Sport Media Group Increases Revenues

Stephen Yagielowicz
LONDON — Springtime is bringing with it continued signs of a thaw in the adult marketplace, with the latest good news coming from U.K.-based Sport Media Group.

Publishers of the Daily Sport and Sunday Sport newspapers, as well as related online and mobile properties, Sport Media Group (SPMG) has announced its earnings for the period covering the past 17 months — perhaps the most difficult economic time in the history of the adult entertainment industry — as well as most other media markets.

Punctuated by technological change, shifting market demands and a global economic crisis, this period saw the widespread dwindling of profitability, heavy cutbacks and the often-outright cessation of operations among a variety of publishers. Positive results from cost-cutting and other measures combined with increased consumer sales, however, have brought other companies back from the brink — including SPMG.

A publically held company, the most recent public financial statement by SPMG cites no final dividend but claims "a much improved performance at the underlying profit level" for the five-month period ending in December 2009.

"It was a dramatic period for Sport Media Group, and also encompasses much of the recent crisis period for the British economy," SPMG Chairman David Bailey reported. "The Group has had a turbulent experience, but has survived and is now profitable on a monthly basis at the operating profit level."

Bailey cites a significant level of debt and debt-servicing costs as ongoing challenges, which the company is addressing in a number of ways; including renewed agreements with debt holders, significant expense cuts and an ongoing program designed to increase operational efficiencies.

"We have a stable platform from which to build a strong position in our marketplace and are optimistic that, through supportive debt holders, dedicated staff and interested shareholders, we can look forward to a positive future," Bailey stated.

For comparison, Bailey listed average circulation figures of 79,500 per day for the Daily, 51,000 for the Saturday and 77,500 for the Sunday Sport in August 2008 — the start of the reporting period — and for January to Easter 2010, lists average circulation figures of 73,700 for the Daily, 49,000 for the Saturday and 66,400 for the Sunday.

Advertising revenues from January to Easter 2010 were down 14 percent from the same period in 2009, but corporate measures have been able to overcome the decline's impact.

"Our production costs have been reduced and the paper is produced by far fewer staff," Bailey stated. "This business is now stable and profitable. However, with unemployment likely to rise further, and few signs of recovery in the sectors that employ our readers, the outlook remains difficult."

Bailey says that the company's newspaper product has improved, "with more news items [and] better quality pictures," and that it is a good value for its readers, but heavy competition is taking its toll and inducing a price war, which SPMG hopes to fight with additional efficiencies and "selective marketing opportunities to increase circulation."

Among these opportunities are those afforded by SPMG's Digital Division, which is tasked with increasing the circulation of the paper.

"[T]heir expertise in the digital space, including mobile phones and the Internet, can be used to alert potential readers to news items and to develop web products that can be monetized to increase revenues," Bailey wrote. "We are the only National newspaper in the U.K. to make revenues by giving away DVDs in our Sunday newspaper, thanks to our 'lock 'n' pay' technology, and we are experimenting with developing this technology in new ways."

Despite this, the company saw "a very significant fall in revenues" during the reported period.

"Revenues in the entire adult industry have fallen dramatically in the last two years, as a consequence of 'free' adult Internet content supported by advertising," Bailey continued. "Our digital division, which markets its products across various platforms, including mobile and Internet, and delivers products sold over the Internet by traditional post, lost customers and margin, as well as some key support contracts as the market declined."

Combating this decline are initiatives such as the formation of Telecom2, a tier-2 level telecom providing routing, aggregation and hosting services to the Group, which is also developing its own customer base.

While SPMG is not yet ready to resume paying dividends, it is directing its net cash flow to debt reduction efforts to strengthen the company.

"Interest charges remain a significant burden on the business and opportunities to improve the position through profitable trading and debt repayment remain a priority for the directors," Chief Executive Officer Andrew Fickling stated.

A 35 percent reduction in editorial costs and staff reduction from 138 to 97 during the reported period helped expenses in the face of reduced advertising and sales revenues, which have now stabilized.

"We are currently assessing the establishment of dedicated studio facilities to further reduce content costs in this area," Fickling stated. "More importantly, this will allow us to significantly increase the volume of wholly owned content within the Group and take greater advantage of opportunities for new revenue streams driven by this content across all platforms."

"We now provide a full subscription-based electronic version of the newspaper online, and although revenues are small in this area they are growing, and providing us with useful data to tailor the future development of both our online and printed offerings," he added. "The introduction of our own studio facilities will significantly improve the opportunity to provide exclusive video and still content online, to complement the printed products."

The company's Digital Division was among the hardest hit, with revenues centered on the sale of adult content across various platforms.

"[T]he rapid increase in usage of the adult 'tube' Internet sites, offering free content in an advertising funded environment, along with lower average newspaper sales volumes, has had an adverse impact on revenues across this division," Fickling offered. "A reflection of the changing environment, Locked DVD revenues overtook mobile content revenues for the first time in October 2009, and, although the DVDs are profitable, they provide a smaller margin revenue stream than mobile content."

Amongst all the reports findings, the integration of corporate efforts is most illuminating for other firms fighting the same battle.

"The changes to the content stream being put into place in the Print Division will feed an improved supply of wholly-owned content to the Digital Division to help reinvigorate the mobile side of the business," Fickling concluded.

The complete report is available online.