Fairfax cuts to the quick
Fairfax's savage restructuring and job cuts are, however unpleasant for those involved, its last chance to save the metro mastheads after years of doing nothing.
For more than a decade a debate has raged within Fairfax, and other print media businesses, about the relationship between the legacy print businesses and their emerging digital alter egos, with successive managements unable to bring themselves to cannibalise their legacy revenues and profits despite understanding that their days would eventually be numbered.
So they watched, frozen into inaction by an unwillingness to sacrifice profits today for a future, as new digital-only verticals like Seek and Carsales emerged to divert those once-fabulous rivers of gold Fairfax boasted because of its historic dominance of print classifieds.
As Andrew Jaspan writes today (Get ready for a Rinehart-led Fairfax, June 18) the only strategy adopted by successive managements in response to the inexorable decline in print revenues was to cut costs, a strategy that by itself was a slow but certain route to oblivion.
The first indication that Fairfax had finally recognised that it had dithered too long came with last year’s appointment of Greg Hywood as chief executive, the first Fairfax chief executive with a working media background in living memory.
While Hywood, managing in the midst of a steep downturn in the advertising market, has overseen even more of the cost-cutting of his predecessors it has been obvious that he understood and accepted the new realities of the digital media age better than those predecessors and has been acting with increasing urgency to develop a model with a better chance of survival.
The restructuring and the 1900 Fairfax job losses he announced today is, however unpleasant for those involved, his last chance to save the metro mastheads, if not their print versions.
With the two big metros – The Sydney Morning Herald and The Age – said to be losing money, their revenue bases now in steady structural decline and Gina Rinehart exerting increasing pressure on the Fairfax board, there were no incremental responses to the predicament Fairfax faces.
Fairfax isn’t alone – News Ltd is expected to announce something equally radical imminently and other newspapers groups around the world face the same and equally urgent existential questions – but the implosion in its revenue base and share price has been so substantial and destabilising that urgent and dramatic action was required to give the group any chance of survival.
With less than a quarter of its metro mastheads’ audience now accessing its content through print editions, and that proportion shrinking, Hywood has come to the only conclusion available. Fairfax has to prepare itself for a digital-only future, despite the uncertain economics of digital-only publishing.
Closing the main printing plants at Chullora and Tullamarine and using the group’s regional printing plants to produce the main mastheads is a logical consequence of that conclusion. Smaller, tabloid, formats for the metros and shifting to an increasingly national editorial model is another, as is the "digital first" editorial model the group will adopt.
Having accepted that its only hope of a future lies in digital platforms, the decision to introduce a subscription model to what have been free sites was also inevitable if Fairfax is to monetise its digital audiences.
Sensibly, Fairfax will pursue the metered model that appears to be working reasonably well for The New York Times, rather than a solid paywall, in an attempt to maintain as much of its digital audiences and advertising revenues as it can while also garnering subscription revenues.
Fairfax is already engaged in a cost-reduction plan that targeted $170 million of savings by 2015. The new plan, it says, will produce total annualised savings of $235 million by June 2015, $215 million of them by June 2014. One-off net costs will be about $248 million, assuming the sale of the Chullora and Tullamarine sites yield at least $65 million.
With those costs, and a review of the value of the metro mastheads that will inevitably result in significant impairments, the Fairfax balance sheet and cash position would be under pressure, which explains why it also announced a sale of 15 per cent of its successful digital auction business, Trade Me, for $160 million. Fairfax will still hold 51 per cent of Trade Me. It may yet have to extract more cash from that asset.
There were no obvious alternatives for Fairfax. With around $500 million of legacy revenues within the metro business it couldn’t jump straight into a pure digital model but it did need to create the foundations – in structure, costs, staffing and work practices – for the inevitable moment when that occurs.
There are, however, no guarantees that Fairfax can manage that transition seamlessly or, even if it does, that a digital-only model would be economic. The only certainty is that, without dramatic change, however traumatic and painful, the metros have a bleak and probably very short-lived future.