Sometime towards the latter half of 2012, the Metro, a free newspaper launched relatively recently in 1999, became the most profitable title in UK’s uber-competitive newspaper market. See table A below.

In absolute numbers Metro trails the Daily Mail and even The Telegraph, but in profitability it pips them.  How is that for a free newspaper? One heavily reliant on short snippety lifestyle + entertainment stories, national + international news content sourced heavily from wires, meant to be consumed in 15-20 minutes (the average commuting time); as against established papers with their large newsrooms, commitment to breaking stories and pursuing a serious journalistic agenda?

Table A – all figures pertain to year 2012, unless otherwise stated

All rev and profit figures in £ Circulation Cover Price Revenues(mns) Profits(mns) Profit %
Metro 1,358,400 M-F Free 92 20 22%
Daily Mail 1,560,000 M-F2,423,000 Sat1,566,000 Sun 0.600.901.50 618 81 13%
The Guardian 161,000 M-F344,000 Sat220,000 Sun 1.302.302.50 196 -31 Loss
The Times 358,000 M-F468,000 Sat845,000 Sun 1.001.502.50 402 (’11) -13 (’12) Loss
The Sun 2,156,000 M-F2,578,000 Sat1,873,000 Sun 0.400.600.60 509 -286 (incl one-time payouts, but EBITDA loss as well)
The Independent 67,00098,000114,000 1.401.802.20 58 -18 Loss
i 305,000 M-F 0.20
London Evening Standard 702,000 M-F Free 58 0.9 2%
Daily Mirror 950,000 M-F1,192,000 Sat1,001,000 Sun 0.400.601.00 Not reported separately; Claire Enders report estimates 20% op profit margin for Trinity Mirror’s National Papers Group, of which Daily Mirror is a part of.
Daily Express 497,000598,000476,000 0.500.801.35 Not reported separately; Claire Enders estimates break-even for Express Newspapers Group in which Daily Express features.  (£8.9m profit for Daily Express in 2010 says Mediaweek)
The Telegraph 500,000 M-F700,000 Sat435,000 Sun 328 58 18%
Financial Times 75,000 M-F104,000 Sat 2.503.00 ~375 20 5%
City AM 129,000 M-F Free 8.6 (’11) 0.1 (’11)

Source of data : Circulation – from UK ABC (July13); Metro and Daily Mail numbers from Guardian article as well as 2012 Annual Report; The Guardian numbers are from their 2012 Annual Report; The Times and The Sun numbers are from various articles including this, this and Klaas Ardinois’s course thesis which he made available publicly; The Independent, i and Evening Standard numbers are from are from articles 1 and 2; Telegraph numbers from a Guardian article; FT numbers from Nat Ives’s article in Bloomberg; City AM numbers from this Press Gazette article

Significantly, Metro is not the only freesheet out there making profits. So does the London Evening Standard and the City A.M. How is a newbie such as the City A.M. (launched Sep’05), and even the Standard (which was loss-making in its paid avatar with – £25m annual loss when it was sold) which went free in Oct’09, able to make profits when the likes of The Sun, Times and Guardian are unable to?

We may also add two related and indeed inter-connected questions to the above 1) Is there a close correlation between profitability and free distribution in a general sense? Or is this true only of London or London-type markets? 2) Should all newspapers explore going free?


Understanding Metro’s success

The answers to the above questions, and thereby understanding the success of freesheets lie in viewing the newspaper industry through a lens of a theory called ‘Jobs-to-be-done’.  Clayton Christensen, the renowned management theorist who pioneered this approach, and David Skok applied this theory to the newspaper industry in their wonderful article Breaking News for the Neiman Foundation’s Fall2012 Report.

