It’s been another ‘bad news’ month for UK newspapers. Just a few weeks after Vice founder Shane Smith predicted a media industry “bloodbath”, Britain’s most successful newspaper group DMGT reported a 16% drop in advertising revenue at the Daily Mail in the six months to the end of March. Even the 20% growth at its Mail Online was scant consolation because annual revenue will not reach the £100m it has been targeting for more than two years. Consequently, the world’s
largest English language newspaper site remains far from profitable. Daily sales of the UK’s national newspapers have more than halved to 6.5m in the past 15 years and are still falling. But it is the continuing drain of advertising that panics investors.
Consultant Enders Analysis says: “Print advertising is going through a structural shift, a hugely significant shift, because of decisions made by major advertisers such as retailers and supermarkets. And there doesn’t seem to be an awful lot sales teams can do about it.” The Financial Times noted: “Fleet Street is following Britain’s regional papers and US metropolitan ones in being hollowed out.”
That’s why DMGT’s share price promptly fell 13% on the London stock exchange but it is also why the smaller Trinity Mirror Plc lost 5% on the same day. The Daily Mail is arguably the UK’s best national news business but the majority of its parent company profits come from world-class B2B media. Trinity Mirror – whose national daily and Sunday newspapers in the UK and Scotland lost circulation at a faster rate than their competitors in 2015 – has no such alternative attractions.
But it does have 1m daily sales of national brands like the Daily Mirror, The People, Scotland’s Daily Record and metropolitan flagships including: Manchester Evening News, Birmingham Mail, Liverpool Echo, Bristol Evening Post, Leicester Mercury, and Newcastle Journal. The company has 13 of the UK’s largest paid-for regional dailies. It has an average weekly circulation of 9m regional newspapers comprising 36 dailies, 8 Metro free tabloids (franchised from DMGT) outside London, 88 paid-for weeklies, including 5 Sunday papers, and 43 free weeklies. Last year, Trinity Mirror made pre-tax profits of £104m from revenues of £593m which were 7% down on 2014.
Red-top pioneer
The group sprang from the Daily Mirror, which was founded in 1903 (like the Daily Mail before it) by tabloid pioneer Lord Northcliffe. Sixty years later, it became part of IPC, the company whose magazines now comprise Time Inc UK. The Daily Mirror soared to a circulation of more than 4.5m and, for decades, managed to combine its role as a racy red-top with serious, left-leaning political coverage and some of Fleet Street’s best-known columnists. Its role as a powerhouse tabloid was disrupted by the 1970s growth of television news – and by Rupert Murdoch who persuaded the Mirror’s then clueless owners Reed International to sell him a struggling newspaper called The Sun.
Within 10 years, the Aussie media emperor and a succession of audacious editors had turned UK journalism upside down and made The Sun into the country’s best selling daily with a raucous mix of football, sex and celebrity. Even today, its sales are about double those of the Daily Mirror which, en passant, had to contend with being pillaged by its 1980s owner, the late Robert Maxwell. The Mirror had been the 1950s model for Axel Springer’s Bild which, ironically, supplanted it as Europe’s largest-selling newspaper. The UK tabloid and its stable-mates The People and the Scottish Daily Record remained in crisis after Maxwell’s 1991 death, before merging with the regional newspaper group Trinity in 1999.
Unconvincing strategy
The initial result was: an unconvincing (and largely unimplemented) national-local newspaper strategy, unmanageable debt, a large pension scheme deficit – and steadily falling circulations. The first Trinity Mirror CEO paid the price for not discovering the synergies of the mixed bag of newspapers he had brought together. Next came Sly Bailey, the CEO who had successfully polished up IPC Media for sale to Time Inc.
Bailey became CEO of Trinity Mirror in 2003. The following year, she reported revenues 6% up and profits up 17%. That proved to be the peak performance. In the next eight years, revenue fell by 30%, operating profit by 40%, and the company’s market value was slashed by almost £1bn to just £80m. The step too far for frazzled investors proved to be the CEO’s own remuneration of £1.7m which had, to say the least, not shrunk with the company. Bailey quit shortly before her chairman also took the hint. Former EMAP and Reuters CFO David Grigson became chairman.
