A macro-economic review of the UK local media sector

A macro-economic review of the UK local media sectorA report prepared for Ofcom

Section 1: Advertising Overview

UK advertising revenue by type

Section 2: Competition for local advertising revenues

The emerging threat of online media

Local classified directories

Section 3: The local and regional press

How is the UK newspaper industry structured?

The economics of the local press value chain

Macro-economic performance of the local press

Newspaper closures

Scenarios for press

Section 4: Local commercial radio

The local radio supply chain

Commercial radio consumption trends

What are the most attractive parts of the market?

How is local radio performing?

Section 5 : Opportunities for synergies

Cross media synergies: local and regional press

and local commercial radio

Television and local and regional press

Intra-industry press

Contents

2

2 2 2 2 2 2 2 2 2 2 2

2 3 3 3 3 3 3 3 3 2

2

1 1 1 1 1 1 1 1 1 1

1

1 1 1 1 1 1 1 1

1 1 1

1 1 1 1 1 1 1 1

1 1

1

4 4 4

3 4 4 4 4 4 4

3

2 2

2 2 2 2

2 2

2 2

2

1 1

1 1 1 1

1 1

1 1

1

0 0

1 0 0 1

1 0

0 0

0

0 1 1

2 3

3 13

14

15 15 15 15

16 16 16 16

15

-

2

4

6

8

10

12

14

16

18

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

£ (Billions)

Internet

CinemaRadioOutdoor & transport

Direct mail

Television

DirectoriesBusiness & professionalConsumer magazines

Regional newspapers

National newspapers -4%

-5%

-3%-7%

-1%

-4%

-3%

3%-3%1%

51%

…the UK advertising market has experienced low growth from 1998 to 2008, with spend on radio and regional newspapers decreasing over the period…

OVERVIEW: THE CHALLENGES FACED BY LOCAL MEDIA

UK advertising expenditure, 1998 to 2008 (at 2000 prices)

UK advertising expenditure by media

Source: Advertising Association 3

CAGR 2001-2008










Newspaper closures

Scenarios for press











Contents

4

0.1 0.1 0.1 0.2 0.2 0.30.5

0.6 0.60.2

0.4

0.8

1.2

1.6

2.0

0.1 0.1 0.1

0.1

0.2

0.3

0.4

0.6

0.7

0.2 0.2 0.2

0.5

0.8

1.4

2.0

2.8

3.3

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

2000 2001 2002 2003 2004 2005 2006 2007 2008

£ (Billions)

Although “pure” classified advertising online is dwarfed by paid-for-search it now amounts for £0.6 billion, directly cannibalising printed press revenues streams…

THE EMERGING ONLINE THREAT

5

Classified online as distinct from search and display has been growing exceptionally strongly representing a significant threat to traditional print advertising revenue streams

Internet advertising spend by type at current prices, 2000 to 2008

Online advertising by type

Source: Advertising Association, IAB, PWC, WARC, Oliver & Ohlbaum Analysis

DISPLAY

PAID-FOR-SEARCH

OTHERCLASSIFIED

CAGR2002-2008

47%

90%

40%

60%

26%

12%10% 10%

8%6% 6% 5% 5% 5%

7%

0%

5%

10%

15%

20%

25%

30%

RECRUITMENT AUTOMOTIVE TECHNOLOGY FINANCE PROPERTY TELECOMS ENTERTAINMENT & MEDIA

CONSUMER GOODS

TRAVEL & TRANSPORT

RETAIL OTHER

Percent

…the traditional printed press classified advertising categories of recruitment, property and automotive account for 46% of all online advertising spend…


6

Recruitment has seen the strongest shift towards online spending, accounting for 26% of all non-search online advertising

The traditional newspaper print classified categories are among the strongest online movers leading to a rapid cannibalisation of print revenues since 2004

However, property and automotive advertisers are traditionally bigger display advertisers than recruitment and so shift online may be slower as press retains a stronger hold on display advertising value and volumes

Share of Internet advertising spend (non-search) by sector, H2 2007

Online advertising revenues by type


Traditional printed press classified categories

769 793 859

738 637 626

505

477 460 480

442

385 373

307

172 167

177

161

142 122

102

56 79

120

158

201 275

304

1,474 1,499

1,636

1,499

1,365 1,396

1,218

-

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2002 2003 2004 2005 2006 2007 2008

£ (Millions)

…there is evidence of price pressure on the total recruitment classified advertising market and regional press’ share is falling rapidly…


7

Recruitment classified has seen the largest proportional shift online of all key industry categories.

There is significant evidence of downwards price pressure shrinking the entire recruitment classified market

This is due to high levels of online supply of classified recruitment advertising inventory

In 2004-2005 it appeared as though regional press was holding it’s share of all recruitment classified advertising but since then the media’s loss of share has been rapid

Regional printed press have seen annual declined in recruitment classified of -12% since 2004

UK classified recruitment advertising spend by type at current prices, 2002 to 2008

Recruitment classified advertising


REGIONALPRESS

B2BPUBLISHING

NATIONALPRESS

ONLINE

CAGR2004-2008

-12%

-11%

-13%

26%

3 4 7 10 13 19 2616 2433

4252

7689

36

51

81

107

135

179

189

56

79

120

158

201

275

304

0

50

100

150

200

250

300

350

2002 2003 2004 2005 2006 2007 2008

£ (Millions)

…online specialist providers account for 65% of all online classified recruitment advertising while regional newspaper owned online sites have struggled to gain market share…


8

Recruitment classified online advertising accounts for the vast majority of regional newspaper online revenues

Regional newspaper online sites have managed to grow recruitment classified revenues strongly since 2004

However, regional newspaper groups have failed to significantly take market share from online specialist provider websites

The promise of being able to dominate online recruitment classified advertising by offering a joined up online-print product to advertisers as thus far not materialised

Online recruitment advertising spend by type of online provider at current prices, 2002 to 2008

Online recruitment classified by provider


NATIONALNEWSPAPERS

REGIONALNEWSPAPERS

ONLINESPECIALISTS

CAGR2002-2008

32%

33%

40%

…there are three national directories providers and a large number of local providers …

