The UK’s Daily Mail & General Trust (DMGT) and Hearst Corporation, of the US, can each claim to be the world’s oldest media company. Both were founded as newspaper publishers in the last years of the nineteenth century by head-strong entrepreneurs with a lust for money and power.
Exactly 100 years ago, at the end of the First World War, W. Randolph Hearst was using his trademark “yellow” journalism to bully US politicians not to get involved in any more European wars. He spent the following 33 years laying the foundations for a privately-owned $11bn corporation whose current claim to be one of the world’s most successfully diversified media groups has been marked by seven consecutive years of record profits, which are now more than $1bn.
Meanwhile, in London’s Fleet Street, Alfred Harmsworth (later Lord Northcliffe) knew all about press power and reportedly said about his Daily Mail “I give my readers a daily hate”. In 1902, it became Britain’s first 1m-selling newspaper. During the 1914-18 war, the British government had appointed him “director of enemy propaganda”. But Harmsworth died in 1922, the year that his DMGT company was floated on the London stock exchange by his younger brother.
Thus began a sequence in which the Daily Mail dynasty has been defined by the success and failure of alternate generations. A successful heir has followed an unsuccessful one for more than a century. It’s a pattern sometimes joked about by the current, fifth generation chairman, Jonathan Harmsworth (the fourth Lord Rothermere). And 2018 is full of reminders that he really might be presiding over the historic decline of the £2.6bn public company in which he owns 100% of the voting shares but less than 30% of the ordinary equity.
It is 20 years since he took over on the death of his father who, arguably, had been the company’s most successful leader. Under Vere Harmsworth, the DMGT valuation soared from £31m to £2.4bn (with profits rising from £3m to £197m) during 1978-98. Much of the success came from the newly-tabloid Daily Mail whose editor widely-acclaimed David English also died in 1998, just a few months before his boss. During that same 20 years, the Euromoney financial information company (launched in 1969 by the Daily Mail’s financial editor) increased its profits from a mere £117k to £32m. Vere Harmsworth left his family-controlled business in fantastic shape.
That stellar performance now threatens the legacy of his son who has reported 2017 operating profits of just £198m – some 28% down on 2016 and the same as those in his father’s final year. Despite the 20 intervening years of real innovation and success, the £1.7bn revenue was only 12% ahead of the company he inherited in 1998. There’s been no growth in five years and newspapers are in a spin.
The surprise may be that the strident mid-market Daily Mail still scares UK governments as much as it did 40 years ago – and is credited with helping to secure the Brexit vote (against the views of Jonathan Harmsworth himself). The still-considerable political power of UK dailies is sustained by extensive TV reviews which ensure that many more people see the front pages than actually buy them. But that’s power not profit. The stronger-than-most Daily Mail’s weekday sales have declined by 27% in the past five years with a cover price that has increased by only 8%. Sales of the magazine-rich Saturday edition (source of most of the newspaper’s profit) are 25% down in five years.
It is anybody’s guess whether the decline can be halted anytime soon, even by a change of editor-in-chief. The imperious Paul Dacre – scourge of governments and liberal politicians for the 20 years – is being retired, which may finally enable the company to take a 21st century view of its structure, staffing and costs. Now, the accountants and consultants can get through the door.
The Daily Mail is, of course, not alone as a traditional news provider suffering both from print losses and an inability to monetise digital audiences. But it has been slower than most to cut costs.
The 15-year-old MailOnline has repeatedly been hailed as a success – but not financially. Its once pioneering use of analytics to deliver hot celebrity news has built a huge global audience with content far from the broad coverage and middle-class populism of the newspaper. But clickbait has been outed and advertising rates keep falling. MailOnline (branded the Daily Mail in Australia and in the US where it also produces a daily TV programme) has yet to achieve the profitability it promised to investors seven years ago when it claimed a world-best 100m audience. The MailOnline boss, who has boasted about his 800 online-only journalists, managed to write-off some $60m in two years on the hasty acquisition-then-sale of Elite Daily in the US. Its return to profit under subsequent ownership came (of course) from much lower staffing.
Industry insiders joke that MailOnline beats its close rival BuzzFeed on almost everything: the size of audience, level of staffing, and trading losses. But BuzzFeed wins on revenue. And, ironically, MailOnline’s luxurious separation from the UK newspaper means the Daily Mail doesn’t really have a web site of its own. With Dacre’s departure, that may soon change.
DMGT’s Metro free tabloid (a clone of the Swedish original) took the UK by storm when it launched in 1999 but profit has fallen from £16m to £11m in the past three years, and is thought to be dropping still. DMGT has tried without success to sell the newspaper for a reputed £40m. They’ll be lucky to get half that. As much as they deny it, a cost-saving merger with the similarly free London Evening Standard (still 25% owned by DMGT and loss-making again) seems inevitable.
It is more than five years since B2B media eclipsed newspapers as the company’s principal profit-maker. In 2009, consumer media (news) still accounted for 61% of operating profit; by 2014, that had fallen to 43%. The game changer had been the 1998 acquisition of Risk Management Services (RMS), a ground-breaking US provider of modelling for the management of catastrophe risks by the global property and insurance industries. The company had been founded a decade before at Stanford University.
Within a few years, RMS had become DMGT’s most successful wholly-owned business, with operating profit of £57m in 2013. But it has suffered through strong competition (including from a non-profit industry provider), careless trumpeting of its own high profit margins, and by repeatedly failing to deliver new software on time and on budget. As STM publishers have painfully discovered, excessive profit margins tend to encourage the rival development of open-source systems, inevitably leading to lower margins. And so it is with catastrophe modelling. RMS operating profits last year fell to £33m – 27% down in three years. Margins have fallen from 26% to 14%. This year, the company celebrated its 30th anniversary with the abrupt departure of the CEO and co-founder. A single-sentence corporate tribute tells us all we need to know about recent RMS disappointments – and what shocks may yet come from the new CEO’s clear-out.