By the time Grigson appointed Simon Fox as CEO, there was a lot of Trinity Mirror whispering about Sly Bailey’s alleged lack of strategic skills. It seemed harsh but Fox certainly impressed as having (perhaps) more appetite for the detail of a business now urgently in need of top-to-bottom transformation.
Trinity Mirror’s stock exchange performance speaks volumes for the way it has tormented investors over the past 13 years. The share price was 429.5p on Sly Bailey’s appointment in 2003 and collapsed to just 50p when she left nine years later. In the following 18 months, investors responded to the new
Grigson-Fox team with a bounce to 228p. But, now, the shares have fallen back to 121.44p, having lost more than 20% in the past year.
Simon Fox is the smart, former CEO of troubled UK music-games-video group HMV whose executive career in retailing took off in 1998 when he joined Kingfisher Plc and, ultimately, became CEO of its e-commerce business. That was a big year also for his current chairman. Grigson’s stellar executive career could have been splashed by EMAP’s 1998 acquisition of US magazines group Petersen.
That disastrous $1.5bn deal eventually brought down the high-flying UK media group, which was broken-up and sold in 2007. Grigson has since built an enviable reputation as the kind of incisive, articulate leader every company needs. He’s a great communicator. With the quietly analytical CEO, this has become a highly-trusted and engaging double act. And they started very well, not least in paying down debt, and restoring profitability and dividends for long-suffering shareholders.
But these are testing times for even the best media executives. For Grigson and Fox, the hard yards began with the UK phone hacking scandals which pre-dated their appointment. They had inherited an audacious Sly Bailey public stance of simply being unable to contemplate any illegal activity at Trinity Mirror. Throughout the criminal trials and parliamentary enquiries, vilified News Corp executives and journalists constantly hinted that “other newspapers” were involved. The gossip about Mirror journalists seemed to lack the traction of the Murdoch scandals which had led to the closure of the big-selling News of the World and some criminal convictions. But the Mirror’s turn was always coming.
Phone hacking bites back
Two years after becoming chairman in 2014, Grigson made the beginner’s mistake of claiming that the Daily Mirror publisher had already done everything except “ripping up the floorboards” in an exhaustive investigation of phone hacking allegations at its newspapers. Nine months later, the company admitted that there had been phone hacking at the Mirror – lots of it, possibly (think about it) even more than at News Corp UK. It has now set aside some £40m to pay compensation to victims many of whom are pursuing civil claims against the company. Nobody knows if that will be enough.
The mistakes of the past continue to haunt Trinity Mirror whose £300m pension deficit now almost equals its stockmarket
valuation. And, then, there’s Local World, a grouping of regional newspapers drawn from DMGT and the Iliffe family, which was put together in 2012 by the one-time Mirror CEO David Montgomery. The new regional newspaper company (in which Trinity Mirror had taken an initial 20% shareholding) last year become the £220m acquisition on which the success of Simon Fox’s whole strategy now depends.
The deal added 83 newspapers and cemented Trinity Mirror’s position as the UK’s leading regional publisher. Its case for acquiring Local World deal was that 44% (23m) of British adults (still) read a regional newspaper. Fox hailed the acquisition as “transformative”, and was widely supported by shareholders, investment analysts and journalists. But it is worth examining a deal which, counter-intuitively, had doubled the valuation of Local World in less than three years.
The price was described as 5 x EBITDA profit for 2014. But it was more like x6 with the inclusion of exceptional rationalisation costs (an every-year requirement, after all, for newspaper companies). But it gets worse. The multiple would have been at least x7 on 2015 figures which saw Local World revenues falling a further 6% (only reported after the deal’s completion seven weeks from the year-end). The fact is that 2015 revenues were 10% down on the company’s first-year results in 2013. So, Trinity Mirror paid a price well in excess of its own x5 stockmarket rating for a company whose squeezed profit growth masked continually falling revenues. And – while the CEO expects to cut more than £12m from Local World costs – he will also be paying the ‘opportunity cost’ of having to concentrate on squeezing the value out of newspapers.
