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CHISHOLM
November, 2009
Discussion document on future of the regional press
GENERAL SUMMARY
Our industry has talked itself into a crisis. Yes, circulations are declining. Yes, advertising
revenues are under pressure from an increasing range of media alternatives. But it was forever
thus. If you do the maths, our industry will continue to provide a strong foundation from
which to grow for a long time to come. The problem is that those doing the reporting
generally can’t do the maths, and those that can count see little value in the importance of
news in society.
This document is not designed as a definitive report, but rather an attempt to contribute to the
current debate regarding the regional newspaper business, and provide an objective analysis
of the past and future trends, and some of the key factors influencing where the industry
might go in the future.
This analysis suggests that UK publishers, shareholders, and lawmakers are receiving an over-
negative picture of the industry’s future. In addition the picture that is generally painted of
newspapers’ position in the media and marketing industries, presents an incomplete picture of
the issues that are facing the industry.
The document should be seen as a high level initial overview, that suggests that further
analysis is required. This author is happy to respond objectively to any of the key statistics or
arguments that have been put forward.
Key Assertions:
In the UK, regional dailies are suffering more severely than national dailies. While the
overall declines can be attributed to changes in society, competition and media demand,
aggressive circulation pricing policies have had an impact on circulation, and these circulation
declines have in turn had an effect on newspapers’ share of advertising revenue. Further
analysis is required to determine whether the net effect on profit is positive or negative.
Chisholm has found no evidence worldwide that the internet is directly affecting newspaper
circulations. Average newspaper Internet audiences per day are about 5% of the print
audiences, and advertising revenues are similar.
The average size of all British daily newspapers at 150,000 is comparatively large. Even UK
regional dailies, with average circulations of 44,000 are large, compared with most other
markets, for example the USA (35,000), Norway (27,000). UK papers can shrink a long way
before they become unviable. Meanwhile they must exploit their core franchise better through
new ventures to create value.
CHISHOLM 1
Discussion document on future of the regional press
Where in 2001/2002 variances were -2% to – 4% behind GDP, in 2008 they were -20% and in
2009, -27%. While declines in revenue will slow, they are unlikely to return as aggressively
as in previous economic cycles.
The main reason for revenue declines is the decline in the number of advertisers. While
revenues appear to be cyclical, what tends to happen is that advertisers leave during a
downturn, find other ways of marketing themselves and don’t come back. Regional
newspapers have lost over half their advertisers over the last ten years.
Newspaper companies reduce staff during downturns, and then do not have enough sales
people to recover the lost advertiser base. This has been compensated for by selling larger ads
to fewer advertisers, at far higher advertising prices. Regional newspapers have seen the
highest growth in advertising rates of any major UK medium, showing a +55% rate rise since
2000, compared with -18% rate fall for TV.
Digital revenues now account for around 5.8% of newspaper revenues, having grown from
3.6% in 2006. Regional newspapers’ share of the online display/classified sector has fallen
from 13.1% in 2006 to 10.4% in 2009, while share of all online advertising has fallen from
5.5% to 4% over the same period. In the USA this share has steadily grown over a similar
period and newspapers now account for 40% of all online display/classified revenues.
More money is spent by marketers on each of market research, PR, events or sales promotion,
than on advertising in either regional or national press. Chisholm estimates that marketers
spend four times as much in Public Relations than UK newspapers spend on editorial
resources.
A number of misunderstandings appear to have arisen in the recent debate regarding the
future of regional newspapers.
Given the analysis outlined in detail below, it must be assumed that most paid-for newspapers
will survive. Circulations and revenues will have to fall significantly further and faster for
most newspapers to become unviable.
Newspaper companies do not have a problem with profitability, but with debt. This is because
profit expectations became unrealistically high. The larger groups expanded by acquiring
declining businesses, rather than investing in reversing the trends.
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Discussion document on future of the regional press
For from holding a monopolistic position in terms of either marketing or content provision,
regional newspapers are a fraction of the total activity or influence.
Only a third of circulation revenue remains after the cost of generating that sale. 85% of
advertising remains. Journalism will never be funded online.
