Action vs strategy: illustrated by Apple Daily's price hike in Taiwan

It is nice to be in HK, and it is nice to be able to read Next and Apple Daily again here.

Apple Daily Taiwan recently raised its price (from NT$10 to NT$15). The founder of Apple Daily, Jimmy Lai discussed the business strategy and related issues, including

• The trade off between action/tempo and a well researched strategy
• The strategy of media industry (such as newspaper) under the challenge of free information (e.g. internet, and free newspapers in HK such as Metro Daily, Headline Daily)
  
• Price elasticity, financial impact of pricing, the ability to command a price premium in readers and advertisers
  

Lai's account is translated by ESWN and reprodcued below (Next Weekly, issue #832, page 142-143 Jimmy Lai. February 16, 2006.)

• "... Our business in Taiwan is exceptional. The magazine as well as the newspaper both lead in sales. The sales price for Apple Daily (Taiwan) is not only highest in Taiwan (NT$15 compared to NT$10 for its competitors), but the sale figure is the highest too. This proves that our readers are largest in numbers as well as consumer power. For advertisers, these two strong points of Apple Daily (Taiwan) gave them an unmatched marketing channel. I am proud of the accomplishments of Apple Daily (Taiwan) and I am proud of Ip Yut-kin and his colleagues.
  
  Last June, the research by A.C. Nielsen showed that Apple Daily (Taiwan) was the winner in sales in Taiwan. At the time, Apple Daily (Taiwan) was sold at NT$10 like its competitors. Two months later, I told the colleagues at Apple Daily (Taiwan) to raise the sales price to NT$15. At the time, they all opposed my proposal and even Ip Yut-kin was against it privately.
  
  I absolutely understand why they think so: they had worked so hard to rise up to the number one spot in sales and the newspaper is profitable. So why take the risk? If the competition does not follow suit, then how could it not affect our sales? What happens if we can no longer keep the number one spot in sales? A newspaper makes money through advertising. Raising the sales price by NT$5 does not help the profit line much. The number one spot was not won easily, so one should not be hasty.
  
  I understand their thinking. But as far as I am concerned, the most expensive and most widely circulated newspapers offers the advertisers a hitherto unseen marketing channel, and I longed for that. This absolute advantage is just too attractive and I did not want to miss out on this opportunity. So I told my Taiwan colleagues: "Don't worry. If the sales plummet after the price increase and I don't see any hope of keeping the price level at NT$15, I will return to the old price again." When they heard me say that, they finally agreed to let this mad man make the bet. Now, the sales figures for Apple Daily (Taiwan) is far higher than the competition and I can finally breathe a sigh of relief.
  
  The results at Apple Daily (Taiwan) are exceptional, but I know that there is never a moment of rest in business. Apple Daily (Hong Kong) is facing a serious challenge. Prior to the appearance of the free newspapers, about a million newspapers were sold in Hong Kong every day. Today, there are a million free newspapers given out every day. How can the paid newspaper continue?
  
  Recently, The Sun (in HK) reduced its sales price from HK$6 to HK$3, and this was another blow to us. The daily sales figures for Apple Daily (Hong Kong) has dropped from 360,000 to 310,000 or so. We are lucky to be able to sustain this level, and these results would not be possible without the talents and hard work of Tung Chiao and his colleagues.
  
  I am confident that Apple Daily (Hong Kong) has the ability to overcome the challenges from this highly competitive environment. The market is not a zero-sum game. It is not as if the presence of free newspapers will cause the paid newspapers to die off. The market is a place for new creations, and the more competitive the environment, the higher the fighting spirit and creativity.
  There is an infinite number of free news sources on the Internet. If the news information business is won by sheer quantity, then the paid newspapers should have been swamped much earlier before the free newspapers ever appeared. Operationally, the paid newspapers in Hong Kong are undoubtedly facing a lot of pressure. This is just a necessary phase in the adaptation and improvement process. This is not a hopeless dead-end. The question is what we should do to overcome the current difficulties.
  
  As I see it, the only solution is to reform -- to change our operational methods to fit the new competitive environment and to create more value for our readers and advertisers. ...
  
  But I am more concerned that some of the Apple Daily (Hong Kong) colleagues are resisting the essential reforms; they tell me all day that "I feel that something is not right," "I don't think that we should act hastily until everything has been thoroughly thought through ..." and other ambiguous, abstract excuses. I know that reforming past habits is as difficult as a junkie getting off a drug habit, but we have no other choice.
  