The continuing decline in print revenue (scarcely mitigated by digital gains) underlines the fragility of forecasts used to justify Trinity Mirror’s role as a “consolidator” of newspapers in a broken market. Revenues might just be shrinking too fast. Last month’s Daily Mail advertising figures emphasised the simple fact that the worst may still be to come.
Manchester disunited
Consider some of the specifics of Trinity Mirror’s regional portfolio. In Manchester – the UK’s third largest conurbation – the
long-established Manchester Evening News is at the centre of a network of no fewer than 21 weekly and daily newspapers reaching some 2.2m people every month. Its online services reach a similar number of weekly unique users. The result is that more than 70% of all people in Greater Manchester are served by the group. But the core Manchester Evening News – the company’s second largest regional daily – is suffering from the fragmentation.
Its circulation fell 21% to 52,158 last year and, worse, some 39% of these copies are now distributed free. This is the picture of a once super-profitable UK metropolitan market where the traditional publisher has had to contend with aggressive competitors (in print and digital). The overall result is reduced profits, lower margins and a long tail of small brands.
In 2015, Trinity Mirror’s regional paid-for daily and weekly newspapers declined by 12% and Sunday papers by 16%.
The UK Advertising Association has forecast that, having lost more than 6% of revenue in the UK’s 2015 advertising boom, regional news brands will fall a further 5.5% this year and 4% in 2017. National news brands (which lost 11% of total advertising in 2015) would shed a further 6% this year and 3.4% in 2017. Consultant eMarketer forecasts that UK newspapers’ share of all adspend will fall from 11% in 2015 to 8% in 2020. But even these forecasts are starting to look conservative. It’s like trying to catch falling knives.
Trinity Mirror is a well-managed news business with a clear strategy. It has developed a distinctive approach in using data to create infographics, journalism and digital information services. Its data journalism, listings and ratings help readers decide on which schools to choose, where best to live and (sort of) how to live their lives. And it is developing captivating audience data to help guide content and sell advertising. But the company remains print-obsessed and, overwhelmingly, views even digital media principally through the prism of newspaper brands and content. This is a handicap in a market in which the ultimate specialists, Google and Facebook, together have more than 50% of all digital advertising.
Betting on newspapers
The Grigson-Fox strategy really is a bet that newspapers and their print-mirroring web sites will remain a substantial force. This optimism seems to discount some inescapable truths:
- General news – to which the bulk of newspaper people and resources are still devoted – has become commoditised, low-value and increasingly free to consumers. Such news, information and entertainment will also increasingly be used as ‘content marketing’ by retailers and other service providers. Media companies need to switch their resources to producing content that is exclusive, distinctive – and competitive.
- It will be increasingly difficult to sustain two major revenue streams, from readers and advertisers, either in print or digital. Readers may be prepared to pay for some “unique” content but, perhaps, only if it does not expose them to high volumes of advertising. This will mean a continuing shift towards free newspapers funded by advertising, a very painful trend for Trinity Mirror which still gets 50% of its revenues from paid-for papers.
- Trinity Mirror’s history of creating ‘super regional’ newspapers (like the multi-edition, 265k free circulation Manchester Weekly News which replaced six local papers in 2015) is an obvious attempt to create scale economies. But the strategy may conflict with the apparent demand for ‘hyper local’ media. It might, therefore, invite many new competitors, especially in digital.
- The growth of online video, live streaming, and (coming soon) virtual reality will expose newspaper-centric web sites to even fiercer competition from social media and tech companies. In the medium term, many newspapers may simply lack the skills and content to compete digitally. The risk is highlighted ironically by Simon Fox’s emphasis on “a clear digital strategy focused primarily on supporting our newspaper brands” which hardly sounds digitally-competitive.
