Business as usual: The economics of 'free' dailies

The proliferation of free daily newspapers over the last decade has triggered wide-spread fears that newspapers as we know them are dying and being replaced by low-standard freesheets. Many scholars and commentators have argued that free papers represent a 'new business model'. Shiar Youssef argues that such claims are exaggerated and that the dichotomy created between free and paid-for papers is a false one.

Since 1995, when the Metro was established in Sweden, over 250 free daily newspapers have been introduced in almost 60 countries, mostly in Europe. More than 45 million copies are read everyday by some 80 million people. In some countries, like Switzerland and Spain, free papers are the most widely read dailies. So how did this 'new' model develop, and how new is it really?

 

Business models

Broadly speaking, there are two main types of free newspaper publishers. The first represents new entrepreneurs -at least in theory- 'invading' the newspaper market with a new product, e.g. Metro International introducing the Metro in many European cities and the Norwegian Schbsted publishing different versions of 20 Minuten. The main requirement for these firms is sound financial backing so as to afford loosing money during the initial intense competition period, until they expand and start to make profit. Indeed, Metro International only started making profit in 2006. In 2008, up to 70% of the 240 or so free titles in existence were still losing money.

The second business model, which includes almost all other free dailies, encompasses established local or national newspaper publishers that endeavour to prevent the first from entering the market in order to protect their market position with readers and advertisers. Examples include Associated Newspapers, which is owned by the Daily Mail & General Trust and publishes both free and paid-for papers (Metro UK, Evening Standard and Daily Mail), and News International, which is owned by Rubert Murdoch's News Corp and publishes the Sun, Times and many other titles. Free dailies launched by these incumbent publishers are mostly 'spoilers', the main goal of which is to protect their publishers' market position by preventing others from entering or surviving in the market. Sometimes this obstructionist approach is taken further, as evidenced by the numerous legal actions against new free dailies for all sort of issues, from using the word 'newspaper' to copyright and littering.

Other types of free daily newspapers, which should be differentiated from weekly or monthly promotional freesheets, include slimmed-down copies of normal paid-for papers as a marketing tool. Examples include Standard Lite and FTpm, but these are not our focus here. The two points to emphasise are that, first, these business models are typical of most industries and markets and, second, that many free papers are published by the same media giants that publish the majority of mainstream paid-for papers.

 

As cheap as it gets

For new entrepreneurs, profit opportunities are the only reason for entering and staying in business. In an already crowded market like that of newspapers, the easiest way of achieving this is through ruthless cost-cutting policies. Indeed, both Metro International and Schibsted have closed down free papers (e.g. in Zurich and Cologne) where big profits were not expected in the future.

Published mainly in metropolitan areas on weekdays, the Metro, and all the other titles that followed suite, utilised a cheap distribution method represented by local public transport systems, where a large number of people with 'wasted' time are concentrated in one place. This also ensured that each copy was read by more than one reader (two to four, according to industry figures). Public transport companies have gradually realised the profit opportunities presented by free papers distributed on public transport and their attitude towards free paper publishers is changing (demanding bigger shares of profits, etc.). At the extreme end, the Moscow Metro is published by the public transport company itself. Other distribution methods, such as door-to-door delivery in crowded urban areas, have also been used with less success. The important thing is reaching a large number of people with limited costs.

Another way of cutting costs has been to cut wages. A typical Metro International edition employs 40 people, only 15 to 20 of whom are journalists. The UK Metro has 90 or so staff and the Paris 20 Minutes has 26 professional journalists, but that is still significantly less than a typical paid-for paper. The small editorial staff means free papers depend heavily on news wire service and third-party material (photographs and so on). For local and national publishers that also publish paid-for papers, they typically combine, or synergise, the activities of their free and paid-for papers, including joint advertising, distribution and even news gathering. For example, many news stories that appear in the Metro and Evening Standard can also be found in the Daily Mail. The result is a loss of original content and diversity of coverage, and further damage to investigative journalism.

Most free papers also outsource their production and distribution process. Most do not have their own printing plants, for instance. As the Metro owners put it, “Outsourcing is a keyword in the Metro business model.”

 

Free wars

On 30 August 2006, Associated Newspapers turned its Standard Lite, which had been launched in London in 2004 to prevent other publishers from entering the evening free paper market, into London Lite as a spoiler against News International's planned evening free daily, The London Paper, which was launched a week later. Attracted by the substantial profits that Metro, had started to make, The London Paper itself was intended as a spoiler against Evening Standard (both the Metro and Evening Standard are owned by Associated Newspapers). Within months, The London Paper was distributing 500,000 copies, about 100,000 more than London Lite. The three-year period of ruthless competition between the two companies (what has come to be known as the London free paper war, between 2006 and 2009) can be explained as a typical short-term business strategy of defence and prevention.