LOCAL CLASSIFIED DIRECTORIES

Number of directories by publisher in the UK, 2006

Directories providers

Source: Competition Commission, O&O Analysis

45

24

17

13

9

6

5

5

4

4

3

2

173

171

104

0 20 40 60 80 100 120 140 160 180 200

Thomson

BT

Yellow Pages

Johnston Press

Dentons Directories

Tele-Pages

Community Publications

Newsquest Media Group

Kingston (Hull & Know)

Memedia

Trinity Mirror

Score Press

Pink Local Directory

Northcliffe Newspapers Group

North Wales Newspapers

NATIONAL DIRECTORIES

LOCAL DIRECTORIES

9

269

129 127

183

59 40

26 19 -

50

100

150

200

250

300

Yell Kingston (Hull) BT Thomson Tele-Pages Kingston (Know) Johnston Press Dentons Directories Trinity Mirror

LOCAL DIRECTORIES

NATIONAL DIRECTORIES

...major directories providers focus on larger coverage regions leaving some opportunities for specialist locally targeted providers…


Average directory circulation by provider, 2006

Directories providers

Note: Kingston is effectively the incumbent telco in Hull and so BT is not present in this market

n/a

Source: Oliver & Ohlbaum Analysis 10

…but beyond the major three players, the directories market is very small leaving little room for local newspaper groups to diversify…


UK consumer directories advertising income, 2006

Market size

944

699

120

95

30 -

100

200

300

400

500

600

700

800

900

1,000

TOTAL Yell Thomson BT Other Local

£ (Millions)

Source: Advertising Association, company accounts, DTI, O&O Analysis 11










Newspaper closures

Scenarios for press











Contents

12

…the main levers for revenue generation remain circulation (cover price) and advertising; other revenue streams are areas of focus for newspapers but remain relatively small (e.g. product offers and events) …

LOCAL NEWSPAPER INDUSTRY STRUCTURE

Newspaper revenue drivers

UK press value chain

Revenue

Circulation revenue

Advertising revenue

Cover price

Paid-for circulation

Advertising yield

Advertising volumes Market demand

Ad/Ed ratio

Readership

Position within book

Colour / Mono

Cost of alternatives

Demand elasticity

Alternative platforms

Corporate ad spend

Total circulation

Readers per copy

Reader demographics

13

…the press supply chain a rigidly linear process from advertising sales and editorial through to distribution…

THE NEWSPAPER SUPPLY CHAIN

The press supply chain

Key elements of the supply chain

Source: McKinsey: Managing Media Companies 14

PUBLISHING /PRODUCTION

ADVERTISING SALES

EDITORIAL

PLATE-ROOM

PRESS-ROOM DISTRIBUTION

MAINTENANCE

PRINTING

PRE-PRESS

PURCHASING AND PROCUREMENT

HR, FINANCE, IT

CORPORATE MANAGEMENT

DIS-PATCH

THE NEWSPAPER SUPPLY CHAINNewspaper supply chain - key functions

…the flexibility to reduce costs in the newspaper supply chain are limited to editorial, ad sales and overhead functions while printing, newsprint and distribution costs are largely outside the short-term control of newspaper groups…

FUNCTION DEFINITION TYPICAL % COSTS KEY RECENT TRENDS

EDITORIAL Principal newsgathering operation Core staff of journalists, reporters, sub-

editors and editorial staff18%

Increasing sharing of editorial content across local titles and also pressure on publisher margins have led to dramatic cuts in editorial expenditure Increasing centralisation of editorial staff around core regional

hub titles

AD VERTISING SALES Teams selling classified and display advertising 18%

Classified advertising telephone sales are increasingly centralised across a region Display advertising still sold by dispersed field teams

PRODUCTION Small team putting together editorial

and advertising content to create newspaper book layout

2% Desktop publishing and templated advertising graphics have

dramatically reduced the labour costs required to amalgamate the book

NEWSPRINT Key paper raw materials A global commodity 14%

Global commodity costs have risen sharply due to reduced global supply and industry consolidation Reduced demand may see prices fall in 2009

PRE-PRESS & PRINTING Print run plate preparation Core industrial printing operation Asset utilisation is key

14% Largely a fixed cost Heavy capital investment in all colour presses between 2000

and 2007

DISTRIBUTION In-store, door-drops and street

distribution Local monopoly distributors

17%Wholesale and newsagent fees account for 50% of cover price

typically Local monopoly distribution still predominant

OVERHEADS Core back-office functions Establishment / premises costs 18%

Significant centralisation of key operations around major regional city title hubs Closure of satellite offices

Source: Company Accounts, Oliver & Ohlbaum, Analysis 15

Key newspaper supply chain functions

…the vast majority of the editorial cost for a smaller local regional title is the cost of internal reporters, sub-editors and an editor…


Typical editorial value chain and costs by type for a small local weekly title

Editorial – small local title


• 1 EDITOR / 2 SUB EDITORS• 4-7 REPORTERS• 1 FREELANCE PHOTOGRAPHER• £200k - £500k COST PER YEAR

INTERNAL EDITORIAL STAFF

TOTAL EDITORIAL COST: £200k – £700k PER YEAR, DEPENDING ON TITLE SIZE

AGENCY CONTENT SYNDICATED CONTENT

• TYPICALLY PRESS ASSOCIATION• USUALLY COURT COPY OR

CELEBRITY NEWS• £10k PER YEAR MAXIMUM COST

ON A STORY BY STORY BASIS

• OPINION PEICES AND REGULAR COLUMNISTS

• £10k - £15k PER YEAR

• PROVIDED BY CENTRAL GROUP REGINAL HUB TEAM

SPORT CONTENT

…the vast majority of editorial cost that a major regional daily title incurs is a large team of reporters to provide full coverage of a large range of stories, typically across a large urban area or county…


