Memorandum from Guardian Media Group plc

1.   Introduction

 

1.1.     GMG welcomes the opportunity to contribute to the Committee’s inquiry. We believe that the future of local and regional media is a very important and pressing issue – one which has rightly moved up the political agenda in recent months. At stake is not only the health of the UK’s creative industries, but also that of our local communities and democracy.

 

1.2.     Local and regional media, and in particular local and regional newspapers, play a vital role by reporting and commenting on news that affects people’s lives, holding authorities to account and underpinning local – and therefore national – democracy.

 

1.3.     The business model which for many years has supported local and regional journalism has been fundamentally challenged by structural changes such as classified advertising moving to online businesses and the abundance of free content on the web.

 

1.4.     This has been going on for many years, but the recession has highlighted these structural problems and exacerbated their effects. The last year has seen dramatic falls in advertising revenues, threatening the viability of many local and regional newspapers and resulting in widespread cutbacks and the closure of a number of titles. Due largely to the structural issues at play, we do not expect revenues to return to previous levels even when the economy recovers. The threat to the future of local/regional news provision will remain.

 

1.5.     Addressing these issues is the responsibility of industry. It is not enough simply to complain about the problems without offering solutions. However, government and regulators also have a role to play.

 

1.6.     In the immediate term this role would include relaxing the local ownership regime; backing progressive ideas such as Ofcom’s local consortium model; placing reasonable limits on the activities of the BBC; encouraging the BBC to engage meaningfully in partnership discussions with commercial players; encouraging local authorities to support independent local newspapers; and recognising the effect of search engines and aggregators on UK content providers.

 

1.7.     The Committee asks respondents for views on a number of issues. We respond below to the majority of these points.

 

2.   The impact on local media of recent and future developments in digital convergence, media technology and changing consumer behaviour

 

2.1.     Parts of the local and regional media industry have traditionally sought to downplay the impact of the structural changes outlined above. In contrast GMG has said consistently for a number of years that declines in revenues and readership were being driven by long-term, permanent changes in the market as well as cyclical economic factors. We do not, therefore, expect revenues to return to old levels even when the recession abates.

 

2.2.     The recession has accentuated the effects of underlying structural issues, with devastating effect. For example, in the last financial year the profits of GMG Regional Media (a division of GMG) fell by 85%. A business which made more than £14 million in 2007/08 is now making a loss each month.

 

2.3.     The loss of classified advertising – a major revenue stream for local and regional newspapers – to online players such as autotrader.co.uk and Monster has had a severe impact. Falling circulations of print titles have also had a negative effect in commercial terms.

 

2.4.     However, despite falling print circulations, audience size is not the central problem. Many local and regional titles have developed highly popular websites and argue that they have thereby expanded their overall reach. Without question publishers need to develop a strong web presence and engage with new audiences online in order to be successful in the future. Our own Manchester Evening News has done so with a site that features not only traditional reporting but also video and audio content, blogs and forums. The success of the MEN’s website has been reflected in audience size and industry awards.

 

2.5.     However, making a significant commercial return from an online audience has proved extremely difficult for all players – ‘traditional’ media and start-ups alike. Online revenues still account for a very small proportion of the total. This is due to a number of factors, not least of which is the presence of huge quantities of free content on bbc.co.uk, which makes it virtually impossible to charge users to access content.

 

2.6.     Local and regional newspapers therefore find themselves in a Catch-22 situation: they know the future is digital; but it is far from clear how they make that future pay for the expensive business of journalism.

 

3.   The impact of newspaper closures on independent local journalism and access to local information

 

3.1.     While it is not clear how media businesses will make a significant return from news on the web, one thing is clear: the current model, which has long sustained investment in local and regional newsgathering, is no longer working. Publishers therefore need to find a new model with much lower costs in order to remain viable. Regrettably, this means reducing the number of people employed by publishers, reducing the number of centres publishers occupy, and in some cases closing loss-making titles.

 

3.2.     Some argue that the problems of the regional press are largely the making of owners and managers who demanded unreasonably high profit margins and irresponsibly cut costs to maintain these margins – at the expense of quality and therefore audience and revenue. The reality, though, is that the issues are far deeper and more complex than this analysis allows.

 

3.3.     GMG Regional Media recently announced various changes designed to reduce costs significantly. These included nearly 300 redundancies and the closure of several offices.

 

3.4.     Our regional business has consistently invested in its journalism and been at the forefront of innovation in the sector with, for example, its pioneering multimedia newsdesk and the MEN’s part-paid, part-free distribution experiment. Nonetheless, it has seen profits plunge and the business move into loss; and the changes made by local management are designed merely to bring the business back towards break-even. This is not about huge profit margins, but survival and sustainability as a business.

