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Profiting from print

Investment opportunities still exist in a declining industry
August 2, 2018

It's nearly two years to the day that Fleet Street waved goodbye to its last two journalists, marking the end of an era for the British newspaper industry. It was an end which began in 1986 when Rupert Murdoch lifted The Times from its former headquarters and plonked it down in Wapping – revolutionising the printing industry in the process. Ironically, Mr Murdoch is now in the process of refocusing on print (he’s selling the media and broadcasting subsidiaries of 21st Century Fox to focus on his publishing company, News Corp), at a time when everyone else is clamouring for the exit.

In April, Richard Desmond sold his newspapers – including the Express and the Star – to Reach (RCH), owners of the Daily Mirror and other regional titles. Earlier in July, Fairfax – Australia’s oldest newspaper business – was bought by Nine Entertainment. Even Mashable – once a fast-growing digital publisher – was unceremoniously dumped at the end of 2017 by the owners of the Independent.

It’s hard to blame the quitters: there's clear evidence that the global newspaper industry is in a perpetual state of decline. According to data gathered by media regulator Ofcom, the proportion of adults who obtain their news from printed papers fell to 29 per cent from 40 per cent during the three years to 2016. In the same period, national daily paper circulation dropped by more than a third to 6m.

Unsurprisingly, this change in demand is impacting the financial results of newspaper owners. For example, Daily Mail & General Trust (DMGT) reported a 2 per cent decline in advertising and 6 per cent decline in circulation at its media business in the nine months to June 2018. That follows five consecutive years of revenue decline from the group’s newspaper and magazine division.

Fortunes have been even worse for Reach, where operating profits have fallen from £250m in 2012 to £204m in 2017, and the Telegraph Media Group, which recently reported a 32 per cent fall in annual operating profits. Meanwhile, the Evening Standard has swung into a loss-making position – a feeling the Guardian owners know only too well seeing as the paper hasn’t turned a profit since 2013.

 

Once, journalism and marketing provided a viable business model as rising reader numbers attracted advertising revenue, which paid for the journalists. A virtuous circle. But Facebook and Google have put a stop to that. In 2017, the two US giants controlled 75 per cent of the global advertising industry and, between them, get roughly 4bn screen views every day. That’s a far more attractive advertising platform than any newspaper can offer.

But as the potential end of national print journalism creeps ever closer, there are still investment opportunities in the media industry. Niche publications aren’t all going to die out, nor are titles whose opinions are deemed valuable enough. It’s easy to pick the losers in publishing, but finding a winner is a great deal harder. Just take comfort in the fact that they are out there.

 

 

Finding your niche

Niche publications sell. Just ask Pearson (PSON), the beleaguered publishing company which sold the Financial Times for a whopping £844m in 2015, or 35 times adjusted operating profits. That helps explain why Future (FUTR) is busy bulking up its specialist title portfolio. In the last three years, it has made several acquisitions, including Newbay Media and four titles from Haymarket, which helped lift revenues from £60m in 2015 to £84m last year.

Chief executive Zillah Byng-Thorne is confident her strategy is the right one because readers of the likes of Tech Radar and Rifle Shooter Scotland are 'sticky', and provide good revenue visibility, high margins and solid grounds from which to generate cash.

Ms Byng-Thorne isn't the only one targeting the niche market. Euromoney Institutional Investor (ERM) has been desperately trying to steer away from the general finance market, where poor demand has caused a sharp fall in revenues over the past few years. Within the last six months, it's disposed of three businesses, plus its minority stake in Dealogic and acquired two new titles. Among recent acquisitions were TowerXchange – the leading source of information on the telecoms tower market and RISI – a reporting agency for global forest products. It doesn’t get much more niche than that.

 

Expand into strength

But with the print market in decline, opportunities for expansion are hard to come by. Trinity Mirror’s attempts to grow away from its core papers fell flat when it attempted to launch New Day – the first new national newspaper in the UK for 30 years. The paper lasted just nine weeks on the shelves before management decided it was the wrong strategy.

Time Out’s (TMO) strategy seems far more sensible. Rather than relying on advertising revenue from its free magazines, it's expanded into e-commerce, live events, books, digital publishing and, most recently, into food and drink. In 2017, this diversity helped the group report a 12 per cent increase in underlying revenues.

Time Out has used its unique media position as a well-renowned entertainment critic to open food and drinks 'markets' around the world. The first branded market in Lisbon welcomed 2m people in 2014 and within just three years has become the city’s top tourist attraction with an annual footfall of 3.6m. The concept is simple: a venue for world class restaurants, street food, bars, live music, shops and arts – all activities that are in high demand from today's consumers. The markets business is why broker Berenberg expects 34 per cent revenue growth between 2018 and 2019.