Typical editorial value chain and costs by type for a large regional daily title

Editorial – large regional daily title


• 1 EDITOR / 1 DEPUTY EDITOR• 5-10 SUB EDITORS• 30-90 REPORTERS• £1.5m - £8m COST PER YEAR

INTERNAL EDITORIAL STAFF

TOTAL EDITORIAL COST: £2m - £10m PER YEAR, DEPENDING ON TITLE SIZE

AGENCY CONTENT SYNDICATED CONTENT

• TYPICALLY PRESS ASSOCIATION• MAJOR NATIONAL AND

INTERNATIONAL NEWS STORIES• £150k - £200k PER YEAR

CENTRAL CONTRACT

• OPINION PEICES AND REGULAR COLUMNISTS

• CULTURE NEWS AND EVENTS• £50k PER YEAR

• 5-10 PEOPLE SERVING ALL REGIONAL TITLES

• £200k - £300k PER YEAR

SPORT CONTENT

THE NEWSPAPER SUPPLY CHAINAdvertising sales – local sales

…local advertising sales teams are generally split between dispersed field sales handling larger display clients and telephone sales teams handling smaller display and classified advertisers…

FIELD SALES TELEPHONE SALES

TYPE OF CLIENTS HANDLED Handle larger display clients Often property, motors Large local run-of-paper clients

Recruitment and other classified Smaller display clients

AVERAGE TEAM SIZE

SMALL WEEKLY TITLE 1-3 people 2-3 people

MAJOR DAILY TITLE 30-40 people 20-40 people

AVERAGE TEAM COST

SMALL WEEKLY TITLE £0.2 million / year £0.2 million / year

MAJOR DAILY TITLE £2-3 million / year £2- 3 million / year

Source: Oliver & Ohlbaum, Analysis 18

Regional newspaper groups: typical local sales structure and costs

30

24

16

12

8

-

5

10

15

20

25

30

35

2000 2002 2004 2006 2008

£ per page

...pre-press, the process that prepares plates and image carriers for printing a specific edition of a paper, has seen a significant reduction in cost in recent years


19

Pre-press costs have fallen considerably in recent years

Less than a decade ago, the pre-press operation of a major regional printing group hub would have required around 60-100 people to print 2000 pages per week but the total is now around 30 people

Desktop publishing and automation of almost all parts of the process have reduced the physical labour costs involved in pre-press

Desktop publishing templates have allowed advertiser creative staff/agencies to prepare advertising copy themselves ready for inclusion at the pre-press stage

70-80% of all advertising is now provided by advertisers ready to include in the production / prepress process

Estimated average regional newspaper pre-press costs per page, 2000 to 2008

Pre-press

Source: Oliver & Ohlbaum Analysis

570

758 718

-

100

200

300

400

500

600

700

800

JAN 08 SEP 08 MAR 09

US$ per tonne

...global newsprint prices rose by around 30% in 2008 putting additional pressure on the cost bases of local newspaper groups, but this cost pressure is likely to ease in 2009/2010…


20

Newsprint is a global commodity, with pricing outside the control of individual groups.

It is likely that newsprint prices will fall in 2009/2010 as global demand for newsprint falls through the recession

The strong upward momentum was driven mainly by industry consolidation among major players in North America, which supply one third of the world’s newsprint production

The gloomy global economic outlook has resulted in a demand slowdown for newsprint – putting downward pressure on prices

Publishers closing titles, reducing pagination and moving titles from daily to weekly should reduce pulp prices further

Global newsprint prices, January 2008 to March 2009

Newsprint


20

15

5

0

5

10

15

20

25

30

35

40

SHARE

Pence

PUBLISHER

WHOLESALER

NEWSAGENT

…distribution of local newspapers is extremely expensive due to the fragmented nature of distribution outlets and also the cost of providing a free-sheet to every home in a given area…


A newspaper publisher typically retains only 50% of the cover price of a paid for newspaper

Wholesale costs are high, given the dispersed nature of outlets and also the regulated local monopoly provision of distribution services in any given region

80% of sales are typically through 20% of outlets

Distributors often generate additional revenue by the insertion of leaflets into the newspapers they distribute but this business model is currently under severe pressure

Average newspaper gross circulation revenue share by company – based on 40p typical cover price

Distribution

Source: Oliver & Ohlbaum 21

…the largest long-term structural decline in classified has thus far been in the recruitment sector …

THE ECONOMIC PERFORMANCE OF THE LOCAL PRESS

Regional newspapers advertising revenue by type, 1998 - 2008

Regional newspaper advertising

Source: Advertising Association

0.2 0.2 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3

0.6 0.6 0.7 0.7 0.7 0.7 0.7 0.6 0.6 0.6 0.5

0.6 0.6 0.7 0.8 0.8 0.8

0.9 0.7

0.6 0.6 0.5

1.0 1.1

1.1 1.1 1.2 1.2

1.3

1.3

1.3 1.3

1.0

2.4 2.5

2.8 2.8 2.9

3.0

3.1 3.0

2.8 2.7

2.3

-

0.5

1.0

1.5

2.0

2.5

3.0

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

£ (Billions)

Other Classified

Recruitment classified

Local Display

CAGR 98-08

(0.9%)

(1.2%)

0.2%

(0.3%)

CAGR 04-08

(6.3%)

(12.4%)

(5.5%)

(7.3%)

National Display 0.5% (4%)

Total

22

RECRUITMENT

PROPERTY

OTHERS

AUTOMOTIVE

TOTAL

-

500

1,000

1,500

2,000

2,500

3,000

£ (Millions)

Recruitment, traditionally the main driver of classified advertising growth, is highly cyclical but a clear structural change has occurred since 2004 with recruitment, automotive and other classified entering decline despite strong GDP growth to 2007…


23

UK newspaper classified advertising by type at constant (2000) prices, 1970 to 2008

Classified advertising

Source: Advertising Association

RECESSION RECESSION RECESSIONB2B

RECESSION

31

66

3

17

2

9

4

0

10

20

30

40

50

60

70

TOTAL PAID WEEKLY* FREESHEETS

No. of newspapers

Closures of local newspapers in the UK are the result of a shakeout – the newspapers closing are generally weaker titles in competitive markets and titles remain from other publishers or are consolidated


24

Analysis of reason for closure of local newspapers, January 2008 to July 2009

Newspaper closures – recent examples

Source: Newspaper Society, Guardian Online, Press Group Announcements, Oliver & Ohlbaum Analysis

