The Economic Reality that Free Newspapers Are Not Free To Produce Finally Takes Roost As Metro International Accepts Minority Partners For Two Of Its Successful Nordic Papers

Philip M. Stone May 23, 2008

The strategy was simple – if you want to attract the young reader then publish a free newspaper catering to their specific needs and wants, and if someone else in your market has the same idea then just throw more and more money at it. Now after millions of whatever currency you care to name has been lost on such ventures, a wiser business model is gaining some traction -- consolidation.

And leading that new business model is Metro International, the father, if you will, of the free newspaper craze that began in February, 1995, with the bright idea of distributing a free newspaper in the Stockholm metro. The rest as they say is history and today some 20 million people in 21 countries  in more than 150 cities are reading more than 70 Metro editions. Just one slight problem – the company loses money, €5.6 million ($8.9 million, £7 million) in Q1, 2008.

Its business in its home Nordic territory does rather well even though  well-heeled competitors kept snapping away at its heels, so it was met with great interest when Metro International entered into partnership deals in Sweden and Denmark within a couple of days of one another. The deals certainly aided the local publishing houses that were hemorrhaging money with their own free newspaper competition, and it certainly gives Metro International cash it really needed, but long-term was it the right play for Metro considering future cash flow if you no longer own as much of two of your more viable  products?

Schibsted appears to have extricated itself from a horrible  problem in Sweden — it’s free newspaper Punkt SE lost €14.6 million, $23 million) last year, it was budgeted to lose €5.4 million ($8.6 million) this year but already in Q1 it was down €5 million and in today’s economic climate who knows when it would actually have turned profitable, so urgent action was required. The clever solution -- Schibsted cut a €37 million ($60 million) deal with Metro for a 35% share of Metro Sweden and Schibsted immediately closed down Punkt SE which it distributed in Stockholm, Gothenburg, and Malmoe.

That really had the tongues wagging. Was this a first step in Schibstead’s takeover of Metro (many thought that would be a smart move) or was this signaling a new Metro business model to do local partnership deals with major publishing houses that are losing their shirts with their own free publications?

The answer seems to be the latter because just two days later Metro announced a deal in Denmark with JP/Politiken buying a 24.5% stake in Metro Denmark, leaving Metro with a 51% holding (24.5% already owned by A-Pressen).

JP/ Politken was bleeding from its 24timer free newspaper, but unlike Schibsted it is not closing down the Metro competitor but rather the free newspapers will combine their  advertising teams, co-operate with JP/Politken’s main newspapers, Politiken and Jyllands-Posten,  and Metro will take over 24Timer’s circulation which is currently using expensive home delivery for some distribution.

The deals certainly buy Metro some financial breathing room – perhaps time enough to figure out what to do with its three US properties that are losing money hand over foot and for which no one seems really interested in taking them off its hands (the New York Times Company has a 49% stake in Metro Boston).

As economies around the world suffer from high oil prices, the credit squeeze, and in the case of newspapers higher newsprint costs, the logical question is whether free newspapers can really make money in an environment  where the advertising ranks are thinning out and ad rates, already pretty much rock-bottom, have to sink lower to attract the free paper advertiser?  Can consolidation that creates bigger advertising package incentive deals with paid-for newspapers save the day?

According to Dr. Piet Bakker, perhaps the foremost expert on global free newspapers, most publishers probably planned at launch that their free newspapers would be  profitable in three years, but they now seem resigned that it will take far longer, perhaps five years or more. Can they stand for that kind of long-term expense?  He believes that some 75 free newspapers have already closed.

Bakker told ftm recently, “In 2008, 475 editions (330 titles) are still published of which 70% were launched in 2005 or later. Those 2005 and later titles probably are not making any profits, and some of the older ones are not making profits either. First launches in some countries might do well such as in Brazil and Mexico, but it would surprise me if more than 30% of free newspapers now make a profit.”

A cover price these days can come in real helpful. In the UK, Viscount Rothermere, chairman of the Daily Mail and General Trust (DMGT), surprised lawmakers at a Parliamentary committee hearing when he said that his popular Daily Mail, circulation 2,324,428, with a recently increased cover price to 50 pence ($1, €0.80)  makes fully 60% of its revenue from the cover price. DMGT, incidentally, publishes the UK version of Metro of which Metro International has no part and is said to make about a £10 a reader profit annually on its 1.36 million total UK circulation.

The Daily Mail’s circulation revenue stream is one free newspaper publishers would just love to have. And not having it is why many are still, and in this economic climate likely to remain, very much  financially losing propositions.

The executive suites at Schibsted and JP/Politken are not stupid. They saw the writing on the wall and took steps to control the free paper blood flow. Schibsted dumped its big money loser in Sweden, JP/Politiken decided to combine activities for its loser and Metro Denmark where it claims there was very little reader overlap. In time we’ll see who made the really right decision.

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