Can Axel Springer do the ‘impossible’? (Part 3)

Can Axel Springer do the ‘impossible’? (Part 3)
The German publisher has morphed from a so-called “Internet midget” 15 years ago to a hyper-active 21st century digital-led media company – perhaps one of the world’s best, argues guest writer Colin Morrison in this three-part post.

by WAN-IFRA Staff | February 25, 2016

(Continued from part 2)

The stream of deals, joint ventures, alliances and new services shows not only what is necessary in order to reinvent a traditional business but also just how risky the strategy can feel for employees and investors alike. Perhaps nothing underlines that more than Business Insider. Springer’s largest deal accounted for some 10% of its market capitalisation – and some 30% of its €1bn+ debt. Investors have been promised it will be profitable from 2020.

That’s a tough proposition in a market where the Financial Times and News Corp’s Wall Street Journal are investing strongly, and where Time Warner has recently announced plans for the global expansion of  CNN Money. Business Insider is clearly a game changer for Axel Springer in every sense. But the rewards must come from synergies with existing operations especially in Germany.

Those synergies have to create an advantage over existing and prospective competitors, some of whose launches will have been directly prompted by the high price Springer paid for Business Insider. The company’s success will best be measured – and sustained – not by acquisitions or deals but from organic development. Its skills and resources must, ultimately, count more than its ability to talent-spot acquisitions.

Search for digital profits

The tricky bit is that the Business Insider management is the team which helped create the brand and saved it from collapse in the 2009 banking crisis with what was described as as “a $1bn bailout disguised as an investment”. Having now pulled off the prize-winning sale to Springer, the team is handcuffed to a much-trumpeted “extensive, long-term equity incentive”. Every corporate knows how such deals can distract the best-intentioned founders-turned-executives.

Along with Business Insider has come board director Ken Lerer. He is the former AOL Time Warner executive who – with Arianna Huffington and Jonah Peretti – co-founded Huffington Post. He and Peretti then moved on to create BuzzFeed, of which he is chairman. The gilded entrepreneur is often said to have been as successful as anyone has been at figuring out how to make money from online journalism.

As a principal of Lerer Hippeau, a hugely successful early-stage venture capital fund, his primary way of making that digital money has actually been by selling the companies to salivating traditional groups – like Axel Springer. This estimable man, who lectures on journalism and campaigns for US gun control, has become a key influence on Döpfner to whom he also sold a stake in his son Ben Lerer’s Thrillist men’s digital lifestyle site.

Whether Springer can justify making digital acquisitions at anything like the same rate in the future is an open question. But nobody doubts that Lerer can be an effective ambassador, facilitator and sounding-board in the US market.

One fundamental issue for Axel Springer involves the maturing of all things digital. The company is credited with its swing from print to digital which now accounts for some 75% of EBITDA. But it will now have to address the simple issue that not all digital revenues are either very profitable or sustainable: there is digital and digital. Springer is getting used to its excellent classified profits (with margins of 40%). It will be interesting, though, to see just how profitable Business Insider (with its 350 employees, including 175 journalists) can really become. The steepness of the climb is clear enough. Next week’s Annual Report may confirm that Business Insider’s 2015 revenues were some €40m. Is there even a chance that these could leap to €6om in 2016 and – a greater stretch still – generate pre-development” profits of, say, €15m? Business Insider’s 10% “share” of the parent company’s market value presumably means it should be generating some €50-60m of annual EBITDA profit (€150m revenue?) by 2020. Phew.

The eye-watering deal seems to undercut Axel Springer’s insistence that it doesn’t believe in over-paying. But then so do a host of other acquisitions. Even its admittedly excellent classifieds venture with General Atlantic looks expensive: the private equity firm bought 30% of Axel Springer Digital Classifieds for €240m in 2012 and then sold it back to Springer for €910m in cash and shares 2-3 years later. Similarly, it paid up to 40 x profits for its French classified operations, and up to 15 x for similar acquisitions in the UK and elsewhere. Before the splash on Business Insider, the CEO had clearly been ready also to pay heavily for the Financial Times – if only Nikkei hadn’t quickly jumped in front of him at the last-minute. And who knows how much of that speculative seed money in digital startups will even prove to be worthwhile?

None of that will matter if Axel Springer starts pumping out the cash. But the degree of scepticism is evident in a share price that has fallen almost 20% in the past year – and not just in the recent period of market instability. Many investment analysts still assume, however, that the company’s buoyant strategies of recent years might have side-stepped some cost-savings and the trimming even of its digital portfolio (some minor assets were sold at good-ish prices in 2015). So, further cuts could yet support the company’s profit growth. And there is always the possibility of IPO or acquisition riches from at least some of those US startups.

In addition to revolutionising a newspaper business, Mathias Döpfner has carved out a substantial reputation as the man who has mobilised his European peers against the predatory Google, articulated the challenge for traditional media, and campaigned to protect journalism in the digital era. He is giving the kind of news industry leadership that, in previous decades, came from Rupert Murdoch. Springer’s dailies have been among the first to test paywalls among publishers in Germany: Döpfner was deliberately pushing his peers along, much as Murdoch had when he fought the UK unions for new printing technology in the 1980s and, 25 years later, when he put his Times of London behind a paywall.

