A week ago, Rupert Murdoch’s decision to break up News Corp looked like a family affair: a very specific solution to a very specific problem. It no longer looks that way. The news that Daily Mail & General Trust is considering a similar move comes as something of a bombshell: it suggests that broader discontents are pushing their way to the surface.
In many ways, DMGT is a dead ringer for News Corp. Both operate with dual-class share structures designed to secure family control. Both companies have nursed newspapers through the first stage of digital transition with implicit cross-subsidies from much more profitable businesses.
In Q1 this year, News Corp’s publishing business generated an operating margin of 6.4 percent versus 18.5 percent for the rest of the business. At DMGT, Associated Newspapers - publisher of the Daily Mail - generated an operating margin of 7.8 percent between October 2011 and April this year. The company’s non-newspaper operations, including B2B brands such as Euromoney, managed 20.4 percent.
Despite the grumbling reflected in discounts for conglomerate and family ownership, the cross-subsidy argument has passed muster with investors for years.
Besides, there was always a nice kicker that came with the deal: in the aftermath of recession, as ad revenues returned, newsprint businesses with high operational gearing always turned into cashflow geysers.
This time around, it hasn’t quite happened. Newspaper ad revenues stabilised in 2010-2011 after the carnage of 2008-2009. But there’s been no real bottom line bonanza, no post-recession cashflow geyser to keep investors happy. The problem is most acute in the US, where newspaper ad revenues didn’t even stabilise properly in 2010 and 2011.
Figures from the Newspaper Association of America suggest an eight percent decline in print advertising revenues in 2010, followed by a further fall of nine percent in 2011.
The lack of recovery is embarrassingly visible at places like the Washington Post (owned by a dual-share conglomerate, like DMGT and News Corp). Across 2008 and 2009, print ad revenues at the Post slumped horrifically -- down 36 percent. In 2010, the decline was a more moderate six percent.
But in 2011, things started to slip again: print ad revenues fell by 11 percent. Now things are really deteriorating: in Q112, ad revenues at the Post fell by 17 percent year on year.
UK less exposed to print ad threat?
In the UK, things have been less extreme. After the carnage of 2008-2009, Trinity Mirror’s nationals -– a useful proxy for national newspaper advertising -- saw ad revenues decline slightly in 2010 and rise slightly in 2011 (assisted by the closure of the News Of The World).
Unfortunately, the numbers are now heading down again: in the first quarter this year, ad revenues at the Mirror and its stablemates fell by 10 percent year on year. Elsewhere, it’s been worse: between October and April, ad revenues at the Daily Mail and the Mail On Sunday slumped by 14 percent year on year.
The evidence suggests that this isn't just about double-dip recession. Something deeper seems to be going on: put simply, press advertising has become decoupled from the broader ad market.
This week, the Advertising Association and WARC released their numbers for ad markets in Q1. Web spend was up 11 percent year on year, out-of-home was up by three percent, radio rose by seven percent, cinema was up by 10 percent. TV was down by a whisker, but expected to remain flat for the year. By contrast, press was a disaster.
On the basis of reports from publishers, AA/WARC identified a decline of 10 percent in Q112. This suggests press advertising is now following a different trajectory to the rest of the ad market. GroupM’s forecasts for 2012, also published last week, suggest something similar.
Overall, Adam Smith of GroupM says that UK ad markets are in “maintenance mode”. Apart from web ads -- forecast to increase by 14 percent this year and make up 40 percent of the measurable ad economy -- GroupM is predicting modest increases in spend for every sector.
Again, press is the exception. GroupM’s prognosis for the nationals is a 6.3 percent decline during 2012. Note, too, the prediction for print ad revenues at Consumer Media: down by eight percent for the year. Print is behaving differently to every other medium.
Remember the good old days?
All of this seems rather different from 2008-2009, when the nationals fended off ad revenue decline quite late in the day, long after the regional press has started plummeting. Back then, the nationals’ print ad revenues seemed resilient.
Today, you’d be hard-pressed to make that argument. Indeed, if you’re a pessimist, you might even be tempted to think that what’s happening to national ad revenues today looks rather like what happened to regional ad revenues in 2008 -- and we all know how that particular story turned out. For investors who own shares in conglomerates like DMGT and News Corp, only one question matters: where’s my cash geyser? Answer: it’s gone AWOL.
The City is driven by fashion. DMGT hasn’t confirmed or denied the FT’s report that it’s looking at a corporate split. In any case, we’re told that it may not spin off its national newspapers if it can offload Northcliffe, the troubled local newspaper division that was once valued at more than £1 billion.
However, this is also a company desperate to attract US-based investors. Under the circumstances, it makes a lot of sense to mimic News Corp. Other media conglomerates may do the same.
You could interpret a rash of moves like these as a profound vote of no confidence in the future of print – especially if you buy the decoupling argument. But think further ahead. Remarkably for a man who has tolerated hundreds of millions in losses at The Times over the years, Rupert Murdoch now says that “print losses” will not be “tolerated” inside Bad Co. “Each newspaper will be expected to pay its way,” he adds.
There’s been plenty of puzzlement about this statement. But taken in combination with his optimism about smartphones and tablets, it’s clear that Murdoch is anticipating an intensified effort to become sustainable on a digital basis. Nothing clears the mind like the prospect of impending doom.
Think of it in terms of a classroom of children turning up the Bunsen burners under sluggishly-performing chemical experiments. Some of their experiments will explode, others will produce the desired outcome.
In the lab, after class, we may end up clearing away some broken glass and mopping up spilled chemicals. But this is a price worth paying. Whatever it takes, speeding up the pace of digital transition can only be a good thing.