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July 27, 2015

Rushil Surapaneni | New York

+1 212 438 0412 Global Newspaper Industry Analysis

Expectation that there will be a continuing shift from a business-to-business

model to a business-to-consumer model.

Newspaper digital audience numbers continue to experience growth, enhanced

by the increasing number of mobile users.

Total newspaper circulation revenue made minimal gains in 2014, but the
adoption of paywalls is making up for lost print revenue on a temporary basis

Several media conglomerates spun off their newspaper divisions as separate

companies in an attempt to prevent the newspaper industrys woes from
affecting the health of their broadcast divisions.

Marketing services, such as commercial printing, distribution of other products,

and event marketing, is the fastest growing new revenue stream for publishers.

Mobile monetization and the economic development of APAC will be the key
drivers that will fuel the industrys growth engine.


July 27, 2015


The Evolution of the Newspaper Industry in Recent Years
U.S. newspaper publishers have seen a profound shirt in their business models as circulation revenues in the
most recent full year were larger than advertising revenues for the first time this century and despite widespread
talk of a shift to digital, most newspaper readership continues to be in print both domestically and internationally.

But this news is offset by the facts that overall newspaper circulation fell again in 2014 after a year of slight gains
and growth in digital ad revenue failed to make up for falls in print ad revenue. This volatility of the newspaper
industry led several media conglomerates, notably Gannett Company, Inc., to spin off their newspaper divisions as
separate companies in an attempt to protect the health and margins of their broadcast divisions.

Witnessing these general trends, it is clear that the industry will seek new areas of growth in place of the traditional
methods that have failed to generate the margins necessary for the major players within the industry to thrive. We
predict that the further development of paywalls through the digital sphere and the continued socio-economic
development of APAC nations such as India and China will slow down the decline in total newspaper revenue. The
growth of mobile monetization however will define the chances of survival for many of the industrys companies as
an increasing amount of the worlds population become mobile Internet subscribers.

The Shift from B2B to B2C

Newspapers: Ad and Circulation Revenue for Publicly-Traded Companies, 2013 2014 (in thousands)

Ad revenue Ad revenue % Circulation revenue Circulation revenue %

2014 2013 change 2014 2013 change

Gannett $1,526,382 $1,609,164 -5.1% $836,756 $840,626 -0.5%

E.W. Scripps $168,000 $176,135 -4.6% $90,738 $86,754 4.6%

New York Times $452,980 $454,595 -0.4% $626,267 $616,603 1.6%

A.H. Belo $114,918 $122,288 -6.0% $63,458 $64,024 -0.9%

$56,527 $58,520 -3.4% $35,663 $37,188 -4.1%

McClatchy $543,894 $587,689 -7.5% $271,114 $255,554 6.1%

Lee Enterprises $442,001 $460,540 -4.0% $176,826 $177,056 -0.1%

Total $3,304,702 $3,468,931 -4.7% $2,100,822 $2,077,805 1.1%

Source: SEC filings. Figures are for the nine months ending Sept. 30, 2014 or 2013, except for Lee, which are for the 52 weeks preceding those dates.

Total newspaper advertising revenue has maintained a consistent trajectory for nearly the past decade any gains
from digital ads have been offset by the significant losses in revenue from print ads. Total newspaper advertising as a
percentage fell from 54.4% in 2010 to 52.6% in 2014 and the continuing decline is foreseeable in the future as
advertisers and companies seek alternative and, in certain cases, cheaper forms of advertisement in the digital era.
While the ratio of advertising revenues to circulation revenues varies from market to market, newspaper advertising
revenues are down nearly everywhere, far short of the 80% of revenues advertising made up for total revenues of the
newspaper industry throughout the 20 th century.

The decline in advertising revenues has led to print and digital circulation revenue to exceed advertising revenue
in 2014 for the first time this century. Figures for Gannett, The New York Times Co., McClatchy, and Lee
Enterprises all show circulation revenue was up 1% from 2013, demonstrating how audiences, rather than
advertisers, have become publishers biggest sources of revenue. According to the World Association of
Newspapers and News Publishers, newspapers generated an estimated $179bn in circulation and advertising
revenue in 2014 globally with $92bn coming from print and digital circulation and $87bn coming from advertising.
We believe this trend will hold in upcoming years as advertisers continue to take advantage of popular consumer-
driven platforms where they can list items for sale at no change, permanently impairing classified revenue for
newspapers. The declines in newspaper advertising revenues across the retail (about 5%), national (about 6%),
and classified (about 5%) categories have been occurring for a number of years now and is a trend that does not
seem be either cyclical or secular in nature, but rather a long-term pattern.