The community value of news therefore needs to be considered not against the relative
profitability of newspapers today, but the likely structure of the publishing industry, and the
structure of its profitability, in five year’s time.
Revenues and profits will recover to some extent over the next five years. The best and worst
case scenarios are as follows:
Please note that sources are provided in the appendices and referenced in roman numerals.
Other comments are provided as footnotes on each page, referenced as decimals.
© Jim Chisholm
Email: jim@jimchisholmnet
Mobile: +447775817797
Skype: jpchisholm
CHISHOLM 3
Discussion document on future of the regional press
CONTENTS
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FIGURES
Table 1. Forecast of circulation sales and revenues .................................................................................6!
Table 2. Forecast of advertising revenues – Linear forecast ....................................................................8!
Table 3. Forecast of advertising revenues – Geometric forecast .............................................................8!
Table 4. Comparison of ad revenue per time consumedxiii .....................................................................10!
Table 5. Growth rates of regional newspaper online advertising...........................................................10!
Table 6: Analysis of journalist productivity – UK and USA .................................................................12!
Table 7. “Best case” P&L forecast based on linear GDP forecast .........................................................13!
Table 8. "Worst case” P&L forecast based on geometric decoupling forecast......................................13!
Table 9. Summary of best and worst case forecasts. Current and constant prices .................................14!
CHISHOLM 4
Discussion document on the future of the regional press
During 2008, national sales fell by 3.4 while regional dailies fell by 5.4% and paid weeklies
fell by 2.9%. UK newspaper circulations are suffering far more than in other European
countries. Over the last four years paid for daily newspaper sales in the UK have fallen by
9.5%i almost the worst decline in Europe.
The argument is not about losing to emerging media. There is little statistical evidence that
newspapers are specifically losing readers to the Internet. Internet readership of newspapers
accounts for around 5% of the daily audience, and less than 3% of consumption timeii.
The above macro model suggests that for every 3% rise in price there has been a 2% decline
in circulation, over a four-year period. In turn there is a well established correlation between
circulation performance over time, and newspapers’ ability to maintain share of advertising
expenditure.
CHISHOLM 5
Discussion document on the future of the regional press
On the basis of recent industry trends, including the impact of the removal of bulk sales, it is
assumed that UK regional newspapers’ circulations will continue to fall, at a composite1 level
of -3%. For the purpose of this model it is assumed that prices will continue to rise at a rate of
5%, which is above assumed inflation (of 2.7%), but in line with recent annual increases.
Circulation (daily and weekly) % -4.94 -3.00 -3.00 -3.00 -3.00 -3.00 -3.00
Aggregate cover price % 4.21 5.00 5.00 5.00 5.00 5.00 5.00
Total annualised revenue % -0.93 1.85 1.85 1.85 1.85 1.85 1.85
The issue of the compound effect of price increases on circulation and consequential impact
on advertising should not be dismissed. Since only 30% of circulation revenues flow through
to fund the rest of the business, compared with 85% of advertising revenues, it may be that
such aggressive cover price increases are ultimately having an adverse effect on profitability.
Publishers are strongly advised to under-take their own compound effect analysis, to
determine whether their own pricing policies are increasing or decreasing overall profitability.
According to the latest data from the Newspaper Association of America, while the number of
people visiting newspaper websites is encouragingly rising, from 27% to over 40% in the last
five years, activity per user remains relatively low.
Daily reach of online newspapers is around 10% of the adult population, compared with 45%
for the printed newspaper. The average number of visits per month is around 8.4. Users spend
only around 4.4 minutes per visit, and typically visit 5.7 pagesiv.
What data exists for the UK suggests that despite the high levels of digital advertising, such
success is not being repeated in terms of online newspaper readers. Daily online regional
newspaper audiences in the UK are between 5% and 15% of the daily print audiences, and
with most far nearer the lower level on averagev.
1
Composite forecast includes daily, Sunday and weekly newspapers
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Discussion document on the future of the regional press
Despite the current debate regarding paid for content, there is little to no evidence that
consumers will pay for general news content, and the thin audience data above seems to
confirm this.