Back in April 2005, the Office of Fair Trading, pushed by former London mayor Ken Livingstone, who is said to be a long-time enemy of the 'Mail lot' (Associated Newspapers is owned by the Daily Mail & General Trust), had decided to open up the afternoon slot on the London underground to other papers to compete with the Stadard. Transport for London (TfL) was expecting to generate a revenue of £4.6 million from the process but the bids were apparently too low and the tender was cancelled in April 2006. Instead, both Associated Newspapers and News International opted for recruiting armies of low-paid distributors to hand out their papers outside busy stations.

Both papers, London Lite and The London Paper, lost tens of millions of pounds in the three-year 'war'. According to industry figures, The London Paper lost over £9m in the year to June 2009, £4m more than the anticipated budget. In its first 10 months alone, it lost almost £17m. The steady increase in advertising revenue, from £7.6m in 2006-7 to 14.4m in 2008-9, was not enough, especially in light of the recession and the accompanying decline in advertising revenue in general. Of course, Associated claimed Lite was part of its long-term strategy and a complement to its 'successful' morning paper, Metro, although this clearly affected its then paid-for paper, the Evening Standard, which raised its price from 40 to 50p and sold 23.5 percent fewer copies a year later.

Many media commentators at the time lamented this "expensive, unnecessary war." But was it? It is considered 'normal' for big competitors to lose money in the first few years until one or a few of them eventually dominate the market and drive all the others out. Indeed, News Corp's James Murdoch is said to have refused to strike a deal with the Daily Mail & General Trust to cut losses in the London market until it was too late.

Once The London Paper exited the market, on 18 September 2009, and the Evening Standard, now 75% owned by Russian billionaire Alexander Lebedev, went free, the London Lite, still owned by Associated's parent company Daily Mail & General Trust, was also stopped. The staff at both papers either lost their jobs or were reassigned somewhere else within the companies. While Associated celebrated its 'victory', News International sought solace in the fact that it forced DMGT to sell a majority stake in the Evening Standard.

The London Paper and London Lite were quite similar in content; the battle was mostly a marketing one: from similar launch publicity blazes, competing teams of distributors wearing similar purple or yellow T-shirts, to a spat over alleged dumping of paper bundles. Associated has even accused News International of gaining access to its business plan for London Lite. Both papers had opted for purple mastheads, leading to accusations of 'copycat' from both sides. In any case, the result was a large cross-over between the two papers' readership - according to some studies, 60 percent of London commuters picked up both papers.

 

The happy monopolists

With launching costs ranging between £5 and £15 million and an expected loss period of 3 to 7 years before breaking even, not many publishers would dare enter the free paper market, and fewer would manage to stay in business for long. Indeed, in many countries only one, two or three out of a dozen free papers introduced have survived the initial competition period. In Sweden, there is only one free daily left; in France, Switzerland and Spain, 20 Minuten and/or Metro are the most read newspapers in the country, while most of the others have closed down. After a peak of 42 million copies in 2008, total free dailies circulation worldwide has been declining, especially in Europe, where 60% of free papers are distributed. According to many industry observers, such as Piet Bakker, the average circulation growth rate of 60% - though non-linear throughout - seems to have reached “a saturation point.”

In economic theory, industries going through their 'mature phase' exhibit greater degrees of concentration as a few large firms dominate the market. Products become more standardised and are mass-produced with more efficiency (in an economic sense), allowing these firms to increase their output, and therefore profits, while reducing long-term costs (this is known in economics as 'economies of scale'). A technological innovation, such as the introduction of free papers, may reset the industry life cycle and save it from decline. With such industry structure, however, the motivation for real innovation is minimal and profits are maximised mainly through management efficiency, i.e. saving money on everything, including journalism. While free market economics strives on the myth of 'perfect competition', most real-life markets, including that of newspapers, are 'imperfectly competitive'. In other words, monopoly is the norm rather than the exception.

A quick scan of local and regional papers in the UK, for instance, shows that most are published by a handful of big newspaper groups (Johnston Press, Northcliffe, Tindle Newspapers, Trinity Mirror and Newsquest). In the age of multinationals, these monopolies are also increasingly globalised: A few giants are progressively dominating newspaper publishing across the industrialised world. Indeed, a new role of 'global marketing vice president' has recently been created at Metro International following a decision to increase the company's marketing activities on the global market.

