The Guardian has recognised that it must invest in technological innovation if it is to create social justice in the 21st century
The extraordinary and unrelenting pace of change across the media and technology industries means that Guardian News & Media (GNM) is facing both enormous commercial and organisational challenges and opportunities.
A decade ago, innovation for the Guardian was largely based around projects such as the redesign of the paper or the launch of a new section, with the internet only just starting to show its potential.
Now the company is dealing with platform proliferation, the acceleration of social media, increasingly sophisticated data technology, as well as the globalisation of information and new multimedia competitors.
Yet at the very moment when significant investment is needed to make the most from the opportunties arising from the rapidly changing media landscape, GNM is under intense financial pressure, caused by economic austerity and the continued decline in traditional newspaper revenues.
In common with most other newspapers, circulations are in long-term decline and paper costs are continuing to rise.
Revenues have also been hit by the general economic malaise as well as by the contraction of the public sector, which has affected advertising in the Guardian particularly hard, especially in recruitment.
Financial results for the year ending 3 April 2011 showed that revenues at GNM fell to �198m from �221m the year before, reflecting a sharp fall in classified advertising revenue.
Recruitment advertising alone has fallen by �41m in the past four years; while thew operating loss before exceptional items in 2010/11 was �38.3m.
Andrew Miller, chief executive of parent company Guardian Media Group and executive chairman of GNM, says if GNM were to carry on with business as usual, then GMG would use up its near �200m cash reserves and investment fund within three to five years, though he makes clear that further funds can be realised from the wider portfolio.
Miller says his chief aim is therefore to secure the financial sustainability of the Guardian, arguing that it will not be able to perform its core purpose of holding power to account and seeking social justice if it does not have the necessary resources.
Miller has a simple definition for what he means by sustainable: "Confidence that, for the foreseeable future, returns from our portfolio of assets will fund the cost of our journalism and allow for further investment in its development."
The Guardian has always prided itself on the fact that ownership by the Scott Trust allows it to behave differently than publicly-owned media companies that are beholden to shareholders, who often have short-term aims.
For example, when the dot.com bubble burst in the early years of the development of the web, the Guardian continued to invest in its own digital enterprise at a time when many others either pulled out or reduced their operations.
Miller sees a similar approach in the years ahead. He points out that while many media companies both in the UK and overseas have responded to the current financial pressures by shrinking their ambitions and their journalism, he is taking GNM on a different course by recognising the importance of investing in order to benefit from emerging new technologies. That means losses will continue to grow in the short-term but with the aim of achieving a sustainable cash outflow within five years.
However, Miller recognises there is a window of opportunity and that if the company fails to turn its commercial fortunes around, then it will have no choice but to shrink further. He says: "If we are not successful in transforming the organisation in the way we would like, we will need to cut overall costs."
To avoid this, the organisation needs to go through a profound reorganisation to become a digital-first company, which will see resources moving away from both the Guardian and Observer newspapers to the digital expressions of our journalism.
Miller also recognises that GNM needs to sharpen its organisational structure by becoming more nimble, better at developing and implementing strategic objectives, and more commercially focussed.
While some costs will need to be taken out of the business ? �25m over the next five years ? plans are for the editorial budget for the Guardian, Observer and guardian.co.uk website network to remain broadly unchanged in the financial year ending March 2012 and the following year.
However, any new initiatives ? such as the planned move to create a US digital edition in the latter part of 2011 ? will have to be paid for from existing budgets. The Guardian, Observer and guardian.co.uk employ approximately 1,500 staff across all departments and 630 journalists.
In a presentation to staff outlining the road ahead, Miller said that the aim is to lift digital revenues from an expected �47m in the current financial year to �91m in 2015/16.
To help achieve these goals, Miller has brought GMG and GNM closer together, so that GMG is putting all its effort and attention on the core business, rather than in the past when the focus was also on managing the other businesses in the group.
The other companies in the portfolio are now managed as arm's-length investments but will, however, remain vital in providing the resources necessary to fund the Guardian's journalism.
In fact, the very purpose of GMG investing in businesses such as Trader Media Group and Emap is to meet the Scott Trust's purpose of supporting the Guardian "in perpetuity".
While in the recent past, the Guardian's losses and investment needs were amply covered by the profits made elsewhere, the scale of support those companies can now offer has been somewhat reduced, and the Guardian's losses have increased significantly.
The struggling regional newspaper division, which used to contribute significant annual profits, was sold as those profits fell away. Emap, in which GMG has a 30% stake, is being affected by some of the same pressures that the Guardian is facing and it will take longer than originally expected to pay down its debt.
Trader Media Group (TMG), however, continues to be the jewel in the crown of GMG's investment portfolio, recording record profits in 2010/11 following a successful transition from print to digital.
However, while GMG has recently taken a dividend from TMG following a refinancing, it will not make a full return on its investment until a sale or flotation.
Miller says: "The way in which private equity works in relation to TMG and Emap is not unlike a mortgage on a house. You buy using some of your own capital plus money borrowed from a bank. Over time you reduce the amount of debt by paying it off, and hope that improvements made by you and external market conditions increase the overall value. When you come to sell, the reduced debt level and increased overall value results in a profit for you. But this profit only comes when you sell."
Source: http://www.guardian.co.uk/sustainability/sustainability-report-2011-business-strategy
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