Why The Economist is Valued at $1.5 billion while The Washington Post was sold for $250 million

The Economist Thrives While Established Rival News and Magazine Publishers are Losing Money

By Ignatius Chithelen. November 2015

(This is an extract from “Six Degrees of Education: From Teaching in Mumbai to Investment Research in New York” Bryant Park Publishers, New York, 2016.)

The Economist - and The Financial Times – have continued to prosper amid fierce competition from free online news and opinion sources over the past two decades, especially in the United States.

In contrast The New York Times, The Wall Street Journal, The Washington Post, Time and Newsweek, all legacy publishers with affluent readers, have seen sharp declines in circulation and advertising revenues and sharply reduced profits and, in some cases, losses.  

The decline began in the mid 1990’s when these and other legacy print publishers in the U.S. allowed free online access to their stories and photographs via AOL, Yahoo and Google. They also allowed their content, created through costly reporting and editorial work, to be re-packaged and distributed for free by new online competitors known as aggregators.  

Many print readers cancelled their subscriptions of the legacy publications since the stories were available free online. These publications, seeking to stem revenue declines, began restricting access to their online content and charging a subscription fee. The New York Times began charging for online content in March 2011.

But many traditional print readers, having gotten used to free access to news and opinions online, do not want to pay subscription fees. The potential younger audience for legacy print publications grew up reading stories on Business Insider, BuzzFeed, The Huffington Post, Vice and other free online sites.

The free online publishers carry brief stories, often based on content from other sources, top ten lists, celebrity gossip, quizzes and lots of photos and cat videos. Their goal is to grow their audience to try and raise advertising revenues. One of their recent revenue strategies, which some legacy publishers have also adopted, is native advertising. This is content created by a publisher’s staff for advertisers and placed amid editorial content, blurring the line between editorial and advertising.

Free online publishers are attracting hundreds of millions of dollars from eager investors, including major venture capital firms as well as legacy media business like Rupert Murdoch’s 21^st Century Fox and Hearst. The German media company Axel Springer bought 97% of Business Insider in 2015 for about $450 million, while Amazon founder Jeff Bezos owns the rest. Such funding is enabling the free online publishers to hire more journalists to rewrite stories from other sources and to create original content.      

One of the few legacy print publishers to grow circulation and revenue is The Economist, which followed a different strategy from that of its legacy print rivals. It did not give free online access to its content and its website offers non-subscribers only brief teasers and that too for some older stories. The content, largely analysis based on facts and data, is also difficult for the online aggregators to convert into popular stories on their free websites.

The magazine continues to be a weekly must read for a growing English educated global audience ranging from academics to professionals on Wall Street. Its circulation has grown consistently reaching 1.6 million in 2015, up from one million in 2006. Three quarters of new and renewing subscribers pay for digital and print subscriptions and it has over 100,000 digital only subscribers.

The Economist also does not offer steeply discounted subscriptions. During the November 2015 Black Friday sales on Amazon in the U.S., for instance, annual subscriptions were slashed 90% for Bloomberg Businessweek, from $300 to $25, and the bi-weekly Fortune, from $116 to $12. The Economist was sold at its full price, $127 for annual digital access and $160 for digital and print formats in the U.S.

The subscription fees provide The Economist with a stable, recurring source of revenue. And its affluent audience, reached via high priced, undiscounted digital and print subscriptions, is very attractive to advertisers selling global brands like watches, alcohol and luxury cars.

Several publications, ranging from The New York Times to new digital ones like the Quartz, are trying to replicate the editorial and business strategy of The Economist. In 2014 Michael Bloomberg hired The Economist’s editor John Micklethwait as editor in chief of Bloomberg News, which owns several media platforms including Bloomberg Businessweek.   

The strength of The Economist’s strategy became evident in August 2015 when the London based Pearson PLC sold its 50% non-controlling stake in The Economist Group to other shareholders, including magazine employees. This cash transaction valued the business at about $1.5 billion. For the year ended March 31, 2016 The Economist Group had $96 million in operating profit on $530 million in revenues. (61 million and 331 m British Pounds respectively.)

In July 2015 Pearson also sold The Financial Times Group to Japan’s leading business media group Nikkei Inc. for $1.3 billion. In contrast Amazon founder Jeff Bezos paid only $250 million to buy The Washington Post in August 2013.

Like The Economist, The Financial Times does not provide free access to its online content. Three quarters of its 720,000 daily global circulation comes from digital subscribers and a year’s subscription is about $700, accounting for much of its revenues. Nikkei’s purchase, following an intense bidding war, was at a steep price of about $1,800 per subscriber. The Financial Times Group’s 2015 revenues were $512 million and profit $37 million.

Exor, the investment arm of Italy’s Agnelli family, increased its stake in The Economist Group to 43% in the 2015 transaction. John Elkann, 39 year old chairman of Exor and a regular reader of the weekly magazine since a teenager, justified the high purchase price telling The New York Times November 23, 2015 “If you have a distinct journalistic offer, which is independent; if you have a readership, which is growing in the world…. and if you have the technology that can help you reach them…. the combination of that, if well executed, is pretty powerful.”

The unique value of The Economist, which numerous web based rivals are yet to disrupt, is summed up in a quote from Eric Schmidt, Executive Chairman of Google, on the magazine’s website: "Life without The Economist would be life without a global perspective." 

(Ignatius Chithelen is manager of Banyan Tree Capital, New York.)