Saturday, May 18, 2013

No sign of digital rescue as newspaper revenues continue to collapse

Two interim statements from newspaper companies last week further demonstrate how their digital strategies won't save their businesses.

Here was how Trinity Mirror (PDF) trumpeted its highlights of the first 17 weeks of this year:

  • Improving revenue trends, in particular circulation revenues
  • Good growth in digital audience with unique users up 25% year on year to 31 million and page views up 36% year on year to 163 million
  • Continued strong cash generation with net debt falling by £25 million to £132 million
  • On track to deliver targeted structural cost savings of £10 million in 2013
  • We remain confident in the outlook for the Group's performance in 2013

Here's my version of the same figures:

  • Advertising revenues fell by 13% - accelerating over last year's fall of 10%
  • Digital revenues fell by 13% - despite all the focus on growing this area
  • Circulation revenues fell by 8% despite significant cover price increases
  • High debt levels continue to hamstring attempts to invest
  • Cost cutting remains the only way of keeping the business going.

Three days earlier, Johnston Press delivered a slightly more up-front (if equally depressing) set of highlights for the first 18 weeks of its financial year:

  • First increase in operating profit for almost 7 years - despite challenging economic environment
  • Total revenues down 11.4% on a like-for-like basis - revenue declines slowing month-on-month
  • Costs on track to reduce by over £20 million in 2013
  • 183 titles now successfully relaunched
  • New website rollout commenced for every title
  • Continued digital audience and revenue growth in the period
  • Focus on debt reduction maintained 

Put another way:

  • Total revenues fell by 11.4% - fractionally better than last year's 12.1%
  • Advertising revenues were down 15.1% - worse than last year's 12.7%
  • Display advertising was down 12.7% - worse than last year's 11.9%
  • Classified advertising was down 16.8% - worse than last year's 13.3%
  • Digital revenues grew by 8.1% - which is a lot better than Trinity, but is less than the 20% gained last year
  • Circulation revenues fell by 0.8% despite huge cover price increases
  • Massive cost cutting remains the only way to grow profit and repay debt

There's not enough detail in either report to be too specific, but it is clear that revenues are still falling at an alarming rate.  At Johnston Press, the full year extrapolation of the first 18 weeks would suggest revenue falls in excess of £37 million.

Newspapers losing £21 of print advertising for every £1 of digital

Earlier this year, JP CEO Ashley Highfield stated clearly that he saw online display advertising as the future of the business, indeed he said that by 2015, online would account for £52 million of revenues - just how difficult that task is can be seen from extrapolating this week's figures out for the rest of this year.

Ashley Highfield
Ashley Highfield:
photo by Ian Forrester
An increase in digital revenues of 8.1% across the whole year would bring in an extra £1.7 million, taking digital revenues for the full year to just £22 million.

As I've pointed out before, print revenues are draining away at a far faster rate: it looks as if £37 million will disappear this year - put another way, Johnston Press is gaining just £1 in digital sales for every £21 in print sales lost.

There can be little doubt that newspaper companies are shrinking in size.  Indeed, it is my belief that the only way local newspaper companies are going to survive is if they become small, low cost, digital and print businesses.

Readers will have to pay for journalism

That's not going to happen unless:

Firstly, readers value news enough to pay the cost of its production.  Journalism is expensive. Traditionally, news has been paid for by advertising, particularly classified advertising such as recruitment, property and motors.  That's not going to happen any more - classified advertising works better online than it does in print.

And, newspaper companies that think that they can build big online classified businesses are deluded.

The internet atomises information - someone looking for a job is not going to go to a news site to find it.  They will go to a specialist job site.  Therefore, businesses that want to make money out of jobs advertising do not need journalists to create an audience.  It follows that they can focus all their attention, and marketing, on producing a far better experience online for job seekers than any newspaper company ever will.

The same is true for every category of classified advertising.  Get used to it.

In fact, anything that you can wrap around news in the hope of subsidising journalism can probably be done better away from news.

So, the best way to pay for journalism is for the reader to pay for it.  In print, that means a much higher cover price.  That, in turn, will mean a much smaller readership as far fewer people will value news at the higher price.

Online, it means some form of paywall. But those who will not pay £1 (or £2 or whatever other price is needed) a day for a print package are not likely to pay £1 a day for a digital package either - news providers, particularly local news providers, are going to have to find a way to let people pay for what they want and nothing else.

That is going to mean a much smaller audience.  A much smaller business.  Which takes me on to my second point:

Secondly, local news companies will be owned by small local businesses.  There just won't be enough money in them to make it worthwhile for large national or international businesses, especially for those with big debts.

Warren Buffett
Warren Buffett: photo by Mark Hirschey
via  Wikimedia  Commons
The current owners look for 20-30% returns on turnover.  Renowned billionaire investor Warren Buffett, recently said he expects a 10% return on local newspapers he has bought, and that he expects that margin to reduce.

It works for him because he says he bought the papers cheaply, but, if he's right, and returns drop to below 10%, it is difficult to see any large business with debt and head office costs, wanting to be part of the local media scene.

If that happens, it seems to me that the most likely scenario is that more newspapers will close down, but will probably be replaced by much smaller, locally-owned businesses.