 

3.5.     GMG Regional Media is committed to retaining as many of its people as possible and continuing to publish newspapers in the North West and South of England. However, we recognise and share concerns about the impact of cutbacks on communities and local democracy.

 

3.6.     The blogosphere has an important role to play in the evolving media landscape. GMG has a strong track record – most obviously via guardian.co.uk but also in our regional division – of embracing the digital world and innovating in these areas. However, bloggers cannot compensate fully for declines in well-resourced, independent journalism, and the idea that they can or will immediately step up to fill the vacuum left by retreating publishers is a fiction.

 

3.7.     Therefore GMG is concerned that declines among local and regional publishers will result in a journalistic and democratic deficit – a danger now acknowledged by government and regulators.

 

3.8.     GMG has been engaged in discussions with government and regulators for some time about how they can best support the industry. In the meantime, publishers like GMG Regional Media have no choice but to make the often very difficult and unpopular changes necessary to stay in business.

4.   How to fund quality local journalism

 

4.1.     The truth is that no-one has yet come up with a comprehensive answer to this question. GMG is a commercial organisation and will continue to seek a commercial model to sustain its local and regional journalism. However, it is clear that fundamental challenges may require radical and previously unconsidered solutions.

 

4.2.     Ofcom has proposed the establishment of independently funded local consortia, which could include regional press publishers, to provide broadcast news for the ITV regional news slot, and possibly further news services online. Ed Richards’ preferred source of funding for such consortia is the BBC’s digital switchover surplus. While this is not by itself the solution to the problems of the regional press, it could well be a very positive step in the right direction.

 

4.3.     GMG Regional Media has been exploring this progressive proposal with Ofcom and other parties, and has offered to conduct a trial in the North West. While GMG is naturally cautious about the prospect of even indirect public subsidy, and any regulatory burden associated with it, we recognise that in these extraordinary times all possibilities should be on the table.

 

4.4.     We also note that public subsidy in other organisations, such as the BBC and ITV, has not compromised editorial independence, and strongly question why Channel 4 should be seen as a more worthy recipient of subsidy than other public service content providers – such as GMG.

 

5.   The role and effects of search engines and online content aggregators

 

5.1.     GMG believes search and aggregation are vital parts of both the present and future online content landscapes. They provide real value for consumers, and we partner with players in the sector in a variety of ways. They are not going to disappear, nor do we want them to. However, we think the current market dynamic between content creators and search engines/aggregators is skewed heavily in the latter's favour. This is not conducive to a healthy environment for content creation in the online world.

 

5.2.     Search engines and aggregators benefit from content creators, in the sense that they generate revenue by acting as gateways to content other people produce. They do not invest in the creation of content (such as journalism). Furthermore, the most successful online business models (and the lion's share of revenues) effectively involve searching and aggregating content, rather than creating content. This results in a disincentive to create quality content, and undermines the viability of its provision.

 

5.3.     The argument has traditionally been that search engines and aggregators provide online publishers with traffic in return for the use of our content, and this is enough to make the relationship symbiotic and equal. However, there is a vast over-supply in the market of advertising inventory, and yields have come under severe downward pressure. As a result, the value of the traffic generated by search engines and aggregators has reduced significantly.

 

5.4.     This is happening at a time of broader concerns about the viability of the business model for quality online content. This applies to both the regional and national press. As is well-documented, classified advertising revenues have already moved away from local and regional publishers to a significant degree. As it stands, it is hard to believe that display advertising alone will be able to fund a healthy plurality of quality online content. Furthermore, there remains no viable model for players such as GMG to take revenue directly from consumers in return for content – not least because of the vast quantities of free content the BBC publishes on bbc.co.uk.

 

5.5.     It is not realistically open to content providers simply to exit the search market and remove their content as a way of objecting to the nature of the relationship – due the presence of a single, dominant player in the market: Google. Even if content providers decided to object, they have no effective sanction because there is no alternative route to market. Content creators cannot simply remove their content from the dominant player because the damage to their business would be significant. As such, this increasingly appears to be an issue that requires examination from the point of view of competition law principles.

 

5.6.     We raise these concerns not because we are trying to protect an old business model, but because we are trying to create new models for a new world – models that will support investment in quality content. These new models will require fair acknowledgement of the value that our content creates, both on our own sites (through advertising) and 'at the edges' – in the world of search and aggregation.

 

5.7.     A successful Digital Britain will need successful UK content providers. At present, we are seeing a substantial drain of value away from the UK creative economy, as an ever greater proportion of online revenues and profits go to non-UK-based search and aggregation businesses. We have strongly encouraged government to use the final Digital Britain report to acknowledge the importance of this issue and the need to examine it further.

6.   The future of local radio and television news

 

6.1.     Commercial radio plays an important role in the provision of public service content, including news, despite the huge discrepancies in funding between the commercial sector and the BBC’s increasingly dominant radio presence – a presence that consistently creeps beyond the boundaries of its intended remit.

