10-01-04 | Printable Version

Are Telephone Books a Good Fit for Newspapers?

Some newspaper companies have enjoyed strong revenue growth publishing independent telephone directories. But others have experienced disappointment.

Publishing telephone directories has been little more than a small side business for many newspaper companies over the past decade.

But a few newspaper owners are building significant directory operations, establishing a foothold in a media segment whose growth rates exceed those of the core newspaper business.

The Hearst Corp. made a big statement in September when it acquired White Directory Publishers, Inc., the fourth-largest independent yellow pages publisher in the U.S.

The Buffalo, New York-based company will be combined with Hearst’s smaller, but lucrative telephone directory operation in Texas. Rick Lewis, chief executive officer of White, will oversee all of Hearst’s directory operations, reporting to George Irish, president of Hearst Newspapers. Irish said the company would continue with White’s expansion plans.

Another company investing in independent telephone directories is Ogden Newspapers based in Wheeling, West Virginia. Ogden has quietly built a directory division with 37 books in six states.

While the traditional, “utility” telephone company books continue to garner the vast majority of the $14 billion spent annually in yellow pages, independent directories are grabbing market share. Industry estimates put the independents’ share at 14%, up from just 4% in the mid-1990s.

These smaller competitors, usually the second or third book in a market, are gaining ground by offering prices more affordable than the Baby Bell book to the mom-and-pop advertisers.

The directory sector overall has grown at a compound annual growth rate of 3.6% over the past seven years, beating the newspaper industry’s growth rate of 2.4% over the same period.

However, bigger gains have been enjoyed by the independents, which have taken share in the directory industry.

Hearst acquired a regional yellow pages publisher in Texas in 1994 with books in several mid-sized markets. It overlapped with only two of Hearst’s newspapers – Midland-Odessa and Plainview.

Irish said the group, with only one start-up in Laredo, grew at a compound annual rate of 13% through 2004, and cash flow grew by 23% annually over the same period.

It was this experience that led Hearst to make a larger investment in independent directories with White. “We found out that this was a very good business,” says Irish.

Hearst has operated its yellow pages business separately from its newspapers, even in markets where they compete. Irish said Hearst has not seen a tremendous amount of synergy between newspapers and directories, although he expects that to change as more of the directory business migrates to the web.

Ogden also keeps its directories separate from its newspapers, which include 39 dailies in 10 states. Only six of its 37 telephone books are published in markets where the company owns a newspaper. However, many of the books are printed at Ogden’s House of Print, a commercial printing plant in Madelia, Minnesota.

“The newspaper and directory cultures are worlds apart,” says Bill Nutting, one of the senior executives at Ogden.

That divide has led some newspaper companies to divest their directory operations and others to avoid the sector. Indeed, some of Ogden’s growth has come in deals for directories that had been owned by newspapers.

In 2000, Ogden acquired six books owned by the Reilly family in Somerset, Pennsylvania after the daily was sold to Schurz Communications. Similarly in 2003, Ogden bought eight directories in Pennsylvania and Maine owned by J.H. Zerbey, Inc., in a deal that saw Zerbey’s daily in Pottsville sold to Times-Shamrock in Scranton. Ogden is now the largest independent publisher of telephone books in Maine.

The New York Times sold several telephone books to TransWestern Publishing in a transaction separate from the sale of its regional newspapers, even though many of the books were in their newspaper markets. The nine books had revenue of $6.7 million.

Even so, some newspaper companies have experimented with closer integration of the two media.

Liberty Group Publishing’s daily in Yreka, California, for example, sells its telephone book with the newspaper’s advertising staff. Packages are offered to non-traditional newspaper advertisers, such as lawyers and other service providers, who receive a yellow pages listing and an ad in the newspaper once a week for a year.

The Petoskey News-Review in Petoskey, Michigan publishes directories in its newspaper markets, and to a limited extent cross-sells advertising between the two. One such package offers new businesses a weekly ad in a “directory section” in the newspaper if an ad is purchased in their directory. Another package ties ads in a newspaper bridal section to a listing in the bridal section of the directory.

Other directory publishers are bundling newspaper, yellow pages and Internet.

There is room in every market for at least two directories, says Larry Angove, president and CEO of the Association of Directory Publishers, based in Traverse City, Michigan.

The local newspaper publisher has instant credibility with advertisers when launching a directory, Angove says, and can be an extension of newspaper advertising. He says a 25% cash flow margin is typical for a #2 book in a market.

However, the time it takes to build a successful directory can be daunting.

Typically a start-up directory is published initially with little or no paid advertising in order to establish a presence in the market.

It can take three or more years for a new directory to reach profitablity.

Some newspaper companies have abandoned telephone directory operations after experiencing disappointing results.

Acquisition prices for local directories vary depending on the size of the deal. Small, stand-alone books trade for mid- to upper-single digits of earnings before interest, taxes, depreciation and amortization (EBITDA).

Some of the larger deals have been done at 12 to 13 times EBITDA, comparable to multiples for larger newspapers and newspaper groups.