Yes, freesheets are challenged, but that's down to the collapse in the print classifieds market, and Mecom is hardly the best example of a company brought down by its frees.

In an article yesterday, The Financial Times (FT) suggested the freesheet model could be the first victim of the current newspaper crisis. Now, I'm not sure if I should have a go at FT or Trinity Mirror CEO Sly Bailey here, but this article elegantly skirts around the newspaper industry's bigger, structural problem, and some of its facts are at best misleading.

Freesheets hardly at the heart of Mecom's problems
"...Companies with the most serious threats to their existence have a strong element of free newspapers in their portfolio," the FT article says - and cites Mecom as its first example. This smacks of lazy reporting. The key problem for the pan-European newspaper group headed by former Mirror boss David Montgomery is high gearing or leverage. In short: scooping up too much, too fast at the top end of the economic cycle, using borrowed money to facilitate its acquisition spree. That, combined with operating in a sector which is both cyclically and structurally challenged, makes it the perfect example of the kind of company whose shares are receiving the worst hammering in the current downturn.

Of course the downturn in the advertisement market is hitting Mecom like all other newspaper companies, but I'm not convinced Mecom is the best example of a company brought down by its frees. If you're not familiar how much of its business is made up of freesheets, here's a quick run down:

Mecom's freesheet portfolio
In Denmark, Mecom rushed out a new short-lived freesheet, Dato, at the start of the Danish freesheet war in 2006 - but as this closed in 2007, it shouldn't affect Mecom's 2008 financial results - and still has the loss making youth-oriented free Urban in its portfolio, which recently reduced its circulation to 203,000, but has merged all its content production. In Norway, the British based company has a small network of non-daily frees in Oslo; in Poland, it has Moje Miasto running on a similar model to the Norwegian frees - which leaves The Netherlands, where free newspapers comprises the biggest part of the British based company's operation. Every week its Dutch divison publishes about 8.6 million copies of free door-to-door distributed papers in addition to seven paid for titles.

However, in contrast to UK newspapers, Mecom also has remarkably high subscription rates for most of its paid for papers which must be of some comfort amid all the current advertisement gloom. From what the British company has indicated about its 2008 earnings so far, it seems Mecom is worst affected by the advertisement decline, not in The Netherlands but in Denmark and hardly at all in Poland (I'm omitting Mecom Germany here as it's not big on frees and practically sold - just need the shareholders to approve the sales agreement).

A more disturbing case
Now, it is true that companies with a strong element of free are struggling - it will certainly be interesting to see how Metro International, the world's biggest publisher of freesheets will fare in the times ahead - but rather than Mecom, I would have used Norwegian-based Schibsted as an example here.

Not only because, in contrast to Mecom, it's a market leading freesheet publisher in several big markets, such as Spain, France and Sweden (the latter in partnership with Metro) and, to a lesser extent, Eastern Europe, but because it illustrates the larger, structural problem at work so much better. In a way, Schibsted is also a much more disconcerting example.

It's freesheets, especially in places like Spain where the property market is in a dire state, are being hammered, but that's also happening to Aftenposten, Norway's newspaper of record, a daily paid for national newspaper which traditionally has relied heavily on print classifieds.

That I believe, is the bigger problem qua business models here, at least in my part of the world: we're seeing the market for print classifieds emigrate online and not necessarily to online newspapers. In contrast, Schibsted's other national Norwegian print newspaper, Verdens Gang (VG), which gets its ad revenues from brand advertisement rather than classifieds, has not, at least until new year, done as bad as Aftenposten (though if we're talking circulation decline, the relationship is reverse).

So yes, frees may be head of the queue, or "in the frontline trenches of the war," as Baily says to FT, but national and big regional dailies relying heavily on print classifieds make a good number two. And that's still only part of the story, I'll return to why I think Schibsted is such a disconcerting example in a separate post a bit later.