According to this theory, and I quote from their report “people don’t go around looking for products to buy. Instead, they take life as it comes and when they encounter a problem, they look for a solution—and at that point, they’ll hire a product or service, for the job to be done.” According to Christensen and Skok, Metro or any freesheet solves the problem of “I have 20 minutes on my hand for this train commute to end. Help me fill the time”. NYT / Guardian provide solutions for a different kind of job : “help me make sense of the world” while WSJ / FT’s focuses on the job-to-be-done : “to provide daily information or insight that can help me do better in my work environment”.

Understanding Metro’s success from a jobs-to-be-done prismBreaking News, NiemanReports Fall2012 edition, by Clayton Christensen and David Skok It’s much easier to understand the success of Metro when you view it through the lens of job-to-be-done. The job of “help me fill the time” is a widespread one, but folks who are on their way home from a day at work are focused on one thing: getting home from work as quickly as they can. Until they get on that train, their willingness to stop for anything—including to pay for a paper—is probably pretty low. However, hand them a paper without asking them to pay for it, and chances are, they’ll take it from you. 

With that in mind, the Metro was made a “freesheet”—the cost of producing itis subsidized entirely by advertising from businesses hoping to target commuters. The stories are intentionally made short, punchy and easy to read. The aim? Allow readers to complete the paper (and expose them to all the ads) within 20 minutes—which Metro worked out was the average time spent on a train commute home. With a traditional newspaper, a copy left behind on a seat means the next reader gets it for free, depriving the paper of revenue. In contrast, a Metro reader who picks up a copy left behind has just saved the newspaper the cost of distributing one more paper. By targeting the job-to-be- done, Metro has dramatically bucked the trend of declining circulation.

While the jobs-to-be-done theory establishes the case for the freesheet business model or at the least a genuine need from the consumer’s end for the free newspaper, this is only half the reason for the success of the freesheet business model. The other half is to get the advertisers to pay generously to reach this audience.  And that is precisely what the publishers of freesheets have been able to do.  They have convinced advertisers that the audiences they deliver are in no way inferior to what the publishers of a Daily Mail or Express deliver. How did this happen?

Let us understand how the economics of newspaper advertising pans out.

Newspapers operate in 2-sided markets.. And as in all 2-sided markets, they acquire consumers in one market (reader markets) and monetize primarily in the other (advertiser markets).

iTunes Music is sold cheaply to lure consumers… …who will pay a high price for iPods and iPhones
Desktop Printers Sell printers cheaply… …to consumers who will pay a premium for cartridges
Traditional Newspapers Attract consumers to buy the paper through low prices… …and sell these audiences to advertisers at a premium

One fundamental assumption that holds for the above is some degree of lock-in – otherwise you will consume your free songs from iTunes on a cheaper Android handset or use your free HP Printer with recycled / cheap cartridges.

As you may have noticed, in all the three cases the acquisition markets see a price (albeit low) for the product.  Now you may ask the question, if the idea is to really make money in the monetization market, why not eliminate the price entirely in the acquisition market and give away the product?

The key reason is that pricing acts as a reasonable filtering mechanism in the acquisition of the right kind of consumers

1)   those with purchasing power to pay a premium for your product in the monetizing market. If you were to give the product free, and you ended up getting the wrong kind of audience from the first market, it would not serve your purpose at all, as they wouldn’t consumer your product in the second market.

2)   those with intent to consume your product – it signals that the product has been demanded by the reader and hence the likelihood that it will be consumed – hence paid circulation as a historical proxy for readership.


Price is no longer the only filtering mechanism

The above theory is predicated on the assumption that there is no other filtering mechanism as good as price to acquire consumers with purchasing power as well as the intent to consumer. The moment some other kind of filtering mechanism emerges, price no longer becomes relevant.

This is precisely what has happened with Metro and other freesheets. Distribution in areas with a concentration of the professional class – metro stations / airports in the morning, business district hubs – has become a good enough filter so as to neutralize the advantage price had in filtering.

