The smart money is backing print – so why is Pearson flogging The Economist?
In selling The Economist, Pearson might well be flogging the wrong assets at the wrong time, says Matthew Lynn.
First the Financial Times was sold off. Now it appears that Pearson is about to sell off The Economist too. The media and education conglomerate is radically reshaping its portfolio to dispose of its upmarket media brands in order to focus on its education business instead. No doubt the City will encourage this. The prices achieved for the assets will be excellent, and will flatter the balance sheet.The trouble is, Pearson might well turn out to be selling the wrong assets at the wrong time as I'll explain in a moment.
Selling its global brands
There had been rumours flying around for years that the FT was up for grabs, but last month it was finally sold. Japan's Nikkei paid a handsome £844m for the pink newspaper far more than most followers of the company had expected, and a rich price given that the FT barely makes any money. There was, however, plenty of competition for the asset, with Axel Springer of Germany in the running right up to the last minute, and with several other potential buyers, such as the American data giant Bloomberg, probably lurking in the wings as well.
Now it seems that The Economist is likely to be sold off as well it may well have happened by the time you read this. The De Rothschild family and Italy's Agnelli family look likely to pay £400m for the 50% stake that Pearson owns. Again, it is a rich price to pay for a magazine that, while profitable, is stuck in what looks like an "old media" business. No one else out there is investing in anything as old fashioned as a print magazine so it may well seem like a good time for Pearson to be getting out of the business.
It is also hard to believe that Pearson will hang onto Penguin books much longer. In 2013, it merged the publisher with Random House, owned by Germany's Bertelsmann, and now owns 47% of Penguin Random House, the world's largest mainstream book publisher.
But since Pearson seems to be in full-scale retreat from consumer businesses, even relatively upmarket ones such as Penguin, it is hard to believe it will keep it. It could easily sell to its German partner or the whole thing could be spun off and listed separately, or sold to a third party.
After all that, Pearson will be purely an education and professional publishing company, with most of its focus in North America. There will be plenty for shareholders to like about that. It will be a farmore streamlined company, and it won't have lots of messy shareholding structures, as with The Economist. And shareholders won't have to worry about digital business models, or watch their dividends being diverted into experimental and risky new ventures.
Is Pearson making a wrong call?
The trouble is, it may prove a big mistake. Mainstream consumer media may already have endured its most intense period of disruption from the internet, and could well now be coming out the other side. The FT has already built up an impressive online business. It has more than half a million digital subscribers, and its digital readership is so far ahead of its print circulation that it may be able to close down its expensive presses in the next few years.
The Economist is a powerful global brand, and one that makes money its well-heeled, fact-hungry readers show very little sign of abandoning it for the free information on the web. Indeed, with so much stuff out there, its ability to distil the week's essential news into a couple of hours' reading may be more valuable than ever (much like this magazine).
Around the world, there is growing evidence that people are willing to pay for news again. The New York Times now has more than a million paid subscribers. Smart money is starting to move into newspapers Jeff Bezos, the founder of Amazon, bought the Washington Post, and Warren Buffett has been buyinglocal papers. Neither of these men are fools. The bad years may beover and if they are, there could be a lot of growth ahead for the survivors.
School's out forever
The education industry, by contrast, may only just be facing the beginning of digital disruption, with the future very uncertain. What kind of teaching do we need oncewe are plugged into our smartphones all the time and the best minds in every subject can be found on the internet? Will we still need expensive printed textbooks, or even expensive digital courses or will peer-to-peer networks replace them? No one really knows. But it seems very unlikely that the industry won't be disrupted by the internet and which players are left standing once that process gets started is anyone's guess.
The brands that Pearson is sellingare unique. There will never beanother FT or Economist, no matterhow much money you pour intostarting one up. These are world-class properties it takes decades to createthat kind of authority and reputation. The brands that Pearson will be leftwith are perfectly good at the moment, but is hard to see anything uniqueabout them. So while Pearson isgetting a good price for its assets, shareholders may end up regretting selling them both.