ANOTHER PUBLISHER HAS STRONGER TITLES IN MARKET

PUBLISHER HAS OTHER STRONGER TITLES IN MARKET

CONSOLIDATED TITLES

CONSOLIDATED TITLES

ANOTHER PUBLISHER HAS STRONGER TITLES IN MARKET

PUBLISHER HAS OTHER STRONGER TITLES IN

MARKET

Of all the local newspapers that have closed since the start of 2008, only one (in Castle Donnington) has left a town or region without a specifically focused title

The Castle Donnington Nu News was published by Trinity, was a weekly free sheet and closed on the 1st October 2008

The paper circulated to only 1600 homes out of the 6000 homes in the town

Castle Donnington no longer has a paper targeting specifically the town with the closure of the weekly free sheet

With only 12,000 inhabitants the town is covered by other titles centred on Derby, Loughborough and Nottingham

*some titles published every two weeks


25

Newspaper closures – recent examples

TITLE CLOSED OWNER POSITION IN MARKET REASON FOR CLOSURE

ESHER NEWS AND MAIL Surrey & Berkshire / GMG 5 Weak title in market already served by larger GMG, Trinity and

Newsquest titles

ALDERSHOT MAIL Surrey & Berkshire / GMG 2 Merged with GMG’s Aldershot News title

BATH OBSERVER Northcliffe 1 Northcliffe also own the only other major title – the paid-for Bath

Chronicle in the same market

CAMBRIDGE WEEKLY NEWS Iliffe 1 Iliffe consolidated with Cambridge Crier free-weekly title

PRESETON & LEYLAND CITIZEN Newsquest 1/2 JP own the big evening title and major weekly free-sheet

LANCASTER & MORCOMBE CITIZEN Newsquest 1/2 Major title competition from JP with the leading paid weekly and

similar sized weekly free-sheet

BLACKPOOL CITIZEN Newsquest 1/2 Major title competition from JP with the leading paid weekly and

similar sized weekly free-sheet

HUYTON & ROBY STAR Trinity 4 Weak title in Trinity dominated market served by several other titles

SOUTH WIRRAL NEWS Trinity 4 Weak title in Trinity dominated market served by several other titles

N. YORKSHIRE HERALD & POST Trinity 14 Weak title in market served by much bigger metropolitan titles

PETERBOROUGH HERALD & POST Trinity 1 Strong weekly title but in a market dominated by the JP paid-for

evening titles and weekly free-sheet

STAMFORD HERALD & POST Trinity 2 Weaker titles up against stronger paid-for daily

…more than 50 local newspapers have closed in the last 18 months but almost all of the closures are of weak titles in markets served by more than one local newspaper…

Selected local newspaper closures, 2007 to 2008

Source: Newspaper Society, Oliver and Ohlbaum Analysis

0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5

0.8 0.9 0.9 0.9 0.9 0.9 1.0 1.0 0.9 0.9 0.8 0.7 0.7 0.8 0.8 0.8

0.6 0.60.7 0.8 0.8 0.8

0.90.7

0.6 0.60.5

0.4 0.40.4 0.4 0.3

0.3 0.3

0.3 0.4 0.4 0.40.4

0.50.5 0.5

0.4

0.3 0.30.4 0.4 0.4

0.3 0.3

0.4 0.4 0.40.4

0.40.3

0.3 0.3

0.2

0.2 0.20.1 0.1 0.1

0.40.4

0.4 0.4 0.50.5

0.50.5

0.5 0.5

0.4

0.4 0.40.4 0.4 0.4

2.93.0

3.3 3.3 3.43.5

3.73.5

3.3 3.3

2.8

2.5 2.52.6 2.6 2.6

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008F 2009F 2010F 2011F 2012F 2013F

£ (Billions)

Regional press revenues will be heavily hit during the recession with only a partial recovery as the economic cycle returns to growth


26

Regional press revenues could recover somewhat as the economic cycle returns to growth

Industry revenues are forecast to fall by £800 million from 2007 to 2010

This fall represents a decline of 24% from 2007 to 2010

While there could be some recovery after the recession, this will only be partial as structural declines continue

The base case recovery assumes:

• Recovery in property classified advertising if property transactions increase with any economic recovery

• Ongoing decline sin recruitment and motors classified advertising due to sustained online competition

• A recovery in display advertising in line with any wider economic recovery

• Maintaining circulation revenues through cover price rises to counter circulation declines

UK regional press revenues by type, 1998 to 2013 (nominal terms)

Long term sustainability – base case

Source: Advertising Association, Oliver & Ohlbaum Analysis

Circulation Revenues

Display Advertising

Classified Recruitment

Classified Property

Classified Motors

Classified Other

Forecast

0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.4 0.4

0.8 0.9 0.9 0.9 0.9 0.9 1.0 1.0 0.9 0.9 0.8 0.7 0.7 0.7 0.7 0.6

0.6 0.60.7 0.8 0.8 0.8

0.90.7

0.6 0.60.5

0.4 0.3 0.30.3

0.2

0.3 0.3

0.3 0.4 0.4 0.40.4

0.50.5 0.5

0.4

0.3 0.30.3

0.30.3

0.3 0.3

0.4 0.4 0.40.4

0.40.3

0.3 0.3

0.2

0.2 0.10.1

0.10.1

0.40.4

0.4 0.4 0.50.5

0.50.5

0.5 0.5

0.4

0.40.4

0.40.4

0.3

2.93.0

3.3 3.3 3.43.5

3.73.5

3.3 3.3

2.8

2.52.4

2.22.1

2.0

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008F 2009F 2010F 2011F 2012F 2013F

£ (Billions)

Regional press revenues will be heavily hit during the recession with only a partial recovery as the economic cycle returns to growth


27

Regional press revenues could recover somewhat as the economic cycle returns to growth

Industry revenues are forecast to fall by £900 million from 2007 to 2010

This fall represents a decline of 27% from 2007 to 2010

The low case assumes that there will be little to no recovery after the recession due to structural changes in the industry, e.g. the rise of online competition for classified advertising

The low case assumes:

• Limited to no recovery in in classified advertising overall due to sustained online competition

• Continued declines in display advertising despite any economic recovery

• Slight circulation revenues declines to represent cover price rises not countering circulation declines

