BusinessStrategic

Strategic Case Study: Newspaper Industry-The London-based newspaper The Sun

On 12 June 1993 The London-based newspaper The Sun dropped its cover price from 25p to 20p, claiming that this would help its readers in the recession. The Daily Mirror responded quickly, cutting its price for a single day to 10p, in an attempt to maintain circulation at the expense of lost revenue.

The resulting increased circulation of The Sun was no surprise for the tabloid market. However, how would the circulation of the quality papers be affected by a similar strategy?

It has always been felt that broadsheets are price insensitive and therefore that a similar strategy adopted by a broadsheet publication would be of no benefit: branding was too strong. However, Peter Stothard, editor of The Times, had begun to disagree, feeling that readers did have brand loyalty but were also very much interested in value for money. A drop in price, he felt, could enhance a publication’s value for money and therefore on 6 September 1993 the price of The Times dropped from 45p to 30p.

Media analysts were unconvinced, maintaining that any resulting increased circulation would not offset the decreased revenue, hence losses are the obvious result: CU200,000 for The Times and CU700,000 for The Sun per week (estimated). Analysts struggled to work out the rationale behind increased circulation bids.

One justification was that it was needed to combat the overall decline in the newspaper market – a 20% fall over the previous thirty years according to leading accountants. The worst affected by this decline had been the tabloids. Another argument was that it was done in order to affect Mirror Group Newspapers adversely during the sale of 55% of its shares in September.

Whatever the reason, the worry was that the price of The Sun would rise again and when it did the success or failure of the strategy would be shown by how many of the new readers (300,000) were retained. As the tabloid market is price sensitive, the signs were not good.

The outlook for The Times was slightly different: city analysts felt that a cut in price was necessary as the paper was on a downward spiral, having lost its previous image. The price cut, they felt, was there to stay: it was envisaged that more money would flow in from advertisers due to increased circulation.

Advertising was a major concern for newspapers in the recession: a typical tabloid received 20% of its revenues from circulation, with the rest coming from advertising. Broadsheets, on the other hand, had a 50:50 split.
The total split on advertising spend had changed dramatically in the previous decade.

1981
66%
20%
14%
1993
51%
36%
13%
Newspapers
Television
Radio

The initial reaction to this was to increase newspaper prices but obviously this had limited effect, hence the cuts by News International. Rupert Murdoch, it was felt, could sustain initial losses from profits elsewhere: his competitors would not be able to do so.

In 1993 The Daily Telegraph remained number one in the UK broadsheet market, its revenue declining by only 1% compared with the previous year. This was achieved by a series of promotions including discounted holidays, as well as by its readers showing remarkable loyalty and an unwillingness to move.

The circulation of The Guardian had fallen by 5.6% and its market position had been affected as The Times overtook it in the race for second position. However, the paper still remained popular. The Independent, however, had been hardest hit. It was felt that the strategy of The Times could potentially squeeze it out of the market. If this were to be the result The Times was sure to benefit. The situation appeared to be mirroring the experience of the London Daily News a few years previously when it was driven out of business by the Evening News. Indeed, The Times would benefit both from increased circulation and increased advertising revenue if The Independent were to be terminated.

However, The Independent was struggling before The Times cut its price. Its circulation had declined significantly since 1988 (20%) and it had been perceived as being ‘weak’ due to the lack of colour photographs. Although this was corrected it meant that the price of The Independent had to be increased to compensate. This 5p rise was unfortunate, since it was implemented a matter of weeks after the reduction by The Times.

The Independent panicked and contacted the Office of Fair Trading, claiming that the price cut by The Times amounted to predatory pricing and that this was not allowed. This complaint was not upheld: it would have to be proved that the cut was aimed solely at The Independent and this would have been difficult to establish.

Furthermore, The Independent was not one of the financially strongest companies, having made a loss approaching CU500,000 in the previous year. A takeover appeared to be a logical next step as The Independent did have a small niche in the market. However, whoever bought it would have to overcome the recent batterings which had left it with an image problem.

If newspapers had been allowed to expand into TV, then the competitive picture would have changed completely.

Case Requirement

The environmental factors that affected the newspaper industry, using the following headings.
(a) Political and Economic
(b) Social
(c) Technological
(d) Ecological
(e) Legal

Environmental analysis


The factors in the surrounding environment obviously played a significant part in the state of the newspaper industry at that time. They were largely external and as such outside the control of the individual newspaper companies, resulting in a reactive approach by the companies to such factors.


(a) Political and economic factors


One the major factors that influenced the industry was the recession. The industry had and still has two main sources of income – revenue from individual sales coupled with revenue from advertising.