The free dailies market shows similar trends. In most European countries, monopoly now seems to be the dominant business model. Furthermore, the majority of free newspapers are owned by big publishers that also publish paid-for newspapers and control more than half of the newspaper circulation in Europe. This also allows them to combine activities (joint advertising packages, shared content, etc.), as indicated above.

The competition myth is often justified by consumers' interests in terms of better quality and diversity, lower prices and so on. However, this overlooks the fact that this kind of competition is often not on content but on driving down costs (as in 'price wars'). The result is a business model that emphasises advertising and profits over serious news and other editorial content. It is no longer editors who make final decisions but the CEOs of the publishing companies or the heads of the advertising departments.

Free paper monopolies are often secured through exclusive distribution deals with transport authorities, as in the case of Metro and Evening Standard. Even if the competition authorities tried to prevent this, the monopolists' large economies of scale mean very few publishers can actually compete with them. Mergers and buy-outs consolidate their power even further, as seen recently with the merger of Metro and Herald AM in Ireland (Metro Herald).

Recent plans put forward by culture secretary Jeremy Hunt will scrap barriers to cross-media ownership at a regional level. The proposed regulation (or deregulation, rather) has been described by media commentators as a 'big bang' similar to the one that 'revolutionised' the City in the 1980s and led the way to the recent financial crisis. A communications bill that is supposed to herald “a new age of converged media” is expected soon.

At the Edinburgh International Television Festival last year, News Corporation's chairman and chief executive for Europe and Asia, James Murdoch, attacked the BBC and warned of the dangers of 'state interference' in the 'independent' media industry, calling for comprehensive deregulation. His true intentions, however, were revealed in the conclusion of his speech: “The only reliable, durable and perpetual guarantor of independence is profit.” News Corp has since been trying to take over British Sky Broadcasting (BSkyB), which will make it “a company of unprecedented scale and cross-media power that has the capability to bundle together print and broadcast news and other content in a way that would stifle rivals and dominate debate,” as one commentator put it.

 

'All the rest is advertising'

A big part of the hostility that free papers were initially met with from traditional publishers was to do with concerns that these may undermine their advertising base, and not really about circulation and readership. There is, in fact, evidence that readership and circulation figures for most paid-for papers were either not, or only marginally, affected by the advance of free dailies.

Newspapers operate in a so-called dual-product market: they sell content to readers and sell access to those readers to advertisers. The increased pressure on space, along with the increased flow of news, meant that newspapers have moved away from reports to 'stories' chopped and shaped to fit ready-made templates. With the development of lifestyle and consumer journalism, the news function was increasingly subdued to papers' function as advertising delivery systems and promoters of capitalist culture. Free papers are a continuation of this trend, which also saw many newspapers switching from broadsheet to tabloid or compact size. And of course, it's not just about size; the claims of ‘tabloidisation’ of newspapers certainly bear some truth.

Most newspapers today depend much more on advertising revenue than they do on sales. Newspapers are considered financially 'healthy' when two-thirds (or up to 70%) of their income is derived from advertising. Over a quarter of this is derived from classified adverts, but most of these are moving online now.

Paradoxically, studies have shown that too many adverts mean that up to 45 percent of all print advertisements are skipped by readers. And that's partly why publishers have been thinking about, and investing in, targeted advertising. Newspapers offer possibilities of 'contextual advertising': a wide range of editorial content combined with commercial messages, e.g. adverts for sports goods in the sports section; product promotions presented as news on business and technology pages and so on. In this sense, free papers are not that much different from paid-for papers or, indeed, from radio and TV, which are solely dependent on advertising income (save for public broadcasting and state-owned media). Transnational dot.com companies, such as Google, Yahoo and others, are also fully dependent on advertising revenue.

The difference is that, instead of money, free paper readers (often commuters) exchange their time for content. Commuters are a captive audience that may give more attention to advertising messages. The Metro has roughly a 50-50 advertising-editorial ratio. The London free papers only managed to reach 25-75, which is partly why they were stopped.

Despite free dailies' claims that they attract a new target audience (younger non-readers) and a different type of advertisers (clubs, theatres, small retailers, etc.), the fact remains that free papers have generated new advertising income for publishers at a time when advertising revenue was drying up due to the recession and many advertisers' moving online.