What is clear though is that news is a good audience generator, from which other revenue
streams can be derived. This has significant implications for the current proposal that
newspapers take on local TV services. While they certainly have the resources to deliver
these, they are unlikely to see any direct financial return, but are best placed to exploit the
generated audience through the delivery of complementary commercial services (see below).
There is a debate as to the degree to which this decoupling is occurring, and whether it
reflects a structural or cyclical change. On this basis two forecasts have been produced:
! The first forecast is based on purely on the linear relationship between GDP variance and
regional newspaper advertising.
! The second draws on the impact of geometric decoupling against GDP over time.
The relationship between advertising revenue and GDP is well established. However over
time, ad revenue variances are falling behind those of the economy, as shown in the next
graph below. Note more recent years, 2005-2008, to the bottom left of the chart, are well
below the modelled regression line.
Chart 2. Geometric relationship between GDP and newspaper advertising over timevi
CHISHOLM 7
Discussion document on the future of the regional press
Newspapers will see some recovery as the economy lifts, however it will not be in line with
previous cycles. Regional newspapers have been losing their share of all Display and
Classified revenues for most of the last 30 years2.
The rate of decline in Display has been relatively steady, but in classified it has rapidly
accelerated in recent years, from around -5% in 2004 to -17% in 2008.
A worst-case scenario is that revenues will continue to see the kind of decoupling that has
been occurring in recent years. This decoupling model therefore draws on both the
relationship with GDP and the evident decoupling over time of advertising, and newspaper
advertising in particular from the general cycleix. In this case, the outcome in terms of
revenues will be as follows:
2
Records from the Advertising Association only go back to 1982
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Discussion document on the future of the regional press
However while the linear GDP model is over-optimistic, newspaper companies are already
mitigating the decoupling effect by seeking new revenues, through NPD initiatives, and
therefore the geometric forecast may prove pessimistic. The outcome will depend on the
extent to which publishers recognise the nature of the changing media environment and where
the real issues lie. It is far too simple to blame the internet, and the notion that newspapers are
outdated.
While, as is pointed out below, UK regional newspapers are not keeping up with the growth
in digital revenues seen in other markets, it is also true that newspaper companies have not
recognised the wider shift in marketing expenditure. The threats and opportunities here are
discussed in chapter 2.5 below.
2.3 Digital
Data on newspapers’ digital activities is hard to come by; an interesting point in itself.
However by culling data from company accounts it is possible to paint a picture of regional
newspapers position in the UK digital world.
According to company reports, digital revenues currently account for around 5.8% of
newspaper revenues, compared with 3.2% in 2006. While this proportion of revenue is
growing, it is not growing in line with either total online advertising, or even share of online
display/classified. In the UK, regional newspapers’ share of the online display/classified
sector has fallen from 13.1% in 2006 to 10.4% in 2009, while share of all online spending has
fallen from 5.5% to 4% in the same period.
This is unlike the USA, where newspapers share of online display and classified grew from
29% to over 40% in the last four years, and share of all online advertising remained stable
around 15%xii.
Initial examination of the differences between the two markets would suggest that UK
newspapers should be adopting more of the US newspaper groups’ industry-wide initiatives,
such as Classified Ventures LLC, and their services such as CareerBuilder.com and Cars.com.
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Discussion document on the future of the regional press
The jury is out regarding the long-term strategic value of partnerships with Google and
Yahoo, which have occurred in the USA.
However, in the future context, regional newspapers should be optimistic about the
opportunities in digital and this should be reflected in their investment policies. Major digital
trends include the move to ‘hyper local’, ‘e-Readers’, mobile services, and the provision of
local TV news.
With Internet advertising expenditure now ahead of Television in the UK, the Internet is now
a relatively mature medium, and treated as such. It is difficult to compare the relative
advertising values of different media, but one measure is to divide the advertising spent on
each medium relative to the time that consumers spend with that mediumxiii. The results are as
follows:
This shows that relative to the time spent with the medium, the internet is already carrying
double the amount of advertising spend vs TV, and newspapers are carrying nearly three
times as much as that.
