Memorandum from Enders Analysis

 

Contents

 

This submission on 'Review of Local Media' responds to the Culture, Media and Sport Committee's request dated 25th March 2009 and numbered 11. Our response addresses the following issues raised by the Committee:

 

The appropriateness and effectiveness of print and electronic publishing initiatives undertaken directly by public sector bodies at the local level;

The desirability of changes to the regulatory framework for print and electronic local media, including cross-media ownership and merger regulations;

The extent of plurality required in local media markets.

 

This submission reflects entirely the views of Claire Enders, Chief Executive Officer of Enders Analysis Limited ('EAL'), an independent research company, and should not be construed or interpreted as necessarily reflecting the views of any of its clients.

 

Who we are

 

Established in 1997, EAL produces materials for its subscribers (see our website, www.endersanalysis.com), on the media and telecoms sector of the UK and major continental European markets, with particular focus on the impact of new technology and convergence. EAL subscribers include industry players, fund managers, government agencies and regulators in our target markets. Enders Analysis is frequently cited as a leader in our sector in the UK. EAL also supplies bespoke consulting services.

 

Claire Enders is Chief Executive Officer of EAL and is widely recognised as a top-level analyst of media and telecoms market developments. Prior to starting EAL in 1997, she was Corporate Development Manager at Thorn EMI, Director of Corporate Development at TVS Entertainment, Director of Marketing for Superchannel, and Head of Business Development for The Virgin Group. She has performed expert industry witness services on digital music services for copyright tribunal proceedings in the UK and United States. Claire holds an MBA from London Business School.

 

Our response

 

Regarding "The appropriateness and effectiveness of print and electronic publishing initiatives undertaken directly by public sector bodies at the local level", we note that the Local Government Association recently reported on a survey of local government authorities indicating that 132 of 188 newsletters (almost three of four newsletters) carry some advertisement. Commercial print local media relies on advertisers for most revenue, and taxpayer-funded print publishing initiatives obviously represent 'unfair competition'. The LGA has not produced evidence of a failure in the provision of local news and information by commercial media that could justify such initiatives.

 

Regarding "The desirability of changes to the regulatory framework for print and electronic local media, including cross-media ownership and merger regulations", we note the distinction that should be made by the Committee between the merger regulations, which affect all UK businesses, and the restrictions on cross-media ownership, which are specific to the media industries. In our view, the specific regulatory burdens imposed on commercial media are heavier to assume given their declining financial health, and should be re-examined in this light as a matter of priority by Ofcom.

 

Indeed, as we noted in our submission to Ofcom on the BBC Local Video proposals in November 2008, "Local Media and BBC Video" [2008-107], delaying a decision on that proposal was essential:

 

Given the critical juncture and existing financial pressures on local media, we would recommend that Ofcom suspend consideration of BBC Local Video until such time as there is evidence of 'market failure' but, in any case, for at least two years;

We also believe that the BBC's proposed remedies will have the effect of increasing costs of local media (e.g. video streams); and of establishing for local media a dependent relationship on the BBC. Otherwise, a result could be that BBC news is put even more to the fore in preference to commercially generated local news, enabling the BBC to piggy-back on commercial investments in websites and other platforms, and in the long-term leading to a decline in plurality in local news.

 

Our views on the merger regulations are contained in the publication "Local media and the OFT review of the merger regime" [2009-025e] we issued to our subscribers on 23rd February 2009. It also contains additional views on "The extent of plurality required in local media markets", and is reproduced in full below:

 

The Office of Fair Trading (OFT) has confirmed it is to follow up on Lord Carter's interim Digital Britain report by launching a full consultation on the local and regional media ownership regime, with a call for "views from interested stakeholders" on the key issues for the review of the merger regime to be submitted by 28th February

Although the OFT's announcement notes the "pressures" on local and regional media, the evidence points to a local media sector in steep decline, a trend which the UK's recession will only exacerbate

Local media will need to consolidate further in the near future if jobs and the supply of local media to communities are to be preserved in a period of declining revenues, and the merger regime (which applies to all UK specific mergers) is a barrier to this consolidation and places a disproportionate burden on local media

 

The Office of Fair Trading (OFT) will launch a full consultation on the local media ownership regime in March. A review of the current rules, focusing on the press, was one of the recommendations in Lord Carter's interim Digital Britain report issued in January. The OFT expects interested stakeholders to submit their views on the scope of the review by 28th February, and to issue a consultation document in March, providing further opportunity for comment. The OFT plans to complete the review by mid April, and submit its findings to Government to fit the timescale for the publication of the final Digital Britain Report which is due early summer 2009.