Changes in income streams (mainly from advertising) not only affect newspapers' choices about employment and work processes, but also content. Newspapers 'adjust' to advertiser's needs and there have been many examples of companies' withdrawing their advertising from an 'offending' paper following the publication of what advertisers regard as 'negative' coverage. The result is often self-censorship by the paper the next time round. A good deal of the content of business, technology and cultural pages is little more than subtle advertising and PR by private businesses. Commercial journalism is the norm rather than the exception.

 

Scenarios

Elite and business newspapers (Guardian, FT, etc.) and strong local brands have proved they can survive the free paper 'invasion'. The main victims seem to be weaker local brands and general news titles. But this cannot all be blamed on free papers, as many commentators and journalists have done. Indeed, over the past 20 years, most of Britain's local dailies lost between 40 and 70 percent of their sales. This has been partly due to the development of new forms of mass media as the main source of news, notably the Internet, but also because of the gradual deterioration in the quality and journalistic standards of the mainstream media. After all, why pay when you can get pretty much the same news for free? A quick comparison of the prime news pages of the UK Metro and The Times, for instance, or the Evening Standard and the Daily Mail, would indeed prove this point (see 'The cost of free' article in this issue).

The future of newspapers has been the subject of much analysis and speculation. One of the dramatic scenarios suggested is the slow death of paid-for papers. With Microsoft's Bill Gates predicting (in 2005) that the internet will attract $30 billion in advertising revenue annually within the next three years, free content paid for by advertising looked like the only business model in town. The decision of the new owner of Evening Standard to make the London evening paper free in the hope of reaching a larger, advertiser-pleasing audience has been repeatedly cited as an indication of this. Others, however, have talked about a 'conspiracy' that, having effectively killed all competition in the evening free paper market in the capital, Associated Newspapers will start charging for the Evening Standard again.

Another possible scenario is a gradual increase in newspaper prices, coupled with charging for online content. This is Rupert Murdoch's more traditional line of thinking, and his News Corp has, indeed, started putting some of its titles behind paywalls. The Times, Sunday Times and News of the World are now only accessible to subscribers, with The Sun following soon. Many national and regional titles had already upped their cover prices last year. But while this may actually work for so-called quality papers (the Financial Times and Wall Street Journal already charge online readers), once the free papers trend is over, it is unlikely to work for most general news papers and tabloids, given the availability of similar content for free elsewhere. Some of these have been experimenting with various types of paywalls and subscription methods, but without much success. It should be stressed that the main reason behind this shift is not that readers are moving online but that many advertisers have moved online.

Other possible 'solutions' suggested include government subsidies (as in France, where Nicolas Sarkozy last year introduced a scheme to 'help' 18- to -24-year-olds receive one free copy of the paper of their choice every week for a year) or philanthropic papers (as in the 'clubland' evening papers of the early twentieth century, where sympathetic millionaires would fund elitist, limited-circulation papers). Both of these are, at best, short-term interventions and pose difficult questions about the influence of the state and the rich over the supposed independence of the press. Both models would not also generate much, if any, profit and are, therefore, unlikely to be pursued by publishers as a model for mass-circulation newspapers, as opposed to political or community newsletters.

The most likely scenario, thus, appears to be the coexistence of free and paid-for papers (the accumulation rather than substitution model). Research commissioned by the British Journalism Review in 2006 suggested that newspapers in general may have a longer self-life than many believe, and that the model of cinema, which adapted to TV rather than being overwhelmed by it, might be more appropriate. True, there are already more free local papers than paid-for ones, but the latter still survive. Nationals could be the same. And true, the industry structure may change a little; we might see more mergers or break-ups, larger or smaller monopolies; but as far as economics is concerned, not much will change.

Part of the problem that newspaper groups now face - one that tends to be conveniently ignored - is that, for years, they sat on supernormal profits: most large newspaper companies had profit margins exceeding 20 percent during the last few decades of the twentieth century and many have accumulated vast amounts of debt to meet their greedy shareholders' demands for ever-greater returns. Now all they can do, apart from cutting jobs and costs, is look for new profits: online and from selling the 'new' readers of 'free' papers to advertisers.

The viability of the free paper model is the wrong question and the dichotomy created between free and paid-for papers is a false one. In light of paid-for sales declining, free papers are just another delivery method devised by the same publishers. To put it bluntly, they are just another way for the same companies to generate profits. They may well rejuvenate a flagging industry that has been shooting itself in the foot with commercial guns and prove, once again, that market economy does not simply commit suicide, as many of us would like to think.

 

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