Seattle Post-Intelligencer to Raise Newspaper Price Back to $1

Case Type: business competition; improve profitability.
Consulting Firm: Roland Berger Strategy Consultants first round summer internship job interview.
Industry Coverage: publishing, mass media & communications.

Case Interview Question #00638: Our client The Hearst Corporation is an American mass media group based in the Hearst Tower, Manhattan in New York City, New York, United States. As a major media conglomerate, the company’s holdings now include a wide variety of media, with radio stations, magazines and newspapers throughout the US.

Hearst is one of the largest diversified communications companies in the world. Its major interests include 15 daily and 38 weekly newspapers, more than 300 magazines around the world, 29 television stations through Hearst Television Inc., as well as business publishing, Internet businesses, television production, newspaper features distribution and real estate.

Hearst Corporation has five major newspapers in five important metropolitan areas. Its oldest newspaper, Seattle Post-Intelligencer (popularly known as the Seattle P-I, the Post-Intelligencer, or simply the P-I), circulates in the Seattle, Washington metropolitan area. After 50 years of great profitability and steady market, early this year Seattle Post-Intelligencer saw a strong decrease in both market share and price.

The CEO of The Hearst Corporation has hired our consulting firm to help understand the new market dynamics and determine what strategy should be taken next. The CEO is also expecting us to provide advice on whether he should increase prices for the Seattle Post-Intelligencer. How would you go about addressing this question?

Suggested Approach:

This is a typical profitability and business competition case for which one single framework won’t be enough. The interviewer was expecting you to look at the big picture and then start thinking about the profitability issue — both cost and revenue — and asking for specific information. A strong candidate would have to arrive at the following set of conclusions:

• The new competitor targets a total different market from our client; this signals that there is an additional market that our client could consider exploring.
• The new sales price is below the cost per paper; however, our client should look at the potential for advertising revenues. These should subsidize the uncovered cost of each paper.

Additional Information: (to be given to candidate if requested)

• Market Share: for over 50 years The Seattle Post-Intelligencer newspaper had split the market (50-50) with a strong, but independent local newspaper The Seattle Times. The two are well recognized for their news quality.
• Earlier this year, another newspaper entered the market, building a 50% market share in less than nine months and leaving the two former newspapers (The Seattle Post-Intelligencer, The Seattle Times) with 25% market share each.
• Although the two major newspapers had dropped their prices to match the new entrant’s, this has not been enough to recapture the loss in market share. The new competitor is recognized as providing lower quality news than the former two players.
• Newspapers generate revenues from sales of papers as well as from advertisements.
• There is a high fixed cost to operating a newspaper, which might be classified as sunk cost.
• Currently none of the players offer subscriptions.

Possible Solution:

Interviewer: So, how would you go about this case?

Candidate: I’d like to understand a few things first in order to evaluate this market, especially what, if anything, has changed from last year.

• To this end, first I’d like to explore the current market demand for newspapers in Seattle.
• Then, I’d like to understand the competitive landscape.
• Third, I’d like to discuss any changes to our client’s management or internal processes.
• Finally, since we’re dealing with a profitability issue here, I’d like to explore both the revenue and the cost side of the business.

Interviewer: That was a long list of things. Where should we start?

Candidate: You said that there had been a decline in our client’s market share, so let’s take a look at the competitive landscape. How has the market share of its competitors changed?

Interviewer: For over 50 years The Seattle Post-Intelligencer has split the market with a strong but independent local newspaper called The Seattle Times. The two are well recognized by their news quality.

Candidate: Do they still split the market?

Interviewer: Early this year, another newspaper entered the market, capturing 50% of the market in less than nine months and leaving the two former newspapers with 25% market share each. Why do you think that this happened, what factors are at play?

Candidate: The new competitor must be offering either a better product or a lower price point. What do we know about the sales volumes and prices?

Interviewer: These are the numbers. What do you think?

Candidate: Interesting, actually our client The Seattle Post-Intelligencer and the former competitor The Seattle Times have increased sales volume with the entrance of a new competitor. I would imagine the new competitor is offering a different product or targeting a different market niche.

Interviewer: That is correct. Although our client The Seattle Post-Intelligencer has dropped its price to match the new entrant’s — and the other major competitor The Seattle Times is always following it — this has not been enough to recapture the loss in market share. The new entrant is recognized for offering a lower quality newspaper. So, how would you explain that?

(The Candidate should have noted the change in price and identified that this may be why there has been an increase in demand)

Candidate: Well, there are some reasons that I can think of that might explain this phenomenon:

• After the two major newspapers dropped their prices to match the lower price of the new entrant, some of their readers could afford purchasing the two papers.
• Alternatively, potential newspaper readers who could not afford the $1 newspaper can now purchase newspapers at 50 cents.
• The new competitor captured a new market niche, one that demands lower quality news.

Sales revenue was 2,000 * $1 = $2,000, but now it is 2,500 * $0.5 = $1,250. This represents only 1,250 / 2,000 = 62.5% of previous sales, or a 37.5% decline in newspaper sales. I don’t think that a newspaper would have such a high profit margin as to cover this decline, let’s look at Profits = Revenue — Cost. To do this I need to understand the per newspaper costs.

Interviewer: OK, here is the data we have.

* There is a cartel for distribution

Candidate: So after the new competitor entered the market, our client has $0.01 * 40 + 40% * $0.50 = $0.60/paper in costs, which is greater than the sales price of 50 cents. The new competitor, on the other hand, has 20 * $0.01 + 40% * $0.50 = $0.40/paper in costs, with a $0.10 margin over the variable cost per newspaper. Are there any fixed costs we should be considering or are these considered to be sunk costs? I would expect some heavy costs in this side.

Interviewer: Yes there are, but they are sunk. However, I can tell you that our client The Seattle Post-Intelligencer is still making a profit, despite the numbers that you just calculated. How would you explain that?

Candidate: Besides newspaper sales, I would expect that a newspaper generates revenues from advertisements and online. We should also consider the balance between subscribers and newsstand sales. Do you have any information?

Interviewer: Yes and no. Actually neither our client nor its two competitors offer subscriptions. They do not have online news either. Let me give you the daily ad revenues. Any thoughts?

Candidate: Clearly the new competitor has not impacted the two former players’ advertisement revenue. It has also not been able to generate any revenue with ads. How come? I also would want to consider that with the expanded customer base, why there has not been also an increase in advertising, since I would imagine advertisers pay per reader.

Interviewer: Usually companies split their budget of ads among the different means of communication that reach out to their target customers. So?

Candidate: We can conclude that the new competitor has created a new market segment.

Interviewer: That is correct. So, let’s say you will have a meeting with the CEO in five minutes, what would you recommend him to do? What will be your strategy?

Candidate: I will tell him that he should raise the price of the newspaer, perhaps back to $1. Some reasons are:

• The new competitor is not a direct competitor; it has created a new market niche of people who cannot afford to pay $1 and reads a totally different kind/quality of news.
• A price of $0.50 is not feasible in the long run for any of the players due to the high fixed cost.
• As our client already mitigates the high fixed cost, the CEO should think about creating a new product (newspaper) focused on this new market niche. The new product should be totally independent and oriented to this market. In the worst case scenario they would make money out of printing (5,000 * $0.10) but could certainly convince its advertisers to direct part of their budgets to the new product.

Interviewer: Excellent! I think you did a great job. Thank you.