Media Fortune Fame & Folly

Can UK’s Reach find the runway?

These past 12 months have brought some good news from newspapers in the US and UK. The New York Times and The Guardian, in their different ways, are carving out a future largely funded by an increasingly international readership. The Washington Post and The Times of London are also looking stronger than ever, helping also to give pointers for the lengthening line of would-be owners of the UK’s Daily Telegraph. The Wall Street Journal and the Financial Times are solid global businesses underpinned by profitable products and services. The Independent, which stopped its printed newspaper in 2016, is now soundly profitable with a growing digital readership on both sides of the Atlantic.

These are the sure signs that at least some of the news brands whose business models were wrecked by advertising are learning to survive without it. Print continues to account for much of the profit, and most traditional news groups have a way to go to ensure (eventual) long-term, digital-only viability. But they’re working on it.

There’s a roadmap.

Publishers must opt to get their revenue primarily from readers or advertisers. Not both. Quality news brands can get readers to pay. But tabloids must depend on advertising or sponsorship. Popular news and celebrity gossip has almost defined the mass appeal of the internet: free content, freely available. So even the huge digital audiences of the UK’s Daily Mail and The Sun, BuzzFeed and HuffPost are, to say the least, difficult to monetise. It is almost too ironic that the mass circulation tabloids which once defined media “branding” now have digital audiences which neither know nor care where their ‘news’ is coming from.

All newspaper brands must use their existing print as a “runway” for the launch of digital services for the future. Most of these new services should be managed separately from the newspapers they will eventually replace. But that’s easier said than done when competing for ads with Google, Facebook, Instagram et al – and when those dwindling print revenues are still delivering the profits.

Nowhere is this strategic challenge more striking than at Reach Plc (the former Trinity Mirror), the UK’s largest newspaper group which publishes more than 25 dailies including the national brands, the Daily Mirror, Daily Star, Daily Express, and Scottish Daily Record.

The group sprang from the Daily Mirror, which was founded in 1903 (like the Daily Mail before it) by tabloid pioneer Lord Northcliffe, the Randolph Hearst of the UK. Sixty years later, it became part of IPC, the company whose one-time formidable magazine empire is now TI Media.

The Daily Mirror (like the Daily Express under Lord Beaverbrook) 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 clueless owners Reed International to sell him a struggling newspaper called The Sun. He quickly turned it into a formidable competitor for the Mirror itself.

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, celebrities, xenophobia, and fake news. Even today, seven years after the demise of its Page 3 topless women, The Sun’s 1.2m average daily sales are almost three times those of the Daily Mirror which, en passant, survived the ruinous 1980s ownership of the late Robert Maxwell.

The Mirror had been the 1950s model for Axel Springer’s Bild which supplanted it as Europe’s largest-selling newspaper in the 1970s. The UK tabloid and its stable-mates the Sunday People and the Scottish Daily Record remained in crisis after Maxwell’s 1991 death, before the MIrror Group’s merger with the Trinity regional newspaper group in 1999.

The result was: an unconvincing national-regional newspaper strategy, unmanageable debt, a large pension scheme deficit – and steadily falling circulations. Two Trinity Mirror CEOs paid the price for not managing to find synergies across their mixed bag of newspapers. Ex retailer Simon Fox took over just as his chairman David Grigson was claiming to have “ripped up the floorboards” and discovered no evidence of the phone hacking, then claimed only to be practised by the journalists of News Corp.

Throughout UK criminal trials and parliamentary enquiries, vilified News Corp executives and journalists had hinted that “other newspapers” were involved. The Mirror’s turn was always coming. Within a few years, the chairman had gone and Trinity Mirror belatedly confessed to phone hacking on an industrial scale. It has so far cost the company more than £60m in legal claims and costs.

That was a headache inherited by Simon Fox. But the disastrous launch of the tabloid New Day in 2016 was all his own work. Critics did not know where to start in explaining the woeful failure of the newspaper after just nine weeks. The CEO’s boast of a laughably low budget (small staff, little promotion and no web site) seemed to underpin his misplaced optimism for a national newspaper whose copy sales quickly fell to just 40k. But it didn’t cost Fox his job. That little surprise, last July, was down to the absence of a digital strategy.

His board’s response was to appoint Jim Mullen, a CEO with digital media and retail experience, latterly in betting.

This week, Mullen reported the company’s 2019 revenue of £702.5m which, on a like-for-like basis, was 5% down on the previous year. Although the £153.4m operating profit was up (another story), advertising was 19% down. The bitter-sweet news was reinforced by the fact that the group’s UK monthly online audience was up 8% to 40m but that 98% of online users were anonymous and had not given their consent through registration, “largely because we have not asked for it”. The new CEO is now targeting some 7m registrations within two years.

