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Boletín Semanal octubre 13, 2019

Just three years ago, The Guardian was deep in crisis. After helping to make the one-time regional UK daily an international Pulitzer-winning brand with electrifying scoops on tabloid phone hacking, WikiLeaks, and Edward Snowden, longtime editor-in-chief Alan Rusbridger had quit. His amazing 20 years at the helm were suddenly buried by an avalanche of stories about the financial woes of the 198-year-old news brand. In 2015 and 2016, it had burned through a total of some £300m.

The embattled company told employees it was headed for a further cash “burn” of  £90m in 2017, needed to cut staff costs, reduce its overheads and perhaps even scale back its international ambitions. It was a familiar enough scenario for daily newspapers. But, arguably, The Guardian’s not-for-profit ownership – and windfall investment gains – had made it more complacent than most.

The parent company had traditionally operated almost as a private-equity firm, with external shareholdings which had helped to fund the newspaper losses and capital investment. But, after years of bold expansion, The Guardian had to face the fact that, unless it stopped the losses, its £1bn of reserves might run out in 6-7 years.

It had been interesting to contrast The Guardian’s global strategy with that of two other long-established UK media brands, the Financial Times and The Economist. Both had built their businesses by investing gradually in US distribution and content, and changing the direction of what had once been UK-focussed journalism. These quiet strategies were seen to have become successful in growing sustainable international operations.

The Guardian was altogether more dramatic, evidenced by the descent into seemingly permanent losses immediately after a record 2011 EBITDA profit of almost £50m. Rusbridger’s expansion had always seemed more like a mission than a business plan. It was all about a free web site, with no plan to sell subscriptions, and only a vague idea of how to grow digital advertising sales, especially in the intensely competitive US market.

The Guardian is a liberal newspaper which – until 1959 – was known as the Manchester Guardian and was based in the UK’s industrial north-west. The big change came after its longest-serving editor Charles (C.P.) Scott bought the newspaper which – over 57 years – he had built into a nationally recognised daily. He bequeathed the paper to a charitable trust pledged to maintain its independence and its liberal politics and to reinvest whatever profit it made. The pledge had survived the trust’s conversion into a limited company which now also publishes The Observer, the world’s oldest Sunday newspaper.

The way this unique ownership structure emboldened the flagship paper was highlighted by Rusbridger who became editor-in-chief in 1995. He led the 2011 exposé of phone hacking and criminality by News Corp journalists in the UK. It was a Watergate moment and helped to define the newspaper, especially for its new audiences outside the UK.

It had come four years after the launch of Guardian America through which Rusbridger had sought to capitalise on his already substantial online readership in the US. In 2010, with other news brands including The New York Times and Der Spiegel, he produced reports on the war in Afghanistan based on a huge cache of classified documents from WikiLeaks.

In 2013, The Guardian won a Pulitzer Prize for its coverage of the US National Security Agency documents leaked by Edward Snowden. The revelations made the paper one of the world’s most visible news services, in much the same way as CNN had rocketed to global recognition as virtually the only news organisation in Baghdad at the start of the 1990 Gulf War. But there was a difference. Unlike CNN 20 years earlier, The Guardian’s financials were not transformed by its scoops. The digital-savvy paper managed to build a big reputation but little revenue, and that’s how it continued. But it always had a legion of admirers. The Economist described it as “the most stylish paper in the hyper-competitive British quality pack, the wittiest and best-designed, the strongest for features, the one most likely to reflect modern life.”

The newspaper’s financial reserves had been piled up primarily by an early 50% investment in digital winner AutoTrader. It eventually produced a windfall profit of more than £600m, which dwarfed disappointing investments in radio and B2B media. Rusbridger reasoned that the gains would help to bankroll his paper’s global digital development until it became profitable. But that was before newspapers got caught in the unending avalanche of falling print revenues and only low-growth online advertising. After almost 10 years of hoping that the promise of a bright new future was somehow guaranteed by soaring (free) web audiences, The Guardian and newspapers everywhere started to panic.

In 2015, Alan Rusbridger stepped down after a reign characterised by brilliant investigative journalism, but also by a profligacy that had seen the newspaper increase its staffing and costs throughout a decade when even its sleepiest competitors were doing the reverse. He had been due to become chair of the newspaper’s parent Scott Trust in 2016. But his successor Kath Viner and rookie CEO David Pemsel persuaded their trustee colleagues to withdraw the offer to their would-be boss, and Rusbridger angrily packed his bags.

Viner had been elected (yes) by the paper’s staff. She and Pemsel put together a three-year rescue plan to reduce total costs by 20%. They announced proposals to cut 250 jobs in the UK: the group’s global headcount had actually increased by 479 to 1,960 since its last round of redundancies in 2012. The urgent need for action belied the cool Viner-Pemsel declaration: “Our plan of action has one goal: to secure the journalistic integrity and financial independence of The Guardian in perpetuity.” They cut costs, cut jobs, out-sourced printing, and pushed digital ad sales.

They also pleaded for the financial support of their readers: “We need your support to keep delivering quality journalism, to maintain our openness and to protect our precious independence. Every reader contribution, big or small, is so valuable. Support The Guardian from as little as £1 – and it only takes a minute. Thank you.”

Now, just three years later, the plan has worked. The company’s recently-announced results for the 12 months ended March 31, 2019 tell a great story:

  • Group revenues of £224.5m, up 3% (2018: £217.0m)
  • Digital revenue of £125.3m, up 15% (2018: £108.6m)
  • Group EBITDA loss (before exceptional items) of £3.7m (2018: £23m loss).
  • Total value of endowment and cash holdings: £1bn

The subsidiary which publishes The Guardian and The Observer, actually made a profit of £800k in the 12 months ended March 2019, compared with losses of £19m in 2018 and £57m in 2017. It is the first EBITDA profit in almost 20 years.

