Monday Note

Here is the Indian newspapers price problem: at the kiosk, you face a multitude of titles (roughly 4700 dailies across the country) including about 60 in English. Prices range from 1 to 3 rupees ($0.02 to $0.06). Even by Indian standards those are untenable rates: they cover only about 10% of variable costs. Finnish newsprint and German printing presses come at Western prices. Just for comparison, based on the Economist Big Mac Index, an Indian newspaper is roughly seven times cheaper than an American one; it is twenty times cheaper than a French daily.
Now, how do you significantly raise prices in a country where a decent meal costs about $2 ?

That question led to a heated debate at the last INMA South Asia Conference, in New Delhi. (INMA is the International News media Marketing Association). I was invited to talk about the migration from print to digital  — which, let’s face it, is not on the top of the publisher’s mind in a country where internet penetration is about 7% of the total population (details here) –  but India media moguls are keen to prepare their industry’s future.

The Indian press is staring at a difficult question. A few years ago, when we met for the first time in Chicago, Times of India’s CEO Ravi Dhariwal explained its newspaper was virtually free, with a price (3 rupees, $0.06) carefully adjusted to be slightly above the price of the scrap paper collected by poor people in the street of Delhi or Mumbai. Things have changed. As one of the publishers explained last Friday in Delhi: “We have built a bubble which is about to burst. Against all fundamentals, we have been pursuing circulation figures at any cost. Our model no longer works”. Around the table, the consensus was the price of papers had to go up significantly, probably by a factor of 2 to 5.

Well… Let’s consider a few impressive fundamentals. Circulation numbers are commensurate to India’s 1.2 billion population.  According to the Indian Readership Survey, Dainak Jangran, a newspaper unknown to Western radars as it is published in Hindi, has 55 million readers in 19 editions. The Times of India is the world’s biggest English speaking newspaper, with a circulation of 4 million and a readership of 14 million.

Most of the industry is quite profitable. Until recently, gross margins of 60% were not uncommon. As shown in the chart below from Price Waterhouse Coopers, the Indian print press, all confounded (advertising + sales) has grown by 13,4% between 2004 and 2008. It is expected to grow by 5.6% per year over the next five years (how PWC can come with such precision in the decimal remains a mystery to me. Let me take this back: if they say 5%, its looks less scientific, meaning less expensive, than 5.6%). The  reason for the slowdown lies in the development of television and, to a lesser extent, internet, both offering much better bang for the rupee.

In itself, the chart pretty well illustrates the Indian press cover price problem. Structurally, because of the GDP growth, advertising revenue is likely to rise eight times faster than copy sales. Hence the worrisome conclusion drawn by some publishers : “We are reaching an unreasonable level of dependency from advertising”, said Tariq Ansari. Tariq is the managing director of Mid-Day, a modern quality tabloid. Mid-Day was first launched in Mumbai where the group is headquartered and has since spread to several more cities.

Mid-Day front page after the Mumbai attacks

I’ve known Tariq for years, (we share a common interest in snobbish magazines such as Wallpaper or Monocle). Tariq isn’t exactly an anti-free market crusader: he’s also the president for INMA South Asia. But, at the conference, he rather vehemently made his point: “Advertising tends to be more and more intrusive in our papers. Media buying agencies are squeezing us. It becomes impossible to say no to those guys. At some point, they will shred every piece of our credibility”. Part of the problem is the Indian’s traditional closeness to economic (and sometimes political) power. This intimacy now seems to backfire. Indians tend to do business as they drive (which, at peak hours, confines to a near-death experience): speed and efficiency first, other considerations optional.

Take the Private Treaties, for instance. In a previous Monday Note, I explained the mechanism. Quickly: a newspaper takes stake in a private company, usually a small startup. In exchange for the cash infusion, the startup is obligated to buy advertising pages in its shareholder-benefactor’s publication; the ad purchase is adjusted to offset the cash infusion over a period of 3 years. Clever mechanism. For the publication, it is almost risk-free: cash is converted into a balance sheet asset, which in turn generates cash, thanks to the ad purchases (which, in addition, can be exclusive, i.e. no money spent with competitors…) In the process, the publication acquires a nice portfolio of companies from which the initial investment is recouped after three years. After that, hopefully, the startup will have grown its cash-flow and valuation. In fact, the only risk is the startup becoming bankrupt before the three-year reimbursement term ends.

The Times of India is the inventor of the private treaty system (official site here). Because of its size, it practically owns the market. TOI executives are short on details about the scope and financials of their private treaties operations. They say it’s too recent to yield a real idea of the portfolio’s value. (A year ago, the business daily Mint — a JV with the Wall Street Journal — estimated the value of Times of India’s privates treaties assets to about $1bn.)
They also deny any potential conflict of interest. Still, if a startup in which the Times of India has a stake releases a lousy product, we don’t see how a bad review could find its way in the Times of India or in the tech section of the Economics Times. Ethics collide with business at the Times of India. That very paper isn’t overly sensitive to advertising’s intrusiveness; actually, it’s part of the revenue stream. The Times of India does sell advertorial which, unsurprisingly, blends seamlessly with the rest of the editorial content. (They don’t mess with “serious” subjects, though). This product is actually pretty well valued: it costs 50% more than traditional advertising, and there is quite a waiting list. Of the $400m in ad revenues generated by the Times of India, paid-for editorial represents about $20m, which is not negligible.

The Mumbai group Mid-Day is testing its own flavor of the private treaty scheme but it chose to prevent the conflict of interest by limiting its investments to real estate companies in which it actually buys properties. In a booming city such as Mumbai, Mid-Day is likely to find itself with a nice portfolio of tangible assets: apartments or offices buildings.

Ingenious as they might be, private treaties are a small part of the solution for India’s press to maintain its financial performance. The most efficient leverage remains an increase in newspaper cover prices. As the Hindustan Times saw for itself, it’s easier said than done: when the HT decided to go from 2.5 rupees to 3 rupees (from $0.05 to $0.06), sales dropped by 10% — it later recovered. But, in the Indian Press’ fiercely competitive environment, no one wants to give a inch to the competition. The solution? Raise paper prices in concert. After all, recalls INMA’s managing director Earl Wilkinson, this is what Australian newspapers did to prevent a drop in advertising. Time to think like a cartel, guys. —FF

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