Publishing houses increasingly face a dilemma between focusing on either quality or diversity.
Newspaper publishing comprises spending on daily, weekly and Sunday print newspapers by advertisers and readers, as well as digital advertising on newspaper websites and mobile applications. Spending by readers includes newsstand purchases, subscriptions, payments for newspapers delivered to mobile devices and fees for accessing online content.
Media use has changed dramatically in recent years and continues to change. Digital platforms have drastically increased the variety of available options and new forms of information dissemination are clearly breaking up old patterns of use. The evolution of everyday media usage in German-speaking Switzerland confirms this trend. Across all age groups, the probability of daily use of the Internet is already at 90 per cent. Among the 15-29 year-olds, the daily probability of using the Internet is as high as 96 per cent, while that of print media has fallen to 39 per cent. Considering the countertrend in print media use and the tremendous relevance of digital platforms for young people, it can be assumed that the existing pressure on the newspaper industry will continue to increase. There is surging demand for innovative solutions, with artificial intelligence, VR and AR as well as blockchain continuing to emerge as powerful forces.
About three years ago, AI caused a stir in the industry through the introduction of writing robots. These robo-journalists were primarily suitable for the preparation of statistics such as annual accounts, weather data and sport results. In the meantime, though, the topic is on everyone's lips and more in vogue than ever before. Fourteen European news agencies have already introduced semi-automated editorial systems, nine of which use “bots” to research and write articles. The British news agency Press Association has pushed robo-journalism the farthest and today supplies local media throughout the UK with a software routine called “Radar”.
Blockchain is set to play an increasingly dominant role in journalism. It has the potential to grow into a key capability by helping publishers to keep track of content assets, avoid contractual disputes and establish the certainty and accountability that fosters readers’ trust. Civil, a decentralised journalism marketplace from the U.S. is technologically based on the Ethereum blockchain platform. It provides transparency and security for trustworthy and reliable journalism in times of fake news, advertising pressure and manipulative power interests. Anyone can register with Civil as a “newsmaker” or “citizen” and publish or receive content. For the latter, the authors can be remunerated on a voluntary basis in their desired crypto currency or in the form of Civil tokens. The traceability of authorship of the respective content in the blockchain database is another added benefit.
Steemit, a kind of hybrid social network cum content platform, even goes one step further than Civil. The provider uses a rating and credit system for content, whereby the publisher's remuneration depends on the resonance the content receives. Like Civil, Steemit has its own crypto currency, the Steem Token. Authors active on the platform receive compensation in the form of Steem Tokens and so-called Steem Power. Steem Power is designed in such a way that its influence on the platform increases with the increased power. Furthermore, the blockchain technology is interesting in other use cases where intellectual property such as texts, images or videos can be legally documented or traded. The Berlin-based company BigchainDB, for example, has developed a database on a blockchain platform to document and define licensing principles as well as to transfer copyrights. However, even blockchain can hardly prevent pirated copies – but at least it makes dealing with legal issues considerably easier. The innovations and potential associated with blockchain are mind-boggling, especially since they can heighten the credibility and transparency of today’s worrisomely assailable journalism.
The technological innovations presented below demonstrate the variety of possibilities on digital platforms. Going forward, the difficulty for Swiss newspapers in particular will not only come from the necessity to rely on click-increasing soft news despite the emotion-driven functional logic of social media, but also from insisting on the quality of content. Especially in comparison to the Anglo-Saxon sector, the Swiss press already has a know-how deficit in the digital sector. It is not the processing of basics that is relevant nowadays; rather, it is the courage to innovate.
The far-reaching structural change in the newspaper industry has been accompanied by significant margin shrinkage over the past years. Technology is enabling cheaper and more personalised content delivery. As a result, the newspaper industry constantly has to adjust outdated cost structures and business models to compete against new challengers with more efficiency. The declining revenue trend in the Swiss newspaper market consequently resulted in a decrease of 6.9% in 2017. This dynamic development is forcing publishing houses to pool their strengths as they increasingly face a dilemma between focusing on either quality or diversity. Due to the range of newspaper offerings at the international and national level, it makes sense to pool strengths at the latter level rather than at the regional and local levels (which in turn remain interesting for SMEs in the advertising market and contribute to preserving the different identities in Switzerland).