  Dear colleagues, please put aside your prejudices and face the challenge of the moment. Do not be afraid to make mistakes. If it is wrong, we can correct it. We will keep trying until we succeed. Okay? I will not give up reform. Please do not resist. Okay?"

Quantifying the "trade-off"

Lai is probably right in his reasoning. In fact, the price hike is probably a brilliant strategic move. However, he found it very hard to convince his team. This is not because his team is stubborn and dumb, it takes very talented people to create such a media empire. Instead, the fault lies in Lai himself. He was unable to communicate to his team clearly his strategy. Lai argued that one needs to make difficult choices betweeen action/tempo and a calculated strategy. He was right that we are faced with such tough decision every day. But he was wrong that this particular one is only justifiable by gut feeling and faith (on the boss). As a matter of fact, Lai made a costly mistake in his Admart (think "Webvan") venture during the dotcom era. The amount of information and analysis Jimmy Lai provided does not differ much in these two moves.

What Lai needs to do is a very simple analysis, to quantify the economic impact of the price hike

1. the price elasticity analysis, i.e. the impact of the loss in readship (d) if the price is raised from NT$10 to NT$15. This is the most difficult to predict. However, one can use a few scenarios to test the overall financial impact to Apple Daily. e.g. If readership drops by 33%, the total revenue is unchanged ( 5(X-d)-10d=0 if d=X/3). The profit actually improves because COGS is lowered. (one reference he could use is to use data he got when AD first entered Taiwan, when there was a price war)
   
2. #1 only considered the newspaper sales revenue. The larger revenue should be from advertisers (y), which is proportional to the readership. So a decrease in readership means the same decrease in ad revenue (yd/X).
   
3. The price premium Apple Daily can command, because of the readers who are willing to pay more (i.e. higher value customers). This can also be quantified (p x d). So one would need pd > yd/X to raise price.
   

So the overall impact is estimated to be (15-10)(X-d) - 10d + c (X-d) - y (d/X) + p d

• where X is the current circulation, c the incremental COGS per copy, y is the ad revenue, p the % price premium for AD's CPM
• assuming the ad revenue is calculated on CPM basis (in reality the relationship is not neccessarily linear)
  

In fact, if one uses this 'back of the envelope calculation', once can even go one step further, to determine the optimum price (whether it is 13 or 15 or 17 NT$), upon different price easticity scenarios, by maximizing the formula above. It only take a couple days for Jimmy Lai to perform the above analysis. He would have a good story to tell his team, and he would avoid the mistake of Admart. He already has most of the data handy.

Positioning under the challenge of free media

Jimmy Lai is correct in that Apple Daily's reader segmentation is different from that of the free papers. In fact, there was an overlap in terms of segmentation a few years ago, before The Sun entered the market. Oriental Daily launched a sister paper called the Sun to capture the price sensitive tabloid readers. Apple Daily's market share suffered then.

Today, the free papers (such as Headline Daily and Metro Daily) has the biggest overlap with the Sun, not with Apple Daily. My parents take 2-3 different free papers each days, but read them for about 2 minutes (the other implication, the CPM for free paper will be much lower in due course). They still purchase Apple Daily. In this example it is not a zero sum game, because AD's customer are spending more time reading papers, vs, eg, TV or bus ads. I would even go as far as saying that Apple Daily (perhaps other MSM such as Ming Pao, and most notably HK Economic Journal) will suffer much less than The Sun. I am also betting that The Sun will fold in about a year (or be downscaled and become free)! That could be rather good news for Jimmy Lai, because its major competitor, Orisun, is hurt most.

The free papers are just new entrants who found a new niche, by surviving entirely on ad revenue (handing out to readers for free). We can view them as no different from the entry of The Sun. I do not have the data, but if Jimmy Lai or his team is reading this, I would like to ask him to check the data when The Sun entered the market. I believe it is very likely that Apple Daily lost more market share back then. (Today, the loss in readership, according to Lai, is 50k/360k=14%)

What is the implication for Apple Daily? It should do some research in its segmentation and review its positioning. e.g.

• give up some low-end tabloid content to save cost because its readers will get those from free papers anyway;
  
• try to capture the segment of other paying customers (e.g. HK Economic Journal may lose some readers if it is swallowed by Richard Li);
  
• try to command a premium in CPM, etc.
• (Updated 2/28) ally with a free paper (e.g. AM730), to include a copy in each copy of AD. AAD gets free content, while the free paper gets free distribution (and a premium customer profile)
  

Categories:

• hk
• taiwan
• biz
• media