Fairfax's Darwinian delusion

Fairfax Media has always been leveraged to economic conditions, so it was no great surprise to see its earnings accelerating towards the end of the year to June. A little disconcerting, however, was how much of the rebound was attributable to the axe that Brian McCarthy took to the group's cost base during the advertising recession.

For the year, Fairfax revenues were down two per cent, costs down five per cent and earnings before interest, tax depreciation and amortisation (EBITDA) were up 7 per cent. In the second half, as advertising volumes rebounded, the revenue base grew 6 per cent, costs fell 1 per cent and EBITDA grew 34 per cent.

While the overall performance was a little better than the market had expected, the recent results of the two companies that effectively built their businesses by carving up Fairfax's former dominance of classified advertising provide a useful context. Seek's full-year earnings were up 62 per cent on revenue that rose 35 per cent, while Carsales' earnings were 41 per cent higher than last year's on revenue that grew 28 per cent.

It is that permanent loss of the part of its revenue base that is most leveraged to economic activity that has dampened the extent of the recovery in Fairfax's revenues and earnings, which are still about 30 per cent lower than the profits it generated in 2008.

The concern about Fairfax as it experienced the financial crisis and the associated steep falls in advertising volumes was whether, when it emerged at the other side of the downturn, its capabilities would be diminished and its sales and earnings permanently re-based at a lower level.

McCarthy's probably unavoidable response to the crisis – a full-scale attack on costs was effectively the only lever he could pull – enlarged that question mark over whether the group could fully capitalise on a recovery.

Despite the very solid second-half earnings gains across the group's businesses, the relatively modest revenue gains in the second half mean that question remains unanswered. Final quarter revenue growth of 12 per cent was somewhat more encouraging, but that growth is off a low base.

With the results, McCarthy provided some broad outlines of Fairfax's strategy for the future, developed with management consultancy Bain & Co. It appears more evolutionary than revolutionary.

There will be a new organisational structure to produce better integration of the group's physical and online properties, with McCarthy saying there would be greater sharing of editorial content and collaboration across the print, online and mobile platforms.

That's a decision that comes about 10 years later than it should have – there was fierce resistance within Fairfax to Fred Hilmer's decision to separate the management and editorial control of the online and physical mastheads in the late 1990s in order to create the ill-fated F2 digital arm.

A further priority was to monetise Fairfax's online content, which may be a reference to charging for access to at least some of the editorial content the group distributes online.

The second leg of the strategy is to 'evolve' the group's news products, transform the metropolitan mastheads' business models and embark on more "business efficiency initiatives to protect revenues and reduce costs over time". That last element will be disquieting for the already dispirited staff of those major mastheads.

McCarthy says Fairfax will expand its position in growth segments through both internal and external investment, with an emphasis on product development and sales and on leveraging its online audiences to build new revenue streams.

He didn't provide detail of the strategy, which was only presented to the Fairfax board last weekend, saying more would be disclosed at a future investor day.

On the basis of what Fairfax has said, however, it would appear that McCarthy is planning incremental rather than radical change.

Given how rapidly the digital media environment is growing and changing, and the implications of that change for traditional media companies, evolution may not be sufficient to secure the futures of the group's metro mastheads.