With 42% market share, newspaper continues to be a dominant advertising medium across the world. As most of the cost is fixed, profitability of a newspaper company is primarily driven by the circulation volume. Large newspaper companies around the world are becoming multi-dimensional and are increasing their stakes in television, radio, magazines and other businesses. They are also operating online news websites to take advantage of economics of scale achieved by sharing resources while providing a range of outlets to advertisers.
The most important characteristic of Newspaper industry is the significant start-up cost that is required for buildings, presses, establishing distribution channels and large editorial staff to develop original content on a daily basis. Building brand value and maintaining a large circulation volume therefore is crucial to recover these high fixed costs. While the rate of renewed subscription is usually high, gaining new subscribers gets difficult in tough competition scenarios.
Advertising is a major source of revenue which directly depends on the health of the economy. Advertising also depends on Circulation, which is the second most important source of revenue and is based on the number of copies sold and subscription rate charged. As circulation drops, advertising revenue also falls. Thus a small fall in circulation can have a much higher impact on a newspaper company’s total revenues.
Newsprint cost comprises of a large proportion of newspaper publishing cost. While it is procured by weight, its production is measured in number of copies produced, commonly referred to as GSM (grams per square meter). Normal wastage of newsprint during this process of conversion is around 3% to 5%.
Historically, newspaper has always been a profitable industry. Despite significant start-up and fixed costs, once a newspaper is able to establish its brand, its dominance is indisputable. However, the last decade witnessed melt-down of several large newspaper companies across US and Europe only because they ignored the threat coming from growing Internet penetration. Several newspapers have filed for bankruptcy or are already looking for a buyer.
Ironically, while analyst across the globe are debating whether any valuation proposition still exists in the outdated newspaper model, one industry continues to hold promises for future growth; the Indian Newspaper Industry. While American newspapers have been struggling to survive the competition from growing internet advertising, Indian newspaper experienced dramatic growth during 2000 and 2005.
Circulation of Dailies in India increased from 5,91,29,000 in 2001 to 7,29,39,000 in 2003 to 7,86,89,000 in 2005. The key drivers for the growth of newspaper penetration in India are the expanding middle class and improving literacy rates. Marginal (though increasing) internet penetration is also one of the important reasons why Indian newspaper industry has not yet come across stiff competition from this medium.
According to a KPMG-FICCI report, Indian print media can be expected to grow conservatively at around 9% over the next 4 to 5 years. However, the industry has been experiencing growing margin pressures due to increasing newsprint costs which are not yet being passed on to readers due to intense competition. Newsprint costs soared almost 50% last year. While Indian newspapers are the cheapest in the world, industry experts opine that it may not be long that newspaper companies will increase their circulation charges and advertising rates to counter the increasing newsprint costs.
Last year, several publishers postponed their plans to expand their capacity in the wake of drastically increasing newsprint costs. On the other hand, they were unable to increase advertising rates as advertisers are slowly moving to other cheap medium like the internet. Publishers are not concerned about the slowly shifting advertising revenue to mediums such as radio and internet.
Despite such concern one important growth area for Indian newspaper publishers is that several rural areas are still untapped. Improving literacy rates, increasing income and benefits from development schemes of the Government will definitely open up penetration opportunities for Indian publishers.