Newspaper advertising prospects were further trashed this week in the latest US analysis by internet guru Mary Meeker, which underlined
the extent to which newspapers (in the US and elsewhere) continue to get much more advertising than they now “deserve”, especially by comparison with mobile.
It all implies that newspaper advertising is not coming back – and the decline has a long way still to go.
‘Innovative’ flop
Two other things might trouble Trinity Mirror’s investors:
New Day: The embarrassing failure – after just 9 weeks – of the company’s unlikely new tabloid daily New Day. The newspaper claimed to be targeted at “women who do not currently buy newspapers” which always seemed like an unpromising objective. But Simon Fox claimed: “It is an exciting and innovative initiative which, we believe, fills a gap in the market for a daily newspaper designed to co-exist in a digital age.”
The paper was promoted to investors as being so low-budget that it needed “only” to sell 200,000 copies to be profitable. It didn’t even have a web site. The company even suggested it could be profitable by the end of 2016. But the 40-page paper was journalistically weak and poor value for its 50p cover price compared, for example, with DMGT’s larger Metro free tabloid and the powerful, female-focused Daily Mail at 65p.
New Day’s prospects were not helped by that boastfully low budget because the so-brief launch advertising campaign scarcely reached its target audience. The upshot was that – even when the content had started to improve in the way of new launches – the newspaper did not have the budget to enable any kind of post-launch boost. In the event, copy sales fell as low as 40,000.
Just two months after he had claimed that research indicated strong demand for New Day, the Trinity Mirror CEO admitted that
“…getting readers who have lapsed out of print to come back to the market was harder than anticipated.” What on earth did he expect? For all the claims that the fiasco had produced “valuable market insights”, it was a surprising blunder for a management team that had (mostly) seemed so careful, considered and cautious.
Iliffe: Trinity Mirror managed to create very private but unwelcome controversy over its acquisition of Local World. As part of the deal, it had agreed to sell on seven of the newspapers to fellow shareholders, the Iliffe family. Given that the initial acquisition talks had been frustrated by Iliffe’s refusal to accept the offer for its 21.3% shareholding, the re-sale was considered crucial to securing shareholder agreement.
That was also what Edward Iliffe and his family thought when they signed a Heads of Terms agreement for the seven newspapers before the acquisition was announced. They had even agreed a price of £15.8m. But, once Trinity Mirror had completed the whole £220m acquisition, it blithely paid £2m to exercise a ‘break clause’. Simon Fox abruptly dropped the re-sale plan – and prompted obvious questions about his company’s ethics. Not nice.
A new strategy?
Trinity Mirror is, to say the very least, a reminder of the challenges of newspaper reinvention. The task of applying traditional skills, brands and resources to create a new, future-proofed business is formidable. Whether they admit it or not, most of their peers around the world are actually involved more in diversification than reinvention. News Corp, Axel Springer and Schibsted are expanding strongly in digital classifieds beyond the geographies served by their newspapers, and DMGT is really a B2B group which happens to be best known for its original news brands. It’s not mostly about newspapers at all.
But that’s the Trinity Mirror difference.
The company is seeking to maximise long-term profits from the newspaper-centric market. This scenario has brokers forecasting that its 2016 revenue will be just 7.5% below that for TW-Local World in 2015 and that, while it will fall by just 4% in 2017, EBITDA profit margins will increase from 18% to 19%. Pretty optimistic stuff.