Erratic strategy

His vision for Springer has survived a slightly jerky strategy which has sometimes seemed obsessed with television and even with buying more newspapers. The Springer CEO has been a public advocate of “Riepl’s Law”, coined more than a century ago by a former German newspaper editor, who said: “New media do not replace existing media. Media progress is cumulative, not substitutive. New media are constantly added, but the old ones remain. This law has yet to be disproved. Books have not replaced storytelling. Newspapers have not replaced books; radio has not replaced newspapers; and television has not replaced radio. It follows that the Internet will not replace television or newspapers.”  But what about the profits?

Döpfner insists that the advertising-only revenue streams of digital media will expand to include readership revenue – once consolidation gets underway. Many observers are not so sure. But, then, this is a media CEO who thinks deeply about such trends and challenges his people to do so too.

But, closer to earth, his strategy is under more pressure.

The proposal for a merger with ProSieben TV almost certainly foundered on Friede Springer’s insistence on retaining control, whatever the relative scale of the two businesses. And, more recently, Axel Springer has dropped plans to switch to KGaA status. This is the limited partnership with a two-tier share structure that keeps some German public companies firmly under family control even when shareholdings risk dilution by share issues. The structure has long been in place at Bertelsmann, Merck, and football club Borussia Dortmund, for example.

The Springer plan to become a KGaA reflected its need to be able to raise new capital (now and in the future) to fund international deals. The structure was “sold” to investors only last month as giving Springer the “best of both worlds”: family control with access to capital markets. But investors and lenders didn’t like it, so the plan was embarrassingly dropped. You can almost feel the strain of a company whose global ambitions seem to threaten Springer family control. But that’s only part of the rising tension.

For all the clarity of vision, it is impossible not to ask whether Döpfner’s strategy is even achievable. In an era of spiralling disruption, this flagship media business has certainly spread its risks. But its satisfying transition from dominant German company to a world player has moved it away from cosy dependence on a strong, reasonably self-contained national media market where – even now – print is dying more slowly than elsewhere and where the best all-digital news services are being provided (mostly) by traditional companies. Now, it is in the high-risk, high-reward jungle of global media.

Axel Springer can already claim a certain uniqueness among its global media peers by producing real profit growth where “Digital media is driving revenue growth and over-compensating for the decline in print”. It has – so far – been a brilliant transformation which has involved digital acquisitions of €4bn and divestments of €2.7bn over the past 10 years. The company now has all the energy, innovation – and global diversity – that could ensure success. But there’s a long way to go.

It has built a world class digital classifieds in competition with other newspaper-centric operators, the Oslo-based Schibsted and Naspers, of South Africa. Classifieds now account for 23% of all Springer revenues and almost 60% of EBITDA. But nobody expects any let-up in the fierce competition, globally as well in individual national markets. And the news media itself is further back. For a company with journalism at the heart of its strategy, the question is not so much whether the print model for news is broken (it is) but whether the digital model is even viable.

A new model for news?

A new commercial model will eventually emerge to deliver solid profits again for journalism. But it may be very different, presumably featuring user generated content, live video, citizen journalism, and some clever technology to replicate the serendipity of print. That’s before you get to the potentially seismic impact on news reporting of virtual reality which may soon start to emerge. Who knows what will happen when, and how far technology will drive content rather than the traditional reverse?

The scale of challenge is further emphasised by Axel Springer’s wholehearted attack on the digital classified market: because classifieds accounted for only 10% of its print business, it had little to defend and nothing to fear. It was the disruptor, especially in many countries like the UK where it had almost no pre-existing business. But will its highly profitable newspaper brands in Germany and Poland preclude the same level of aggressive expansion in digital news? Further, like many content-led companies, it may increasingly need to develop proprietary technologies for new media channels, which is why Bezos’s experiments with the Washington Post are so compelling. Springer’s Upday news aggregation app with Samsung might be just be the beginning of some important innovation. But it may also open up a whole new seam of investment – and competition.

Döpfner and his Palo Alto disciples have placed their bets as widely and wisely as possible. This exciting business needs to accelerate organic development – and start to capitalise on its investments. Now his Business Insider deal has raised the bar on digital acquisitions, the Springer CEO might just feel relieved that his spending spree is over, at least for now. Time to deliver.

Colin Morrison is a director and consultant of digital, media, and information companies, principally in the UK, Europe, and the AsiaPacific. He is chairman of the newly launched SBTV News, an online news joint venture between the (UK) Press Association and the online music platform SBTV.

He was previously CEO of international media and digital companies for Reed Elsevier, EMAP, Australian Consolidated Press, Axel Springer, Future, and Hearst. He has been widely involved in media partnerships with organisations including the BBC, Hearst, Springer, Dennis, Sony, Microsoft, Washington Post, Press Association, and Hachette.

This post was republished with permission from his blog, Flashes & Flames. His views are his own and do not necessarily express the opinion of WAN-IFRA.

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