Newspaper Competition in Hong Kong

This is a selected translation from the front-cover story in the July 14, 2005 edition of Next magazine.

The latest development is the entry of a free newspaper Headline News from the Sing Tao Group, with a daily distribution of 400,000 copies.  Another free newspaper AM730 is scheduled to begin in August.  What are the economics behind these newspapers?

The reason for the interest in free newspapers is the example offered by the existing free newspaper Metro.  That newspaper began its existence in April 2002.  According to the annual report for the Sweden-based parent company Metro, the newspaper began to be profitable 14 months after it started and was one of the most best Metro performers around the world.

Although Metro does not break out its Hong Kong figures, the assumptions are as follows:

Compare this against the financial performances of some of the publicly held newspaper groups in Hong Kong:

Newspaper group Market value Revenues Profit/loss Flagship newspaper (circulation)
South China Morning Post HK$5.31 billion HK$1,375 million HK$317 million South China Morning Post (95,000*)
Oriental  HK$5.22 billion HK$2,020 million HK$301 million Oriental Daily (~400,000)
The Sun (~75,000)
Next Media HK$5.12 billion HK$2,930 million HK$104 million Apple Daily (340,000*)
Sing Tao HK$697 million HK$1,440 million HK$4.7 million Sing Tao (40,000)
Ming Pao Enterprises HK$647 million HK$1,170 million HK$40.2 million Ming Pao (94,000*)

 * Audited by the Hong Kong Audit Bureau of Circulations

The assumptions for Headline News are as follows:

Please note that there are some differences between Metro and the latecomers.  When Metro arrived in Hong Kong in 2002, they obtained the distribution rights within the MTR stations for three years.  Since then, the contract has been renewed for another five years until 2010.  There are three advantages for Metro to be able to get into the MTR stations.  (1) There are only about 50 MTR stations in all, so the shipping costs are less.  (2) The readers are locked in as people who go to work every weekday morning, and this allows the advertisers to know how to appeal to this target group.  (3)  For the readers, it is a simple matter to pick up the newspaper near the subway entrance, read the newspaper during the ride and then toss the newspaper into the collection box at the exit.

By comparison, Headline News and AM730 will not have those advantages.  So they will have to be distributed in person at several hundred locations, such as residential estates and major traffic hubs, thus incurring higher shipping and labor costs.  This also means that students, housewives, retirees and anyone else can get a copy, and this makes the target group more diffuse.  According to an ad agency executive, "Most advertisers prefer to send their advertising messages directly to the target customers.  Thus, an athletic shoe manufacturer would rather have an outdoor board in Causeway Bay to attract the young customers rather than advertise in newspapers."  

Another advertising worker said: "There is tremendous competition between Apple Daily and Oriental Daily.  If Oriental Daily finds out that Apple Daily has an advertiser, they will offer a package of both Oriental Daily and The Sun.  And if Apple Daily finds out that Oriental Daily has an advertiser, they will cut their rates.  The other smaller newspapers are forced to follow suit, and this causes a vicious cycle of competition.  Right now, Sing Pao and Xin Pao are only asking for HK$30,000 per page and they still don't have customers; they can't go any lower, because that is what it costs them."

The battle among Metro, Headline News and AM730 is a test of patience to see who has more money to 'burn.'  Metro is supported by its parent company and has accumulated enough profits in its war chest; Headline News is supported by the Sing Tao group; and AM730 is funded by a real-estate mogul.

No matter what, this battle will cause tremendous damage to the newspaper vendors.  Presently, if a distributor brings the newspaper to the vendor, the cost is HK$4.30; if the newspaper vendor picks it up from the distributor, the cost is $3.70.  The newspaper is sold at a nominal price of HK$6.00, and the difference is the profit for the vendor.  The newspaper vendors face competition from the convenience stores (such as Seven Eleven and OK), and they may have to offer plastic bags and paper tissues to customers in order to compete.  The newspaper vendors have also agreed that they will slash the prices to HK$5 at noon in order to sell more copies, but that also means that some customers will look at their watch and show up right after noon.  One vendor said, "It is a better living to sell wonton noodle soup than newspapers."

Some newspaper vendors have decided to abandon their news stands and take up itinerant street vending (i.e. no rent): they reduce their prices to HK$4.50 per copy and they will sell just enough to get meal money.  An official with the Newspaper Vendors Association said, "In places like Cheung Kwun O with many young families, many people get their news from the Internet or mobile telephones, so that newspaper sales have fallen.  With more free newspapers now, sales will fall even further."