Another parallel can be drawn with internet sites / portals which do not charge for content – here broadband or internet access itself acts as a filtering mechanism signaling some degree of education and purchasing power. As we can see from the growing share of digital advertising in the overall ad spend (a whopping 28% in UK – the highest in the world) advertisers are comfortable with the idea of paying for free or rather non-price filtered audiences.


A general model of freesheet profitability

Now that we have established why Metro succeeded, let us take a step back and look at the freesheet model itself, and answer the questions we had raised earlier

1) Is there a close correlation between profitability and free distribution in a general sense? Or is this true only of London or London-type markets?

2) Should all newspapers explore going free?

To answer question 1, let us recall the jobs-to-be-done theory which had said that all freesheets are fundamentally solving a “let me kill some free time” problem. The business model that emerges from this is that of aggregating audiences for advertising. The efficiency of the business model and the profitability is determined by the performance of each of these factors – aggregation, audience and advertising. Let us look at each of these factors, along with the two supporting factors – the degree of competitiveness and environmental factors to arrive at a general model that can explain the success of freesheets in a market.

Aggregation Audiences Advertising
How cheaply and efficiently are you able to aggregate this audience

  • Provide quality content at low costs
  • Is the freesheet compelling enough to pick up given other alternatives – magazines, kindle, angry birds etc
Premiumness and distinctiveness of the available audience

  • In London and European cities, even senior executives travel by public transport. This may not be true of other cities where the affluent may travel by cars, and only those unable to do so take the metro.
  • Is the audience that is aggregated an audience that is traditionally not reached by newspapers
Willingness of advertisers to pay for ‘free’ audiences. This is also dependent on the availability of tracking metrics, and also the ability to target a differentiated, non-traditional newspaper readership

Supported by

Competitiveness Environmental Factors
Are there a lots of freesheets competing for the same audience? Or is there even a lot of competition / resistance from traditional publishers

  • 20 Minuten’s profitability in Switzerland took off after Metro shut shop in 2002. Similiarly Metro UK’s profitability has grown thanks to the exit of News Corp’s thelondonpaper and a relative lack of competition. Evening Standard distributed later in the day
  • In Germany, fierce resistance from traditional players who launched freesheets of their own stymied the growth of 20 Minuten who then pulled out of the market
  •  How widespread is home distribution of newspapers?
    • The lower the proportion of copies that are home-delivered, the better the prospects for a commuting paper
  • Other obscure but relevant factors such as wireless access in subway (not good for freesheets), early start to day (good for freesheets) etc

So the theory clearly says that freesheets are profitable only in a certain context

1)   existence of a sizeable set of affluent audiences not presently served by traditional audiences

2)   getting distribution to premium audiences right – There is a very interesting example of distribution challenges in the HBS case study on Metro (paid-for) which quotes Pelle Tornberg, their ex-CEO “Contracting with the subway in Philadelphia was a mistake. Our motto ‘If you have a subway, we’ll give you a newspaper’ proved wrong again. Advertisers were not willing to pay a premium for the commuter groups in Philadelphia, where people take the subway if they can’t afford a car. In order to reach a more attractive consumer group we needed to reach other groups not exclusive to the subway. For that, we distributed Metro at gas stations, shopping malls, universities, etc. It actually became a key issue to avoid distributing in the subway. “

3)   lack of significant competition from traditional players or other freesheets, etc


Should all newspapers go free?

Only those newspapers that rely on advertising revenue primarily.

Let me elaborate. Newspapers making money primarily through advertising is a recent phenomenon. As newspaper industry guru John Morton states in a recent article in the American Journalism Review “Our nation’s earliest newspapers – well, even before there was an actual nation – printed advertising for free, figuring that displaying prices for various goods qualified as news. They made all of their money from sales. That didn’t last long, as publishers concluded that they could make a lot more money by charging merchants for access to newspaper readers. By the mid-1800s, slightly more than half of newspaper revenue came from advertisers, a proportion that gradually increased to two-thirds by the early 20th century and a bit more by the 1950s.”.

