ZIFFPAGE TITLERent versus OwnBy Rob Garretson | Posted 07-05-2005
Thomson Evolves from Newspapers to New Media
In January 1997, when Michael Wilens returned to the Thomson Corp. as CTO of the legal publishing group, the Internet hadn't yet changed everything. The Nasdaq Composite Index was at 1290, and Amazon.com was still a private company. Yet Wilens, who had left Thomson just 16 months earlier to pursue an opportunity to work in Europe, felt something was different.
Sure, Thomson was still a multibillion-dollar, highly diversified conglomerate with far-flung interests in everything from specialized information publishing to the leisure-travel business in the U.K.not to mention the company's core North American newspaper group, which published 68 papers with a collective circulation of nearly two million. But something was bubbling under the surface of this unwieldy beast. The then 63-year old, Stamford, Conn.-based media giant was on the cusp of a radical transformation.
Fast-forward eight years to today, and the Thomson Corp. is almost unrecognizable as the old-media company founded in 1934 by Roy Thomson, a Canadian, who acquired his first newspaper after unsuccessful forays into selling car parts and running a radio station. The company is still majority owned by the Thomson familybut gone are the newspapers, gone is the travel business, and gone are all of the trade and specialty publications that didn't fit into president and CEo Richard Harrington's long-term vision. That visionto create a leaner, more focused provider of electronic information to professionals in targeted, vertical industriesgenerated $8.1 billion in revenue and more than $1.1 billion in free cash flow last year. Thomson Corp. is now traded on the NYSE, and has a market cap of more than $21 billion.
Thomson's radical transformation away from the print business is a study in the challenges and opportunities the Internet has foisted upon nearly every industry in the past decade. The lesson learned? Embracing change early is essential, resistance is futile.
Even with 20/20 hindsight, Thomson's new business can't be measured against the old, because they are essentially two completely different companies. Clearly, however, Thomson is better positioned for growth in a knowledge-based economy. The new company hasn't yet matched its 1997 revenue total of nearly $8.8 billion-which included nearly $3 billion from Thomson Travelbut it is solidly more profitable, and positioned for more consistent and sustained growth. Its adjusted operating profitsexcluding amortization and restructuring charges from its relentless acquisitionstopped $1.6 billion in 2004, compared to less than $1.2 billion in 1997 on almost $700 million more revenue. The restructured company has achieved compound annual revenue growth of more than 8 percent over the past five years, while adjusted operating profits grew nearly 12 percent annually from 1999 through 2004.
Company Thomson Corp.
Corporate Headquarters Stamford, Conn.
Senior Vice President of Technology Joe Rhyne
Revenues $8.3 billion(trailing 12 months)
EBITDA $2.3 billion (ttm)
Stock Price $33.23 (June 24, 2005)
52 week high-low $36.48$31.09
By contrast, advertising spending for daily newspapers has yet to recover to its 2000 peak, according to figures from the Newspaper Association of America. And just last month, Merrill Lynch media analyst Lauren Rich Fine issued a cautionary report to investors suggesting that, even at currently low valuations, newspaper stocks may be priced too high in relation to their less-than-stellar growth prospects. "We do not think there are any cliffs on the horizon, but we do see a gentle long-term descent," the report concludes.
With Thomson's transition to the electronic services business, IT became suddenly and irrevocably important. Emblematic of that change is Michael Wilens himself. When he returned to Thomson in 1997, he was CTO of West Group, the company's legal publishing arm. In January of this year, he was named president and CEO of the North American Legal unit of Thomson Legal & Regulatory, the company's largest operating unit. Wilens is the new breed of Thomson executivea manager who came up through the technology organization and blends both technical and business acumen. "Thomson is a harbinger of what's happening [in] industries that are increasingly making technology part of the product," he says. Wilens is the most prominent of several former technologists who've risen to executive posts running significant portions of Thomson's business. "In the old publishing world, it was editorial or salesthose were the only two functions that had guts," Wilens recalls. "Now there are the extroverts in technology who like doing the marketing and the operations, and they're stepping forward because the organization encourages it. Seven years ago, it was the opposite. It was discouraged."
As part of Thomson's broader metamorphosis from an old-line publishing company into a provider of integrated information services and software, the company has developed a culture that not only encourages and rewards business-savvy technologists, but actively cultivates them. (See Viewpoint, page 54.) Of the company's 40,000 employees, about 9,000 are technologists, and an increasing percentage of those are in "front-office" roles developing and supporting technology for customers, rather than back-office positions supporting internal Thomson IT.
