Why the Financial Times Has a New Owner
It's easy to understand why London-based Pearson got rid of the Financial Times, even though the newspaper -- I should probably say the "website and app family" -- is much better known than its parent company. Despite one of the most successful digital transitions among what the kids call legacy media, the FT has stopped making money for Pearson. And what with the ongoing technological revolution in the education business, the company needs cash more than it needs the FT's prestige.
Back in 1999, when I became the editor of Vedomosti, the FT's Russian joint venture with archrival the Wall Street Journal, here's how Pearson's annual report presented its business:
The Financial Times Group was at the center of this scheme, and Pearson Education, which produced textbooks and teaching aids and designed educational programs, was down in the lower right-hand corner. That didn't quite reflect Pearson's revenues -- 52 percent from the education business and 20 percent from the news organization -- but the FT was still the flagship, Pearson's strongest global brand.
What's more, the FT Group contributed a third of Pearson's operating profit, more than any other division. It was a goose that laid golden eggs. Both subscription and advertising revenue showed strong growth. The Internet was on everyone's mind, of course, but FT executives thought they could keep ft.com free for readers. (That was a major ideological difference between them and their somewhat wary partners in our venture, the managers at Dow Jones, who were even then experimenting with paywalls.)
Just 15 years later, in 2014, Pearson's annual report no longer broke out the FT Group. Its first mention came on Page 25, with no financial results disclosed. The report said only that the FT had 720,000 digital subscribers, and that amounted to 70 percent of its paying audience.
That is a remarkable achievement, however.
A standard online subscription to the Financial Times costs 5.35 British pounds ($8.30) per week. All kinds of discounts (such as those for corporate clients) probably bring the annual subscription price down to $300. Assuming the subscriber base in 2014 was about 600,000 (the mid-point between its size at the beginning and at the end of the year), that would mean $180 million in digital subscription revenue -- more than the $169 million the New York Times extracted last year from its much bigger base of 910,000 paying subscribers.
Yet that wasn't a big source of joy for Pearson. In 2012, the last year the FT Group's revenues were reported separately, the news operation contributed just 6.9 percent of Pearson's revenue and 2.7 percent of its adjusted operating income. The FT Group's adjusted operating profit was down to just 22 million pounds -- insignificant, especially as the education business boomed. Pearson now runs for-profit colleges and has made a big push into online courses; it's a high-tech education conglomerate, not merely a publisher, as it was in 1999. In the past five years, the e-learning industry has grown at a 9.2 percent annual rate, while the news industry has struggled to replace its legacy revenue streams. No wonder Pearson sees its future in education, not news. Its capital expenditure in 2013 and 2014 was all in the education business, and its need for capital has been growing.
The deal with Nikkei fills that need. Pearson will receive 844 million pounds ($1.3 billion) in cash for the FT, 38 times the FT Group's 2012 operating profit, and it will get to keep its 50 percent share of The Economist, which, with only a slight stretch of the imagination, can be described as an educational product. All in all, a good trade for the FT's prestige.
It's the prestige that Japan's Nikkei, the paper's new owner, has acquired. The biggest media group in Japan, a private company, Nikkei doesn't have a stellar reputation among journalists: It's said to be too soft on the Japanese corporate establishment. You can get a flavor of its kind of business journalism from its English-language Asian Review. Many of the stories read like press releases, and the FT probably wouldn't have run them. Although Nikkei President Tsuneo Kita says the "philosophy and values of the FT are exactly the same as ours," he must be aware of the quality difference. Owning a flagship like the FT should ease Nikkei's planned international expansion: It'll make it easier to talk to politicians and regulators, hire journalists and establish relationships with advertisers.
Despite the FT's successful effort to transform itself -- it's ridiculous to apply the word "legacy" to the smoothly running, fast-paced digital product that is today's FT -- the paper hasn't been acquired for its business potential. Nevertheless, Financial Times staffers -- and to some extent my former colleagues at Vedomosti, since a 33 percent stake in the Russian business news outlet will now pass to Nikkei -- can take heart that the acquisition isn't the philanthropic act of some Internet billionaire who likes the FT's journalism but may soon become disenchanted. The FT has built a news business that feels right in the 21st century, and it did so within a company that hasn't been interested enough to invest in it. Nikkei is likely to show more enthusiasm for its new global icebreaker. I, for one, expect more bang for my subscription dollars.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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