In Search of a Profitability Framework for the Local Daily Newspaper Industry
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In search of a profitability framework for the local daily newspaper industry A case study at Göteborgs-Posten Master’s thesis in the Master Degree Programme, Quality and Operations Management FRANK ERIKSSON BARMAN Department of Technology Management and Economics Division of Management of Organizational Renewal and Entrepreneurship - MORE CHALMERS UNIVERSITY OF TECHNOLOGY Gothenburg, Sweden 2014 Report No. E2014:086 i Abstract Stampen Local Media is a newly founded local newspaper group, as a subsidiary to Stampen Media Group (SMG), a media group with a turnover of about five billion SEK. Local newspapers typically rely on a so called 33/67 business model where 33 percent of revenues stem from newspaper sales, mainly through subscription fees, and the remaining 67 percent are derived from advertisement. Thus, advertisement subsidizes the subscription price which is a newspaper business model that has prevailed for the past 150 years. However, the newspaper industry is experiencing a severe decline in terms of both circulation and advertisement revenue and there is talk of a pending newspaper death. This thesis investigate preconditions for newspaper profitability in an industry severely altered by digital forces by means of a single case study at Göteborgs-Posten (GP), the largest paper within SMG with a yearly turnover of about one billion SEK. Through 2011 to 2013, GP’s newspaper sales revenues remained stable meanwhile advertisement revenues decreased by about 100 MSEK a year. Swedish newspaper circulation has fallen steadily during the past years and GP has experienced one of the worst declines which so far have been offset by price increases revenue-wise. However, the traditional 33/67 business model crumbles as advertisement cannot subsidize the cost base which puts a tremendous pressure on the organisations profitability. GP’s foremost digital revenue stream is advertisement, where a lion’s share stem from display banners at gp.se. However, internet reached a steady-state level of diffusion in Sweden around 2009 and web internet growth is weak in general and for display advertisement in particular. The diffusion of mobile internet on the other hand has completely exploded since 2010 and tablets are about to overtake personal computer (PC) sales. Leading online news sites have already experienced that mobile internet has overtaken PC traffic. GP’s ratio between print and digital revenues is about 95- to-5 for and highly similar for web internet and mobile. However conversion is not at all smooth revenue-wise, a conversion heuristic states that converting from print to web as well as converting from web internet to mobile divides revenues by ten all else equal. This is described as an innovator’s dilemma where digital is seen as the dominant future platform meanwhile GP depend on print customers for 95 percent of their revenues. This is an issue of increasing concern as the capabilities needed in the digital marketplace differ from their print counterpart which calls for investments in digital capabilities. The future of the growing mobile segment is unknown and currently too small to make up for the revenue growth required by a newspaper of GP’s size. In order to assess how to move forward, GP can assess which customer jobs they can perform successfully on print and digital platforms in order to identify suitable changes that can improve their profitability. Three such cases are investigated namely to first establish a price and product mix that nudges customers towards digital distribution, second to print newspapers earlier, thus allowing room for more cost-efficient production, and third to reduce the issue frequency. It is argued that GP not only needs to improve their profitability for the sake of turning a profit. Instead, it is likely mandated in order to be able to invest in needed capabilities to ensure the organisations longevity as the demise of the print newspaper has picked up its pace during recent years. It is concluded that newspapers should strive for profitable circulation irrespective of advertisement and all cases can support such endeavour, however case one and two are the recommended first steps. Keywords: profitability, Stampen, Göteborgs-Posten, media, newspapers, circulation, advertisement, frequency, disruption, jobs-to-be-done. ii Acknowledgements This thesis work was initiated by Technology Management and Economics Professor Tobias Fredberg. From a company perspective the main initiator was Stampen Local Media’s resigning CEO Ricard Robbstål. Thank you! It has truly been an interesting and valuable learning experience. Disregarding any outcomes and instead focusing on the process of conducting the thesis, the supervision and interest shown by Tobias Fredberg and doctoral student Johanna Pregmark has been highly stimulating. Thank you for all the interesting discussions and for every bit of feedback along the way. From Stampen Local Media (SLM), first the resigning CEO and later the board members Christian Elofsson, Helena Johnsson, Fredrik Dobber and Hanna Konyi has taken plenty of time out of their busy schedules to provide tremendous support in terms of interview time, referrals and access to organisational documents. In this aspect, Christian deserves a special mention for taking the time to schedule more than five individual meeting. One day was designated to experience the operations and following the entire process from the newsroom through printing and delivery. Such an opportunity is invaluable for anyone interested in business and operations. As an extension of this, several employees from V-TAB and VTD have provided highly valuable inputs. Both Anders Egerstad and Torbjörn Karlsson from VTD showed an extraordinary willingness to contribute to the project. Hopefully, some of the work conducted during this thesis can make up for all this generosity. Finally, thanks to Göteborgs-Posten for the free subscription during the thesis period. Besides increasing my product knowledge the daily newspapers also kept me dialled in. As far as the overall Industrial Engineering and Management program that now is about to be completed, there are several students that would deserve mention for help, for good and bad teamwork and the many fun and valuable experiences one gets along the way. In my mind, the bachelor thesis group stand out. Our thesis work at Volvo Cars was the start for many good things to come for which I am the most grateful. My iPad was a great companion and I believe that it actually helped improve my academic performance. Finally, I would like to thank my family for support and inspiration. Thank you, Frank Eriksson Barman iii Table of contents 1. Introduction ..................................................................................................................................... 1 1.1 Purpose and intended outcome .............................................................................................. 2 1.2 Research questions.................................................................................................................. 2 1.3 Methodology ........................................................................................................................... 2 1.4 Delimitations ........................................................................................................................... 4 2. Theoretical framework .................................................................................................................... 5 2.1 Business models and profitability ........................................................................................... 5 2.1.1 Newspaper characteristics and their business models ................................................... 5 2.1.2 Dual markets with two main revenue streams ............................................................... 5 2.1.3 Characteristics of a newspapers cost structure .............................................................. 7 2.2 Disruptive innovations and traditional management practises .............................................. 7 2.2.1 The five principles of disruptive innovations .................................................................. 9 2.2.2 Coping with disruptive innovations by identifying the extendable core ...................... 11 2.2.3 Securing essential capabilities ....................................................................................... 12 2.3 Product-orientation, marketing myopia and jobs-to-be-done ............................................. 13 2.3.1 The right product for the job by identifying jobs-to-be-done ....................................... 14 2.4 A brief note on strategy and some context for the newspaper industry .............................. 15 3. An empirical assessment of the situation ..................................................................................... 17 3.1 The Swedish media landscape and newspaper industry development ................................ 17 3.2 The state of the newspaper industry .................................................................................... 18 3.2.1 A macroeconomic note ................................................................................................. 18 3.2.2 Trends associated with newspaper reading .................................................................. 19 3.2.3 Trends associated with frequency of publication ......................................................... 20 3.2.4 Trends associated with newspaper