Strategy On Media From riches to rags: prospects for local newspapers Authors: Alison Sprague [email protected] Olga Nuryaeva [email protected] 2 PricewaterhouseCoopers LLP Consolidation or collapse? Regional and local press owners have expressed the urgent need to consolidate in order to make a successful transition to digital. However, they argue that they face a major obstacle in the form of a restrictive media merger control regime that has not in the past taken into account the potential for competition across boundaries between newspapers and other media. The Digital Britain report states that such arguments need to be tested against the evidence. With the gauntlet effectively thrown down, now is • In respect of advertisers, the strength of alternative the time for the industry to gather the evidence, and media substitutability needs to be tested, rigorously. quickly, both in terms of advertising markets and media While on a case by case basis there may be specific consumption. And, in forming conclusions about the nuances, evidence on internet advertising and radio potential for competition, a forward looking view needs advertising as potential substitutes for regional to be taken owing to the rapid pace of technological press advertising needs to be re-examined. Previous change and expected continuing changes in consumer evidence in the UK has indicated that radio and behaviour. We are in the digital age and new market newspaper advertising may be in the same market; boundaries need to be appreciated. the inclusion of internet advertising would broaden the market further. • Geographic and product markets need to be assessed in terms of where and how consumers Such actions are overdue. We welcome the ongoing get their news and whether or not there is more Office of Fair Trading (OFT) review of the local and substitutability between regional newspapers and regional media merger regime as stakeholders need to other media, particularly internet news provision, be confident that there is transparency and certainty than perhaps has been assumed so far. We consider about the approach to competition issues by the that internet news provision in particular will serve to authorities. This will offer more certainty to the sector broaden the markets in question. and help ensure that consumers over the longer term • The concept of plurality in the digital age needs to be are well-served by diverse and plural local media examined and, specifically, the existing requirement sectors. for plurality of views in newspapers should be subject to challenge for its relevance today and in the future. In a digital age, local voices are likely to comprise more than the local press, especially given the presence of BBC online and other local media outlets. From riches to rags 3 Introduction and local newspaper groups have expressed the need to consolidate in order to make a successful transition The local and regional newspaper industry in the UK is to digital against a backdrop of a media merger regime facing unprecedented pressure owing to a combination that has not in the past taken account of the potential of structural and cyclical factors. Some reports suggest for competition across boundaries between newspapers that within two years, nearly a third of all local and and other media. The Digital Britain report states that regional titles could be loss-making. Direct subsidies such arguments need to be tested against the evidence. are at one end of the spectrum for dealing with these pressures. In France, for example, the government In response to Action 14, the OFT invited stakeholders responded to similar challenges with a €600m rescue to shape the scope of the review and published package for the French newspaper industry. At the other a discussion paper in March 20092.Guided by end of the spectrum are self-help actions and measures Government, key elements of the review include: the industry can take, such as consolidation, but these face regulatory challenges and a political environment • The extent to which print markets are self contained that is deeply suspicious of concentrations in regional either in relation to advertisers or to readership and and local media ownership. We do not believe that the implications for market definitions; government subsidies should be the focus of efforts • The extent to which public service broadcasting, directed at the sector. Instead, the most appropriate local authorities and other public sector news and response, in our view, is to review the way the existing local information services, whether or not funded by competition and public interest frameworks are applied advertising, constitute competition to commercial to the local and regional press in the UK. local media services; This paper seeks to contribute to this important debate • The potential for clear guidance to be available to by assessing the challenges faced by the industry industry on how cases would be approached by the and potential ways of addressing them. In particular, OFT and Competition Commission including, where we understand that time is of the essence: long-term appropriate, guidance on the factual and economic structural factors together with recent cyclical effects evidence likely to be relevant to referral decisions; mean that to ensure continued provision for consumers • The need for informal advice in relation to specific of diverse and plural regional/local news provision, cases; and policy makers may need to move quickly. • The extent to which the public interest considerations remain appropriate; and specifically Context whether the requirement for a sufficient plurality of Stephen Carter’s Digital Britain interim report published views in newspapers in each market for newspapers in January 20091 acknowledges the challenges facing in the UK is realistic or desirable in the digital age. local news provision. The report tables 22 actions covering many diverse issues spanning content While the review is timely given the current state of provision and networks. Action 14 invites the OFT the newspaper sector, there may be a danger that and Ofcom to undertake an exploratory review of the resolution of key issues occurs too late and that plurality local and regional media sector to assess whether any (as currently defined in terms of newspaper voices) is changes to the way the current merger regime is applied diminished owing to closures. to the sector are necessary and desirable. Regional 1 http://www.culture.gov.uk/images/publications/digital_britain_interimreportjan09.pdf 2 http://www.oft.gov.uk/news/press/2009/14-09 4 PricewaterhouseCoopers LLP The challenge facing regional newspapers A combination of long term structural factors and the Figure 1: Circulation of paid-for daily newspapers current economic climate have placed unprecedented pressure on the local and regional newspaper sector. The increasing availability of the internet and 24-hour 18,000 television news all mean that up-to-date news can be accessed virtually as events unfold. Newspaper 16,000 publishers are finding it increasingly difficult to compete 4,359 in this environment. The evidence of this can be found 14,000 4,170 3,845 ) in the circulation of paid-for daily local and regional s 3,428 2005-2008 0 12,000 0 CAGR -7.7% 0 newspapers which has fallen by over 20% over the past ( s e four years (Figure 1). l 10,000 a s y l i a The traditional business model for a regional newspaper D 8,000 comprised around 75% advertising revenue and 2005-2008 6,000 11,913 11,530 25% circulation revenue. However, recent trends 11,223 10,907 CAGR -2.9% demonstrate that advertising revenue at local and 4,000 regional press titles is under significant pressure. Classified advertising, traditionally the most important 2,000 element of newspaper revenues contributing around 70% to regional newspapers advertising revenues, 0 declined by 11% on a compound average growth rate 2005 2006 2007 2008 basis in each of the past three years (Figure 2). These National newspapers Local & regional newspaper figures reflect a shift of advertising online and the growing popularity of search engines and specialist Source: 2005-2007 data - The Advertising Statistics classified advertising websites such as rightmove. Yearbook; 2008 data – Enders Analysis co.uk (property), totaljobs.com (jobs), and autotrader. co.uk (cars). According to one report3 the value of Figure 2: Newspaper Print Advertising Market online classified advertising has already overtaken the classified advertising spend received by national newspapers and magazines and looks set to rise above 6,000 directories in 2008. In the near future, online is expected to be the leading classified advertising medium, 5,000 outstripping the regional press. 449 424 387 4,000 Local and regional newspapers have attempted to 325 2005-2008 CAGR -10.3% arrest the structural decline in their share of advertising ) 2,044 m 1,899 1,876 £ ( revenue by investing heavily in their online offerings. e 3,000 1,443 u 2005-2008 Despite the efforts to recapture some of the classified n e CAGR -11.0% v revenue lost to the online channel, the online share of e R local and regional newspapers remains substantially 2,000 below their share of overall classified advertising spend. For example, whereas local and regional newspapers 2,413 2,372 2,412 2,249 had a 50% share in total recruitment advertising 1,000 2005-2008 spending in 2007, their share of online recruitment CAGR -2.3% advertising was much lower at 28%4 . Overall, the 0 contribution of online to local and regional newspaper 2005 2006 2007 2008 revenues remains too small to offset the falling print Display All Print Classified Regional revenues (online contributed 4% to revenues at Classified National Johnston in the first half of 2008 and 9% at Trinity Mirror Regional Papers division)5.