Twice a week I do a cycle tour of central London as my exercise.

I head down through the City of London, inhabited solely by security guards in masks.

I loop back through a criss-cross of streets until finally I reach the shopping mecca of Regent Street and cut left onto Oxford Street, which now makes an excellent cycle racetrack with only the odd bus to navigate around.

Almost a million people in the UK (3.5% of the working population) have applied for Universal Credit in the last 2 weeks.

Many hundreds of thousands more have been furloughed.

We are entering just week 3 of lockdown. We have at least 10 more weeks to go.

Advertising has been cut hard but there are still many cuts to come. Companies selling products that people can’t buy, ranging from cars to sofas, holidays to theatre, have slashed media spend to £0. Others must cut every variable cost in the coming weeks as they cling onto cash to survive.

This recession will be deeper and more brutal than 2007-8 but it is the best comparison we have.

Total advertising fell around 14% between 2007 and 2009. This doesn’t sound like a dramatic drop but for the operationally leveraged, high cost base world of traditional media it was a shuddering blow, many lost their jobs and the valuations of consumer media companies were hammered. reports that 20% of small businesses will run out of cash within 4 weeks without help. Chats with a few independent local businesses make me feel that there is more truth in this than I imagined. This alone will create a dramatic deflationary effect on the economy.

Does anybody have a reliable view of what will happen over the next few months? I think we are all in the land of hypothesis and guess work.

In this first post of the Covid-19 era, I am going to start with the companies that I believe are clear losers, at least in the short-term.

Make sure there are no sharp objects close to hand as you read on.

Operationally leveraged businesses dependent on advertising revenue must walk across hot coals.

ITV is one of the most exposed with its big and sticky channel cost base. When revenues rise, profitability soars but in bad times profitability is crushed.

In the 2008 recession, Michael Grade, then Executive Chairman said “Current conditions in the advertising market are the most challenging I have experienced in over 30 years in UK broadcasting… we are now implementing the plan needed to enable ITV to get through this difficult period and emerge as a leaner and fitter business.”

£150m of immediate cost cuts were implemented. More followed the year after. £65m came from programming budgets. Despite this, operating profits fell from £323m to £140m.

ITV’s advertising revenue in 2019 was around £1.8bn creating £462m (63%) of its £729m EBITA.

Another £1.8bn of revenue came from the Studios production business, which was assumed to be more robust in a recession. But at a time when programmes can’t be made, this division will also be hit hard.

If the economy does not return to some sort of normality soon, ITV’s profitability could rapidly evaporate. Cost cuts equalling or going beyond those of Michael Grade look inevitable.

The share price has already fallen by 2/3 this year. Without good economic news, it must fall further.

Sky already had the feel of last year’s slightly tired model before we ever heard the C word.

Then coronavirus wiped out Sky’s most valuable asset - the sporting calendar - for the foreseeable future.

Then Disney+ arrived to show every household that hasn’t already subscribed to Netflix what a powerful content archive really looks like.

Add in the increasing financial pressure that households across the nation are feeling and you can expect Sky’s churn rates, which were increasing beforehand, to rise dramatically.

Comcast’s $38.8 billion Sky purchase looks like an ego-driven error.

How will Sky viewing figures and subscriptions hold up? They won’t be pleasant viewing.

Annoying related winner: the Murdoch family. Rupert sold out just in time - with his habitual luck of the devil.

Do the big agency groups with their eclectic mix of creative, digital, and buying agencies make sense today? Covid-19 will intensify the pressure on every aspect of their business model.

Advertising buying agencies require scale of spend from big clients. Bar government, all clients will be making swingeing cuts to marketing spend. Creative agencies require grand projects with grand budgets – there will be almost none for at least 6 months.

Clients will discover that smaller, lower cost base providers are nimbler, more cost effective and transparent. Internal client teams will buy more of their own digital advertising, cutting out the middleman.

WPP’s EBIT margin, at 12% in 2019, is hardly above the level that it hit at the bottom of the last recession. The business is entering this deeper recession from a weaker position.

Unsurprisingly, CEO Mark Read is striking early to reduce costs. That means lots of redundancies in a business that remains dominated by people.

At times like this, debt can be deadly. WPP carries total borrowing of £6.76bn.

Recessions catalyse industry change. This may be a defining moment in the decline of the big agency groups as we know them.

Print Distribution

Will the news distribution system collapse?