"As we've headed into online services, technology isn't just business systems," explains Joe Rhyne, senior vice president of technology at Thomson. "It's everything. It's the product. It's the distribution channel. It's the factory that produces the product."
ZIFFPAGE TITLEThe Harrington Effect
The Harrington Effect
Richard Harrington took over as CEO of Thomson Corp. seven years ago, after having served as president and CEO of Thomson Newspapers since 1993. In his five years running the newspaper group, Harrington continued to prune the portfolio, which had peaked in 1980 at nearly 200 dailies and weeklies spread across North America and the U.K., including Toronto's Globe and Mail, the Times of London and Scotland's the Scotsman.
The family-owned company had been in perpetual transition, casting about into wildly divergent businesses, whether it was expanding into Scottish television in the 1950s and 1960s, or exploring for North Sea oil in the 1970s. But newspaper publishing had always been at the core. Harrington, however, read the handwritingor the newsprinton the wall, and foresaw the impact of the Internet on a business already declining in profitability.
The explosive growth of the Internet, as well as the proliferation of cable and satellite television stations, was eroding the fundamental assets of newspapers from both ends of their double-sided customer base: readers and advertisers. In 1949, newspapers accounted for 40 percent of all advertising spending. Today, they account for just 18 percent, a trend that has only been accelerated by the Web. And circulation numbers have been in steady decline since the early 1990s, according to the Newspaper Association of America.
This shook Harrington's faith in the long-term prospects for newspapers, especially the regional papers that made up the bulk of Thomson's strategic marketing groups. At the same time, he and his management team realized that, in an economy increasingly driven by knowledge workers, some of Thomson's professional publications were well positioned to exploit the economic shift.
Severing ties to the company's tradition as a newspaper publisher was no easy task. But Harrington was supported by a Thomson family motto, "Never take a backward step," a vow reportedly issued by Roy Thomson after his 1934 purchase of the Ontario newspaper that proved to be his first profitable venture. Harrington was also supported by Thomson's board, which was then chaired by Roy's son, Ken Thomson.
Harrington convinced the board that a small number of the company's professional information businessessuch as the confederation of financial services under the Thomson Financial umbrellacould use proprietary technologies to transform the way information was delivered and integrated into the workplace. The 1998 sale of Thomson Travel was an obvious place to start divesting noncore businesses, even though it still provided roughly a third of the company's revenues. Over a six-year period, Thomson divested itself of more than 60 companies and 130 newspapers, most of which were sold near the peak of their profitability during the booming economy of the late 1990s. All told, Thomson raised an estimated $7 billion from the divestitures, which helped finance $10 billion in acquisitions of more than 200 businesses focused on the legal, tax and accounting, education, financial, science and healthcare fields.
Thomson is now organized into four divisions: Legal & Regulatory, Learning, Financial, and Scientific & Healthcare. Each group serves a distinctly different market but with the same overarching strategy of delivering critical information thatwhen in electronic formcan be integrated into the customer's workflow. The biggest, Legal & Regulatory, accounts for 42 percent of Thomson's revenue, generating nearly $3.4 billion in 2004. Tellingly, it now delivers two-thirds of its products and services electronically and only one-third in print. The second largest unit, Thomson Learning, with nearly $2.2 billion in 2004 revenue, delivered only 34 percent of its products and services electronically last year, and was also the laggard among the units with 2004 revenue growth of only 6 percent. In contrast, the fastest growing business in the stable, Thomson Financial, generated 98 percent of its 2004 revenue of $1.7 billion through electronic products, services and software. Even Thomson Scientific & Healthcare, the smallest of the four divisions, with only $934 million in 2004 revenue, delivered a healthy 81 percent of its products and services electronically and, consequently, is the second-fastest growing unit, with a 10 percent revenue increase and a 19 percent jump in adjusted operating profit in 2004.
ZIFFPAGE TITLERent versus Own
Rent versus Own
The divestitures and acquisitions were all in support of the overarching strategic shift: the migration from print publishing to electronic information delivery. "I joined the company to help develop more online capability, more online services," recalls Rhyne, an electronic publishing veteran recruited from rival LexisNexis Group in 1997. "There was a great deal more print in those days, so there was a lot of focus on where we were going to go electronic."
But there was much more to the transition than delivering print publications electronically. Thomson's strategy also involved moving from the role of information intermediarynewspapers delivering information generated by wire servicesto owning the information it provided, and becoming a supplier of proprietary databases to its target markets. In addition, Harrington envisioned an integrated information enterprise, one that doesn't just sell information, but also the tools to help professionals use it and to integrate it with their own data.