However, the problem is that, despite the successful model of indirect press promotion, the local and regional press have also come under enormous pressure in recent years. This is mainly due to two major developments. On the one hand, Google and Facebook are now the largest advertising companies in Switzerland and continue to grow relentlessly. The local newspaper industry is increasingly lacking the advertising funds necessary for the production of journalistic content, since the related money is being shunted to these international giants. On the other hand, the circulation of printed newspapers is steadily declining, which in turn increases the costs for their delivery. With digital payment offers, the Swiss newspaper market is only at the threshold of a trend-setting development, and online advertising is not yet sufficient to finance high-quality journalism. All of this is increasingly calling into question the traditional business models in the printed newspaper industry. The new law on electronic media currently under discussion aims to expand press promotion and support publishers in their innovation process through a transformation contribution so they can successfully implement the steps necessary to develop an economically viable digital business.
“People are used to getting everything for free online; this trend must now be reversed.”
Equally spoken, advertising revenues for Swiss newspapers are still slightly higher than circulation revenues. Switzerland is in an uncommon position compared to the norm elsewhere in the world, where circulation revenues have already exceeded advertising revenues. In Switzerland, the approximate revenue contributions for 2017 came in at 57 per cent from advertising and 43 per cent from circulation. The decline in advertising revenues, which began in 2012, continued to accelerate in 2017. In total, the daily, regional, weekly and Sunday press generated sales of CHF 692 million. Advertising revenues were 11.6 per cent below the prior-year level. The Sunday press suffered particularly heavy losses, with advertising revenues down 26.1 per cent on the previous year. These extraordinary changes are mainly due to the discontinuation of several titles in the Sunday press and the launch of new weeklies. Last year also showed that the number of paid print titles sold (-14.2 per cent in 2017) significantly underperformed the volume of free titles (-3.5 per cent in 2017).
The downtrend in print advertising is being offset by increasing sales of digital advertising (5.5 per cent in 2017). However, this increase still falls short of compensating for the decline in sales from the print advertising business. Nonetheless, digital offerings such as programmatic and content advertising are on the advance. The willingness of Tamedia, Ringier and NZZ Mediengruppe to invest more in these forms of advertising show that publishers have not yet written off the advertising market.
“We have to focus on our USPs, exciting storytelling and focus on relevant topics. With the right "look and feel", we can succeed in making the environment attractive for advertisers.”
In 2017, for example, Tamedia decided to enter the growth market of digital outdoor advertising by acquiring a majority stake in Neo Advertising. Its takeover of Goldbach Group cements the publisher's efforts to be involved in the promising field of databased advertising in the future. The NZZ Mediengruppe also aims to strengthen its position in the advertising market through alliances, as the positive developments of its digital marketing organisation “Audienzz” illustrate. The Swiss newspapers are not losing heart because of the bleak prospects in the advertising market, but instead are trying to counter this with targeted investments.
Circulation revenues are experiencing less turbulent times than advertising revenues. Overall, circulation revenues declined by 2.9 per cent in 2017, and this trend should continue over the next five years. Digital circulation rose from CHF 20 million to CHF 28 million in 2017 (+40 per cent). In the same period, print circulation decreased by 4.4 per cent. Swiss newspapers are still struggling to compensate the decline in print with growth from digital channels. “20 Minuten”, which now has 1.3 million readers in Switzerland with its online edition, is leading the way by setting a good example. However, the creation of high-quality content while simultaneously having to streamline resources and search for user-friendly and proven payment systems is still a source of concern for publishing houses. Innovative ideas such as the crowdfunding-sponsored and advertising-free magazine Republik from Zurich could gain a foothold in the newspaper industry and force both customers and publishers to rethink.
