Fairfax struggles towards an ever moving target

The dismal performance of Fairfax's regionals creates new instability for Greg Hywood, as revenue leakages impede the group's transition to a digital-only environment.

Greg Hywood’s comments at today’s Fairfax Media annual meeting were confident and upbeat – until he got to the end.

For the year to date, he told shareholders, group revenues for its continuing businesses were down 6 per cent on the same period of the 2012-13 financial year, with the post-election cycle not proving to be robust and limited visibility for the advertising pipeline.

That’s sobering, given that revenues for Fairfax’s continuing businesses were down 8.2 per cent last year (down 12.5 per cent on a reported basis). Five years ago, Fairfax had revenues of about $2.6 billion. If the current-year trend is maintained, they will be closer to $1.9 billion.

Hywood said Fairfax’s metro media businesses were down 9 per cent, its regionals 10 per cent, New Zealand 4 per cent (up 7 per cent after currency gains) and broadcasting in line with the previous year. Domain was up 4 per cent.

Perhaps most disconcerting among those numbers is the performance of the regionals, given that the plight of the metros has been evident for some years. The regionals had, until recently, been quite resilient but their revenues fell 10.4 per cent and their earnings before interest and tax 20.7 per cent last year. That rate of decline is ongoing, creating  another front to test management and another source of instability.

The continuing and significant revenue leakages from the traditional core newspaper businesses provide some indication of the magnitude of the challenge that the group (and newspaper publishers generally) are still confronting.

Hywood has responded with a radical and painful and continuing restructuring of Fairfax, which is on track to yank $311 million a year from its cost base by 2014-15. The cost base this year is expected to be around $1.6 billion. But the rate at which revenue is evaporating means that Hywood is being forced to respond to a continually moving target.

There are some elements of cyclicality to the advertising market, although it is proving to be a long post-crisis cycle. The recent tentative signs of some optimism among retailers and bankers in the aftermath of the federal election offer a glimmer of hope that the market might stabilise.

It is the deep structural change occurring within publishing businesses globally, however, that are challenging Fairfax and its peers. Despite the extent of the changes Hywood has implemented and the size of the audiences the group is building online, including encouraging uptakes of Fairfax’s digital subscriptions, there remains a very substantial question mark over the ability of traditional publishers to make the transition to the digital-only environment.

Hywood said today that digital subscriptions for The Sydney Morning Herald and The Age, introduced towards the end of last financial year, had exceeded expectations. The mastheads had attracted more than 86,000 new digital subscribers and more than 102,000 existing print subscribers had signed up for digital access, he said.

The difficulty for publishers is that digital yields are a fraction of those available from their traditional print products. They have to sell a lot of digital advertising and subscriptions to replace the higher-margin print revenues that are disappearing.

That helps explain why Hywood is looking for new sources of revenue, beefing up Fairfax’s events team and ambitions and establishing digital marketing and content marketing businesses.

The probable beginning of the end for the group’s metro print businesses will start next year when, having converted its two big broadsheets into tabloids, Fairfax will close its existing big printing plants at Chullora and Tullamarine, sell those sites and shift production to regional presses.

That will move the production to an incremental and variable cost basis and make the almost inevitable eventual decision to move to digital-only publishing somewhat easier, when the moment comes.

In the meantime Hywood is at least prolonging the life of the traditional products as he tries to create a path to a viable digital future. He and his peers would find it somewhat easier if the cyclical elements within the current environment improved, or at least if the broader advertising environment stabilised.