The Impact of Mobile Development

The digital audience engaged with newspaper content totaled 176 million adult unique visitors in March 2015, a
10% increase compared to the numbers from March 2014, according to the Newspaper Association of America.
This increase can be attributed to the general growing trend of individuals consuming newspaper digital content
through mobile exclusive UVs. Those who use only mobile devices, rather than desktop or laptops, to consume
newspaper digital content increased to 71 million adult unique visitors in March 2015, an increase of 53%
compared to March 2014, according to the Newspaper Association of America. While globally, consumption
through print still remains firmly dominant compared to the size of the digital audience, over the past five years,
paid digital circulation has grown 1420%, with the percentage of individuals answering that they pay for digital
subscriptions ranging from 7% in the United Kingdom to 22% in Brazil.

When looking at these numbers further in-depth, growth in digital consumption rose in all major demographic
segments, including men age 18-24 (68%), men 35-44 (65%), men age 55 or more (79%), and women 45-54
(81%). For the largest newspapers, their digital audience numbers far outpaced circulation yet more readers
reported reading a newspaper in print than on a digital device. The explanation for this can be found in the average
amount of time readers spend on the websites of these publications. The average visit to The New York Times
website and associated apps in January 2015 lasted only 4.6 minutes with these flybys arriving at the website
through a link on a social networking site or email, thus not considering this experience as reading a newspaper,
but rather simply browsing an article. Nonetheless, with the continued growth of the mobile market and the general
shift in the populace from print to digital, we can expect the digital audience to continue to grow into the near future
and beyond for the newspaper industry, posing new challenges for an industry mired in antiquated techniques.

Generating Revenues from Paywalls

According to PwC, digital newspaper circulation revenue from a wave of subscription offerings reached nearly
$2.5bn in 2014, contributing to a 0.7% increase in total newspaper circulation revenue despite continued print
shrinkage. In response to this, newspaper publishers located in more developed markets such as the U.S. and
Western Europe have sought to increase their margins through fiscal policies intended to devote more resources
towards the burgeoning digital subscriber market and cutting production costs by reducing the frequency of
printing. While such a practice risks alienating segments of the readership who prefer print to digital, the lower
operating costs of the digital sphere in comparison to print and the general growth in popularity and revenue from
online subscriptions has led publishers to adopt a more digitally-influenced business strategy.

After several years of trial and error with the paywall system, publishers have noted a track record of noteworthy
short-term gains in revenue, but long-term concerns about the continuing profitability of paywalls. Publishers such
as The New York Times released the metered paywall a few years back that block a reader from accessing
articles once they reach a certain threshold per day, week, or month. This model was established under the
assumption that core readers will eventually purchase a digital subscription for unlimited access once they are
blocked from viewing more articles. To account for fly-bys, newspapers have also succeeded in asking print
subscribers to pay slightly more for a digital subscription that will allow readers to access articles found through
search or social media even if they have exceeded their monthly limit. In the case of The Gannett Company, after
implementing metered paywalls for 78 of its newspapers in 2013, digital subscriptions added more than $100
million in operating income and in 2014 digital subscriptions at The New York Times earned $169 million.

While paywalls have served recently as a significant source of revenue for the industry, concerns linger about the
long-term profitability of these systems. The fear that paywalls may only serve as temporary boosters was
intensified when subscription revenue stalled in the most recent full year for both the Tribune Publishing Company
and Gannett. Furthermore, certain newspapers such as The Dallas Morning News and San Francisco Chronicle
decided to abandon the concept of a paywall entirely for their content. These sites, which featured hard paywalls
that dont allow any access to articles without a digital subscription, saw minimal, if any, gains from these paywalls,
especially in the case of the Chronicle, where some of its news content could be found on a free website. In
attempting to explain the failure behind these hard paywalls, the Columbia Journalism Review declared that hard
paywalls made sense for only the most essential news providers or those providers where readers cannot find
the same information elsewhere. While paywalls and digital subscriptions have been a blessing in terms of profits
and revenues for the industry in recent years, their viability to generate continuing profits into the future remains
murky for the newspaper industry.

