Business report 2009: "The victims in the UK market have been more local and free than national and paid"
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An interview with Charles Ross, director, Ocean Strategy*
WAN-IFRA: “As many as five national newspapers could fold within two years in a worst-case scenario as the medium suffers unprecedented carnage”, Guardian News & Media executive Emily Bell has warned in October 2008. A year after, what has really happened? It sounds that the free newspaper market took the worst hit.
Charles Ross: Downturns are market leaders’ environments where scale offers some protection. Inevitably leading national publishers investing in their products (NI and DMGT) are faring better, while those less crucial for the ad schedule are suffering (Independent). Popular papers also fare better with less dependency on advertising.
After a year of recession, the victims in the UK market have been more local and free than national and paid. The majority of the woes of the market are cyclical rather than structural, and therefore likely to start recovering in line with the economy. Those with higher subscriptions levels or other consumer revenues have had an easier time than those heavily advertising-dependent. Undoubtedly worst hit are those dependent on classified revenues, not only cyclical, but also more subject to structural change forced by digital disruption.
This pattern was predictable at the outset of the downturn, of all the business models out there a local free with substantial reliance on recruitment and property, was always going to have been one of the low performers through the recession.
The lasting legacy of the downturn will be that publishers will constantly review their portfolio and products and take action to keep brands as healthy as possible.
WAN-IFRA: The Daily Mail & General Trust, Johnston Press's, Independent News & Media, Mecom and Newsquest were struggling in 2008 and 2009 with a difficult financial situation, due to big debts. They have all downsized and cut costs, have they managed to improve their financial situation?
The downturn has forced regional publisher margins down from the highly profitable (ca. 30%) to more normal levels (ca. 10%). Problems have come from over-leveraged owners carrying significant debt from high-multiple purchases.
All publishers have cut costs, which obviously improves short-term financial positions that will improve further with the cycle. However, a cost-focused strategy, while pertinent now, needs to be complemented with investment in brands, marketing, product and new revenue opportunities for newspapers to have a sustainable future. Investors in content such as NI and DMGT are seeing the results in the relatively stable sale of their key brands, while elsewhere this is not the case. This is a problem as only healthy brands provide the growth platform for diverse new revenue streams (digital, enterprise, brand extensions, paywalls) to build from and spin-off. With solid core brands the sustainability of the newspaper sector (both local and national) should not be in doubt.
WAN-IFRA: The UK market is often seen as a test market in terms of media development, the Internet now accounts for 23.5% of all advertising money spent in the UK, while TV ad spend accounts for 21.9% of marketing budgets. So UK has become the first major economy where advertisers spend more on Internet advertising than on television advertising. How is the ad situation for national and regional newspapers? Are they able/doing enough to capture a part of those online budgets?
Charles Ross: The success of newspaper publishers online varies widely. Nationals are better positioned than local players, with some local publishers only now waking up to the loss of revenue to Google. The most successful have diversified, can sell all platforms in an integrated way and have a tight control of their inventory and prices. While revenues can be maximised, even at best, online advertising revenues will never replace lost print ad revenues.
Online may be the largest ad channel (using a blunt catch-all definition) and this may well be prescient, but it is not particularly relevant, with on-line for many media providers simply being an additional channel of content distribution.
An area where online does have significant impact is in the disruption of purchasing processes, which can in some cases entirely alter a process and remove the need for marketing channels. Think of secondary ticketing sites like Seatwave; many years ago spare tickets for a concert might have been advertised in a local paper, then e-bay while now online offers the most efficient solution. So Online’s impact on advertising is only part of the issue for traditional media, especially those media playing a key role close to the purchase.
WAN-IFRA: There was a lot of discussion concerning the regional newspapers this year: the need for more consolidation, the battle about the obligation to publish legal notice in those papers, the competition on local news and of course the fact that they are losing their classifieds revenue… but it’s complicated for us to understand where they stand really, could you tell us how what is the outlook for the local papers?
Charles Ross: This is without question a watershed period for the local press in the UK. The majority of lost revenue is, in Ocean’s view, cyclical. However, on top of this we are seeing all categories (including property, motors and recruitment) shift to become ‘display’ categories in regional press. Therefore the key value is their audience, which with declining circulations means local papers risk losing their position as the best route to local markets.
Obviously the industry should be allowed to consolidate, as no media company operates in a vacuum in this day and age, and online and other competition for revenue is everywhere. Local papers operate in highly fragmented media markets with multiple options open to advertisers and consumers. However, combining declining groups together does not solve the industry’s problems nor change the impact of cyclical and structural change.
The future of local press can, with investment in the right strategies for maximising their print revenues and building strong new revenues, be solid. But continued cost-cutting and limited/no investment in the right talent and strategies to develop new offers and revenues locally will lead to failure.
WAN-IFRA: Circulation is a major concern with a continuous decline, what is you own opinion on the cause of this decline that could be specific to the UK and would you say that the growing web audience is compensating for most of the big newspapers? What is your own position on the possibility to implement paid content on the existing publisher websites?
Charles Ross: In any developed market, print circulation will slowly decline (for the print brands investing in products and more rapidly for those milking cash cows), while growth is possible and likely in immature print markets (BRIC regions). The causes are multiple including fragmentation, convergence and social change.
It is clear that publishers’ web audiences have lower value than print audiences, and cannot fully compensate for lost revenues from print’s decline. Online newspaper audiences, evident in the figures of their websites, are often larger than print audiences ever were. The problem for publishers is not size but monetisation and loyalty with regard to these audiences, hence the current focus on the paywall opportunity. Paywall strategies are sensible for any publisher with sufficient value in their content (high in value and low in number of users in specialised areas, while the opposite is the case in more general content areas) but the amount of this unique content within the inventory of most publishers is limited. It is therefore right to install mixed model paywall strategies, but the contribution from these will vary significantly by paper and should be seen simply as another necessary monetisation strategy.
* Ocean was founded in 2000 with the goal of providing tailored strategic advisory services exclusively for clients and investors in the media industry. Charles Ross joined Ocean Strategy from its foundation in 2000, having previously worked in media for more than a decade. Charles started his career at Thomson Regional Newspapers in 1990 and gained both HQ and operating centre experience in research, marketing and strategy. During his work with Ocean Strategy, Charles has worked on projects throughout all media sectors in the UK and internationally, as well as a wide range of strategic due diligence projects in the media sector.