UK regional press revenues by type, 1998 to 2013 (nominal terms)

Long term sustainability – low case

Source: Advertising Association, Oliver & Ohlbaum Analysis

Circulation Revenues

Display Advertising

Classified Recruitment

Classified PropertyClassified Motors

Classified Other

Forecast

In order for low case margins of around 10% by 2013 to be realised, steeper declines would need to be experienced in most revenue lines (rather than just one or two)


Impact of each individual low case revenue line on overall industry margin in 2013 (base case industry margin = 15%)

Sensitivity analysis

28

REVENUE LINE BASE CASE CAGR 2007 TO 2013 LOW CASE CAGR 2007 TO 2013 INDUSTRY MARGIN 2013(WITH LOW CASE REVENUE LINE*)

CIRCULATION -1% -4% 14%

DISPLAY -2% -5% 12%

RECRUITMENT -10% -16% 13%

PROPERTY -3% -9% 11%

AUTOMOTIVE -12% -19% 15%

OTHER -3% -5% 15%

Source: Oliver & Ohlbaum Analysis*and related proportionate cost reduction

REVENUES

COSTS

EBIT

EBIT MARGIN

0%

5%

10%

15%

20%

25%

30%

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

2006 2007 2008F 2009F 2010F 2011F 2012F 2013F

EBIT margin (%)£ (Billions)

While the recession will see margins fall dramatically, the industry could remain highly profitable but at EBIT margin levelsof 10-15% rather than 25-30% historically seen


29

The recession is hitting regional press groups hard with a resulting significant drop in EBIT margin expected under the base case scenario

Margins will halve through the recession but the industry will remain in profit

Long term structural decline will continue to see margins squeezed in the medium term

However, as the economy recovers after recession margin levels also recover but never to historic high levels seen between 2000 and 2007

Under base case assumptions, average industry profitability could be 15% in 2013

Major restructures and cost cutting measures could allow major regional press groups to maintain these margins for the next 5-10 years

Base case scenario: regional press revenues, costs, EBIT and EBIT margin, 2006 to 2013 (nominal terms)

Industry profitability – base case

Source: Company accounts, Advertising Association, Oliver & Ohlbaum Analysis

Forecast

REVENUES

COSTS

EBIT

EBIT MARGIN

0%

5%

10%

15%

20%

25%

30%

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

2006 2007 2008F 2009F 2010F 2011F 2012F 2013F

EBIT margin (%)£ (Billions)

O&O’s low case forecast suggests that average industry margins could fall to around 10% by 2013


30

O&O’s low case forecast for the regional press industry implies little recovery after the recession combined with continued structural change

This low case forecasts a more limited recovery in property classified advertising – and slower recessional recovery in other lines

All other key revenue lines are forecast to experience more rapid decline to 2013

However, under such conditions it is likely that the industry would continue to cut costs, so some additional cost reduction has been included

O&O’s low case forecast assumes annual industry cost cuts of 5% per year from 2009 to 2013

Low case scenario: regional press revenues, costs, EBIT and EBIT margin, 2006 to 2013 (nominal terms)

Industry profitability – low case

Source: Company accounts, Advertising Association, Oliver & Ohlbaum Analysis

Forecast










Newspaper closures

Scenarios for press











Contents

31

THE LOCAL RADIO SUPPLY CHAINSupply of programming and news output

…radio programming is usually produced directly by each station with local news also produced locally while national and international news is provided at low cost by a third party…

News programming is low cost on local radio, usually representing no more than 15 %-20% of total programming costs

Local news is produced internally and also presented by a small team of local reporter/presenters

National and international news is extremely cheap and provided by one of tow major radio news providers in the UK

Source: Oliver & Ohlbaum 32

• PRODUCED INTERNALLY

• £200-250k / per year for large city station

• £50-150k / year for smaller stations• 2-5 local reporters and presenters

LOCAL NEWS

• NEWS FEED AQUIRED FROM THIRD PARTY

• Approximately £10k per year• Main providers are Sky News and

IRN

NATIONAL / INTERNATIONAL NEWS

• NEWS BULLETING ARE USUALLY PRESENTED HALF HOURLY DURING BREAKFAST AND DRIVE TIME

• NEWS BROADCAST HOURLY THROUGHOUT OFF-PEAK SLOTS• NO NEWS BROADCAST THROUGH THE NIGHT

Typical radio station news supply value chain

NARROWLY BASED/NICHE

BROADLY BASED

NATIONALLY ORIENTATED

REGIONALLY ORIENTATED

LOCALLY ORIENTATED

AUDIENCE FOCUS

…an increasing focus on fewer major national brands is likely to increase the degree of national networked programming and reduce the focus on local output within some groups. However, key local personality, news, traffic & travel is likely to remain vital for local competitive differentiation at peak listening hours…

THE LOCAL RADIO SUPPLY CHAIN

Consumer choice in 2008

Increasing prominence of national brands

Consumer choice in 2014

R1

RADIO 2, RADIO 4

HERITAGE ILR(Capital, Clyde,

GWR, Key, BRMB)

REGIONAL ILR(Smooth,

Real/Century, Heart, Galaxy,

Magic)

R5L

NICHE ILR/DIGITAL(XFM, Talk, Jazz, etc)

INRR3

INTERNET RADIO INR DIGITAL

BBC DIGITAL

COMMUNITY RADIO “SALLIES”

NARROWLY BASED/NICHE

BROADLY BASED

NATIONALLY ORIENTATED

REGIONALLY ORIENTATED

LOCALLY ORIENTATED

AUDIENCE FOCUS

MAR

KET

FO

CU

S

COMMUNITY RADIO

“SALLIES”Survival through increased networking

REGIONAL ILR(Heart, Galaxy,

Magic) R1

RADIO 2, RADIO 4R5L

Slightly smaller

INR

INR DIGITAL

NICHE ILR/DIGITAL

Quasi national

R3

BBC DIGITAL

INTERNET RADIO

HERITAGE ILR

(Large markets)

HERITAGE ILR(Small markets)