 Now the above refers to US newspapers, but it is unlikely that it would be very much different in other markets as well.  Newspapers that derive a large measure their revenues from advertising are a 20th century trend. So the dominant newspaper model that we are exposed to, where newspapers bundle dollops of advertising along with news to their ‘locked-in’ audiences, emerges as a historical anomaly, one made possible thanks to the emergence of local newspaper monopolies and the lack of viable media options for consuming news during this period.

In recent years the internet impacted this bundling of news and advertising severely – craigslist and google lopped off the classified and local revenue flows, severely impacting their ad revenues. And the access to free content on the net, led to readers dropping their expensive newspaper subscriptions, impacting their circulations, and thereby impacting the advertisers willingness to pay.

In emerging markets, such as India, where the impact of the internet has not been felt yet, we still have the bundled model at play.

But in the west, the newspaper business model, has cleaved sharply into two distinct models now

–       most newspapers now derive a bulk of their revenues from non-ad sources, and increasingly this is beginning to grow. Even a relatively mass newspaper such as the Daily Mail now makes about 57% of its revenues through circulation, and this proportion is growing every year. For newspapers such as the New York Times or even smaller papers such as The Orange County Register, the path is clear – invest in creating high-quality content that a few readers will pay for and keep you profitable. Advertising if it comes is a bonus!

–       a small number, almost usually freesheets, that make their money from advertising primarily

Hence the statement I made earlier. If you are deriving the bulk of your revenues through advertising, and if pricing is no longer a superior filter to aggregate audiences, then why not drop price and aggregate as many audiences as you can?


The curious case of the London Evening Standard

The London Evening Standard’s decision to go free in Oct’09 and aggregate audiences perfectly illustrates this. By going free, the Standard has been able to double its revenues (£30m in ‘09, of which about 40% was circulation, to £58m, entirely advertising for ’12), and make a marginal profit of £82,500 in about 3 years. For the record, their losses in ’09 were estimated at £25m! An article by Peter Kirwan details the economics of the Evening Standard’s transition.

Standard’s decision to go free was a source of bafflement to many. Roy Greenslade, a leading newspaper observer writing on the turnaround calls it surprising. But when seen through the lens of the freesheet profitability theory, the decision to go free doesn’t seem surprising. What is surprising is why more newspapers haven’t done it, or at least those that are likely to benefit from some of the advantages that Evening Standard enjoyed (enhanced ability to aggregate premium audiences through non-price filters accentuated by advertiser willingness to pay for those audiences)

Closer home; this is also the thinking that has underpinned the strategies of newspaper publishers such as those of The Times of India Group.

Rahul Kansal, Executive President for The Times of India Group states it in an interview“TOI had the clarity to see that circulation revenue comes in conflict with advertising revenue. And rather than blindly chase both streams of revenue, TOI was quite willing to sacrifice one for the sake of the other. If you look back, in absolute terms, the newspaper circulation prices have decreased. That is to say that a newspaper used to cost Rs 2 or more 12 years ago. Today the cost is as little as Rs 1 or Rs 1.50 in some markets. In the process, we have been able to grow and bring our English newspapers to a larger number of people.”

In India, newspapers, even though they charge a nominal price – primarily to incentivize the trade and also to filter audiences – are in some senses free or nearly free. This is thanks to the raddi or recycling fee that independent vendors (raddiwalas) pay to buy the old newspapers off readers, and then sell back to paper companies.  So Indian newspapers have a business model analogous to that of freesheets. They do have to price given the need to hold prices above the raddi line (else people will buy papers and sell it wholesale to the raddiwallas!)

and given that non-price filters do not work in India (the affluent travel largely by car).



In my next post, which I hope to do next week, I plan to update you the developments and happenings from India’s leading newspaper conference, the INMA South Asia Forum which is happening on 22-23 August in New Delhi. I had also written on last year’s conference. You can find it here.