After The Guardian and The Observer announced its ‘digital-first’ strategy the other week, which I, like Kevin, see as a burning platform admission, Alan Rusbridger went on Radio 4’s Media Show (MP3) to talk about the situation. Listening to the interview with half an ear open, one would hear a very calm, measured response from Rusbridger that would seem to make an awful lot of sense. But listening more closely, I heard a lot of statements that worry me, because they don’t seem to jibe with reality at all.

The Media Show’s Steve Hewlett started off by asking whether there really is a cash crisis at the Guardian, and Rusbridger replied:

It was a kind of, sort of, pre-crisis moment so we don’t want to get to that crisis. We were saying that if we did nothing and continued as we were, it wouldn’t look too good. We actually wouldn’t run out of money because we’ve got lots of investments in other things, but we would run out of the cash reserves that we have.

For a long time, The Guardian Media Group’s cash cow was actually Autotrader, of which they sold 49.9% in 2007 for £674m. At the time, the Independent reported:

Carolyn McCall, the chief executive of GMG, said: “The basis of all our investment is creating a sound financial basis for The Guardian. It’s all about the long-term security and independence of The Guardian. It’s a great position to be in.”

GMG is owned by the Scott Trust, a not-for-profit organisation set up to safeguard The Guardian “in perpetuity”.

Ms McCall said the money would be spent “very wisely and carefully over a very long period of time”, suggesting perhaps 50 or 60 years.

But “wise” and “careful” are not words that one could use to describe the next big deal GMG did, which was to buy the debt-laden Emap in 2008 with private equity firm Apax re-valuing the deal less than two years later:

GMG and Apax bought Emap for £1bn in 2008 but the business has been squeezed by the recession and weakened by a high debt burden which costs £50m a year in interest payments.

[…]

Apax has written its investment in Emap down to zero and, while GMG has not yet followed suit, it is expected to review its valuation in the next few months.

Emap has £700m of borrowings and GMG had to inject “an undisclosed amount of new cash” in Jan 2010. GMG has now written off about half of its investment in Emap, but they can’t write off the whole lot like Apex did because that would blow a hole in its balance sheet and no one wants to torpedo their own ship.

Furthermore, from Oct 2010:

Emap, the magazine, data and exhibitions business, has reported a 4% year-on-year fall in operating profit to £52m in the first half of 2010.

The company, which also reported a 4% fall in revenue to £135.5m in the first six months, said the results were “primarily due to uncertainty in the UK public sector”.

Emap’s profits continue to fall:

Emap has reported a significant fall in pre-tax profits in 2010, as government spending cuts hit revenues in its magazine publishing and conferences division.

The business-to-business publisher, which owns titles including Retail Week and events such as Cannes Lions, reported pre-tax profits of £27m for the 12 months to 31 December, according to accounts made available on Friday.

This is not a recipe for success: Emap will now struggle to cover the interest payments on its debt, and any profits from Autotrader are “ring-fenced to repay debts“. Whilst GMG has money in other investments, it’s not clear whether they have already had to raid those funds to keep going, or even whether there’s enough liquidity there for those investments to be useful.

So whilst Rusbridger is right that GMG has investments in other things, that’s not necessarily a reason to be relaxed about its finances. In 2009, The Guardian was burning £100,000 a day and reported an operating loss of £36.8m. In June’s announcement, their operating loss is stated at £33m, a reduction of just £3.8m.

“So it’s not a crisis,” Rusbridger continued, “but the point of the talk was to say that we have to do things before we get to a crisis.”

If the above doesn’t look like a crisis, then I don’t know what does. I have a lot of friends still at The Guardian, and the mood on the ground amongst many of them is that the sense of urgency one might expect to feel internally is entirely missing.

Hewlett later brought up the decline in advertising revenue, the fact that circulation is down 12% year on year, and the above mentioned cash losses of £33m. Rusbridger responded:

The big picture for the whole of the press, the whole of the market is going away at about 8%, and the Guardian is completely in line. Classified advertising has largely gone, and I don’t think that will come back and as circulations decline across the market, of course advertisers say, “Well, we want to pay you less,” and you just don’t want to get into that spiral of decline that we’ve seen in a lot of American newspapers where they then respond by viciously cutting back editorial costs, and then you have something that’s less readable and you’re in some sort of death spiral.