2.5 Marketing
The measurement of newspaper advertising within the broader context of how advertisers
communicate is incomplete. Most media businesses measure performance against other
advertising media. Yet over two thirds of marketing budgets are on things other advertising.
In the last 20 years, the proportion of marketing expenditure spent on advertising has fallen
from 70% to 30%. In 1988 regional newspapers accounted for 15.7% of all marketing
expenditure. Today, they account for 6.1%.
3
Figures assume that 65% of TV viewing is with commercial TV and 50% of radio listening is with commercial radio. No figures
are available for viewing of internet sites with or without advertising.
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Discussion document on the future of the regional press
In the debate regarding newspaper’s monopoly of communication, this demolishes any notion
that regional newspapers are a monopolistic threat to the communications industry.
It is estimated that companies invest nearly five times as much on Public Relations than UK
newspapers spend on editorial resourcesxvi. Over the last twenty years companies have
increasingly, and invisibly, transferred their budgets into other forms of marketing, which
traditional media companies fail to measure, or respond to.
The principal reason why newspaper companies lose revenue during downturns is that
advertisers find alternative ways to spend their money, and don’t come back. The Internet is
simply an extension of this trend, but has not been their only choice.
More marketing money today is spent on each of market research, PR, events or sales
promotion, than on advertising in either regional or national press.
Advertisers find alternative forms of communication during a downturn then don’t come
back. The situation is exacerbated by the fact, that during downturns companies lose sales
people in order to save costs, then do not have sufficient resources during periods of recovery
to recover the lost business. The removal of sales staff is a false economy, which has cost our
industry dearly.
Chisholm estimates that the typical regional newspaper company has lost around half of its
advertiser base in the last five years. Newspapers have been losing out to more transparent
direct forms of communication and interaction for decades. The Internet is only accelerating
these trends.
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Discussion document on the future of the regional press
Newspaper companies have a great opportunity to break into the wider area of marketing
communications. In a recent project for the Newspaper Association of America, authored by
Jim Chisholm, “Opportunities Out Of Adversity. Repositioning For Future Growth”, a key
conclusion was that newspaper companies should set a target of attracting an incremental
0.5% per year of below the line communications. If the UK regional press followed this
recommendation, they would increase turnover by around a third over five years.
What is more, many of the resources required to deliver below the line services – databases,
distribution, creativity, sales, events management, - already exist, and indeed are being made
redundant at considerable cost.
In addition, other factors such as newsprint consumption will have an effect on the final P&L
outcome, since paginations are falling and ratios are tightening4. In fact newsprint
consumption is falling geometrically faster than variances in revenue to tightening of quotas,
and the previously noted increase in advertising rates.
For the forecast the following assumptions regarding costs have been made.
! Labour costs These are flat lined, therefore falling against inflation.
4
Benchmarking of different newspaper companies’ editorial operations, reveals a strong correlation between circulation and
editorial staff numbers, and strong correlation between turnover and editorial staff numbers but virtually no correlation between
page numbers and editorial staff numbers.
CHISHOLM 12
Discussion document on the future of the regional press
CHISHOLM 13
Discussion document on the future of the regional press
Table 9. Summary of best and worst case forecasts. Current and constant pricesxxi
£M 2009 2010 2011 2012 2013 2014 CAGR
Current values
Best case operating profit 248 278 387 490 590 687 23.0%
Worst case operating profit 248 229 277 318 353 384 9.6%
Constant values
Best case operating profit 248 271 377 477 574 669 22.4%
Worst case operating profit 248 223 270 310 343 373 9.1%
Best case operating margin 10.0 11.7 16.0 20.1 23.9 27.5
Worst case op. margin 10.0 9.8 12.2 14.3 16.2 18.0
These forecasts therefore suggest that, against the assumptions and forecasts outlined above,
newspaper companies can look forward to ongoing growth in profitability, providing costs
continue to be controlled and reduced as described.
The best case scenario is an annualised 22.4% growth in profits in real terms, while the worst
case is real term growth of 9.1%.