Industry Spinoffs and M&A Activity

In 2014, several media companies, including Gannett, E.W. Scripps and Journal Communications, and Tribune,
completed spin-offs of their publishing divisions in hopes of preventing the newspaper industry s woes from
affecting the health of their broadcast divisions. Tribune emerged from bankruptcy, spun off its newspapers in
August 2014, and proceed to buy the Chicago Sun-Times suburban papers, which the Sun-Times was spinning off
in a bid to build a national network of local news websites. In April 2015, E.W. Scripps and Journal
Communications simultaneously spun off and merged their newspaper operations to form Journal Media Group.
And in late June 2015, TEGNA, the media company formerly called Gannett, spun off its publishing business,
which retained the name Gannett, seeking to protect its broadcasting and digital businesses from the decline in
print advertising. Gannett expects revenue to continue to fall with the decline of print advertising and newspaper
This trend in recent spin-offs along with consolidation isnt limited to solely the desire of media companies to
protect their broadcasting divisions, but driven by a multitude of internal and external factors. Companies are
increasingly concentrating businesses in specific markets to maximize synergies among publications, saving
money and attracting larger advertising clients. This process involves operating a single editorial team across
several newspapers through shutting down inefficient printing presses. Production costs, specifically concerning
higher world prices of wood pulp, the primary component into the manufacturing of paper, have led companies to
work together to mitigate costs.

With revenues projected as declining in the foreseeable future, it is clear that this pattern of spin-offs and
consolidation will continue within the industry to mitigate the damage that the downturn in the newspaper industry
has caused. The NAA predicts that additional consolidation is anticipated to occur during the next five years, with
the number of businesses in the industry declining at an annualized rate of 4.5% to 2,646 companies by 2018. As
competition amongst those in the digital sphere continues to develop and expand, publishers will not be able to
charge print-level prices for online platforms, which they are currently invested in to counteract print declines. It is
for these reasons we believe newspaper publishing will become increasingly concentrated in coming years as
publishers realize the necessity behind merging activities to ultimately reduce costs to counterbalance the
continued losses in their primary revenue streams.

Potential New Revenue Streams

In their U.S. Newspaper Media Revenue Profile for 2013, the NAA listed New/Other Revenue at $3.15bn, the
fastest growing segment of the revenue profile in terms of year-over-year percentage growth for the industry. This
source of revenue included services such as commercial printing, distribution of other products (i.e. other
newspapers), event marketing, e-commerce and marketing services. In respect to marketing services, companies
such as Gannett with G/O Digital, McClatchy with impressLocal, and New Media with Propel, are investing in the
potential growth this base possesses, with marketing services featuring a 43% year-over-year growth in 2013.
However, while marketing services possess potential for the industry to build off of, the execution of such services
are tough in regards to establishing business featuring a small base of customers each paying in the multiple
hundreds of dollars a month. While the growth in marketing services is indeed real and should serve as a positive
uptick for the industry, the share of the revenue stream that this service occupies, along with other new and
alternative forms of revenue, is too small at its current state to have any significant impact on the overall revenue
landscape of the industry as a whole in the upcoming future.
Mobile Monetization and Foreign Operations
PwC estimates that by 2017, more than half of the worlds population will be mobile Internet subscribers.
Publishers realize that more people are consuming their media on a daily basis through mobile products more so
than utilizing the newspaper. The challenge, as David Payne, the Chief Digital Officer of Gannett put it, is
transferring mobile utilization towards revenue growth, especially since tablets and smart phones are so different
from each other, with phones shaping up as the primary facilitators of electronic commerce, otherwise known as
m-commerce. The rapidly expanding nature of the mobile market has led to expectations for publishers to push
mobile digital advertising spending to about 88% of all local advertising, as advertising on desktops decline
precipitously. Already, the impact of the mobile market can be seen with 19 of the top 25 newspaper sites and
associated apps in overall traffic reporting that in 2014 that mobile traffic exceeded desktop traffic by at least 10%.
Through strategies involving all-access bundled subscriptions and increased amounts of coupons and circulars on
mobile newspaper applications, publishers have taken an initiative to continually expand within the mobile market
and we expect this trend to continue with the growing utilization of mobile phones worldwide.

While the newspaper industry continues to shrink in its most matured markets, it remains relatively healthy and
experiencing strong growth in APAC countries, specifically China and India, as expanding literacy, economies, and
population spur consumption. The development of APAC is a strong driver behind why print circulation increased
6.4% globally in 2014 from a year earlier and shows a five year growth of 16.5% as circulation grew 9.8% in Asia
from a year earlier alone. PwC estimates that China and India alone will account for 57.3% of global average daily
unit circulation print in 2019, up from 49.7% in 2014 as the global newspaper industry will become increasingly
reliant on these emerging markets to make up for their significant losses of more mature markets.
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