Memorandum from Trinity Mirror plc
perform a vital role in communities across
Despite extensive cost reductions, numerous rounds of restructuring and the closure of 47 titles (including 27 newspapers) in 2008 and 12 titles (including 8 newspapers) so far in 2009, a large proportion of Trinity Mirror's regional newspaper portfolio is in a precarious position and is at risk of closure in 2009 and beyond as the economic situation worsens.
consolidation more titles will undoubtedly close across the
Mergers won't lessen competition as regional newspapers now compete vigorously with numerous other media, in particular with internet businesses, across all material advertising categories. There is significant substitutability for newspaper advertising by new media forms. These new forms provide material price constraint on newspaper advertising rates.
Actions intended to protect media plurality could in fact lead to a reduction in the number of newspapers. Whole towns could be left without a local paper.
As the media industry transforms there is a clear and demonstrable consumer benefit from consolidation - the survival of the regional press.
1. The role of regional newspapers
1.1 Vital for local communities
The regional press performs a vital role in communities across
Jack Straw has described local newspapers as "the backbone of our
democracy" and many studies routinely place local newspapers at the heart of
communities and local democracy. Gordon Brown in a 2008 Newspaper Society
speech said, "Local newspapers are right at the heart of
1.2 Trinity Mirror plc
Trinity Mirror is one of the
1.3 Regional Newspapers as providers of news
Regional and local newspapers provide greater coverage of local news than any other medium. It is the local newspaper that covers the local Crown and Magistrates Courts, reports on meetings of local authorities and more importantly of their Planning and Licensing committees.
Our courts system only works if justice is seen to be done. Local newspapers are the "eyes and ears of the public". The deterrent effect of many non-custodial sentences is significantly enhanced by the fear of local opprobrium. It is only local newspapers that report the everyday activities of the lower courts.
Similarly the activities of local authorities are only fully reported by the local press. To use US Justice Louis Brandeis's famous phrase: "Sunlight is the best disinfectant". The knowledge that most of their actions will be reported by the local press to local voters helps ensure that local politicians resist the temptation to abuse their position.
Newspapers are vital to the maintenance of healthy local democracy.
They are also the places where people read about their local schools, about their children's football teams, about which Chemist is open 24 hours a day and who is preaching at the Parish church that Sunday.
But it is not just lost dogs and local car crashes. It is the campaign to keep the local hospital, the building of the new hyper-market, the death of the respected secondary school headmaster.
No other medium yet provides this level of news written by professional journalists.
1.4 Regional and local newspapers are politically independent
With one or two well known exceptions (Belfast Newsletter, Belfast Telegraph and Yorkshire Post), local and regional newspapers strive to avoid party political allegiance. In part this is driven by commercial common sense. Circulating in small geographical areas the publications cannot afford to alienate large portions of their potential readership. This commercial necessity has been turned into a virtue by many publishers (including Trinity Mirror) who now have political independence enshrined into their editorial policies. These policies would survive consolidation and the ownership of an individual title would not affect the need for it to remain independent.
1.5 Regional newspapers as employers and trainers
Regional newspapers are significant employers with a wide geographical spread. In 2007, the last year for which detailed figures are available, a Newspaper Society ('NS') survey showed that the industry employed over 41,000 people, nearly 12,000 of whom are journalists. The NS estimates that total employment had fallen to 35,260 (-4%) in 2008 of whom 11,200 ( -7%) were journalists.
It is not too high a claim to say that regional newspapers have long
been the training ground for
It is not easy to secure a job on a regional newspaper for a young journalist but it is a world away from the "entry only for the metropolitan elite" that often forms the caricature of early employment in the media.
The closure of significant numbers of local newspapers would have a
direct impact on employment in the
2. Structural changes and the cyclical downturn
The regional newspaper industry is undergoing rapid change as a result of shifting consumption patterns and media fragmentation. Print media (including newspapers and magazines), TV and radio are facing increased competition from the internet (Google, blogs, social networks) for audience attention, and advertising revenues are following users online.
Circulations for regional newspapers are on a downward trend, declining by an average of -2.4% per year over the last 15 years (excluding morning and evening free newspapers such as Metro and London Lite). However, this trend has accelerated in recent years and in 2008 circulations were over -4% lower than in 2007. In that year circulations had dropped by around -5% compared to 2006. This decline is due to increased competition from other media, first as multi-channel TV grabbed more audience share, and secondly and more crucially the impact of the internet over the last decade. The take-up of broadband over recent years, to the extent that over 62.5% of households are now connected to the internet via a high-speed link, has transformed the consumer experience and fundamentally altered the competitive environment for regional newspapers.
