UK newspapers The road forward

A discussion document on the future of the UK regional press.

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 overnegative 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. Traditionally, variances in newspaper advertising revenues closely followed GDP. However in recent years that relationship has been decoupling with newspaper revenues falling behind GDP.

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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. A major revenue opportunity lies in the development of marketing activities. Today advertising accounts for only 30% of marketing expenditure, compared with 70%, twenty years ago. Regional newspapers’ share of marketing expenditure has fallen from 15.7% to 6.1% during this period. The biggest regional player probably accounts for less than 1.5% of all marketing spend. 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. Another point of misunderstanding relates to regional newspaper’s alleged control and influence. With only 6% of marketing expenditure, an average reader attention span of less than 30 minutes per day, and a fifth of the content generation budget of commercial companies, newspapers hardly have a monopolistic hold on either consumers or communicators. CHISHOLM 2

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. However there is a considerable difference between the potential health of newspaper companies, and the prospects for news provision. The necessary development of revenue streams, means that new branded verticals will draw revenue away from the once integrated newspaper package. These new products will effectively be stand alone businesses. The revenues and profits will lie in one area, while news provision and attendant costs will lie in another. 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: Table. Best and Worst case scenarios for industry profits.
Profit growth over period CAGR Operating Margin in 2014 Worst case 55% 9% 17% Best case 177% 22% 28%

All financial numbers are “current” Sterling, unless stated otherwise. 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

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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! Chart 1. Influence of cover price variance on circulation. .......................................................................5! Chart 2. Geometric relationship between GDP and newspaper advertising over time ............................7! Chart 3. Variance in rate of change of regionals' share of display and classified ....................................8! Chart 4. Estimate of regional newspapers' share of online display and classified ...................................9! Chart 5. Expenditure through different marketing channels. .................................................................11!

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Discussion document on the future of the regional press

1 CIRCULATION, READERSHIP AND AUDIENCES
1.1 Print circulation

Newspapers are under pressure. In part this is due to the long-term evolution of other media – broadcast, digital – but also due to social change. Newspapers compete as much with the golf course as with other media for readers’ time. 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.
1.2 Impact of strategic decisions re pricing and distribution

While on the surface these figures seem discouraging, it should be noted that much of the fall in sale is due to the removal of bulk sales, which offered little strategic value, added nothing to readership, and were essential a vanity cost. UK newspapers have enjoyed reasonable increases in circulation revenue due to exceptionally large price increases, though as the chart below suggests, there is a direct correlation between pricing and circulation performance.
Chart 1. Influence of cover price variance on circulation.

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.

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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.
1.3 Circulation forecasts

On the basis of the assumptions above, forecasts for circulation over the next five years are as follows:
Table 1. Forecast of circulation sales and revenuesiii
2008 Circulation (daily and weekly) B Aggregate cover price (pence) Total annualised revenue £B 1,482 49.0 726 -4.94 4.21 % -0.93 2009 1,438 51.4 739 -3.00 5.00 1.85 2010 1,394 54.0 753 -3.00 5.00 1.85 2011 1,353 56.7 767 -3.00 5.00 1.85 2012 1,312 59.5 781 -3.00 5.00 1.85 2013 1,273 62.5 795 -3.00 5.00 1.85 2014 1,234 65.6 810 -3.00 5.00 1.85

Circulation (daily and weekly) % Aggregate cover price % Total annualised revenue

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.
1.4 Online audiences

It is also important to consider the role of digital audiences, in terms of content revenues, and in terms of extending the coverage for advertisers. Detailed data will soon be available in the UK, but analysis of USA data provides a comparable illustration of trends in the digital space. 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).

2 ADVERTISING, COMMUNICATIONS AND MARKETING
2.1 Advertising

Advertising revenues have traditionally been strongly linked to GDP. However in recent years, there is strong evidence that both general advertising and newspaper advertising revenues are “decoupling” from GDP. 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

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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.
Chart 3. Variance in rate of change of regionals' share of display and classifiedvii

2.2

Forecast of advertising revenues

The most positive forecast assumes a scenario that advertising will continue to follow the GDP model. This would suggest that revenues over the next five years as follows:
Table 2. Forecast of advertising revenues – Linear forecastviii
Advertising revenue (£M) % variance 2008 2141 -17.7 2009 1483 -30.7 2010 1369 -7.7 2011 1339 -2.2 2012 1310 -2.2 2013 1284 -2.0 2014 1266 -1.4

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:
Table 3. Forecast of advertising revenues – Geometric forecastx
2008 Advertising revenue (£M) % variance 2141 -17.7 2009 1483 -30.7 2010 1308 -11.4 2011 1204 -5.1 2012 1099 -5.6 2013 995 -6.1 2014 899 -6.5

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.
Chart 4. Estimate of regional newspapers' share of online display and classifiedxi

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. CHISHOLM 9

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:
Table 4. Comparison of ad revenue per time consumedxiii
Spend per nation hour (£M) TV Radio Internet Newspapers
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4.2 1.2 8.2 23.5

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.
2.4 Forecast of digital revenues

In forecasting newspapers’ digital future there is little historical experience to draw on. In addition Chisholm does not believe that materially significant revenues will be derived from content by local newspapers. The growth forecast is based on the following growth rates of online advertising, which derive in industry revenues.
Table 5. Growth rates of regional newspaper online advertisingxiv
Growth rate Newspaper digital revenues (£M) 2010 5% 143 2011 25% 178 2012 20% 214 2013 15% 246 2014 10% 271

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%.

