Monday Note

There are signs. Not necessarily good ones. At ten in the morning in Paris, you still find piles of free dailies at almost every distribution point. At four in the afternoon, in the business district, outside one of the busiest subway stations, unopened stacks of copies of Metro lay soaked by the winter rain. Two years ago, subway and commuter trains were filled with people reading a free daily. Now, readership has dropped dramatically. In 2002-2005, to make sure the morning daily was there when its intended target group walked by, the logistics team at 20 Minutes (the market leader) carefully adjusted the number of papers available at key locations using traffic analysis in 15 mins increments. Today, the oversupply is obvious.

What happened to the free dailies that once rocked the press market?

Before I go further, a bit of disclosure. I was 20 Minutes’ editor from 2001 to mid-2007; then, until December 2009, I went to work for Schibsted ASA, the Norwegian group that owns 50% of 20 Minutes.

The French free daily market is a strong one. Here are the main data (source: EPIQ/ Audipresse market research): total readership is 4.5m people (+0.4% from September 2009 to September 2010); this is approx. 9% of the French adult population in about 10-12 major cities.

Ranking……………………Readership…………….Ownership
1- 20 Minutes :………….. 2.7m (+2.2% Y/Y) ……Schibsted/Ouest-France
2-  Metro :      ……………. 2.4m  (-0.7%) …………Metro International
3- Direct Matin: …………..1.7m (+4.8%)……….  Bolloré Média
4- Direct Soir: …………….1.0m.(-5.4%) …………Bolloré Media

Financially speaking, these titles share an advertising market of about €120m ($160m). Their market strategy is built on heavy discounting (about 80% of the rate card vs. 50% for the paid-for press). As a result, a full page in a free daily will net about €10,000-15,000 as opposed to €40,000-50,000 for a major paid-newspaper.
In Q3 2010, for 16% revenue growth, 20 Minutes showed a negative EBIT of €1.3m; it could however turn a small profit for the full 2010 year with revenue in the €50-55m range. Metro showed both a declining EBIT and declining revenue for the same period. The other two papers don’t provide figures but are said to bleed cash.

Where is this going?

#1 Readership. The key issue, obviously, but without a clear trend. The free press is designed to target a young, urban, active audience, one that is in high demand by advertisers. To make targeting more efficient, these papers beg for localization: specific pages for news, culture, services, etc. produced by a small local staff.
On the French market, free dailies show a small year-to-year growth thanks to the opening of new cities. In theory, such expansion is fine.  But going in the second tier of cities means watering down the very demographics the papers rely on for their pitch to advertisers. Plus, in smaller areas, localization becomes economically unviable. Even if, on a spreadsheet, publishers are still able to defend the marginal cost of expanding into smaller cities, the gain in advertising revenues is close to zero (or will get there after few quarters). A perfect example of the law of diminishing returns.

#2 The product. When they commute, what do people do instead of reading a free daily? Their heads are deep down inside their smartphones. Compared to a convenient, permanently updated, set of mobile services, the free press has lost its appeal.
Right now, the free daily is riding a low-cost downward spiral: fewer pages every day, requiring less journalists and editors, at every level cheapest is best, etc. Product people are no longer in charge. The result is seen every day in the product: nothing to retain the reader’s attention, no original treatment or angle, no uniqueness whatsoever; content is flat, bland, and often packaged in an increasingly aggressive ad environment (several times a week, an advertising cover-sheet conceals the content of the front page). No wonder the mobile phone is taking over. The rise of the smartphone took the free press by surprise, both in terms of time allocation (hours spent to text-messaging of Facebooking) and by its ability to provide a competing news product.
In retrospect — always easier than making good predictions — free papers should have capitalized on their brands, built upon millions of daily readers, to develop strongholds in web and mobile, with products targeted at every segment of their audience. In addition, satellite, market driven products in both editorial and services, should have been engineered. Darwin’s survival of the fittest.

#3 Market positions. Revenue and profit numbers show the importance of retaining the number one slot. On the French market, in spite of having a better product and running a tight ship, the n°1 position held from the start by 20 Minutes is likely to change. For one, profitability is fragile with three players on the market — one too many, at least. Two, Bolloré Media — publisher of Direct Matin and Direct Soir — shows both resilience and resolve. Size matters: for the €6bn revenue Bolloré Group, its free dailies weigh about 2% of the conglomerate (two thirds are transportation and logistics). In such a context, the €40-50m poured into the free press is pocket change.

The low barrier-to-entry is one of the most challenging free press features. Basically, you design a product, put together a stable of two dozens journalists, sign a couple of printing and distribution contracts and you’re in business. The rest is a constant adjustment to circumstances. It is very difficult to built a durable, unique and hard to replicate business.
In addition, Bolloré enjoys two advantages: it holds strong positions in the advertising sector (from creation to media buying) and, more importantly, it has the luxury of the time. From its perspective, being the late-comer with a so-so product is a minor inconvenience that can be corrected over time. The 172 years-old Bolloré group is good at the wait-and-adapt game. For instance, the weak evening edition of its free daily (Direct Soir) is about to morph into a theme-oriented daily special (cars, sports, well-being…). In the meantime, it will keep beefing up its circulation and thus could en up in a position to take the critical #1 slot. With a set of editorial products carefully designed to attract advertisers, Bolloré and its Direct papers could disrupt the game.

But in the long run, free newspapers face the tough and delicate challenge of dealing with digital news consumption. They still own great assets: brands (not as diversified as they could have been, still…), huge audiences and healthy shareholder structures. It is “a mere matter” of adapting products and creating new ones. Management by KPI is fine — and necessary. But, in a highly media-diverse competitive market, “painting by the numbers” can’t compensate a lack of product strategy vision and implementation.

—frederic.filloux@mondaynote.com

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