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.

Sunday, March 24, 2013

Newspapers lose £228 million in print advertising and replace it with just £20 million of digital revenue

The full brutality of the collapse of revenues at local newspapers was exposed in the announcement of preliminary results for 2012 by Johnston Press earlier this week.

The company publishes 13 daily papers including The Scotsman, The Yorkshire Post, The Star, in Sheffield, and The News, in Portsmouth.  It also has 230 weekly newspapers.

The most salient points for me were these:

  • Advertising revenues at Johnston Press have fallen £228 million since 2006
  • Recruitment revenues have fallen £120 million since their peak
  • Every lost print pound is being replaced by just 9p of digital revenue
  • Total revenue has fallen £280 million in just five years

As a result:

  • The number of journalists employed by Johnston Press has been cut by 1,000 to 1,558 in four years
  • Overall staffing has fallen by half in five years, from 8,823 to 4,392
  • Total costs have been cut by £144 million
  • Leaving an operating profit of £57 million compared to a peak of £186 million

Which is barely enough to allow the company to pay the interest on the loans it took out when it went on an acquisition spree in the early and middle part of the decade.

I've said before that the depth and speed of the falls in revenue have been such that the major regional newspaper companies in the UK have had little choice but to cut their costs if they were to survive.  I constantly read comments from journalists who blame senior management for the current state of our newspapers, but it is difficult to see what they could have done.

(See also why I believe newspaper digital strategies are doomed to failure).

Recruitment advertising has gone online because it works better on the internet than it does in a newspaper

Look at Johnston Press - according the company's annual accounts, recruitment advertising has dropped by £120 million in not much more than five years.  That money did not disappear because of decisions made by management: it disappeared because recruitment advertising works better online than it does in paper.

Waiting til next Wednesday to browse through a couple of hundred ads in the supplement of your local paper, just doesn't stack up against the always-there, searchable, thousands of vacancies on Jobsite or any of the other big jobs boards.  Add to that the ability to set up alerts or post your CV and, in truth, it's amazing that Johnston Press still has £14.6 million of recruitment advertising in print.

It's possible to argue that the company - or at least, its managers - have done a pretty poor job of building up the online recruitment business.  While £120 million jobs advertising has disappeared from print, the company has attracted barely £7 million from that category online.  And, while the company seems to take the somewhat quaint view that much of the fall in recruitment revenues is cyclical and will return when the economy recovers, evidence elsewhere suggests that much more could have been done.  Over at my former employer DMGT, for example, its preliminary results (PDF) for 2012 report that its recruitment business, Evenbase, brought in £11 million operating PROFIT.

As an aside, DMGT reported total digital revenues of £93 million as opposed to the £20 million reported by Johnston Press.  JP's business case would look very different if they had grown digital in the way that DMGT has.
However, don't be fooled into thinking this would have saved the journalists' jobs.
It appears that DMGT noted very early on that recruitment online was a standalone business and did not require the expensive baggage of a newspaper - and all its journalists - to succeed. It wasn't just chance that DMGT moved its big classified online businesses away from Northcliffe about 10 years ago. Nor was it just chance that when Northcliffe (DMGT's regional newspaper business) was sold off at Christmas, the digital classified money-makers were not included in the deal.

(I said at the time that I thought that this made it difficult to see how the new owners, Local World, could make the regional business work).

It's also worth noting that Northcliffe's slashing of journalists' jobs has been the equal of Johnston Press.

There was a time when recruitment advertising was the biggest advertising category in a regional newspaper and, combined with the rest of classified (property, motors and other), it made up well in excess of 50% of all revenues.  Back in 2004 (PDF), for example, Johnston's had £117 million of recruitment ads in a total of £281 million of classified ads.  Display ads took the total advertising revenues up to £370 million, with just £70 million coming from newspaper sales.

The perfect storm for regional newspapers arose because they had such a heavy reliance on classified advertising and classified advertising works so much better online than in paper.  Add the fact that without the need for expensive journalism, online classified operators could charge advertisers far less, and it is hardly surprising that almost 90% of JP's in print recruitment advertising has disappeared.

Some classified has fared slightly better, notably property advertising.  This is probably because not all property advertising is about listing properties for sale.  Estate agents have long argued that the main purpose of their advertising was not to sell houses, but to build their brand so that people would put their houses up for sale through them rather than their competitors.

Nevertheless, classified advertising in print has fallen by more than two-thirds at JP in the past six or seven years.

Last year, at just £14.6 million Johnston Press' in-print recruitment advertising had fallen from being the highest category of revenue for the business to the lowest.

Nobody asked cart makers to save carts when Henry Ford came along

I guess the point that I am trying to make is that the problem facing regional newspapers is largely not of their own making.  The disruptive force of the internet has destroyed the very foundations on which the business was built.

People like to compare what is happening to newspaper companies with what happened to cart makers when Henry Ford came along, but it is not the same.  Cart makers could become car makers, or even just service garages for the big manufacturers - nobody asked them to save the cart.  The problem for the hitherto newspaper publishers is that they are businesses, but they are being asked to save the newspaper or, at the very least, journalism.  However, we have to accept that it is simply not their job to save anything other than their own businesses.