 

6.2.     Commercial radio faces very serious challenges. Ofcom estimated last summer that some 40% of commercial radio stations were loss-making, and conditions have of course worsened considerably since then. Relaxing outdated rules will go some way to easing the pressure on players in the sector, for example by allowing greater co-location and networking, and we welcome the conclusions of the Myers independent review of local radio.

 

6.3.     Such a relaxation is important if the UK is to continue to have a genuine counterweight to the BBC in radio – in the form of viable commercial competition.

 

6.4.     GMG Regional Media has been a pioneer in local TV in the UK with its city TV station for Greater Manchester, Channel M. The station has provided a range of programming from news to lifestyle, music and sport, and has attracted a substantial audience. It will be available on Freeview from November this year.

 

6.5.     The economics of local TV have always been challenging. Channel M has never made a profit and the recession has caused losses to widen, necessitating cutbacks. However, it provides a valuable public service, has brought many benefits to GMG Regional Media, and local TV could play an important role in Ofcom’s local consortia model – an option GMG Regional Media is exploring with the regulator and industry.

 

7.   The desirability of changes to the regulatory framework, including cross-media ownership and merger regulations

 

7.1.     We welcomed the government’s invitation to the OFT to conduct a review of the merger regime in relation to the local media sector, and are contributing to this work along with our industry peers.

 

7.2.     Analysts’ forecasts suggest that a substantial proportion of the UK’s local and regional newspapers face closure in the coming year. A regulatory environment that offers more encouragement to owners to consider mergers, disposals and acquisitions will be a positive step for the sector, and for the future viability of local and regional journalism.

 

8.   The opportunities and implications of BBC partnerships with local media

 

8.1.     GMG welcomes the BBC’s attempts to become more open and to partner with commercial organisations. There are potential benefits for local and regional publishers, such as the ability to use BBC content, or the iPlayer, on their websites.

8.2.     However, these benefits should not be overplayed, nor is this the first time that the BBC has raised the possibility of partnerships in response to criticism. As an example of this: the BBC recently leaked a story about an imminent partnership deal with the regional press. This came as something of a surprise because – like the wider industry – we were unaware of the existence of such a deal.

 

8.3.     Our experience of attempting to partner with the BBC is that despite encouraging conversations and positive intentions on both sides, the culture of the BBC acts as an inherent, institutional barrier to effective partnership. For all the admirable public service values of the BBC, at root it is set up to compete – and to win. Very few of our past efforts to build partnerships with the BBC have resulted in concrete benefits for our businesses.

 

8.4.     Despite this, we hope that the BBC’s latest proposals will deliver advantages to commercial players, and we will continue to work with the BBC to take this forward where we can. Such partnerships will not, of course, provide a solution to the structural issues faced by the local and regional media industry.

 

8.5.     The Committee is aware of GMG’s views on certain of the BBC’s expansionary activities, so we will not go into detail again here. To summarise: establishing reasonable parameters for the BBC’s activity and ensuring proper oversight by the BBC Trust will be essential to the success of the UK’s creative economy, because such actions will allow the commercial sector to invest with greater confidence in the future of their own businesses.

 

9.   The extent of plurality required in local media markets

 

9.1.     The prospect of the BBC eventually becoming the sole provider of regional news is unattractive in a variety of ways. It is important that plurality of news provision is maintained at a local and regional level. As Ofcom’s research has shown, the public supports this view.

 

9.2.     GMG believes that the right action (as outlined above) by individual companies, industry, regulators and government will help to maintain the plurality which is so valuable to the UK’s creative economy, our communities and our democracy.

 

About GMG

Guardian Media Group plc (‘GMG’) is one of the UK’s leading multimedia businesses. Our portfolio includes national, regional and local newspapers, a range of websites, radio stations, magazines and business-to-business media.

 

GMG divisions and joint venture companies:

 

Guardian News & Media publishes the Guardian and Observer, two of the UK’s most respected and successful newspapers, and guardian.co.uk, the internationally successful website.

GMG Regional Media publishes the Manchester Evening News and its website, and a number of weekly newspapers and websites in the North West and South of England. It also includes Channel M, a TV station for Greater Manchester.

GMG Radio operates regional stations across the UK, predominantly under the Real Radio and Smooth Radio brands.

GMG Property Services operates software providers to independent estate agents.

Trader Media Group publishes Auto Trader, the leading motors classified website and magazine, along with a number of other titles and websites. Trader Media Group is jointly owned by GMG and Apax Partners.

Emap is a leading international business-to-business publishing, events and information company. It is also jointly owned by GMG and Apax Partners.

 

GMG is wholly owned by the Scott Trust, which was created in 1936 to secure the financial and editorial independence of the Guardian in perpetuity.

 

May 2009