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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Chart 5. Expenditure through different marketing channels.xv

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.

3 IMPACT ON NEWSPAPER TURNOVER AND VALUE
3.1 Impact of cost management

Alongside forecasts of revenue, newspaper companies have been making great strides in terms of cost management. There are still costs to be removed in both back office resources, and editorial. UK regional newspaper newsrooms continue to be overstaffed relative to similar industries overseas.
Table 6: Analysis of journalist productivity – UK and USAxvii
Circulation (k) Journalists Journalists per distribution On basis of annual sales UK USA 3558932 23510500 12000 55000 Ratio 3.4 2.3 1.4 Staff per million annually On the basis of daily sales UK USA 6650 51398 12000 55000 ratio 1.8 1.1 1.7 Staff per thousand copies

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. ! Newsprint Newsprint costs are assumed to be 15% of revenues in 2008. Future forecasts are then aggregated according to variances in circulation copies and advertising revenues, and rate risesxviii . These are flat lined, therefore falling against inflation. These are assumed to fall annually by 5% in current prices.

! !

Labour costs Other costs

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.

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3.2

P&L forecast.

On the basis of the revenue forecasts above, and the assumptions on costs in 4.1, the “best case” model for the industry, based on the linear GDP forecast, is as follows:
Table 7. “Best case” P&L forecast based on linear GDP forecastxix
£M Advertising revenue Circulation revenue Digital revenue Other revenues TOTAL REVENUE Variance in revenue % Labour Newsprint Other TOTAL COSTS Operating profit Ratio 2009 1483 739 136 118 2476 -30.7 834 315 1080 2228 248 10.0 2010 1369 753 143 124 2388 -7.7 817 267 1026 2110 278 11.7 2011 1339 767 178 130 2414 -2.2 801 252 974 2027 387 16.0 2012 1310 781 214 136 2441 -2.2 785 240 926 1951 490 20.1 2013 1284 795 246 143 2469 -2.0 769 231 879 1879 590 23.9 2014 1266 810 271 150 2497 -1.4 754 221 835 1810 687 27.5

The “worst case” model, that acknowledges the full extreme of geometric decoupling that is occurring is as follows:
Table 8. "Worst case” P&L forecast based on geometric decoupling forecastxx
£M Advertising revenue Circulation revenue Digital revenue Other revenues TOTAL REVENUE Variance in revenue % Labour Newsprint Other TOTAL COSTS Operating profit Ratio % 2009 1483 739 136 118 2476 -30.7 834 315 1080 2228 248 10.0 2010 1308 753 143 124 2327 -11.4 817 255 1026 2098 229 9.8 2011 1204 767 178 130 2279 -5.1 801 227 974 2002 277 12.2 2012 1099 781 214 136 2230 -5.6 785 202 926 1912 318 14.3 2013 995 795 246 143 2180 -6.1 769 179 879 1827 353 16.2 2014 899 810 271 150 2130 -6.5 754 157 835 1746 384 18.0

The difference between the two models is summarized as follows:

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Table 9. Summary of best and worst case forecasts. Current and constant pricesxxi
£M Current values Best case operating profit Worst case operating profit Constant values Best case operating profit Worst case operating profit Best case operating margin Worst case op. margin 2009 248 248 2010 278 229 2011 387 277 2012 490 318 2013 590 353 2014 687 384 CAGR 23.0% 9.6%

248 248 10.0 10.0

271 223 11.7 9.8

377 270 16.0 12.2

477 310 20.1 14.3

574 343 23.9 16.2

669 373 27.5 18.0

22.4% 9.1%

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.

4 ANALYSIS AND RECOMMENDATIONS
4.1 The economics of news provision

While regional newspapers traditionally derive most of their revenues from advertising, they are - in common with most other forms of communication - increasingly deriving revenue contribution from contentxxii . However for most newspapers, circulation generates far less net revenue, after costs to market, than advertising, since as a general rule, only 30% of circulation revenues fall through to gross profit after sales costs, compared with 85% of advertising revenuesxxiii While cover price revenues barely cover the costs of editorial and related newsprint, providing editorial costs are pinned to pagination fall, this situation will not deteriorate. The provision of news in the UK cannot be considered a profitable business in itself, hence the reason that other media, are seeking to drop their news services. Regional newspapers have traditionally profited from advertising revenues derived from advertising.

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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.
4.2 The economics of marketing and communication

This report points out that the shift from traditional “display” media to more “direct” forms of communication has been going on for decades, and digital is only a logical, extension of this. Other more direct marketing competitors were stealing customers from newspapers long before the Internet arrived. For newspaper publishers to truly realise their potential, they must see themselves in this broader market environment, rather than simply a competitor to TV and radio. 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. CHISHOLM 15

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.
4.3 The reality of today’s media environment

One obvious issue for UK regional publishers to consider is how they capture a greater level of the UK digital space both in terms of audience and advertising. UK newspapers appear to be attracting similar audiences to other markets, with relatively high numbers of occasional visitors spending little time with the medium. Within this there are a number of high volume, high value users, but the profile of users is not known in detail at an industry level. In terms of communication revenues, the industry would appear to be behind other markets, in part because of a lack of cohesion. 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.

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Both Norway’s Schibsted, and Sweden Bonnier operate print and TV operations. Notably, Gannett, in Phoenix, and Media General in Tampa.

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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.

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Discussion document on the future of the regional press

APPENDICES Sources, references and explanations
i

Source: World Press Trends 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.
ii

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.

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