News. The largest newspaper publishers in the US and UK, like their counterparts everywhere, are wrestling with sharp declines in revenue and readership. In the UK, the £265m Reach Plc (formerly known as Trinity Mirror) has been playing the role of newsprint consolidator by spending £350m acquiring the Local World regional newspapers (once largely owned by the Daily Mail Group) and the Express & Star national newspapers, formerly owned by Richard Desmond. It has national and regional news brands across the UK, including the Daily Mirror, Sunday People, Daily Express, Daily Star, Daily Record, Sunday Mail, leading papers in key metropolitan markets, and celebrity magazines OK! and New!.
In the US, New Media Investment Group, a holding company that controls GateHouse Media has agreed to pay $1.4bn for the country’s largest newspaper group Gannett, the owner of USA Today and more than 100 other publications nationwide – and also Newsquest, the UK’s most successful regionals group. In combination, GateHouse and Gannett would publish more than 260 daily newspapers in the United States, along with more than 300 weeklies. Instead of applauding the deal, investors are said by the New York Post to have “sent shares of New Media plummeting in a sell-off that has lasted three days. The now sagging New Media shares will be used as currency to pay Gannett shareholders for selling the company. They could vote the deal down if they feel they aren’t being properly compensated.” The deal is hanging by a thread.
The US saga was playing out just as, across the Atlantic, Reach CEO Simon Fox was preparing to announce better-than-expected half-year results that led one analyst to say it was “the stand-out value play” of all listed UK media companies. But, just days before the announcement, the engaging Fox had been summoned by his chairman to be told that the board wanted his immediate resignation and that they had already chosen his successor. Enter Jim Mullen, the former CEO of betting group Ladbrokes Coral.
Everything about the abrupt change seemed awkward, not least the chairman’s admission that “Reach in very good health, with a strong balance sheet and real progress in developing the business for the future”. Even the announcement purported to “confirm” that the CEO was leaving even though it had been a complete surprise to almost everyone including Fox himself. Mullen, whose decade-ago digital roles in News Corp UK were played up by his new boss, wasted no time in declaring his mission “to build upon its digital transformation”.
And that was the point.
Former retailer Simon Fox had spent seven years paying down debt and growing margins at a company with a history of management mayhem dating back to even before the late Robert Maxwell plundered its pension fund in the 1990s. Fox’s board colleagues (including people from Facebook and Amazon) had engaged him in regular debates about digital futures but, back in his office, he remained preoccupied with squeezing profits from print. Even as his board was secretly finalising the arrangements for his successor, the CEO was openly discussing a possible merger with the distressed newspapers of the former Johnston Press. He was also wondering whether the proposed GateHouse acquisition of Gannett would prompt the sell-off of Newsquest newspapers in the UK. More print!
He had succeeded in trebling his company’s share price. Both the Local World and Express & Star acquisitions will have paid back the investment in less than four years. The company has been doing much better than its industry and has mostly satisfied its nervous investors.
For January-June 2019, this publisher of almost 150 UK newspapers made operating profit of £69.9m from £352.6m of revenue. The real story is in the detail because operating profit was 7% up, even though revenue was slightly down, profit margin was a seemingly solid 20%, and the shareholders’ dividend was 5.5% up on the previous year. The company delivered acquisition synergies of £6m (£15m for the full year and £22m forecast for 2020). Not bad for a profitable acquisition which will have cost a maximum of £127m.
The outgoing CEO almost choked as he said: “We have delivered a positive financial performance in what remains a difficult trading environment for the industry, in particular the regional businesses. The benefit of improved performance from national print advertising coupled with further cost mitigation will support profits over the year despite a further increase in newsprint prices for the second half. We have started the process of integrating Express & Star in order to accelerate the benefits that our combined scale will deliver and have a clear strategy which fully reflects the changing shape of the group.”
The trouble is that Reach has been wringing every last pound of profit from its fading news brands. The flagship national newspaper brands, the Daily Mirror and Daily Express, which (decades ago) each had market-leading circulations of some 5million copies daily, have suffered worse than most. In just the past five years, Mirror copy sales have fallen by some 80% to just 480k, and the Express by 70% to just 300k.
What are among the UK market’s worst circulation performances may be attributed to the fact that their tabloid audiences are the ones that have most readily turned away from print. But they may also be suffering from the salami cost cutting that is producing short-term profit gains even in the face of revenue decline.
Reach has quite simply been generating more cash than investors could ever have expected from its legendary newspapers – by doing so little for the future.
Simon Fox is not alone among newspaper owners in trying not to compete with his own print media for fear of accelerating the decline. But, arguably, he has believed just a bit too strongly that:
- Readers won’t pay for digital content
- News media can be competitive for advertising
- Print has a long way still to go
The reality is that newspaper publishers must get real and either win advertising support by guaranteeing large, free or low-cost readership; or get readers to pay for the content. Not both. That’s easier said than done for traditional media that has grown fat from being able to generate substantial revenues both from readers and advertisers. But newspaper publishers need to re-engineer the print business model and build new-style digital services.
That means identifying what (separately) readers and advertisers will pay for. Many UK dailies have made a start, even if only to produce decent digital editions and/or convert casual sales to posted subscriptions. Reach hasn’t even done that.
You could satirise the Reach strategy by reference to what one of its dailies told readers: “The days are long gone when we could afford to be a paper of record and dutifully report everything that happened on our patch”.
By the outgoing CEO’s own account, Reach has no confidence in the willingness of readers to pay for content. But he has been ignoring the stark reality that a full 50% of his own revenue still comes from circulation, most as casual retail sales. So, the publisher needs either to ensure it can maintain these copy sales or – somehow – prepare for life without them. Perhaps it is Reach’s fatalism that gives it the pride for being not just the UK’s largest publisher of newspapers but also also its largest printer, with six factories employing a full 14% of Reach’s entire workforce.
It’s no surprise that genuine innovation is thin on the ground. The 2016 launch of New Day, aimed dreamily at people who had “fallen out of love” with newspapers, was shocking. The embarrassingly low-cost, ill-conceived tabloid lasted just two months. The MyLondon news aggregator is equally feeble. And the cutting back of short-run stand-alone digital initiatives long ago revealed the company’s limited appetite for innovation.
While Reach’s digital-native, non-executive directors have their own ideas of what can be achieved by a public company whose demanding investors are not going away, the strategy of wringing the maximum amount of profit from the portfolio must change. Its total print and digital audience of 48.5m (76% digital) speaks volumes for the growth opportunities.
Jim Mullen will hit the ground running when he takes over from Simon Fox next week. His action plan may include the following:
- Forget the idea of merging with Johnston Press. Reach has got enough print, especially among stricken regionals
- Develop stand-alone digital products and services which can use Reach content and be promoted via its newspapers – but would be managed separately
- Build paid-for digital newsletters, apps and websites for exclusive newspaper content, including columnists and special interests
- Find partners which can gradually free Reach from the burden of operating its own printing plants
- Build partnerships to create new business for the Mirror, Record, and Express including co-branded products and services in retail, broadcasting, and leisure
As someone who has earned a living from an industry which has taken betting from little high street shops to huge online sites, the new CEO of Reach Plc may be confident about the prospects of turning his national and regional news brands into viable digital media. But he will realise just how the long-gone advertising boom dislocated newspapers’ relationships with their readers. Mullen must hope that investors who so recently cheered his predecessor will now accept that a real strategy for the future depends on innovation – and investment.