Media rivals facing brave new world

Fairfax and News plot strategies for the new digital battleground, writes Elizabeth Knight.

On Wednesday night, rugby league's battle royal, State of Origin, was the must-see theatre in Australian sport. Colloquially referred to as "state against state, mate against mate", the slug-fest took centre stage in living rooms around NSW and Queensland.

But rugby league was not the only game in town this week.

The chief executives of Australia's rival print media organisations, News Corp and Fairfax, were doing battle to sell their survival plans to local investors.

Strategy against strategy.

News Corp's new chief executive, Robert Thomson, was holding court at Sydney's Four Seasons Hotel on Wednesday, flanked by chairman Rupert Murdoch. Fairfax CEO Greg Hywood chose the historic Mint on the other side of town, to face the same gathering of suits on Thursday.

It's a tough crowd more attuned to reading the numbers than partnering management in the belief of longer-term aspirational objectives.

Hywood came out of the dressing rooms and went straight into a tackle: "We are the media company that delivers detail and transparency. The media company that fully understands the complexity of the issues we are facing."

Sitting atop a traditional print media company is a hard gig in an industry that is arguably more challenged than any other with core advertising and audience rapidly migrating to the lower-margin highly competitive digital arena.

The business models that sustained healthy returns 10 years ago are under such intense threat that the response has to be one of revolution rather than evolution.

As Hywood noted in a speech to the International News Media Association a month ago, "business models don't last forever".

"Industries don't last forever at least in the form they were at their peak."

Having had to inform the market this week that forecast earnings would come in at between $129 million and $135 million in the June half (compared with $210 million for the same period last year), Hywood is acutely aware that status quo is a corporate death sentence for Fairfax.

Both Hywood and Thomson readily admit the difficulties the industry faces, the costs that need to come out of their businesses and the need to manage down unprofitable circulation given the pressure on print revenues. Nothing new there.

The key to who wins the performance war rests with the company that best adapts to the new environment.

Both media bosses have the herculean task of convincing investors they have discovered the mutant gene that will allow them to adapt more quickly to the new challenge.

News' approach this week was to offer a mix of big picture resolution with a heavy lashing of "Trust me, I have done it before" from Murdoch.

"We will create new businesses and new products that embrace the mobile future and compress the time of success from 60 years to 10 years," Murdoch says.

Thomson, who is steering the breakaway of News Corp's local and international print business along with its cash cow, Australian pay television assets, into a new company this month, says he is "candidly and decidedly optimistic about the medium-term prospects for the company in revenue growth and margin expansion".

Thomson speaks not of the demise of print; rather he is selling the story that print has a sustainable future and is immensely important. "Print is still a particularly powerful medium ... 43 per cent of Wall Street Journal readers are millionaires."

What Thomson lacked in numerical detail, he compensated for with poetic oratory meets management speak .

It may not have impressed the analysts but it is worth repeating.

"News is an extraordinary company of scale, reach and opportunity but with the sensibility of a start-up.

"A company with provenance. A company with restless energy and insatiable curiosity.

"There will be opportunism and experimentation.

"There will be alchemy. Murdochian magic."

The disclosure minimalism did not impress many of the analysts. CBA's Alice Bennett summed it up: "Poor disclosure remains an issue with no separate disclosure of the asset with the most downside risk of the next two to three years [newspapers], no geographic breakdown within newspapers, and no breakdown of print versus digital revenues. We expect this kind of disclosure will be crucial to the stock's performance post the split."

Where News, or "new News" as it has been tagged, has the luxury of an earnings cushioning from the contribution from pay TV and a $4 billion cash stash, Fairfax is far more reliant on the core business of print and digital publishing for its revenue.

Cutting through the rhetoric, Thomson's strategy is to transform publishing brands through digital innovation to increase profits, while keeping an intense focus on costs and cash flow - a move he describes as offensive rather than defensive.

It should arguably be both.

Fairfax has been forced to address the structural challenges of operating with the sunset print business more quickly.

Hywood's stated strategy sounds simple enough: "Our business model across metropolitan and regional markets revolves around quality, independent journalism and content - and we monetise that content throughout the day across multiple platforms. That's the strategy."

It's about "delivering the transition of this company from a legacy print business to a media company that prospers in a competitive market".

And this includes the elephant in the room for all print businesses - when does the printed newspaper cease to exist?

Hywood says, "We know that at some time in the near future we will be predominantly digital or digital-only in our metropolitan markets. We can't say whether it's three, five, seven or 10 years, but it will happen as media consumption continues to shift and fragment and advertisers follow.

"We will run newspapers only while they are profitable ... we are not about propping up or cross-subsidising newspapers with other parts of our business". (A head-high tackle on Thomson from Hywood).

To the diehard core of hard-copy newspaper junkies, Hywood's remarks are tantamount to heresy.

But cutting the frequency of delivering big newspaper brands in the near future is not on the agenda, Hywood says.

He does not define near.

The same future cannot be guaranteed for some of the other 431 publications and 337 websites the company operates. This cupboard clearly needs a clean-out and more importantly, it could deliver another opportunity to cut costs.

The balancing act for Fairfax, as for newspapers around the world including those in the new News camp, is to cut the costs at the print businesses faster than their revenues are falling. And this is especially difficult when in the grip of the revenue pincer's other arm - a cyclical downturn.

In the six-month period that ends in three weeks, group revenue at Fairfax will be down between 9 per cent and 10 per cent. On a divisional basis, the laggards are metropolitan media and the regionals, which are both down 11 per cent, while revenues from radio are up 10 per cent and Domain digital (real estate) is up 16 per cent.

In what has been an arduous and painful exercise, Fairfax has already signalled taking $250 million in costs out of the business, including cutting 20 per cent of the workforce, and consolidating business units. It told investors this week cost-outs would be increased by a further $60 million.

It is a battleground where circulation has been a major casualty. Both News and Fairfax are cutting their print runs - turning the traditional nexus between circulation and advertising revenue on its head.

Says Hywood: "We absolutely reject circulation as a relevant measure of newspapers. There is virtually no correlation between circulation and advertising revenue."

In the digital age, it is about readership and engagement.

"We have aggressively reduced circulation that doesn't reach our core highly engaged readership, by 15 per cent last year, and we're removing another 15 per cent this year."

The flip side of the coin for "new News" and Fairfax is developing new sources of revenue that are not necessarily tied to the masthead brands - in Fairfax's case, sites such as Stayz and RSVP.

But growing digital real estate businesses - realestate.com.au (for News) and Domain (for Fairfax) - are grabbing the attention of analysts and investors.

Hywood has moved Domain into a stand-alone business and lavished it with resources in a move seen by some experts as a precursor to a sale or spin-off.

In the first half of the financial year, Domain's earnings before interest, tax, depreciation and amortisation (EBITDA) were $22.1 million on revenues of $66.3 million. This was slightly lower that the previous corresponding half as the print contribution declined and the improvement in digital fell just short of fully compensating.

At the very least, the greater transparency the market has around Domain's performance should allow investors to ascribe it a value within the Fairfax structure.

In terms of recognition or admission that a problem exists, Fairfax is a clear winner. In terms of optimism, Thomson and Murdoch will win hands down.

Thomson summed it up with a question once asked by Churchill. "Is it the end of the beginning?" He says: "No, it's a new beginning."