The tabloid newspapers were heavily reliant on advertising revenue (representing 80% of their income) whilst the broadsheets had a more even split. Both sources, however, suffered severely in the recession as disposable income fell. Redundancies, pay freezes, and low inflation all resulted in a decrease in the income of the individual. The individual therefore cut back on what he perceived to be non-essential items, which may include his newspaper. Alternatively he will search for a cheaper alternative – the tabloid or the free issue (‘freebie’).

Probably the broadsheets were relatively more influenced by government policies such as increased taxes, which were aimed directly at individuals, decreasing their disposable income and hence decreasing demand for the more expensive newspaper. This obviously resulted in the price drop for The Times. To some extent this price drop prevented broadsheet customers deserting to cheaper tabloids, and also hit very hard the higher priced broadsheets, such as The
Independent.

The decrease in the individual’s net disposable income would have had a knock-on effect on the advertisers: if the target market had less disposable income than previously was the case, companies would be less willing to advertise in newspapers, as it may not have been cost-efficient. The overall effect was a sharp fall in revenues for newspaper companies. In order to overcome this the newspapers attempted to increase volume by dropping sales price, hoping that the increased volume would compensate for the overall decrease in revenues.


(b) Social Environmental Factors

At that time, the newspaper market was split into two distinct sections – the tabloids and the broadsheets. Historically those individuals with lower incomes tended to buy the tabloids and those with higher incomes tended to buy the broadsheets. Furthermore, the tabloids are intended to be sold to a more ‘lower class’ market than the broadsheets.
How the recession would have affected this is arguable. Some held that the ‘higher class’ image attached to the broadsheets would prevent a switch by such readers to the cheaper ‘lower class’ tabloid. However, the tabloid editors believed that this was not the case: people are money driven and the broadsheet readers would be just as price-sensitive as those of the tabloids – hence a switch would be feasible.

General levels of literacy have declined and the public are less inclined to obtain their news from newspapers but instead rely on news bursts in the middle of radio and television programming.


(c) Technological Factors


Changes in technology at that time had a considerable effect on the newspaper industry. Color photographs, although not too recent an innovation, were considered by then to be the norm for national newspapers and therefore became a necessity if a newspaper was to compete at a national level. This was borne out by the experience of The Independent which initially had no color pictures, resulting in an uncompetitive stance. The technology required to upgrade the paper to color printing was very expensive, necessitating an increase in the price of the paper at
a time when a price war was emerging.

Since then the emergence of on-line services such as news websites and 24 hour-news programming on digital TV have increased the competition to newspapers. As we live in an age where television is the focal point of many people’s lives, the accessibility of news/sport and television information has rendered it less important for people to have a newspaper on a daily basis.

Newspaper companies have also encountered further costs due to increased technology in the typesetting area which is now centrally controlled and downloaded to regional areas where the printing is done. Once again, to compete on a national basis, this has involved major capital outlay for most companies, which has to be recouped by increased circulation, increased selling prices or increased efficiencies.

Given that newspapers are often bought to while away boredom on journeys to and from work etc the development of compact multimedia devices such as MP3 music and video players will reduce the casual purchase of newspapers.


(d) Ecological factors


Newspaper production and distribution has many ecological impacts. The raw material is timber and the manufacture of paper involves large amounts of water and bleaches. Print ink was solvent based originally. It is an industry that requires substantial logistics and so leaves a carbon footprint.

Regulations affecting pollutants, the recycling of paper, and the carbon emissions from a business would impact sharply on the costs of the newspaper industry.


(e) Legal factors


During the recession, in order to boost sales, the tabloids in particular tended to search for more ‘popular’ stories such as the Royal family and scandals about prominent people. This, however, resulted in an increase in law suits, as a struggle emerged as to whether the private lives of prominent individuals were indeed ‘private’. The current ruling is that anything that is in the public interest may be published. However, there remains a grey area as to what is in the
‘public interest’.

This was then coupled with the maneuvering by newspapers on the issue of publishing sensitive photographs. Some published in order to obtain a short-term boost to their circulation whereas others decided to publish their ‘disgust at those seizing the opportunity’ in the hope of a longer-term increase in circulation.

The legal issues surrounding the competitive nature of the industry also came to the fore, particularly as to whether the price cuts were an attempt at predatory pricing in order to force a competitor out of business.

Conclusion

The newspaper industry was in a particularly turbulent phase in the 1990s. This was mainly caused by the recession and the effect this had on disposable incomes. Moreover, with technology ever improving since that time, television and radio have taken increasing shares of the media market away from newspapers.

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