Everyone knows that classified have tanked, but during a recession recruitment advertising also tanks. The problem is, many of The Guardian’s pull-out sections, such as media, tech or public sector, are/were reliant on recruitment ads. Now, you’d think that with a subject like tech, where The Guardian had an excellent reputation and a great editorial team (and I say that not just because I used to freelance for the tech section), there would be plenty of opportunity to widen out the advertising from recruitment to display ads, sponsorships, events, etc. But that’s not what happened.

In 2009, The Guardian wiped out the tech section’s freelance budget and in December of that year they stopped printing tech as a standalone section. Commercial seemed to have no Plan B for the collapse of the recruitment ad market and instead of looking for one, the tech section was radically reduced. Towards the end of 2009 and through the first few months of 2010, The Guardian offered some very attractive voluntary redundancy packages and the majority of the tech section staff applied and were granted redundancy. (Disclosure: Kevin accepted voluntary redundancy from the Guardian at the end of March 2010.)

We know that focused verticals do work in digital — just look at GigaOm, TalkingPointsMemo, Engadget or AllThingsD (a sub-brand of the Wall Street Journal). They’re are doing pretty well, because they are developing key niches and are able to aggregate focused audiences who are primed for ads, but those ads have to be the right sort. General ads aren’t going to fund specialised sections, but if commercial won’t get their heads round what the right sort of ads are and then go out and get them, there’s no hope. Ads are, of course, only part of the revenue equation, but the same holds true for events, sponsorship and premium content.

This is exactly the same discussion I had with Computer Weekly, and it’s a fundamental problem that news outlets need to deal with.

The story is much the same as the Media Guardian, where arguably they had an even more bankable brand. And even with new ventures like Guardian Local, where they created great new products in three different cities and yet couldn’t capitalise on the skill of their journalists or the audiences they built.

In short, this is exactly the sort of editorial self-immolation that Rusbridger says he wants to avoid. But if you can’t capitalise on smart editorial staff and a passionate audience, what are you going to capitalise on?

Hewlett went on to ask Rusbridger about the announcement that sparked all this off: “How is digital first different to what you do now?”

Print is tremendously consuming of resource and time and energy and also the way that you think about things. So if you come in on the morning and your main concentration is on this huge thing that you’ve got to produce at the end of the day then that is going to dominate your thinking. The thing where all papers are exposed is in the innovation and the resources that we need for digital and the blunt truth is that we don’t have enough developers, we don’t have enough people who know about mobile, who know about Flash and data and multimeida so we need to get more of those and we need to spend more of our day thinking about those forms of our journalism.

Two points to make about this: Firstly, the attitude amongst some printies at The Guardian still leaves a lot to be desired. I saw in response to Kevin’s previous post a comment on a non-journalism forum somewhere on the internet from someone who said they worked as a print journalist on The Guardian. I’m not interested in pointing out who this person is, but I am going to paraphrase their stated position:

The website isn’t the newspaper. The website might be popular but it’s about being fast, about being the first to get a story up, and the standard of writing is pretty poor. In the newspaper, though, the writing is much better, probably the best in the industry.

Rusbridger needs to address the print-first attitudes, because print-first thinking results in print-first doing. He had an opportunity to shift towards digital thinking when The Guardian reworked its CMS, but instead of a digital-first system the one they ended up spending £18m on a new web CMS but with a workflow that is still print-first. Even now, even with The Guardian’s great web presence, they still have problems doing basic things like adding URLs to stories.

As for stocking up on developers and journalists with digital skills, well, The Guardian used to have some great digital journalists, but many of them have now gone. The former desk editors of Guardian.co.uk like Deborah Summers (politics), the people who either did digital journalism on the ground, like Kevin, or the people higher up the food chain who had a pretty good handle on how digital was affecting the news landscape, like Emily Bell, have moved on. From top to bottom, the digital folk have either taken redundancy, been pushed out or edged aside.