Pemsel-Viner have succeeded in cutting that 20% from the cost base, resulting in a loss of 450 jobs, including 120 journalists. That achievement is matched by the modest revenue growth, a record 163m monthly uniques and 1.35bn page views in March this year. Together, it marked a triumph for their refusal to introduce a paywall – choosing to keep making the content available to everyone – and essentially to rely on voluntary contributions from readers. The publisher now has some 655k monthly paying “supporters” and has also received an additional 300k one-off contributions. Suddenly, The Guardian’s ambition to double that and achieve 2m “supporters” starts to look achievable.

While the breakthrough “profit” is calculated before exceptional costs of £29m on capex, redundancies and management, the company is now committed to ensuring that such costs remain within the £25-30m annual yield of the Scott Trust’s £1bn endowment.

Digital now accounts for 56% of total revenue, and 80% of advertising is digital. But the stand-out revenue performance has been the growth of the digital-only services in the US and Australia where revenues have doubled in the last three years to £30.8m. They are 14% of global revenue, and both businesses are now said to be profitable in their own right. They employ a total of 160 people (some 11% of the 1,455 global workforce) and have grown in line with revenues during the last two years. Even while cutting costs at home, The Guardian has become a real global brand.

Pemsel’s achievements, as an advertising-marketing executive breaking down the high walls of ‘church and state’ are illustrated by the company’s growing sales of sponsored editorial (content marketing) which still seems a counter-intuitive revenue source for The Guardian. But there’s nothing like a near-death experience for changing hearts and minds. And nobody needs reminding of the challenges that keep coming.

The next may be the printed newspaper itself. The Monday-Friday editions are currently selling an average of some 100k copies – 23% down in the last four years. Like the other UK national dailies, The Guardian depends on its magazine-laden Saturday edition with copy sales of more than double the weekday, at a 45% higher cover price – and attracting the majority of the newspaper’s print advertising. But even Saturday copy sales have declined by 20% over the four years, presumably held back by a 19% increase in cover price. It’s a similar story right across “Fleet Street”, where newspapers have had to persuade readers to pay a “realistic” price to counter their loss of advertising.

While nobody at The Guardian can (yet) contemplate life without a printed daily, the next big decision may be to merge the largely standalone Observer (selling some 150k copies every Sunday at £3.20) into the main newspaper by operating a single team for the seven days, as News Corp UK’s The Times/ Sunday Times is set to do. Ultimately, of course, a continuing fall in daily newspaper sales (and the retailers which sell them) will persuade publishers to cut back print, maybe to concentrate on the popular Friday-Monday editions. The Guardian’s digital-only success in Australia and the US may eventually help to persuade traditionalists that there is life after print in the UK.

But that’s for another day.

The immediate challenge is the crushing advertising dominance by Google, Facebook and (increasingly) Amazon. There is growing evidence that readers-users of quality news brands will pay for content (witness the New York Times, Times of London, The Australian, and The Guardian itself). But none could (yet) manage without any advertising at all. That reality dictates the need for increasing levels of sponsorship, paid-for content – and more revenue from readers. Bundling these news brands with complementary media and entertainment services might just help them to hold readers and push up subscription prices.

But there is room for new strategy too. Might The Guardian (and also the New York Times, 16% of whose subscribers are now from outside the US) ultimately consolidate its role as a global news brand by launching online streaming channels to compete with CNN, Sky News, Fox News, Al Jazeera, and the BBC?

The Guardian already produces substantial amounts of high-quality video each month, including news, short features and longer documentaries of up to 30 minutes. Over the past year, it has won international recognition including an Oscar nomination for Black Sheep (tackling racism in the UK), best short film award at Cannes for the documentary Skip Day (rites of passage for teens), and an award for “How Steve Bannon’s far-right ‘movement’ stalled in Europe” at the international Documentari Inchieste Giornalismi (DIG) Festival, which celebrates investigative journalism. It has a growing audience – and 1.8m subscribers – on YouTube with channels across news, culture and sport.

The New York Times’ TV news show The Weekly (launched in June on FX and Hulu) will have set Pemsel and Viner thinking about video, and also how to monetize the huge growth in audio.

While a much vaunted collaboration with Vice News lasted little more than a year, we might expect some future partnerships, especially with broadcasters around the world which have complementary skills but share with newspapers the need to grow their digital footprints. The Guardian could also be a non-predatory partner for digital independents.

The lessons of the New York Times (including its success in building 700k separate digital subscriptions for its Crosswords and Food apps) are that all media companies must devote resources to R&D and just trying things: you don’t know which will be the future winners. For The Guardian, that search already includes a full-throated return to the venture capital investing that provided its own financial safety net. Its GMG Ventures is a £40m fund which has early-stage investments in more than 20 media-tech startups.

The under-stated David Pemsel is entitled to feel pretty pleased with having made “this unique business model work and support Guardian journalism…. in 2015, many well-meaning people told us simply to cut costs and put up a paywall. The latter was something that felt fundamentally opposed to Guardian values – essentially taxing consumption, so we decided to follow a path where we asked our readers to contribute. Some people called it a begging-bowl strategy – which ignored the great nuances and sophistication of the editorial craft and digital commercial nous that went into making the strategy a success. It’s a great testament to this model that many publishers, even digital start ups, are now attempting to set up similar revenue streams.”

But, having got back to sustainability, The Guardian may now find it just as difficult to maintain this level of performance. Continually falling print volumes will tend to increase newspaper unit costs (even before you factor in the wild fluctuations in paper prices) and advertising yields may keep falling. And that’s without considering the possible impact on adspend of Brexit, trade