The CEO has defined his strategy as “One Trinity Mirror” – creating a single centralised organisation for its newspapers and all else. But there may be a much stronger case for the UK company to consider a new three-way strategy:
- Separate print from digital. The approach pioneered seven years ago by Professor Clark Gilbert at Deseret Media, in Utah of completely separating the management of print from digital, would clearly help to ensure Trinity Mirror’ssingle-minded maximisation of print profits – and also the development of digital services unencumbered by the legacy brands. It would also recognise that the most effective executives for digital media will seldom will be the same as those for newspapers. Arguably, the commercial under-performance of DMGT’s Mail Online highlights this disadvantage of managing a digital insurgent alongside a print incumbent. The acceleration of online video and virtual reality content will exacerbate the divergence. The case for ‘digital demarcation’ is becoming more critical to newspaper companies because it is clear that the new businesses have to be smaller, lower-cost and more agile. The big beasts of print like Trinity Mirror must realise this before it is too late.
- Re-engineer content. The company needs to redirect many of the skills and resources currently dedicated to ‘widely available’ news, in order to increase the provision of exclusive information, comment, analysis and services. Trinity Mirror could, for example, substantially out-source much of its general news content to the Press Association (PA), the UK’s leading news agency, in which it is a 21% shareholder. The recent announcement of an independent, paid-for UK daily “24” – which says 95% of its content will come from PA – might help to prompt a rethink. Come to that, why wouldn’t a newspaper (or its digital equivalent) also aggregate other content from, say, The Economist, Grazia or even the BBC? Such a change could actually help strengthen the appeal of daily newspapers while reducing overall costs. It is two long years since one digital media guru said it all: “Concentrate on the best, link to the rest”.
- Invest in digital startups. Trinity Mirror should actively invest in digital startups. The much larger legacy news groups Axel Springer and Hearst are showing how such venturing can give powerful insights – and create the prospect of investment returns and/or future acquisitions. Relatively small cash investments and in-kind promotional and infrastructure support can give mature companies access to the new generation of digital entrepreneurs. Over time, such investments could help to transform the whole culture of a parent company.
Trinity Mirror’s strategic options include whether to use its £100m annual cash flow to invest in new businesses. But, when investors applaud the company for becoming a ‘consolidator’ in newspapers, that’s code for encouraging it to squeeze out profits and not to invest too much for the long-term.
Few significant media groups anywhere have chosen to be quite so single-minded about print. That’s why we’re all watching Simon Fox.
UPDATE: 9 January 2017 (from The Guardian)
The Daily Mirror’s parent company has confirmed it is back in talks with Richard Desmond in a potential deal to take a stake in Express Newspapers, the owner of the Daily Express and The Star. Trinity Mirror, the owner of the Daily Mirror, Sunday Mirror and Sunday People, is understood to have reignited talks to potentially merge parts of their businesses. The two companies held talks about a potential deal two years ago, which at that time focused on a full sale of the newspapers to Trinity Mirror. The negotiations fizzled out, however, with disagreements over price and the significant pension deficit carried by Desmond’s titles.
One source with knowledge of the negotiations, which are thought to have started late last year, said that at this stage they were focused on Trinity Mirror potentially taking a minority stake in Express Newspapers. This would lead to a merging of back office and sales operations to make significant savings.
The talks come as UK national newspaper publishers including Trinity Mirror, the Telegraph, the Sun and Times owner News UK and the Guardian explore combining print and digital sales to fight back against the growing dominance of Google and Facebook. Express Newspapers is not involved in the intiative, called Project Juno.
In May last year, the firm reported it had more than tripled pre-tax profits in 2015 to £30.5m after slashing staff and printing costs. Desmond has been thinning his media portfolio in recent years, selling Channel 5 to MTV’s owner, Viacom, for £463m in 2014. He also sold his adult TV business in April last year, including the Television X and Red Hot channels, severing his last link with the industry that helped make him a billionaire.
Desmond acquired Express Newspapers in 2000 for £125m. His Northern & Shell business also owns assets including OK! magazine, which was included in the sale talks two years ago, and the loss-making Health Lottery. Last year, Trinity Mirror looked at buying Evgeny Lebedev’s i newspaper, the cut price national newspaper originally launched to support the Independent. It was outbid by the regional publisher Johnston Press, which acquired i for £24.4m last February. (www.theguardian.com).