Source: Oliver & Ohlbaum

Growth

33

11% 11% 11% 11% 11% 11% 11% 11%

14% 11% 10% 6% 6% 6% 5% 5%

15%10% 11%

7% 6% 6% 5% 5%

6%

3% 4%

2% 6% 7% 10% 10%

14%

9% 9%

5%6% 7% 10% 10%

5%

7% 8%

9%9% 9%

8% 6%

48%

46% 40%

45%24%

35%34% 39%

114%

98%93%

85%

68%

82% 84% 87%

-40%

-20%

0%

20%

40%

60%

80%

100%

120%

Percent

TYPE OF STATION

…across the UK industry, radio programming costs represent around only 20-40% of revenues, limiting the impact of content cost sharing with other media such as newspapers…

THE LOCAL RADIO SUPPLY CHAIN

34

News programming only represents a very small proportion of the overall costs of running a radio station

There are therefore only limited potential cost benefits for a radio station looking to share newsgathering costs with a local newspaper

Key areas of cost reduction for radio stations with pressure on profits are:

• Ad sales• Ad sales commission• Local news production• Marketing spend

UK Radio stations by type: average costs and EBITDA as a proportion of revenues, 2006 / 2007

Radio station costs


TOTAL COSTS

PROGRAMMING

ROYALTIES

MARKETING

TRANSMISSIONSTATION MANAGEMENTHEAD OFFICE MANAGEMENTAD SALES

EBITDA MARGIN

…since the end of 2002 the share of independent local radio services (ILR) has been declining faced with competition from national rivals and the BBC’s array of pop music stations. Last year saw a slight recovery for the ILR brands…

COMMERCIAL RADIO CONSUMPTION TRENDS

BBC’s upward trajectory to 2008

Following the launch of the BBC’s digital stations, the broadcaster has seen a significant increase in audience share for its pop music stations at the expense commercial ILR stations

National radio stations share has grown by 6 per cent year on year while BBC local radio has seen a significant decline in listening

In the last three quarters there has been a slight recovery for local commercial stations (ILR) while the BBC pop music stations have seen a significant fall in share of overall listening hours

Outlook for the future

Shift of listening away from local stations towards national networks over the last few years

Quasi-national and networked shows from commercial sector may drive audiences back ?

Big name talent networked across a number of branded stations may reinvigorate competition between BBC pop stations and ILR

BBC Speech challenged by proposed LBC-like national stations?

Quarterly audience listening share, June ‘01 – Dec ‘08

Listening by station type

Source: Rajar, Oliver & Ohlbaum

0

5

10

15

20

25

30

35

40

45

Jun

'01

Sep

'01

Dec

'01

Mar

'02

Jun

'02

Sep

'02

Dec

'02

Mar

'03

Jun

'03

Sep

'03

Dec

'03

Mar

'04

Jun

'04

Sep

'04

Dec

'04

Mar

'05

Jun

'05

Sep

'05

Dec

'05

Mar

'06

Jun

'06

Sep

'06

Dec

'06

Mar

'07

Jun

'07

Sep

'07

Dec

'07

Mar

'08

Jun

'08

Sep

'08

Dec

'08

% share

ILR

BBC POP MUSIC

BBC SPEECH

INRBBC LOCAL

35

60 78106

135 155183

233281

350310 308 324 311 300 284 306

276

6782

93

109123

137

144

139

131

129 136151 159

149139

144

135

55

56 64

69 8180

89

92

94

127

161

198

244

278

320

377

419

536

495509

543 551530

512

542

506

0

100

200

300

400

500

600

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

£ M

… following a period of significant growth, radio advertising has been fairly flat since 2000…

HOW IS LOCAL RADIO PERFORMING?

Total Net Advertising Revenue (nominal), 1992-2007

Commercial radio revenues

*Note this growth rate is skewed slightly by S&P contribution in 2000

CAGR 92-00

CAGR 00-08

N/A +7%S&P

+9% 0%LOCAL

+35% -3%NATIONAL

+20% -1%

Source: Oliver & Ohlbaum adjustment of RAB, AA and Ofcom data

Radio industry revenue has been broadly flat since the start of the decade – national advertising has declined slightly (replaced by increased S&P); local advertising has been more resilient

Broad, all adults advertising still dominates – radio has not been able to monetise niche audiences (with the exception of Classic FM, specialist radio stations have struggled)

Older audiences are not attractive to radio advertisers, who can obtain older impacts at low cost on TV (where the volume of impacts has been increasing and price falling)

The internet has not cannibalised radio (or TV) advertising – advertisers have not switched spend. It has, however, caused a rethink of advertising and may have depressed growth in the overall display advertising segment

Share deals are key to the industry and do influence advertiser choices – the big groups dominate spending

The London market is unduly influential on advertiser choices – agencies choose familiar options, and are less influenced by performance elsewhere in the UK

We forecast that after a sharp downturn (followed by recovery), the advertising market will return to slow growth – driven by national advertisers (and a renewed focus on radio catalysed by the Global/GCap portfolio)

36

TOTAL

… ILR stations tend to generate higher advertising yields (revenue per listener hour) than their regional and national counterparts…


Revenue per listener hour and average weekly reach by station, 06/07*

Revenues and yields by station type

0

1

2

3

4

5

6

7

8

0% 5% 10% 15% 20% 25% 30% 35%

Revenue / listenerHour (pence)

Average weekly reach (% in station TSA))

HERITAGE ILR

REGIONAL STATIONS

The ILR Premium

Heritage ILR stations premium on the market average is down to a number of factors:

Local - compared to regional and national counterparts there is far less wastage associated with advertising on an ILR. Consequently ILRs tend to generate a relatively higher proportion of their revenues from local advertisers who can be sure they’re targeting a local audience.

Habitual/legacy – ILR stations tend to have long-lasting and strong relationships with local advertisers and media planning/buying agencies.