Today, Thomson's products have evolved from primarily news and databases of professional information to include a range of business applications that integrate information from disparate sources, help streamline workflows and even manage client relationships. Among the best examples is the flagship product of Thomson Financial, which integrated 40 different product lines into a single suite that was released in 2002 as the Thomson ONE workstation. It combines market data and newsfrom well-known Thomson brands such as Datastream, AutEx and First Callwith financial planning applications and portfolio and client management tools into a single desktop.
Still, some analysts expected better and faster returns on the investment in electronic publishing. The exodus from the newspaper business has pleased investors as a whole, says Merrill's Fine, but the restructured company has yet to generate adequate return on capital. Thus the jury is still out on whether Thomson will earn sufficient incremental returns on the new businesses acquired with the proceeds of the newspaper sell-off.
"I think they are on the right track, but it seems to be taking longer than anticipated," she says.
ZIFFPAGE TITLELaw and Order
Law and Order
Nowhere within Thomson's business has the transition to electronic distribution been as daunting, or as critical to the company's growth, as in its legal publishing business. Even today, the staid world of jurisprudence is bound by tradition and precedencei.e., legal decisions and documents printed on paper. Yet Thomson has been able to migrate two-thirds of the business from print to online services and software. And in May it celebrated the completion of a more than $20-million expansion of its Eagan, Minn., data center to a capacity of 650 terabytes.
"Law firms are very much a citation population," observes Linda G. Will, director of information resources at Dorsey & Whitney LLP in Minneapolis, one of the original subscribers to Westlaw (Thomson's ubiquitous legal database) when it first went online back in the 1970s. But even 30 years after legal decisions first became available in electronic form, U.S. courts still recognize only print as the authoritative version to be cited in legal arguments.
"When you display a case on Westlaw we can literally show you what it looks like in the book, and that turns out to be very important because federal judges want to make sure it looks like the book, when you attach a case in your filings," says Thomson's Wilens, recalling the legal group's transition to Adobe's PDF file format back in the late 1990s. "But it required us essentially switching out all the backroom manufacturing photo and type-composition stuff. We turned print from a legacy into a strategic advantage, all through an information system."
Another critical transition Wilens presided over was the move from dedicated and costly private networks for its online services, to a more cost-efficient use of the Internet.
"We had an enormousI mean an enormousset of private communication networks connecting to all of the large law firms in the countrythousands of T-1 lines and a very sophisticated X.25 network," he recalls. "I shut all that down and I moved us to the Internet and deployed a Web version of Westlaw." But as the online services grew in popularity, Wilens encountered another challenge imposed by the balkanized corporate culture of the 1990sa culture that Thomson had forged by decades of growth through acquisition.
"We had an online accounting system, and we had a print accounting system, and our customers were sent separate invoices," Wilens says. "To create bundled products or any kind of [bundled] pricing, we couldn't even do that. If you asked me how much revenue we had from one customer, it was a very serious manual exercise."
Among the systems Wilens implemented to help synchronize the legal group was a massive and highly customized SAP system that allowed the company to unify its customer, product and pricing data for both internal and outbound use.
"It cost us a fortune," Wilens says with no trace of lament. "But it gave us the strategic ability to combine product lines and [offer] very sophisticated pricing arrangements that gave us a huge strategic advantage in the market."
Newspaper Association of America www.naa.org
The National Newspaper Association www.nna.org
Confronting Reality: Doing What Matters to Get Things Right
By Larry Bossidy and Ram CharanCrown Business, 2004
The autonomous print and online groups that had to be unified at the legal group were symptomatic of the broader corporate culture of siloed operations at Thomson in the late 1990s. The old Thomson conglomerate was essentially a holding company for autonomous brands: august newspapers such as the Times of London and the Globe and Mail, consumer businesses such as Thomson Travel, venerable trade publications such as American Banker, and Wall Street staples such as First Call and I/B/E/S. And even as he reshaped the company by selling off businesses that didn't fit the new model, Harrington and his team acquired hundreds of new pieces that had to be integrated.
"In 1997 Thomson was very decentralized," Rhynes remembers. "Each organization was basically doing its own thing in terms of its technology. In fact, there really wasn't a need to build something that coordinated or that leveraged across the company."
Acquisitions continue at all four Thomson divisions, but mostly to fill small gaps and complementary niches. The extreme makeover is done. Thomson has succeeded in transforming itself from a 20th-century purveyor of ink on dead trees into a 21st-century media company whose products are as much technology as they are content. "Ten years ago technology was a black box and it did magical things," says Wilens. "Now everybody is pretty technologically savvy."
Rob Garretson has more than 20 years' experience as a business and technology journalist, most recently as a reporter and editor on the financial desk of The Washington Post.