Furthermore, with lots of the digital talent and the experience they had developed gone and a culture that is still defined by print, the chances for those who remain, and those who have yet to join, to progress into senior managerial positions decreases. The Guardian, as all other news organisations, needs people who truly understand digital in senior positions, but without a pool of talent to promote, they just aren’t going to get that. Indeed, I’d say The Guardian has suffered a significant digital brain-drain and it’s going to take 10 to 15 years for digital folk now to penetrate the higher levels of management.

Rusbridger continued:

We need to get more developers in, so we need all of these people with digital skills, and we’re losing money so we need to reduce the cost base, so yes, we will need to lose some people and we’ll try and do it in a voluntary way, but we need to end up employing fewer people than we have at the moment.

At this point, it’s worth noting that The Guardian has had at least three waves of cuts over the last four years. This will be its fourth round, with more than 300 positions cut, and yet it still only managed to reduce its losses by £3.6m a year?

The final part of this interview I want to address is The Guardian’s new foray into American waters. This is their third attempt to crack America and I find the reasoning quite bizarre. Rusbridger once more:

The UK market is too small, really, we can’t grow very much more here, it’s a fairly mature market. Meanwhile, there is a huge appetite for what we’re doing in America, where now a third of our readers are, and so far we’ve done it with virtually no marketing and a tiny staff, so we think it’s not a ‘nice to have’ but essential that we cater for that market.

Firstly, the idea that the UK market is saturated is strange. We know that general news is hard to monetise, but niche markets can do pretty well, yet in terms of products produced by The Guardian’s key editorial teams, they have barely scratched the surface. As I mentioned earlier, there’s no paid tech product of which I am aware, despite the fact that this is an area where The Guardian could do really well.

Common news business models fall into some pretty discrete categories:

• Eyeballs: You aggregate an audience and sell access to that audience to advertisers and sponsors.
• Information: You provide information that people can use to make money or make decisions.
• Access: You provide access to data, people, networks, etc. which allow people to make money or make decisions.

The tech industry is really very good at exploiting all three of those basic business models but with much of the activity focused on the US, The Guardian could have used its brand to prise that UK market wide open. It didn’t. Media markets are also quite geographically specific, and again, the Guardian could have dominated that market, but didn’t. So the idea that the UK market is so mature that there’s no room for expansion here is a nonsense.

Secondly, the idea that the US market is easier because it is bigger would be a terrible premise for an expensive expansion. There may be a market there, but the monetisation should come first, before the new office and staff. As it is, by opening an office and moving a few people across the Atlantic and hiring 20 to 30 reporters and editors, The Guardian pushes its break-even point much further away than it needs to. The stakes will be high in an endeavour not well augured by its forebears.

The Guardian already tried Guardian America, with a site focused on American content with American ads, and that closed in October 2009 due to “continuing changes in the distribution patterns of web content”. Why will this new venture be more successful? And what will the business model be? As American news outlets know, making money of general news over there is just as hard, if not harder, than it is here, so The Guardian will need an innovative niche strategy. ‘America’ is not a niche, not over there, anyway. And ‘Europe for Americans’ is likely to be equally tough thing to turn into a product. They are also launching the project in New York, already at the centre of a New York Times, Wall Street Journal and Huffington Post battle. Do they have the resources, much less the stomach, for such an epic media battle?

I have fond memories of The Guardian as the paper I always wanted to read, the paper I always wanted to write for, not to mention the paper that got me my first ever job. Indeed, The Guardian also gave me my first major freelance commission outside of the music press and I would have been happy to write a lot more for them had circumstances allowed. I don’t want to see it fail, and I don’t want to poke it with sharp sticks for the sake of it. But I am worried that Rusbridger is a visionary lacking in business sense, clarity and a firm grip on reality. If The Guardian is to survive, it needs someone who can lead it with a clear, commercial head. I’m not convinced Rusbridger is that person.