National – Being the local market leader (which typically is the heritage ILR station) holds significant weight with national ad agencies who may be placing spend across a bundle of brands. Within this, being ‘No. 1’ in London can have a profound effect on the volume of spend distributed to other heritage ILRs within a group

*Note: revenue includes S&P and all airtime revenues (net of agency commission)Source: Rajar, Nielsen, Company Accounts, Oliver & Ohlbaum 37

… advertisers place a premium on reach of a broad 20 to 40 age audience within any given local market…


No demographic targeting (yet)

Advertisers (both local and national) are drawn to spend with ILR stations due to their appeal across mass markets with a broad age/demographic profile

Heritage ILR stations with the broadest reach in terms of age, gender and socio demographic profile generate the highest ad yields in the market

There is still very little demographic targeting or differentiation in the commercial radio market

Revenue per listener hour and average age of listenership, 06/07*

Advertiser preferences

*Note: revenue includes S&P and all airtime revenues (net of agency commission)Source: Rajar, Nielsen, Company Accounts, Oliver & Ohlbaum 38

0

1

2

3

4

5

6

7

8

25 30 35 40 45 50 55 60 65

Revenue / listenerHour (pence)

Average age of listening

-14%

2%

7%

15%

32%

18%

16%13%

-20%

-10%

0%

10%

20%

30%

40%

RURAL SMALL TOWN MEDIUM TOWN LARGE TOWN METROPOLITAN REGIONAL LONDON NATIONAL

Percent

…the smaller the station, the tougher the commercial radio business model – national advertisers are more focused on the main large urban centers and local advertising markets are not big enough to sustain small stations…


Average station EBITDA by station type, 2007

Profitability by station type

*Note: Sample of 60 stationsSource: Companies house, Oliver & Ohlbaum Analysis 39










Newspaper closures

Scenarios for press











Contents

40

CAN CROSS-MEDIA SYNERGIES BE EXPLOITED?

Given that both radio stations and newspapers output local news and undertake newsgathering it is possible that synergies through cross-media mergers could be achieved. In reality the benefits are minimal.

Intra-media mergers could, however, lead to cost synergies that improve the economics of marginal titles and stations.

Equally, most regional newspaper groups are already dominant in print in their markets but compete heavily with other media, especially online, for revenues and so mergers are unlikely to bring any significant revenue synergies.

Summary

Cost synergies are limited while there might only be a very limited revenue upside from major group mergers

There are relatively few cost saving to be made from cross media mergers

Radio stations generally spend only around 5-10% of costs on news programming costs

Not even all of this would be saved through merger with a newspaper as presenters are still required

However, there are modest cost savings that could be achieved by merging regional newspaper groups together

In practice this might make smaller/marginal titles more viable

These saving are likely to be mainly derived from overheads, printing and ad sales synergies

The cost of news gathering for regional / local TV news channels represents only a modest proportion of the overall costs of running a TV station

It is debatable whether there are any revenue synergies that can be exploited from either cross-media mergers or major group regional mergers

Regional press accounts for only a minority of overall local advertising spend in local markets

• Changes to cross-media ownership laws would probably not bring revenue synergies

Only a small number of brands (10-20%) use only newspapers across key vertical categories

• Newspapers probably have little pricing power in general

However, where they offer unique reach and impact, especially in property and display, major group mergers and the removal of competition in specific local markets may provide a small amount of pricing power back to newspapers

O&O have modeled two scenarios for slight price increases in property classified and display but the revenue uplift over time is minimal

However, the impact on margins is somewhat greater as incremental revenues go straight to the bottom line but there is no meaningful medium-term protection from margin erosion due to structural change in the long run

41Source: Oliver & Ohlbaum Analysis

CAN CROSS-MEDIA SYNERGIES BE EXPLOITED?Cost synergies: cross-media and intra-media

There are two types of cost synergies that local media owners might be able to take advantage of – cross-media consolidation and intra-media mergers

42

Possible merger synergies in local media markets

RADIO

LOCAL / REGIONAL TV

LOCAL / REGIONAL PRESS LOCAL / REGIONAL PRESS

CROSS-MEDIA INTRA-MEDIA


CAN CROSS-MEDIA SYNERGIES BE EXPLOITED?Cross-media cost synergies - radio value chain

Radio news programming is mostly generated internally through local journalists but low cost IRN feeds are used to obtain key national and regional headlines

News programming is low cost on local radio, usually representing no more than 15 %-20% of total programming costs

Local news is produced internally and also presented by a small team of local reporter/presenters

National and international news is extremely cheap and provided by Sky news who are the sole provider of radio news in the UK


Typical radio station news supply value chain

95% OF RADIO NEWS SPEND IS ON INTERNAL STAFF

SPEND = £200k - £300k PER YEAR

(Typical city station)

IRN / SKY NEWS AUDIO PACKAGES

(National news)

INTERNAL JOURNALISTS

SEND = £10k – 17k PER YEAR

CONTENT SOURCE CONTENT SPEND ON AIR NEWS

IRN / SKY NEWS STORY FEED

(National news)

OTHER WIRES(Local news)

NEWSGATHERING(Limited)

TYPICALLY THE SAME STAFF

= potential for some cost savings when combined with local press

29.0

-

-

5.0

10.0

15.0

20.0

25.0

30.0

NEWSPAPEREDITORIAL SPEND

COMMERCIAL RADIONEWS SPEND

£ (Millions)

Radio stations spend very little on news programming in comparative terms to local and regional newspapers limiting any upside for newspaper groups in exploiting any synergies


Regional newspapers in Anglia spent £29m on editorial activities in 2008 while all 26 commercial radio stations in the region spent only £2.4m

Radio stations could benefit from access to the considerable newsgathering resources of regional press groups

Given that most radio station journalists also present on air, the cost synergy achievable from merger with a newspaper group is relatively small

However, the cost savings achievable are minimal in the context of the overall cost base of radio stations in the region

In terms of the combined cost base, saving 40% of radio news spend would only reduce total regional editorial / newsgathering costs by around 3% or around 1% of the total combined radio and press cost base

Anglia region: estimated regional press editorial spend and commercial radio news spend, 2008

Cross-media cost synergies – Anglia

Source: Company Accounts, RAJAR, Oliver & Ohlbaum Analysis 44

There are 26 commercial stations serving the Anglia region

2.4

42.2

4.8

-

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

NEWSPAPEREDITORIAL SPEND

COMMERCIAL RADIONEWS SPEND

£ (Millions)

At least one group groups already exploit radio and press newsgathering synergies in the greater Manchester region and so further merger synergies could only be enjoyed in other smaller metropolitan areas limiting the possible wider gain