While revenue forecasts are not strong, they are mitigated by the ongoing potential for cost
reduction and the impact of ongoing reductions in newsprint costs.
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Discussion document on the future of the regional press
Digital services are not proving to be a salvation. Online news consumers are relatively low in
volume and intensity. But global experience suggests that newspapers can effectively convert
their digital audiences, into viable media consumers in other ways. As packaged newspaper
products migrate to standalone digital verticals, the current concept of a single product
profitability model must be questioned.
In the future, specialist niche services will deliver specific solutions to market segments.
While it is clear that services such as entertainment, cars, property, travel, business, etc, can
derive revenue streams, it is far from clear whether news can ever be financially self-funding
either from consumption revenues or from supporting advertising.
Newspapers have a relatively small share of a massive market, but have fantastic resources
available to exploit these other activities. They also can leverage these resources across new
activities and into the digital world.
So the question is how newspapers can leverage their print, online services and marketing to
generate new forms of revenue. Regional newspapers should be buying into diversified
marketing activities, such as events, sales promotion, distribution, etc, either individually or
collectively. This is where the majority of marketing expenditure lies now, and is from where
much of the digital evolution will evolve.
Given that regional newspapers now account for only 6.1% of total marketing expenditure,
and that the biggest player probably accounts for less than 1.5%, it is unlikely that any
individual company is going to make headroom against major players such as Vodafone, the
BBC, Walmart/Asda, etc.
What is clear, however, is that “localisation” is becoming a major theme among marketers
and new media players. In the USA, Google and Yahoo have been investing heavily in
localisation media, both in terms of GPS systems, and in terms of local search capabilities. As
a result revenue growth in these sectors has been considerablexxiv , though expected to slow. In
the UK however such a revenue potential has yet to be realised. Therefore newspaper
publishers need to be partnering with search and telco suppliers to develop these localisation
opportunities. They also need to be partnering with alternative local information suppliers,
such as local government, and local companies.
OfCom rightly point to the Swedish experience. And their experience is compelling. Sweden
follows the UK in terms of internet revenue growth and share, but unlike the UK, newspapers
enjoy a high proportion of the digital audiences and revenues.
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Discussion document on the future of the regional press
Schibsted, regarded by many as the most advanced newspaper company in the world, operate
five of the top ten websites in Sweden. Their “Galleria” business model offers a range of
profitable digital verticals, that surround the hub of the newspaper websites. YTD in 2009,
30% of Schibsted’s revenues and 90% of profits were derived from their digital activities.xxv
A strong element of their newspaper websites is the provision of local digital TV services.
This model could be the basis of a UK regional news service. But the model is made easier in
Sweden, and Norway for a number of other reasons.
Both the major players in these markets – Schibsted, based in Oslo and Bonnier, Stockholm
based – are able to operate across all media channels. Both companies are committed, through
their charters, to independence and free expression; though they are monitored by regulators.
Schibsted are a quoted stock, with a strong family influence. Bonnier are family owned.
Schibsted are renowned for their mobile activities. But while they deserve to be recognised
for their innovation, the opportunity is in part due to the fact that Norway did not undergo the
destructive lottery for 3G services seen in other countries. As a consequence Telco operator
Telenor were able to introduce low cost data and multi-media access costs, as well as
attractive introductory offers that encouraged market uptake. Encouraging the avaricious UK
telco operators to introduce similar pricing structures in the UK would revolutionise content
services, both at a national level and in particular in locational media.
UK regulators have been aggressive in their controls of cross media development, and also in
single media expansion, but experience suggests their concerns are unfounded in reality.
If regional newspapers are to survive in the longer term, they require an even playing field,
where they have freedom to operate across platforms and compete effectively in an industry
in which they have a 6% share, and the biggest player holds around 1.5%.
In Scandanavia, perhaps the most sophisticated media markets in the world, with extreme
demands for plurality, media companies own a range of media, but in reality operate them as
separate ventures5. In the USA, where a number of publishers have attempted to merge TV
and print operations6, they have had difficulty achieving integration.
5
Both Norway’s Schibsted, and Sweden Bonnier operate print and TV operations.