 

Local and regional newspapers

 

The UK publishes 1,300 local and regional newspapers across a range of formats and frequencies. Like all businesses that rely on advertising for a large part of their income, this recession is already having a devastating impact on revenues, with the worst still to come. However, to a greater degree than other advertising media, local and regional newspapers are suffering from additional threats to their longevity: an accelerating decline in usage as a result of the distribution of the free newspaper Metro and also the increase in consumer time spent online, particularly among younger demographics; a structural shift in local classified and display advertising to the internet, notably in categories such as recruitment, property and automotive; the decreasing expenditure by public sector not just in terms of recruitment but in announcements; a squeezing of the physical distribution model through a reduction in retail outlets; and, finally, a steep increase in some cost areas such as that for paper.

 

How do we quantify the overall impact? In the sector, revenues consist of: 25% display-style advertising; 54% classified-style advertising; 21% from purchases. In some if not all cases publishers are able to offset declining circulation volumes by increasing cover prices, therefore roughly maintaining that revenue stream. In advertising, however, overall revenue is declining at a rate of 30% year-on-year, a rate that is more likely to accelerate than decelerate. The rate of decline is worst in classified categories such as property and recruitment, which we strongly believe are subject to a structural switch to the internet. Therefore, while some of this advertising may return when the economy recovers, we believe it will be relatively small and not long lasting. Used car advertising has declined every year in recent years even in those when used car sales have grown substantially in volume and value. We believe this problem has now transferred to many if indeed not all other local classified categories.

 

In all, we forecast the advertising income of the local and regional press to decline about 50% from 2.7 billion in 2007 to 1.4 billion in 2012. At the same time, paper costs have increased 16% in 2009, and are unlikely to decline again for the foreseeable future, and certainly not to 2007 rates. As a result, the squeeze on local media will grow and many titles will either be closed or saved if a buyer can be found. This raises the question of the operation of the merger regime, to which newspaper acquisitions must be referred if certain thresholds are met.

 

Application of the merger regime to local and regional newspapers

 

Some general points:

 

The merger regime in the UK has two levels: mergers with a 'Community dimension' are notified and vetted by the EU Commission; other mergers, namely those with a UK-only dimension, are notified and vetted to OFT, with possible referral to the Competition Commission in the event of a 'substantial lessening of competition (SLC)' that undertakings do not resolve;

The OFT has examined 697 mergers during 2003-08, of which just eight have concerned the acquisition of newspapers by an existing newspaper publishing group, and fewer local newspaper mergers, and even fewer newspapers in financial difficulty.

 

In practice, the operation of the mergers regime to local media has functioned as follows:

 

A merger must be notified to the OFT if either (a) the proposed acquisition tops 70 million; or (b) the proposed merger would supply at least 25% of the market, and the burden of proof is on the applicant buyer to demonstrate that concerns over SLC are not warranted when such conditions are met;

OFT practice is to identify local newspapers as the product and the market as the geographic footprint of its circulation based on JICREG, i.e. a local geography, in which the supply test of 25% is easily met even if turnover is low;

OFT excludes regional or national newspapers from the local newspaper market, so the key question for its analysis of competition is the substitutes available to advertisers using local newspapers to advertise, including print and non-print media

Regarding print media, the OFT will look at various options like titles with a different periodicity, or directories, etc;

Regarding non-print media, such as the internet, the OFT has shifted from exclusion to giving it a "relatively low" weight in the last case it examined (DPL/Berkshire Regional News) based on responses of existing diehard advertisers to local newspapers (ignoring the advertisers that have already deserted the medium for the internet);

Regarding SLC, the OFT examines the effect of the proposed merger on conditions of competition in the market, comparing the post-merger hypothetical with the pre-merger state of affairs - by definition, it does not look at the merger in the context of the unfolding state of the industry;

OFT issued a detailed opinion on the "failing industry" defence last December 2008, for which it provides informal advice upon request - such a defence could be invoked by a publisher acquiring a newspaper 'in trouble', but its application is subject to such stringent criteria, it has only been accepted by the OFT four times since 2000 (and never in a newspaper case).

