Another Media Business Model Broken – Free Newspapers

Philip M. Stone February 18, 2009

Metro International’s announcement that it is calling a special shareholders meeting for Feb.24 to authorize a $65 million rights issue because it has basically run out of working cash is just one very visible sign that free newspapers even with their very low advertising rates are not immune from today’s economic gloom.

And with Schibsted, the Norwegian media powerhouse, issuing a profit warning in January that among several problems its 20 Minutes free newspaper in Spain is in trouble -- revenue down there 31% in Q4  compared to the year before, the storm clouds seem only to be getting worse. 

Indeed Spain, that had just a couple of years back been the shining example of how the free newspaper business model can really work, has now really tanked. Metro International, the world’s largest free newspaper group, has closed its Spanish Metro division that had published in seven Spanish cities. 

The Metro Spain decision came very quickly, says Piet Bakker, considered to be the world’s foremost expert on free newspapers. Bakker, at Amsterdam University where he runs the Newspaper Innovation Web site that concentrates on the free newspaper world, noted Metro was “cutting staff and closing editions in November/December and pulling the plug within a week.”

Metro said it investigated mergers in Spain but it came to nothing. “The size of the combined losses of the Spanish free press markets made it extremely difficult to find an alternative that would have improved the future financial performance of Metro Spain, “the company said in a statement.

So if Spain is gone how far behind can the three Metro US properties be? “In terms of advertising and page count the US editions are not doing too bad, actually,” Bakker told ftm, somewhat surprisingly, in an email exchange.  “Boston seems somewhat behind, but there the New York Times (49% ownership) is deciding as well (the NYT recently wrote down its Boston Metro investment). Metro has been looking for buyers (New York and Philadelphia) for more than a year. If ads keep up like this my guess is they will continue, if the recession gets worse, they will close down.”

Bakker continues, “As Metro’s strategy is clearly divesting non-profitable operations and/or finding partners in difficult markets, and both strategies didn’t work in the US, you would wonder what their plan is.  The difference with Spain is that the competition was much more intensive, four titles, while in the US they only have a competitor in New York.”

It was Bakker who first noted back in September, 2008, that European free newspaper circulation had turned a milestone --  circulation dropped, not surprising considering  23 free newspapers had stopped publishing in 2007  and 12 more had stopped by then in 2008. His warning at the time was that those free newspapers that are relying solely on advertising without being part of major publishing groups that can absorb losses and offer joint advertising proposals were going to suffer the most. Metro counters all of that by claiming that while circulation may be down readership is up.

As an example of how the circulation numbers keep falling, Bakker says that in Spain the average daily circulation of free national dailies in 2008 was 3.2 million compared to 3.8 million in 2007, but Spain started this year with less than 2.5 million.

Perhaps the most spectacular European free newspaper closure came with Nyhedsavisen in Denmark that shut down  in September. Even though it was Denmark’s best-read newspaper it had reported losses of some $100 million since its start-up in October, 2006. Last month Morten Lund, its majority owner who had made many fortunes over the years investing in Web start-ups including Skype, was declared personally bankrupt.

Metro International claims to have more than 20 million daily readership from its more than 100 editions in 20 countries. It claims that since its launch in 1995 in Stockholm it has had an annual advertising compound sales growth of 38%, but even that was not enough for the company to breakeven last year and it had a money-losing Q4, and as a consequence the company says it is now in violation of loan covenants which is why it is having a rights issue to raise some 550 million Swedish kroner (about €50 million, $66 million).  Kinnevik Investment, that owns 44% of the company, says it will take up its rights so it seems the company will continue.

The most mysterious decision for supporting a free newspaper has come from London where the Daily Mail & General Trust (DM&GT) elected to sell its paid-for London Evening Standard to a Russian oligarch – former KGB officer in the Soviet embassy – while holding onto its free London Lite that is in fierce competition with Murdoch’s free thelondonpaper.London Lite has a circulation of about 400,000 daily, thelondonpaper is around 500,000 daily while the Standard is at 292,976 but only 53% of that is at the full 50 pence a copy and the rest is bulk sales.

The Standard apparently is looking at a new strategy of continuing to be a paid-for during the prime commuter times, but after around 7:30 p.m. it may give itself away where crowds gather such as the theater district and underground (subway) stations.

As for DM&GT, it owns the very profitable morning Metro free newspaper (it legally got the name and it has no relation to Metro International) and the thinking is that there will be plenty of advertising convergence between it and London Lite.

It’s is an example of a newspaper group  giving up on its paid-for to keep its free newspaper, and that’s something you don’t get to see every day.