According to a recent survey by the Internet Advertising Bureau, in terms of media time spent by consumers, the Internet, at 29%, is now second only to TV. Newspapers account for around 6%. A similar recent survey of US 18-26 year olds finds that the Internet is already the number one medium for this younger age group, who spend just 3% of their media time consuming newspapers.
A different form of structural change has also had a significant impact on the number of newspapers sold. As more and more of the national retail spend is attracted to the large supermarkets, consumer buying habits have changed. As consumers consolidate their shopping into one or two visits to a supermarket a week, they are no longer visiting small local shops on a daily basis. The habit of picking up a newspaper as they pass a newsagent or shop in a local general store is being broken.
2.2 Regional newspaper advertising revenues falling fast
As a result, advertisers have been shifting ever-increasing proportions of advertising budgets online to match these changing consumption habits. As shown in chart 1 below, total regional newspaper advertising fell by -15% in 2008 and has been forecast to fall by -28% in 2009, reflecting the sharp decline in classified categories we and our competitors have been experiencing over the last year. This compares to just -1% decline in regional newspaper advertising revenues in 2007.
At the same time internet advertising grew by 39% in 2007, 19% in 2008 and, although also expected to be hit by the recession, is forecast to decline by just by -0.2% in 2009, far lower than the decline in regional newspapers.
Chart 2 below shows that Trinity Mirror's regionals business is experiencing deep declines in advertising revenue, down -36% in the first 17 weeks of 2009 compared to the same period a year ago. Recruitment and Property advertising are both down -50% or more. Other regional newspaper groups have announced similar levels of decline.
Newspaper groups such as ours recover some of this lost print income through revenues from their own digital products, but the net effect is negative because of the small size of embryonic digital businesses and the highly competitive digital market. In 2008, despite significant growth, our regional digital revenues accounted for just 3.9% of total revenues for the regional business. In addition, chart 2 shows our regional digital advertising revenues are down -14% in the first 17 weeks of 2009 compared to the same period a year ago.
As a result, despite the slowdown in the growth of internet advertising, the fragmentation of media and cyclical pressures threaten the existence of the regional press.
Chart 1: Internet advertising market overtakes regional newspaper advertising which is shrinking fast
(b) Internet, 2004-2008: Advertising Association/IAB. 2009: Enders Analysis.
Chart 2: Our regionals business has experienced steep revenue declines across all advertising categories
Trinity Mirror Interim Management Statement, 13 May 2009
2.3 New competitors in local markets
This net loss of advertising revenues by regional newspaper groups demonstrates the fragmentation of media in the digital era, as market entry barriers have been swept away. We are now in direct competition with a raft of competitors on the internet which did not exist just a few years ago, such as Rightmove in property and Monster in jobs, which provide localised classified advertising content from national platforms. Other companies such as Google, Craigslist and Gumtree all have an increasing local focus.
In addition, Local Authorities are cutting advertising spend in the regional press as they develop their own websites and in some cases launch their own newspapers and this is further weakening our core advertising base. This is a particularly worrying trend. A number of local authorities are producing heavily subsidised newspapers that have moved far away from traditional four-page information sheets to publications that openly compete with commercial newspapers for advertising.
All this is happening as our local newspapers and websites compete with an ever expanding BBC and its call on consumers' time and eyeballs.
3. Consolidation: benefits, barriers and the effect on competition
3.1 The need for strong newspaper groups
As shown above, the structural changes afflicting the newspaper industry combined with the current cyclical pressures have led to falling circulations and weakening advertising revenues which threaten the viability of the regional press.
Our goal is to build a growing multi-platform media business, across print, online and mobile. But we are facing an unprecedented combination of rapid structural changes coupled with a severe cyclical downturn of which we have not yet seen the bottom. British consumers need strong, robust, efficient and profitable regional newspaper businesses of scale, in order to safeguard the regional press that they value so highly and develop compelling local digital services.
3.2 Benefits of consolidation
Newspaper groups will need to merge to survive. Consolidation would enable sharing of back office costs and increased scale economies, with bigger audiences and more local brands. Improved profitability will save a number of newspaper titles which would otherwise be closed and enable us to invest in digital media.
