Fairfax throws its baby off the train

Newspaper companies everywhere are trying to figure out whether the current advertising downturn is cyclical or structural – that is, whether it's temporary or permanent.

It's the sort of thing you only find later, so the only sensible answer is that it's a bit of both. That would be why Fairfax Media has made the agonising decision to sell its best digital asset, Trade Me in New Zealand.

Newspaper advertising has collapsed this year, digital display advertising is down about 6 per cent but digital classifieds are still growing – up 8 per cent year on year in Australia.

Trade Me is wonderful digital business. It's the Kiwi equivalent of eBay, carsales.com.au, realestate.com.au and Seek, rolled into one. It has 2.5 million registered users out of a population of 4.4 million. It's the sort of digital growth business that any newspaper company in the world would love to own.

Yet Fairfax is selling its remaining 51 per cent to reduce debt. It's expected to get $600 million, which would reduce net debt to $230 million.

The company has thus made the transition to digital both easier and harder. Easier because it will nearly be debt free, which gets some of the lead out its saddlebags, but harder without the core digital asset of Trade Me to anchor the process.

So, now what? According to The Australian Financial Review this morning, Fairfax is "close to signing” former Microsoft executive Daniel Petre and the former head of eBay Australia, Alison Deans, to advise on new digital opportunities in Australia. These two are smart people and will provide good advice, but they will struggle to find a better opportunity than Trade Me, especially now.

When Fairfax bought Trade Me in 2006, newspapers were still optimistic; they still believed the future for digital display was bright and that their businesses would flourish online. Six years later that optimism has been crushed.

In New York two weeks ago, at the UBS global media conference, I heard presentations on 2013 forecasts from three big advertising agencies: ZenithOptimedia, Magna Global and GroupM.

All three firms agreed that 2013 would be another difficult year in the global advertising market because of the weak economy (cyclical) and that because of the structural transformation taking place, global digital advertising would outstrip print for the first time in 2013.

The key problem for print is that, according to Sir Martin Sorrell of WPP Group, the proportion of time spent reading newspapers and magazines is now 7 per cent, while the proportion of ad spend is 25 per cent. Time spent on the internet and mobile devices is now up to 36 per cent, while ad spend on them is 23 per cent.

Newspapers are not capturing what the ad world calls the "fragmentation paradox”, which is helping to maintain television revenues. Even though TV audiences are declining they are still delivering decent audiences for brand advertisers and the smaller numbers are becoming more and more valuable.

The result is that while internet and mobile are capturing the vast majority of media growth, TV is still getting some growth. Print is going backwards at an accelerating rate.

Sir Martin Sorrell said the structural rebalancing of advertising away from print towards digital would see the "demise of newspapers and magazines over time”.

"Trying to define digital versus traditional media is difficult and maybe it's useless because it's all merging into one,” he said.

Yes, but where it's all merging is on screens of varying sizes – and increasingly it's the small ones that fit into your pocket, not on pieces of paper.

Right now most traditional print businesses believe their salvation lies in paywalls – charging subscriptions for content rather than giving it away for free and hoping that digital advertising revenue is enough (which it hasn't been so far). But that is a fraught and risky strategy.

One print company that is making a successful transition is Atlantic Media Company, which publishes The Atlantic magazine in the US.

Its president, Justin Smith, gave an interview to The New York Times in 2010 explaining how he did it. "We imagined ourselves as a venture-capital-backed start-up in Silicon Valley whose mission was to attack and disrupt The Atlantic. In essence, we brainstormed the question, ‘What would we do if the goal was to aggressively cannibalise ourselves?' ”

The existing paywall was torn down, new young writers were hired and sales staff were told to hit one target – it didn't matter whether it was print or digital.

But The Atlantic is not Fairfax – it's a tiny business owned by one individual, David Bradley. While self-cannibalisation is theoretically the way to go for all traditional media companies trying to make the transition to digital, that's very difficult for a big publicly listed firm.

Big traditional media firms with less understanding owners have a much more difficult task ahead.

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