This question has floated around the publishing industry for a few years. Now the question seems more ‘when’ rather than ‘if’.

SmithsNews (not to be confused with WH Smith) and Menzies own the industry, relying on the carriage fees to thousands of newsagents to stay profitable. Now many of those newsagents are closed, so the revenues disappear but many of the costs remain.

The profitability of these two businesses must be evaporating. Do they have the cash to keep going?

UK print distribution must be reinvented. Inevitably there will be yet more disruption to the newspaper and magazine groups, most of which remain heavily reliant upon newspaper sales to keep their businesses alive.

This will require the fractious publishing groups to coordinate. Will they have the coherence to achieve something more than a temporary fudge when also facing huge financial challenges?

The Newspaper and Magazine Groups

Sales of paid-for print newspapers and magazines in shops remain critical for the national and regional newspaper groups and for magazine companies.

Sales have fallen over a third in a few weeks as local shops have closed, purchase habits have changed, and the distribution system has struggled to get copies in the right places.

For local newspaper and magazine groups, with their particularly high exposure to advertising, there is a double whammy as page advertising and creative solutions pitches have evaporated.

Most magazine companies have been operating on the edge for some time with thin or negative margins even during the years of economic growth. This recession will force them to face reality – the need to close large numbers of magazines in a heavily oversupplied market, merge companies, fire expensive senior people and invest in the minority of brands that have coffee-table sustainability or a realistic digital future.

Newspapers? The 2007-2009 experience of Reach plc (then owner of The Mirror and The People and a portfolio of regional newspapers) gives us a view on the impact of a significant recession on a print-dominated news business.

Operating profit fell 68% despite cost cutting.

The senior teams of every newspaper group will be looking at every possible cost reduction and many regional and local news brands will close permanently in print. Local journalism will take another chop.

Fortunately, Reach is debt free but 78% of its 2019 revenues came from newspaper sales, print advertising and linked sources. The inevitable double-digit hits to both newspaper sales and advertising revenue will eat deeply into EBITDA margins, even though they currently stand at a healthy 19%.

News UK and the Telegraph have growing consumer subscriptions revenues but still face similar challenges.

Lucky escapes: Epiris private equity will be thanking the Gods they sold TI Media to Future at the end of last year. Recently appointed Reach CEO, Jim Mullen, has earnt his salary simply for walking away from the proposed purchase of JPI Media.

Coronavirus is an existential crisis for free print, a sector that I was closely involved in for a decade.

The sector has struggled to find a digital future. Even Time Out, with enormous investment and losses, has not succeeded and has pivoted wildly into food markets built upon the success of the remarkable Lisbon market created by its former Portuguese franchisee.

Metro and the Evening Standard struggle manfully on, distributing increasingly skinny editions. Stylist and Time Out have already suspended publication faced by streets with few commuters and an advertising market in freefall.

Will commuters and advertising confidence return in time?

Sadly, only Metro’s future in print looks secure.

Exhibition and Conference Focused B2B

“Our business is roadkill,” the CEO of an exhibition driven B2B business said to me a week ago.

Events are being rescheduled to the Autumn or next year. But do we believe that global industries will want to fly across continents, pack themselves into an exhibition space and then socialise in the surrounding restaurants and bars when viral infection still weighs heavily on everybody’s mind?

Just as communal office buildings like WeWork suddenly look a lot less attractive, so too does the concept of the huge, B2B exhibition.

This is a sector that seemed blissfully secure in a world of digital disruption. Private equity has invested heavily attracted by regular cashflows and many B2B companies carry large buckets of debt across their shoulders.

Informa has £2.85bn of debt. Tarsus, recently acquired by private equity, has plenty of financial leverage beneath the bonnet.

The combination of heavy exposure to live events and significant debt could be unpleasant.

This has been a mercilessly depressing post to write.

Businesses, brands and people I care deeply about face horrible decisions.

Next week will be more cheerful – the winners.

What have I learnt from writing the post?

  • Many domestic media companies face existential challenges far greater than those of 2008-9.

  • Media share prices still look over-valued to me and, I suspect, have a way to fall.

  • The challenging trends were often already there. But what was expected over 2 or 3 years has now arrived.

  • Management teams face an immediate crisis and must cut costs. At the same time, if they believe they can survive, they must reinvent their businesses for the aftermath.

Patting your head and rubbing your stomach at the same time is never easy at the best of times.