Are European Newspapers Doing Better Financially Than American?

Philip M. Stone August 19, 2008

The publisher of Germany’s Bild, Europe’s largest circulation newspaper at some 4.1 million copies daily with a readership around 12 million, makes no bone that the secret to success is an editorial product that people are willing to pay for each day. His advice to American newspapers: “It’s too late.”

Kai Diekman’s comments, in a BusinessWeek interview, may be somewhat over the top, and he neglected to mention that it wasn’t that long ago that Bild’s circulation was more than 5 million, but Axel Springer, Bild’s owner, last week did announce Q2 profits up 73%, boosted by big increases in digital media revenue, and when was the last time an American newspaper company could announce such numbers?

Not all is uniformly well in Europe, of course, and there are big and mighty print groups having their problems, but it does look like the Europeans are not suffering the deep problems troubling American newspaper publishers. One of Europe’s worst results has just come from The Netherlands where the Telegraaf Media Group reported a €176 million ($257 million) first-half loss, but that was really because a broadcast deal had gone terribly wrong rather than its newspapers in trouble.

To cut a very long story short, Telegraaf had to buy a 12% stake in Germany’s ProSiebenSat1 at a price fixed a year ago of  €28.71 ($44.72)   --  that’s  €377 million ($587 million) when the shares today are actually worth only about one-fifth of that. Goes to show the peril of agreeing upon a fixed price for a media company a year ahead; ProSieben shares have dropped 80% during that period!

Bad luck, market forces or whatever, the group took a €185 million ($270 million) write-down charge, announced the first half loss, and as usual when senior management get it wrong the rank and file are the ones to suffer with the company announcing a cull of more than 10% of its workforce (425 employees out of a total around 4,000) and that will include layoffs if necessary. There’s to be more restructuring charges in the second half!

The official spin from the company, incidentally, is that even with the very high price for those German TV shares, the deal itself was not a mistake – it’s prudent today not to have all of one’s eggs in the print basket!

But back to Germany where the Springer results showed just how well its digital media businesses are doing -- up some 262% over the same quarter last year. And by the way, guess who sold a 12% stake in ProSiebenSat1 late last year? Yes, the very same Axel Springer and it got €509 million ($759 million) for its stake.

Springer’s print newspapers also turned in revenue increases, up 3%. And it did not escape CEO Mathias Doepfner’s notice that the increase came mainly from a 20% increase in Bild’s subscription cost. Doepfner told Handelsblatt, “I believe consumers are prepared to spend more money on good products.” 

Even in Germany circulations are falling – down about 20% over the past 10 years --and the policies therefore are to build up digital business so it represents about half of a media company’s revenues.  At Springer it is already 10%.

But Germany’s newspaper business has one advantage that few other countries have – there are no free newspapers and that is by no accident.  Springer, for instance, is said to have some €300 million ($438 million) set aside  to launch within days  its Gratissimo free paper should anyone be silly enough to try and enter the German market. Gratissimo’s main purpose would be to protect Bild with the business plan calling for the two together to offer very cheap combined advertising rates.  

Springer already has experience spending big money to see off a free competitor. In 1999 the Norwegian Schibsted launched its very successful  20 Minutes brand in Cologne with a 150,000 circulation and Springer reacted by combining forces with DuMont Schaumburg, the local Cologne publisher, to kill the upstart – they published two free newspapers and made sure there were no local presses in the area that would print 20 Minutes. Within two years, the 20 Minutes Cologne edition was history, and the battle sent an international message that if the mighty Schibsted couldn’t make it work in Germany then probably no one could. And so far they haven’t tried.

Springer itself has delved into “near-free”. It publishes Welt Kompakt at just €0.70  -- around half the price of many mainstream newspapers -- but it is thought it only circulates some 20,000 – 30,000 copies a day whereas free newspapers would expect to distribute in the six figures. Springer has always hidden Welt Kompakt’s circulation within the Die Welt circulation numbers and the numbers have always been a closely guarded secret. 

Speaking of Schibsted, its Q2 earnings showed what for it was considered a very disappointing 3% increase. The company said that in the Nordic region advertising prospects, except for classifieds, still appears good – not too many can say similar about their European markets -- but costs still need to be controlled.

Given that Norway is a market where print newspapers have really suffered from  readers turning to the online editions instead, a “telling “point in the results was the announcement that its leading  Aftenposten would continue introducing measures to ensure an operating margin of between 4 – 10%. That’s a lot less than what American publishers find acceptable.  On the other hand Schibsted says online activities now account for 25% of revenues and that’s a percentage American publishers would love to have.

And the company’s fortune with its international free newspaper business is mixed. 20 Minutos is Spain’s most read newspapers but whereas it had a profit in the first half of 2007 it fell into loss for the same period this year. Schibsted calls the Spanish advertising market “challenging”. On the other hand in France 20 Minutes now makes a profit whereas last year it did not.

Indeed free newspapers in Europe are having a rough time of it generally with a whole lot of consolidation going on. In Helsinki, for instance, Sanoma says it is merging in September its two free newspapers Uutislehti 100 and Metro because the market is not profitable enough to support both. In reality Uutislehti 100 is being killed off (but could be resurrected if necessary the company says) and thus the 300,000 circulation that each of the two papers now has is expected to result in a 400,000 circulation for Metro when all is said and done. Sanoma says there probably won’t be job cuts.

Meanwhile our ftm Media Sleuth in Norway tells us there is a “time-out” in the discussions after Mecom received an unsolicited bid for Edda Media from an unidentified group. Mecom bought Edda in 2006 for 7.5 billion Norwegian Crowns (€945 million, $1.4 billion), and the offer on the table is said to be at around half of that. CEO David Montgomery is said to be looking for a price some 30% higher than the bid.

Circulation drops in the UK at the national and regional level have been well documented, with the regionals in particular experiencing a very weak advertising climate that is expected to get even weaker. Newsquest, for instance, owned by Gannett and comprising some 300 titles making it the second largest UK regional group, reported dismal June figures with property ads slumping 36%, employment off 17.3% and autos down 14.9% explaining why much of Gannett’s recent $2.8 billion write-down had to do with its UK properties.

But the good UK news is that last year newspapers overall took in £4.7 billion in advertising – more than television, radio and the Internet --  according to the Ofcom (office of communications) annual Communications Market report. And Ofcom said 2007 saw the biggest growth in overall advertising for three years although admittedly the bulk came from Internet advertising   that has grown 70.2% in each of the past five years. Left unspoken, of course, is that these were last year’s figures and everyone knows 2008 is pretty much a disaster.

Even so, European publishers really do seem to be doing better than their American counterparts. That may well be because this was one of the few times that Europeans saw the writing on the wall earlier than Americans and started their digital investments sooner.

In many European countries it is not easy to fire workers. It can be a long, long drawn out process unlike in the US where a company says it wants people gone and within a couple of weeks they’re gone. So while the Europeans have resorted to job layoffs, there is more emphasis in Europe on trying to bring in new revenues (digital) rather than just relying on cutting costs, and that might be something American publishers might want to give more thought to.

In Baltimore The Sun is going to print the Washington Times. That’s a winner for both sides – the Times doesn’t have to make a large capital investment for new presses and for the Sun it’s additional revenue and economies of scale will help reduce some costs. It’s more deals like that that will help move print forward. Firing people is not the only solution.