DMGT’s own recent performance and a share price that has fluctuated by some 40% during the past year explain the torment of investors. They worry about the long-term strategy, despite an unrivalled record of trading media assets. One broker calculated that such “exceptional gains” have averaged no less than 23% of pre-tax profits over the past 11 years. DMGT has, arguably, been better at buying and selling assets than managing them long-term. That is one big reason why it is now in strategic crisis.
But it’s not your normal crisis
DMGT is not going bust. Even now, it has many great media assets, which together are worth much more than the company’s market capitalisation. Its 49% share of Euromoney is equal to one-third of DMGT’s current value. Even now, RMS may be worth more than that to competitors like RELX. But it is the lack of a robust overall strategy that has had DMGT profit margins falling steadily since 2014.
Executives have eulogised their company’s “light touch” management of its media portfolio. It has encouraged entrepreneurs to stay with their businesses long after acquisition by DMGT. But, in reality, the private equity-like approach was reserved for B2B and non-traditional operations in a company which seemed to say: news is core, everything else is disposable. So, it is that high-performing exhibitions, broadcasting, and information companies have been regularly flipped for what looked like short-term gains. By contrast, the reluctant company turned down a £1bn offer for its long-established but shaky regional newspapers in 2006, only to sell them for less than £200m a few years later.
In calmer times, the DMGT style produced results and plaudits. The simple truth, of course, is that successful markets help to make successful companies and vice versa. In the memorable words of Warren Buffett, “you only find who is swimming naked when the tide goes out”.
For DMGT, the tide has gone out.
It is two years since the appointment as CEO of Paul Zwillenberg, former BCG management consultant to the company. He has described the £900m of disposals in those two years as giving “financial flexibility”. No pretence of strategy yet, in moves which will clear the company’s borrowings and take the heat off. Maybe.
In reality, DMGT has been profitably churning its portfolio for the last 30 years. But one problem with these latest divestments is that they look more attractive as long-term assets than much of the business being retained. Euromoney Institutional Investor Plc, of which DMGT has owned a large majority for most of the 32 years since IPO, has consistently been one of the world’s best-performing B2B companies. Even in the midst of restructuring, it has £100m operating profits and 25% margins. Is B2B a core business or not?
Another great company, Zoopla, into which DMGT merged its property digitals in 2012, has tripled operating profit in the past five years. But its initial shareholding has been run down from 55% to the 30% that it is now cashing in with the company’s sale to private equity. DMGT says it will have received a total of £890m from its investment in Zoopla – more than 14 times the investment cost. Some £640m will come from the sale of this last 30%, but DMGT offloaded almost half of its stake in the 2014 IPO at 45% of the current share price. What’s wrong with Zoopla’s double-digit growth rates and 39% operating profit margins? Is B2C digital media a core business or not?
There’s has been little comment about either the strategic rationale or valuation for ERD, the US commercial property data service, which DMGT sold this year for 8 x operating profit. Cheap by any standards.
Less spectacular stories can be told about the way that DMGT has been an on-off operator in exhibitions. At a time when quoted UK companies Informa and RELX are leading the fast-growing market for global trade shows, DMGT has highly profitable events in energy and construction. But its executives are left to reflect on the number of times when their successful events have been cashed-in. They recently failed to acquire the US-based Penwell energy exhibitions and data in the US (a perfect fit) and the Ascential UK exhibitions which would have complemented US events that DMGT sold six years ago.
Until relatively recently, DMGT looked almost like the model media company whose cool financial decision-making kept the profits flowing. How times change. News has become a larger, more competitive but less valuable business. B2B information and exhibitions companies are having to specialise (and invest) in order to compete globally, and backing digital startups is an increasingly competitive (and risky) business. The changing fortunes of global information and entertainment demand long-term commitment. The days of milking a dominant position in a traditional business and betting the profits in the media casino have gone.
Some newspaper-centric companies have managed revolutionary change without having to cut off the branches they were sitting on. Germany’s Axel Springer and Schibsted, from Norway, transformed themselves into digital groups not by abandoning their domestic news brands but by using their skills to launch online classifieds in “new” global markets where they became the disruptors. But both companies took big decisions to invest digitally and internationally. By contrast, DMGT’s fickle approach to digital classifieds has been to dabble and then cash-in.
Even now, DMGT sounds complacent. Its 2018 shareholder presentations spuriously claim No.1 market positions everywhere: insurance risk, property data, education-tech, energy, exhibitions, and consumer media.
Its current annual report says the company “manages a diverse, multinational portfolio of companies, with total revenues of around £1.5bn, that provide businesses and consumers with compelling information, analysis, insight, events, news and entertainment.” DMGT must specialise in order to compete globally at scale. It is too thinly spread to be the large global player that Jonathan Harmsworth has publicly said media players need to be.
There is the recurring question about whether DMGT can really afford to compete in B2C as well as B2B, although a strategic alliance could play a key role in some kind of de-merger. Almost six years after floating the idea here, I still believe that a Europe-wide news alliance between DMGT and, say, Axel Springer could be hugely productive for both. But DMGT needs a global strategy for B2B: what, where and how? Beyond that, the UK’s oldest media company needs to decide whether it wants primarily to manage and build media businesses long-term or be a portfolio investor.
What strategy will the fourth Lord Rothermere choose, and will it be enough to beat the family curse?
