In buoyant markets, most businesses do reasonably well. In a downturn, business performance tends to polarise – between those who take advantage of conditions and respond, and those who do not. Recessions are about cyclical economic change, but they also promote conditions under which structural change takes place, enabling businesses to establish competitive advantage. In challenging markets, companies become either winners or losers.
Diversification is one such strategic response and has provided significant upside for those businesses willing and able to invest. Undiversified, traditional media businesses are exposed to greater risk and have fewer options to help them meet the challenges of the recession.
Why are newspapers diversifying?
Newspaper circulation has been falling steadily since the 1970s. Publishers have been able to use copy and advertising prices to sustain and strengthen financial performance but, with circulation volumes continuing to slide, this strategy is no longer enough to sustain the business.
Investors are putting increasing pressure on businesses to spread their risk and mitigate the impact of declines in specific media. Diversification into events, research and other areas related to their titles has delivered some success for magazine publishers. There is, therefore, some pressure to consider diversification, and examples of success within the newspaper publishing sector.
The BCG Matrix Method is often used to bring diversification to life and show how businesses can use a diversified product portfolio to drive value. It is based on the theory that a company should have a portfolio of products containing both high-growth products in need of investment and low-growth products that generate a lot of cash. This strategy is core to private equity firms, where a balanced portfolio of assets is used to mitigate risk and deliver more predictable returns, and for large advertising companies such as WPP.
To date, newspapers have remained largely focused on core products, plus online, and some activities such as Bingo or events that leverage the brand or readership of the core product. The need now may be to look at opportunities beyond those related to the main title – both in digital and traditional media.
Expanding digital
Online media has often been held aloft by industry commentators as the new growth engine for publishers and the first step in the move away from print. Findings from Deloitte’s State of the Media Democracy show that UK consumers spend 18 hours a week online as against 2.4 hours reading newspapers in print and 1.8 hours reading magazines.
However, online media alone is not the answer. Research from London’s City University suggests that a newspaper title would have to be running at a loss of 31% to make going online-only worthwhile, a decision most recently taken by the Seattle Post-Intelligencer. The university’s research focused on Finnish financial daily Taloussanomat after it published its last print edition five months ago, and found that the newspaper has recorded a 22% drop in unique users, a 52% fall in costs but a 75% fall in revenue. Across the industry, publishers continue to struggle to get digital to make up the revenue shortfall caused by the decline of print. Consumers are moving online en masse, but they often want content for free and the number of competitors for their attention is, in a global medium, far greater than it is in print. At Trinity Mirror, for example, digital revenues have risen by over £9 million (from £34 million in 2007 to £44 million in 2008) but non-digital revenues have fallen by over £60 million to £872 million. And perhaps more alarming news comes from the US where the New York Times Company's online revenues are now shrinking on an absolute basis, sliding 6% in Q1 to $78 million from $83 million last year.
The move to online is unlikely, on its own, to solve the challenges faced by newspapers. But online is a medium in which some areas continue to enjoy rapid growth. Affiliate marketing, over the past three years, is one example. Newspapers – with large, established sales teams and long experience in the advertising sector – now compete with affiliates for advertising spend. One opportunity might be, or have been, to acquire affiliate marketing companies and grow the newspaper business not by selling more copies but by expanding the sales service that the company can deliver. This may be an opportunity that has passed, but spotting the next rapidly growing, adjacent product – and having the right funds and leadership in place to execute on it – may be an important element in separating winners from losers in the current climate.
More than digital
Yet, the answer to diversification is more than digital. True diversification means accessing both new products and new markets, and in doing so, new customer groups. For major newspaper publishers, this has been an increasing drive and will remain so. In this regard, we can point to DMGT as an example of how to drive success beyond “news content” per se. In 2008, 39% of DMGT’s revenues were from its non-newspaper publishing businesses, including Euromoney, DMG Information, DMG World, Risk Management and DMG Radio. DMGT’s existing brands and capabilities have been critical, but the focus has been on tapping into new customer groups that can provide growth – namely the B2B community providing non-advertising based revenues, including subscription and sponsorship.
In addition to product diversification, geographical expansion has been a viable option for spreading risk and boosting growth, and tends to be based on a “back to basics” model. The newspaper industry is still growing on a global basis, particularly in emerging economies. Print media in India, for example, is witnessing favourable traction due to the confluence of favourable government policies, high growth in ad spend, an emerging middle-class population and an increase in literacy. With both advertising revenue and circulation revenue expected to continue with double digit growth, the print sector has become attractive to foreign investors, who are now permitted to bring in foreign equity – the likes of News Corp, Pearson and UBM have already invested. However, with acquisition a preferred model for market entry and credit remaining tight, this could become a difficult channel to exploit for those publishers who have yet to establish market presence.
Making it happen
Despite good strategic intentions, making it “real” is the ultimate challenge in any diversification strategy. Diversification often requires large capital investment. With increasing financial pressures, making the business case stick will be difficult when short-term survival is the core focus. Furthermore, diversification is perhaps one of the more risky strategies for a business to pursue. Entering a new market with an unfamiliar product often means a lack of experience and a need for new capabilities, new techniques and potentially new brands. As a result, it invariably leads to physical and organisational change in the structure of the business.
Deciding on the strategic positioning of the new venture is another key consideration. Should a new product extend from existing capabilities and brands? Should it be a very distinct offering that is perhaps a new business in its entirety? Disney focuses upon extending its brands with a wide range of ancillary products and services and manages these very centrally. Virgin, on the other hand, has used its financial strength to launch a mass of distinctive and independent businesses, but all connected by the brand. While brand is the major attribute in both cases, these two businesses manage their products and services in very different ways.
In order to assess the impetus, rationale and opportunity for diversification, there are some key questions that publishers should be addressing:
* What are the product markets where existing assets and capabilities could be effective?
* Are there underexploited or new channels to market that could be explored?
* What opportunities are there for geographic expansion with existing or similar products?
* What are the radical options for new products?
* Which customer segments offer the best growth prospects now and in the medium term?
* What will be the shape of demand in the future recovery?
* What capabilities are required to capitalise on potential opportunities?
* Can existing brands be taken into new products and new markets?
Conclusion
At a time when the press is full of doom and gloom on the economy around us and cost-control is the most immediate course of action for short-term survival, it may seem odd to think seriously about market growth. However, recessions create winners and publishers should take time to think strategically about growth. Taking bold action now – potentially involving diversification – is a positive response that can support newspaper publishers over the longer-term, helping them to mitigate the current downturn today and positioning them to secure competitive advantage in the future.