 

OFT consultation

 

The Government has informed the OFT that it would find it particularly helpful if the following issues could be considered when looking at the scope of the review:

 

The extent to which print markets are any longer self contained either in relation to advertisers or to readership and the implications for market definitions;

The extent to which public service broadcasting, local authorities and other public sector news and local information services, whether or not funded by advertising, constitute competition to commercial local media services;

The potential for clear guidance to be available to industry on how cases would be approached by the OFT and Competition Commission including, where appropriate, guidance on the factual and economic evidence likely to be relevant to referral decisions;

The need for informal advice in relation to specific cases, and

The extent to which the public interest considerations remain appropriate; and specifically whether the requirement for a sufficient plurality of views in newspapers in each market for newspapers in the UK is realistic or desirable in the digital age.

 

In our view, the scope of the review needs to be wider, and specifically address two issues:

 

The burden of satisfying the merger regime for small businesses operating in small local markets, where the 25% supply test is easily met, as compared to businesses operating in the UK market more generally. Just meeting the requirements of the OFT is a very costly and time consuming exercise for newspaper publishers, costing up to 500,000 and, not only is this a disproportionate burden in relation to revenues and margins of the businesses involved, but the burden will only get heavier as revenues shrink;

The future of the local media, since consolidation is key to its survival, and uppermost in the strategies of publishers for the near future.

 

The role of the merger regime in hindering consolidation of local media is of vital significance to the supply of local media to the many local communities that contain people that are not connected to the internet, and never will be. One third of the readership base is over 55 and half is mid to low income (see the table below), both being demographics that face significant challenges in connecting to the internet, whether in terms of skills, or the income to buy a PC and train to use it.

 

Profile of local and regional newspaper readers

 

Age

15-24

25-34

35-44

45-54

55-64

65-74

75+

Share of readers

14.1%

16.6%

18.3%

15.6%

14.0%

11.4%

10.0%

Socio-economic

ABC1

C2DE

AB

C1

C2

DE

Share of readers

45.2%

54.8%

17.1%

28.1%

22.9%

31.9%

 

[Source: Enders Analysis based on JICREG]

 

The risk is that titles will be closed without exploring consolidation as a solution simply because of the merger regime, and the result will be a needless loss of jobs and local news, as well as plurality since there is no replacement for local media once the shutters have been closed for good. Meanwhile, the elderly and the low income could

lose the vital lifeline provided by local media in terms of the information that really matters to them. At the limit, local media might be seen as providing a public service to the most vulnerable members of the UK's local communities, and the review should consider the local media ownership rules in this light.

 

Regarding "The extent of plurality required in local media markets", we note that it is the Internet have-nots (the elderly, the low-income or the unskilled) that will be most affected by the retreat of commercial local media. As we stated above "One third of the readership base is over 55 and half is mid to low income (see the table below), both being demographics that face significant challenges in connecting to the internet, whether in terms of skills, or the income to buy a PC and train to use it".

 

If true plurality is defined as a strong network of commercial businesses acting alongside the BBC, then clearly plurality is at risk as a result of the retreat of commercial media. This retreat is an irreducible feature of the current media landscape, because the traditional means of funding the newsroom - through charging consumers for access and surrounding the news with attractive information and advertising - is being dismantled.

 

Local and regional newspaper publishers are caught between 'a rock and a hard place': young consumers are accessing news and information, including advertising listings, on the internet, yet the revenue generated by online services is substantially lower than that provided by the print newspaper model, and cannot offset the decline in print revenues. Access to online services is free to users, with only highly specialist news services able to charge for access (local and regional newspapers are unlikely to fit into this category in the foreseeable future). Newspaper publishers cannot reduce newsroom costs proportionately to the decline in aggregated revenues without reducing the quality of the service, although there are means available to reduce those costs (such as through consolidation). Therefore, the gap between the costs of funding newsrooms and the revenue generated from the traditional model will continue to grow.

 

What we can say with certainty is that news provision will have to be substantially different in the future: time consuming news provision, such as court reports, is the genre that is most at risk from disappearing entirely, as there is an inevitable drift towards local coverage provided by user-generated content and 'cottage industry' (hobbyist) services.

 

May 2009