The North West has a highly competitive radio market with a strong supply of large city heritage ILR stations leading to a high comparative news programme spend compared to Anglia

One group already exploits synergies between newspaper and radio news spend

Given that most radio station journalists also present on air, the cost synergy achievable from merger with a newspaper group is relatively small

However, the cost savings achievable are minimal in the context of the overall cost base of radio stations in the region

In terms of the combined cost base, saving 40% of radio news spend would only reduce total regional editorial / newsgathering costs by around 3% or around 1% of the total combined radio and press cost base

North West region: estimated regional press editorial spend and commercial radio news spend, 2008

Cross-media cost synergies – North West

45

There are 32 commercial stations serving the Granada region

Source: Company Accounts, RAJAR, Oliver & Ohlbaum Analysis


Field Operations

Gathering news footage / material from the scene

Infrastructure

The fixed assets required to handle multiple sources and produce news packages

Programming

The assets required to produce news programming output

Cross-media merger synergies – local TV news and newspapers

There are only a limited number of costs within the regional / local TV news value chain which can benefit from synergies with local newspapers

Regional TV newsgathering value chain and principal activities

Correspondent Crew Footage

Hub / Traffic Newsroom Production Systems Edit

Studio On-screen talent Gallery

Background / story

Graphics

Playout

Synergies with

Newspapers

There are only limited parts of the TV news value chain where synergies with local newspapers can be exploited. These related mainly to newsgathering activities.

Dark shaded elements are where synergies can be exploited with a local newspaper:


O&O has modelled the regional newspaper industry cost base by category and have reduced costs where synergies are most realistically achieved


Regional newspaper group merger cost synergies

Newspaper cost synergies – O&O assumptions

47

ISSUES MODELLED ASSUMPTION OF COST REDUCTION (POST 2008)

PRINTING

• Geographical proximity of major groups’ distribution regions means the same presses might be used for more than one group

• Reduced circulation and weekly title closures in the last five years has led to excess printing capacity across almost all groups

(10%)

OVERHEADS/MANAGEMENT• There is considerable room to extract overheads costs in industry regional

groups even before mergers• Replication of management functions across regions is feasible

(25%)

ADVERTISING SALES

• Advertising sales operations can certainly be reduced in size further through mergers across a region

• Cost savings are most likely to be made through centralisation of telephone sales teams

• These saving are most likely to come through reductions of classified teams rather than display field sales teams which tend to be more localised and on client site

• Advertisers only need one point of contact for all press advertising

(30%)

Source: Company Accounts, Oliver & Ohlbaum Analysis

29.2 26.3

27.020.3

38.6

27.0

20.3

20.3

13.3

13.3

28.8

28.8

23.7

23.7

180.8

159.6

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

180.0

PRE MERGER (2008) O&O ESTMIATEDPOST MERGER

£ (Millions)

Cost synergies through regional newspaper group mergers in Anglia would deliver an annual cost synergy of £21m


48

It may be possible to reduce costs for the regional press industry by as much as 12% in Anglia

Despite the rural nature of and large size of the Anglia region the proximity of existing printing operations for the six major groups means that there is some ability to extract printing cost synergies

Similarly there are likely to be significant cost savings that can be extracted from regional overheads, management and advertising sales

Note that these forecasts are very much estimated figures and do not result from an in-depth analysis of likely consolidation benefits

Anglia region: estimated regional newspaper group costs savings through merger synergies

Newspaper cost synergies - Anglia


NEWSPRINT

PRINTING

DISTRIBUTION

EDITORIAL

OTHER

SALES

OVERHEADS

34.0 30.6

44.333.3

47.9

33.5

37.4

37.4

43.8

43.8

42.2

42.2

3.9

3.9

253.4

224.6

0.0

50.0

100.0

150.0

200.0

250.0

300.0

PRE MERGER POST MERGER

£ (Millions)

Cost synergies through regional newspaper group mergers in the North West would deliver a cost synergy of £29m


49

In the North West the cost savings that might be achieved through a merger of the major regional press groups could equate to 11% of all costs

The proximity of all key metropolitan centre in the region (Manchester, Liverpool, Preston & Leyland) could allow some printing operation synergies

However, some groups already exploit printing synergies between them through joint operation of the Trafford Presses and so the overall benefit would be limited

Note that these forecasts are very much estimated figures and do not result from an in-depth analysis of likely consolidation benefits

North West region: estimated regional newspaper group costs savings through merger synergies

Newspaper cost synergies – North West


NEWSPRINT

PRINTING

DISTRIBUTION

EDITORIAL

OVERHEADS

SALES

PRODUCTION

The synergies that could be exploited through cross-media mergers between local press groups and other local media are limited – newsgathering is only a small proportion of the total cost involved in running local TV services and radio stations


Potential for and benefits of cross-media mergers in local markets

Summary – potential benefits of cross-media synergies

COMBINATION KEY POTENTIAL SYNERGIES ISSUES LIKELIHOOD OF MERGER

RADIO + PRESS

• Newsgathering synergies• Ad sales synergies• Overheads and management

synergies

• Most radio station news journalists also present the news on air so limited ability to cut costs in this area, if any

• Few brands advertise on both radio and press and advertising sales methodology differs considerably for radio and press

• Radio management roles are specific to radio functions and so limited scope to cut costs in this area

• Already scope for such mergers but very few in place to-date

• LOW

LOCAL TV + PRESS • Newsgathering synergies

• Significant newsgathering synergies can be exploited• However, news only a small proportion of local TV channel costs• Limited spectrum and at best marginal economics for local TV channels

- so few expected to launch

• LOW

ITV1 REGIONAL NEWS + PRESS • Newsgathering synergies

• Significant newsgathering synergies• Potential revenue upside from ITV1 airtime• However, 4-6 newspaper groups would need to co-ordinate in each ITV1

region• Significant fixed cost of running a TV production operation would remain

• HIGH

ONLINE + PRESS • Newsgathering synergies

• Newspaper already own and operate their own online content and also classified portals

• Regional press groups unlikely to find major synergies with large national vertical classified websites

• LOW


A macro-economic review of the UK local media sector

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