Four major players, namely Ringier AG, Tamedia AG, NZZ Mediengruppe and AZ Medien AG, have dominated the Swiss newspaper market for years. In effort to maintain the quality of the editorial content despite declining ad revenues, as well as to be in a position to continuously invest in new, digital offerings and competencies, several reorganisations, takeovers and disposals were conducted by the major publishers. The trend here is obvious: certain publishers are seeking success through diversification or a focus on their core competencies in publishing. Since spring 2018, Tamedia has concentrated its efforts on two national editorial offices, one in German-speaking Switzerland and one in the French-speaking part, whereby the regional daily newspapers continue to have an independent and different profile. Tamedia caused a particular stir with its takeover of the “Basler Zeitung” for around CHF 60 million and the discontinuation of the print edition of “Le Matin”'. Ringier, for its part, continues to pursue the strategy of investing in digital, transaction-based businesses. The Ringier Group now generates around 42 per cent of its revenues with digital business models. However, the announcement by NZZ Mediengruppe and AZ Medien AG to establish a joint venture called “CH media” was probably the most talked-about topic. The two media houses are trying to ensure their independence and the further development of their regional media brands, whilst generating even more strength in these markets thanks to economies of scale.
Digitalisation is changing not only media production and distribution, but also the advertising industry. The mechanics of supply and demand have driven prices into the basement, ad fraud is more problematic than ever, and ad blocking is widespread. In addition, the Internet opens up new advertising channels for advertisers, which has led to the decoupling of advertising from journalism. Traditional newspapers are losing readership to new aggregators and search engines, which makes advertising financing increasingly difficult for them. The large technology platforms such as Google and Facebook are garnering the lion's share of today’s digital advertising revenues due to their ability to address the audience efficiently and at scale. Publishers should not only accept this development (albeit with suspicion), but also see the associated opportunities as these platforms are equally dependent on entertaining and informative content. In this respect, Facebook, for example, offers media houses a channel for distributing their content in the form of “instant articles”. Facebook argues that much of this revenue benefits publishers. Other ways to generate advertising revenue are to sell the embedded advertising directly or to use the platform's advertising network. Although the success of this model is still unclear, it is evident that social platforms in particular have an interest in high-quality content from established media companies.
After years of broadening their paid content offerings, publishers now face the challenge of optimising them. Since subscription revenue in Switzerland will also exceed advertising revenue in the medium term, publishers need to finance more digital content via recipients.
“There is a clear trend that publishing houses with paid online services are moving more towards paywall and paygate again.”
However, publishers need to bear in mind that many people are still reluctant to pay anything at all for online news. This leads to the point where today a one-size-fits-all reader payment or business model is unfeasible in actual practice. Here, indirect press promotion should come into play in the future to regulate the coexistence of private and fee-financed providers in the digital space as clearly as possible at the legal level. Private media should be able to finance their journalistic services on the Internet increasingly through subscriptions, whereas the willingness of users to pay takes time and has yet to be built up. The activities of fee-financed providers and freely accessible news portals must therefore be regulated and restricted. The compromise reached in Germany between ARD, ZDF and the newspaper publishers offers a framework worth imitating.
“The technology used provides opportunities to collect and analyse the user behaviour and subsequently individually adjust the usage of the paywall.”
With the elimination of the fixed costs associated with conventional media consumption, the barriers to market entry are also disappearing and freelance journalists are participating in the market. It is important to keep an eye on the increase in dubious content, as the production of such non-verifiable or even deliberately false reports is associated with negligible costs. The bigger relative market size and thus the available supply is also concomitant with increased competition and price pressure for publishers, who often respond to this with product differentiation. For example, the newspaper range is offered in different variations and quality levels, thereby making the range less interchangeable from the customer's point of view and in turn strengthening the market position of the individual producers. From the recipient’s point of view, the growing need for orientation aids must be accommodated due to the increasing variety of offerings. Especially in the Swiss newspaper market, regional or content-related specialisation is becoming more and more common as niche interests with theme-specific publications are gaining in attraction due to falling fixed costs. This is reflected in the increasing focus of Swiss media houses on small markets, a move favoured by the local peculiarities of Switzerland.