Fox’s departure had been a shock for investors: his seven years as CEO had been marked by a sharp recovery in the financials, elimination of debt and the return to shareholder dividends. His “print consolidation” strategy was marked by the acquisition of the 83 Local World regional newspapers for £220m and the Express & Star tabloids and OK! magazine for almost the same again. But Fox’s plan to acquire the bankrupt former Johnston Press regional papers scarcely survived the clear-out of his office.

The 2019 results showed the impact of the former CEO’s acquisitions:

  • EBITDA of £175m and a 25% margin is the highest for more than a decade
  • Earnings per share have increased by 14% in the last two years
  • Acquisitions in the last five years have delivered £75m of profit so far, and may account for 30% of the current profit – and all the growth.

These are the milestones of a company whose management has been forced to apply more than 50% of its free cash flow to legal claims from the phone hacking scandals and to paying down the long-term pension deficit (currently some £240m, after payments of £213k in the last six years).

The apparent financial success has seemingly cost the company a credible digital strategy. How else can you explain why digital is only 15% of total revenue and just 16% higher than in 2016? The sleepy strategy is the context for the company’s trumpeting of a UK digital audience larger than either News Corp or the Daily Mail. The good news starts to unravel.

For all the realisation that tabloid readers are increasingly reluctant to pay for news, Reach can be seen to have sacrificed copy sales for the sugar rush of higher cover prices. The weekday Daily Mirror has increased its cover price by 45% in the past five years and lost 49% of its copy sales. On Saturdays, the most profitable publishing day for most UK daily newspapers, the Mirror has increased its price by 75% and lost 50% of sales. The Daily Express has increased its weekday cover price by 27% and lost 35% of sales. The Daily Star has increased its price by 25% and lost 38% of sales.

So, not only do these famous tabloid brands have flakey, unregistered, low-value online audiences but the printed newspapers are also shrinking faster than most of their peers. Even Reach’s strongest regional dailies are losing their grip. The Manchester Evening News, Liverpool Echo, Birmingham Mail, Newcastle Chronicle, and Bristol Post have each lost some 50% of their copy sales since 2015. And the Manchester paper is padding its circulation with 50% of free copies.

The depressing picture of once-powerful media brands being squeezed for short-term profit is highlighted by Reach’s pretty embarrassing raft of low-cost web sites with poor functionality and weak branding. It is almost 10 years since Harvard Professor Clark Gilbert made the Deseret Media case for separating the management of print newspapers from their digital successors in order to maximise the potential of both. Reach only got half the message.

As someone who has earned a living from an industry which has swung betting from high street shops to online sites, Jim Mullen may be be just the person to turn the Reach national and regional news brands into viable digital media but it will be tough. The long-gone advertising boom managed to dislocate newspapers’ relationships with their readers, and Reach has contrived to make matters even worse. Mullen must hope that investors who so recently cheered his predecessor will now accept that a robust strategy depends on innovation – and investment. They can’t expect many more years of uninterrupted profit growth without it.

The new CEO is, of course, right to emphasise the need for the readership data that his company has lazily eschewed. But it’s no silver bullet because Reach does not have a single, unified audience. It is a large collection of disparate national-regional-local brands and audiences. Its 70+ web sites, in aggregate, are simply no match for those of a single branded site like the Daily Mail or The Sun. However successfully Reach is able to sign up its online audience, it risks remaining a low-value advertising platform for a patchwork of readers. Online registration is not, of course, an answer to the question of how the UK’s largest newspaper company can generate future growth.

Mullen is now doubling his efforts to create digital-only “Live” services, especially in areas where the company does not have newspapers. Smart. But he will have to do much more. Reach needs, at the very least, to acquire one or more significant digital businesses which can exploit the promotional power, content and brands of its newspapers and change the profile of the business.

The acquisitions could be in e-commerce, news, entertainment, or sport. The publisher might also start creating online audio or video channels – with new brands as well as existing ones. Could the Mirror make sense of a popular version of the UK radio/ podcast/ streaming network planned by The Times? It should consider spinning-out digital and specialist “verticals” from its national newspapers, perhaps including sport, politics, puzzles, property, and food. It might even strike online partnerships with radio and TV broadcasters: everyone’s trying to build online brands.

The point about “runway” strategies for daily newspapers is that these publishers still have substantial brand power and resources, which can be used to create new products and services. But they need to invest adequately in the development of major new brands, not simply ancillaries to the legacy business.

Reach Plc is a reminder that the platform is burning fiercely. No time to lose.

Reach Plc

Additional reporting and analysis by independent consultant Alex DeGroote