6
Notably, Gannett, in Phoenix, and Media General in Tampa.
CHISHOLM 16
Discussion document on the future of the regional press
A report by the University of Paris reported that cross media companies were less value
generative than those operating in single media7. In other words there is no evidence that
either cross media ownership is overtly over influential, or that it encourages great profit
generation by the media owners.
5 Conclusions
The initial conclusions of this brief review of the regional press suggest that not all the “facts”
are on the table. This author believes that the newspapers’ cup is more than half full.
Everyone knows the industry has to change, and perhaps the current difficulties are a wake up
call.
The UK newspaper industry is not performing as well as it could be, either relative to
newspapers in other similar markets, or in the new digital space relative to the UK’s
leadership in online advertising. However it is clear that the industry is hampered by over
regulation, that inhibits its ability to compete across media channels, for a larger share of
audiences and communications revenues or consolidate to a degree that enables it to compete
or negotiate in the far larger marketing pond. It is after all only 6% of the total marketing
industry in the UK.
There is still room for improvement in the effectiveness and efficiency of newsrooms. But
there is also a major opportunity available if journalists can operate across different media
channels. In the meantime, regional newspapers must stop sacking sales staff. It is a major
cause of long term decline.
There is also a need for the industry to work more closely together, as in the USA, in
developing digital advertising services. Even the largest newspaper groups can not compete
alone, against the major pure plays, nor negotiate effectively against technology giants such
as Vodafone or Google.
More detailed analysis will reveal further opportunities, and alternative business models, but
this would require access to more research and data, and the inclusion of best practice from
other countries.
This report is only one voice in the current debate, but it is hoped that it provides an objective
analysis of the industry’s position, and provides some optimism against the purveyors of
doom and gloom.
7
Report by Prof Stephanie Peltier, University of Paris, reported in WAN SFN project.
CHISHOLM 17
Discussion document on the future of the regional press
APPENDICES
Sources, references and explanations
i
Source: World Press Trends
ii
Sources: Available estimates in the UK, World Press Trends, and Newspaper Association of America
data.
iii
analysis and modelling
iv
Source: NAA data. See Newspaper and Technology magazine October, 2009.
www.newsandtech.com
v
Estimates based on known data for a range of UK regional publishers.
vi
Source: Advertising Association and OECD data on GDP.
vii
Source: Advertising Association
viii
Source: Advertising Association and OECD data on GDP.
ix
Source: Advertising Association data, OECD data on GDP.
x
Source: Advertising Association data, OECD data on GDP Model is a multiple correlation model, and
produces an R2 factor of 0.83, suggesting a high level of fit between the three variables.
xi
Source: Chisholm analysis including company statements re digital revenues, and IAB (UK) and AA
data.
xii
Sources: NAA, IAB (USA). See Chisholm report for the NAA, “Opportunities Out of Adversity.
Repositioning For Future Growth.”
xiii
Chisholm analysis of IPA touchpoint and AA data. Calculation is based on dividing the annual
expenditure by the total nation hours spent with the medium
xiv
Chisholm estimates, based on previous media evolutions.
Source: UK Advertising Association, WPP, Bellwether
xvi
Chisholm analysis based on European benchmarks. Calculation assumes that 15% of newspaper
revenues are spent on editorial resources.
xvii
Source: World Press Trends
xviii
Sources: Chisholm benchmarks of newsprint consumption. From this a regression model based on
revenue trends and Advertising Association index of newspaper media rates, was used to calculate
future newsprint trends. It is assumed that newsprint prices will rise at inflation of 2.7%.
xix
Source: Chisholm modelling.
xx
Source Chisholm modelling.
xxi
Source: Chisholm modelling. Constant prices assume 2.7% inflation.
xxii
For data on relative revenues from content or communication (advertising) see either PwC (global)
or Veronis Suhler Stevenson (USA).
xxiii
Net contributions based on Chisholm benchmarks of many European newspaper companies.
xxiv
Source: Borrell Associates.
xxiv
Source: Schibsted Interim Statement. Figures exclude head office costs.
CHISHOLM 18