Key benefits of consolidation would be:
· Synergies in functional areas such as senior management, HR, IT, Finance, Marketing and office costs would lower the fixed cost base of the business and improve profitability;
· In geographies where there is an overlap of titles, cost-sharing in all areas, from editorial and sales to printing, distribution and premises would improve profitability of both titles and increase the likelihood of both titles surviving
· In areas where the population and/or advertiser base cannot sustain two titles indefinitely, a merger may result in the closure of one title but a strengthened and sustainable improvement in the profitability of the other, thereby enabling communities to continue to be served by the regional press
· Scale benefits across the business, from newsprint procurement to improved access to capital markets;
· Combined cashflow providing greater stability for the combined entity and improved ability to service debts and pension liabilities in the face of increasing pressures of a declining advertising market
· additional cash to invest in digital development.
3.3 Vibrant competition for regional newspapers
Only a few years ago a local advertiser had no real option but to use the local press for pure classifieds, for birth, death and marriage announcements or to promote a small business. The advertiser can now, and increasingly is, doing all of that through the internet. eBay, Craigslist, Gumtree, other niche competitors as well as our own local sites mean that any Wanted, For Sale, Lonely Hearts and other personal classifieds have real local competition even from large National internet sites. Rightmove, AutoTrader and Monster provide local advertising services for property, motors and jobs. Further examples are in the tables below. As a result, mergers between major newspaper groups cannot now, in our view, lead to a substantial lessening of competition because the local press no longer enjoys any real market power.
In addition, regional newspaper groups are now in competition with Google and other search engines, which use a targeted advertising model to poach large and small advertisers from regional newspapers across all of these advertising categories. In the past, only regional newspapers and directories such as Yellow Pages were able to match local advertisers with local audiences: now we compete with Google whose very business model is based on this kind of targeting. Search advertising was estimated by Enders to be worth around £2bn in 2008, compared to £2.3bn for regional newspaper advertising, and is expected to grow by 4.5% in 2009.
Table 3(a): Examples of key pure-play internet competitors
In their different ways, each of these sites competes with our regional newspapers and our digital advertising products. There is now almost unlimited consumer choice. Proprietary research we have undertaken in our key regional footprints reveals that a significant proportion of people will turn to the internet to look for jobs, property and cars, as shown in chart 5(c) below. The result is that if we charge advertisers too much, they will simply go elsewhere.
Chart 3(c): research demonstrating competition from the internet in our geographic areas
3.5 Competition in niche advertising categories
We understand that the OFT/Competition Commission has, in past merger decisions, highlighted several categories of advertising for which there are not thought to be effective competitive constraints. These include Public Notices, display advertising by smaller businesses providing local services and classified advertising for private individuals such as announcements of Births, Marriages and Deaths (BMDs).
We have demonstrated above that the regional press faces substantial competition from the internet across the board, but it is also worth noting these niche categories account for a small proportion of our total advertising revenues; for example just 6% for BMDs and 5% for Public Notices (2008), as shown in the chart below. Therefore we believe that a newspaper merger could not be said to result in a "substantial lessening of competition" in these areas, due both to extensive internet competition and the small contribution of these revenues to our business.
Source: Trinity Mirror analysis
It is worth noting here that there is yet another potential threat to the regional newspaper industry from government pressure on local authorities to move many of their public notices on line. Apart from the lack of transparency inherent in such a move (significant parts of the country do not have anything like universal broadband take-up), a steady income stream will be taken from the regional press.
Local Authority "Newspapers"
A new threat to the viability of local and regional newspapers has been the launch of a number of faux newspapers published by local authorities. These new publications have moved on from the familiar local information and council puff-sheets over four or eight pages. They now represent themselves as alternatives to commercially published newspapers. They purport to carry local news and hold themselves out as full alternatives local newspapers to potential advertisers. Some even publish advertising rate cards with direct comparative cost per thousand rates against local newspapers.
Trinity Mirror has a number of serious concerns about such publications.
Shadow publishing exercises have demonstrated that they are not independently commercially viable and are therefore being published at a direct cost to local council tax payers.
Commercial publishers are therefore facing direct competition from an operation in receipt of direct subsidy from public funds.
No one can believe that the reporting of local events, particularly of local authority/council affairs, will be impartial or independent in these mini Pravdas under the control of local council Directors of Communications.
These publications will not serve democracy but will simply add to the pressures on commercial operations without the luxury of a publicly funded safety net.
The regional newspaper industry is under a three or
four pronged attack; from an expanding choice of media outlets, from subsidised
local authority newspapers, from an ever expanding
Perhaps the only way that regional newspapers will survive and be able to continue to play their vital role in a democratic society of the provision of local news is through consolidation. In some areas that may mean only one local newspaper rather than two but one is better than none.
Former concerns about the impact of consolidation on local advertisers should no longer be a barrier as the growth of real substitutes, in particular the internet, means that local and regional newspapers have no real pricing control.