The increasing use of ad-blockers and customer control over personal data release associated with advertising create new obstacles for publishers. A positive aspect of ad-blockers from the customer’s point of view is the performance boost on mobile devices: they considerably reduce the amount of data to be loaded. However, the use of ad-blockers also increases the pressure on publishers, who now need to deliver advertising to users they hardly know are out there. So-called “native advertising” is becoming more and more popular and creates real benefit for users by illuminating topics that are relevant to the products of the advertisers. The art is to package these topics informatively and attractively so the customer does not even recognise the advertising hidden inside. From the publisher’s point of view, however, the question arises as to whether this effect is at all desirable in terms of content quality and objectivity. However, such incentive problems already existed in times of traditional advertising-financed journalism. Companies that generated significant advertising revenue for the publisher may have been treated differently in newspaper articles than companies that were not financial contributors. And finally, more stringent data protection regulations mean that digital providers must now obtain the users' consent for the processing of their personal user data. This could make room for price differentiation, as some people agree to the use of their data and others do not. Those with shared data may be offered lower user prices because their data is applied for advertising purposes and therefore generates additional revenue.
The growth prospects for the Swiss newspaper market are not promising for 2018 and beyond. Over the course of the next five years, we expect the compound annual growth rate (CAGR) for total advertising and circulation to average -3.5 per cent, largely due to the further decline in print advertising and the ongoing shift of advertising into the digital advertising space. The fact that print segment continues to lose considerable ground indicates that print advertising market is decoupling from the general economic trend. Because of the positive economic developments in 2017, total gross advertising expenditure exceeded CHF 6 billion for the first time, which corresponds to adjusted organic growth of 4.5 per cent versus the previous year. Regardless of this favourable development, though, print advertising fell by 11.6 per cent in 2017, with the Sunday and daily press taking the hardest hit. The increasing migration of these advertising revenues to digital platforms also caused advertising agency Publicitas to file for insolvency. Like the entire press market, the company suffered from structural change and the associated decline in advertising investments in print media. AdAgent, a new company for handling media campaigns, is about to be founded by Tamedia, NZZ, AZ Medien, Corriere del Ticino and the Verband Schweizer Medien.
Despite the predicted decline in print advertising revenues, the latter will remain the main sources of income for publishers over the period under review. In the longer run, we are going on the assumption that print advertising will decline further, but at a slower pace. We expect that the annual growth of print advertising will average -9.5 per cent over the next five years. For print circulation, we project a CAGR of -3.8 per cent. That said, circulation revenues are becoming increasingly important as a way of absorbing at least part of the advertising revenues that have been lost. Given their limited resources, publishers are facing the tremendous challenge of maintaining the high quality standards expected from traditional media. Their content needs to be brought to channels that consumers use and where relevant, insightful information is expected. At the same time, visually composed information, for example through digital storytelling, is becoming increasingly important. Swiss publishers are generating more and more revenue from digital offerings. We also expect continued strong growth in the digital sector and forecast a CAGR of 18.4 per cent for digital circulation and 14.7 per cent for digital advertising over the period 2017-2022.
Western Europe is the oldest newspaper publishing market in the world and, at this level of maturity, is one of those that will be most disrupted by digital transformation. Publishers have lost a quarter of their daily print circulation since 2013 and are expected to lose another one-fifth in the next five years. In the past decade, newspapers have dabbled with digital publications to address recipients via digital channels. This approach has become widespread, but publishers have been very slow to grasp the shift to a digital-first mindset due to labour laws and their strong loyalty to the legacy of print media. The declining revenues from print advertising and circulation revenues continue to cause headaches, as digital revenue is not growing exponentially as previously assumed. In fact, it is slowing down. In particular, intense competition from new digital advertising platforms and the realisation that digitalisation cannot compensate for the decline in print volume are creating difficulties for Western European publishers. These publishers are at a crucial crossroads where the make-or-break question is whether the printing cost base should be reformed or even abandoned in order to pursue a purely digital strategy.
Switzerland accounted for a 4.3 per cent share of the Western European newspaper market last year. Due to the slow pace of digital change in Switzerland, we expect overall newspaper revenues to fall more than the Western European average, but the gap is getting smaller and smaller. The 2017-2022 CAGR for Switzerland is projected at -3.5 per cent for total advertising and circulation, compared to -3.2 per cent for Western Europe.
Director Advisory, Strategy and Digital Change Expert, Bern, PwC Switzerland
Tel: +41 58 792 77 51
Leader Swiss GAAP FER, PwC Switzerland
Tel: +41 58 792 26 76
Manager, PwC Switzerland
Tel: +41 58 792 7510