Wednesday, March 27, 2013

Newspapers' digital strategy amounts to clutching at straws

[Update: I wrote this post on Sunday and was going to publish it later in the week once I'd had a chance to add a few other points, but yesterday's announcement that another 30 editorial jobs were under threat at Johnston Press, has made me bring it forward]

Johnston Press clearly hasn't covered itself in glory over the past decade as it has cast about for a digital strategy, but has it now found the answer to the devastating disappearance of print advertising?

The company was far too slow off the blocks in the transition to digital and, in more recent years, growth has stuttered with revenue reaching £19.8 in 2008, before falling back to £18.4 million over the next three years.  Revenues finally got back above the 2008 figure last year when JP reported £20.6 million in its preliminary results.

However, what worries me most is that I cannot make the numbers add up.

Don't get me wrong.  I am not claiming to have any more foresight than anyone else and trying to read too much into annual accounts is a dangerous thing as they are complex, confusing and, of course, are there to try to persuade investors that the business is on the right track.

Nevertheless, this is the slide which Johnston Press was most excited about in the presentation it gave to investors last week.

CEO Ashley Highfield was pulling no punches.  This is what he said: "In our digital business, the most important number to focus on is that 39% - 39% growth in local online digital display.  This is the future of our business, advertising online and this, for me, is the most encouraging number in the entire deck."

And again, a few moments later in case you missed it the first time round, he said: "The most important number, the engine of our future growth, digital advertising, digital display, up 39%."

So there we have it - online display is the future of Johnston Press.

It might be the journalist in me, but I always worry when somebody gives me a percentage without giving me a base figure.  Digital display is up 39% - on the face of it, that's great news, but what does it mean in hard cash?

Well, luckily, last year, in the presentation of the 2011 accounts, Highfield gave a few more details around actual numbers.  In 2011, online display amounted to a nice round £5 million.  So, a 39% increase would add another 1.95 million, taking the total to just below £7 million.

It's clear from what Highfield said in the presentation that most of this increase has come from bundling digital advertising along with print advertising.  "When I joined [November 2011], just 10% of the time did we include a digital upsell when we sold a print advert. By the end of last year, 40% of the time we bundled print along with digital."

There's a sum in there somewhere which ought to give us an idea of the potential revenues that upselling might bring. 

In the worst case scenario, the extra upsells (ie 30%, as the upsells increased from 10% to 40%) equate to about £2 million, giving a maximum potential revenue from upsell of about £6.7 million.  

In the best case scenario, the extra upselling was all done in the last month of the year and only accounts for about 8.5% of what is available from the extra 30% - that means that the full 30% would be equal to something like £24 million and the total potential is nearer £80 million.

It seems likely that the upsell has been building through the year and the real potential is somewhere in the middle of these numbers.  And indeed, this is supported by the note in the preliminary results presentation below:

This says that the total increase in digital revenue will be £32 million over the next three years - which is the timespan given by Highfield for moving from 40% upsell to 100% - suggesting upsell of print ads might come in at, say, £20 million as Highfield also makes a big play about new national verticals around what's on (a 'sort of Time Out for the provinces') and a wannabe Groupon.

Whatever the exact figures, my concern is two-fold.  Firstly, even at the high end, digital display would not be the saviour of the business.  JP has lost more than £220 million of advertising revenue ... and the print numbers are still falling. £30 million might stabilise the situation momentarily, but it is not going to give the company the sort of money it needs to invest in the future.  And, according to Highfield, it will take three years to get to 100% upsell: in the past three years, print advertising revenues at JP have fallen more than £75 million.

Secondly, JP is too late to this particular bandwagon.  At least one wheel is probably already off.  Banner advertising is hated by consumers, is almost as unpopular with publishers and barely works for advertisers. Plenty of people who are far more qualified than me, believe the end is nigh for the unloved banner.  And as for Groupon ...

So, what's going to happen at JP?

I wish I knew.  Unless there is an extraordinary turnaround on print advertising (unlikely) or the massive hikes in newspaper cover prices (up to 50%) bring in pots of new money (equally unlikely), there are going to be more cuts.

Indeed, Highfield acknowledged as much.  He told investors: "We don't anticipate, or need, 2013 to be as strong a year in terms of cost or headcount reduction."

Cuts made last year will bring another £10 million of savings this year.  "We are probably going to be making something like another £15 million savings over and above that."

Will £15 million in cuts be enough?  Not if Highfield wants to keep his promise to investors that JP will move back into profit growth and print advertising remains on a downward trend.

Although about £7 million will be re-invested in the business (mostly on 'technology and infrastructure'), that £15 million of savings this year will be painful and will involve more job cuts - it's difficult to say how many, but with average FTE costs of about £25,000, it would take 600 to make up £15 million.

I hope I'm wrong, but I don't see how this can be the year that JP halts the profit slide without making far more than £15 million cuts if it is relying on its flawed digital strategy.

Let's hope Highfield has a different trick up his sleeve.

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