The most compelling angle of Fairfax Media’s company shake-up this morning – and every angle has been explored by the jotters, only too happy to discuss their own industry – is the timing. The restructure comes far too late to prevent the now enormous pain the workforce is about to go through, perhaps even too late for the company to survive in any meaningful sense. But it also comes too early for chief executive Greg Hywood, who has distinguished himself from his predecessors and faced the publisher’s unmistakable decline, to prepare his workforce for the blow.
We go to the source, two senior Fairfax columnists, for the answer.
Fairfax’s Elizabeth Knight (given the consolidation in their titles, The Distillery will no longer distinguish Fairfax jotters as being from either The Sydney Morning Herald or The Age) thinks she’s got an answer as to why the announcement came so suddenly.
"Fairfax has been working on a strategy to revive its earnings for at least a year but it's hard to believe the precise timing of yesterday's major restructuring was not affected by last week's move by Rinehart to top up her stake. The announcement of an overhaul over at the rival News Ltd's print operations has also come into play in a decision on timing and public relations. Regardless of these external factors, Fairfax has been running its own race against time. Metropolitan newspapers' advertising is falling at a pace. So the cost of these papers (including their digital costs) is greater than their print revenue. That is why this restructure is so important. The digital advertising business is growing at a double-digit rate but still its revenue is less than a half as much as that of newspapers. But digital operates on a much lower cost base. The revenue from online and printed advertising combined is enough to keep the metropolitan papers profitable but not profitable enough. The problem for Fairfax is that digital revenues are not growing fast enough to offset the fall in revenue from printed advertisements.”
Knight’s colleague Malcolm Maiden similarly notices that the announcement helps the boardroom battle against Rinehart.
"Fairfax says the changes are not a response to Gina Rinehart, who confirmed yesterday she had built her stake in the group to 18.7 per cent, and is believed to be making a proprietorial demand – three seats on the board including the deputy chairmanship, and the right to have input into editorial matters. It does, however, have the effect of blunting Rinehart's case for moving onto Fairfax's board as a change agent. Fairfax says it only committed to the plan after analysing and rejecting a break-up of the tightly woven group, and the restructuring it has launched is big by anyone's measure. It will cost $248 million to push through, and will save almost that much every year when it is completed in 2015: the 7.4 per cent rise in Fairfax's share price yesterday suggests shareholders like the maths.”
We’ll return to the consequences of Rinehart’s involvement in a moment, but first there’s the question of whether Hywood’s radical action will work. The Australian Financial Review’s Chanticleer columnist Tony Boyd offers his assessment.
"It is proposing the ‘metered’ model used by The New York Times that allows readers to access a set number of stories each month before having to pay. In the case of The New York Times, about 90 per cent of its digital-only readers pay for content. The opportunity is huge given that 65 per cent of Fairfax’s 7 million customers access the company’s mastheads online. The SMH iPad app released last year has been downloaded by 570,000 people and is now on a third of all iPads in Australia. The Fairfax board has advice from consultants McKinsey & Co that its paywall strategy will work and ultimately will allow the Fairfax metro group, which includes the SMH and The Age, to stand alone. However, experience in the US has been patchy. The Boston Globe, which is owned by The New York Times, has only 19,000 readers paying $US16 a month.”
The AFR’s Matthew Stevens suggests that managing the staff will be a difficult task.
"History says Fairfax people will resist this latest life-sustaining effort. Resistance to the exercise of management authority, especially when initiated in the name of silo-busting efficiency, has become something of an art form at Fairfax. At a numerically rational level, it has long seemed obvious that Fairfax could no longer sustain the silo mentality that segregates its newspapers into either city states or regional fiefdoms. Yesterday’s data enumerates clearly why further indulgence of the sort of workplace democracy that has slowed or stopped reform is no longer an affordable luxury at Fairfax. Just finally on Fairfax, whether or not senior shareholder Gina Rinehart is supportive of the Fairfax future being shaped by Hywood & Co, she should surely welcome the squeak of share price momentum it triggered yesterday.”
Indeed, the protest in some sense has already begun. Senior columnist Stuart Washington gave a handful of interviews lambasting the company’s management yesterday. But as Business Spectator’s Stephen Bartholomeusz writes, the action is absolutely necessary to give the ailing titles any chance of survival.
"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.”
However, one aspect of the strategy announced yesterday is coming under fire, the sale of another stake in Trade Me. As The Australian’s John Durie explains.
"Much of what Hywood did yesterday was undoing his predecessors' snafus, such as the $220 million Tullamarine printing press, completed in 2003 and to be shut in a couple of years. The $160 million collected on the sale of 15 per cent of online auction house Trade Me will offset some of the $248 million in restructuring costs unveiled yesterday. But it also means in the past six months Fairfax has sold almost half its fastest-growing asset. It represented about 28 per cent of the company's estimated enterprise value of $3.3 billion before the latest sell-down."
Technology Spectator’s Supratim Adhikari understands to some extent the Trade Me stake sale, but says it could be a terribly short-lived strategy for a company that’s clearly, and necessarily, thinking much more long-term.
"With the Rinehart situation still unfolding selling the Trade Me stake was the quickest and the most viable option for Fairfax to raise the cash and it does give Fairfax some breathing room. However, it might not be too long before the board may have to revisit the idea. Trade Me is a profitable business and is an integral part of Fairfax's digital division. However, it has limited scope and can't realistically extend its footprint across the Tasman and into the broader digital future that Fairfax is envisioning. Given the enormous structural challenges the company is facing it might have no choice but to divest the entire business even at the risk of losing some of the shine off its digital credentials.”
The Australian’s Damon Kitney points out that former Fairfax chief executive Fred Hilmer and the directors at the time of the Tullamarine printing plant approval would be a little red-faced at the moment.
"Fairfax shareholders have paid the price for that decision over many years as the heavy capital expenditure program curtailed the company’s growth ambitions and weighed on the balance sheet. Hilmer and co would argue the decision to spend big on Tullamarine at the time of the dotcom boom delivered a big revenue boost by allowing printing in full colour, but many then and still now rightly question the timing of such a significant investment on assets from an earlier media age. Now Hywood has drawn a line in the sand and judging from the Fairfax share price reaction this morning, investors are cheering. The reality is that his massive restructuring program announced today is something Fairfax has needed for a long time.”
Returning to the issue of Rinehart. In Business Spectator economist Christopher Joye argues that the mining billionaire might just be the best thing for Fairfax at the moment, because a media organisation first has to make a profit if it isn’t government owned.
"To parse this debate with clear eyes, we need to go back to first principles. What is Fairfax? A privately-owned media company. Okay, so what is a media business? Any enterprise that takes information, content, and analysis generated in-house and/or via third-parties, and packages that up into products that are sold through a diverse range of analogue, digital, radio and print 'channels', depending on the preferences expressed by their customers (and the returns management believes it can extract from those clients). Media businesses include, amongst other things, real-time news, opinion and "entertainment” websites, online and print magazines, free-to-air and pay-television stations, old school newspapers, radio stations, music, sports, and entertainment content producers, and all the private entities, such as advertising companies, that work alongside this long value chain. Of course, every one of these businesses has a common goal: to create profits that are satisfactory to their owners. A successful media business is not one that wins Walkley Awards or produces the most dispassionate journalism deemed acceptable to an elite commentariat.”
The Distillery would instance that the equally radical changes set to come from News Limited would suggest that no one is willing to pay for almost any kind of written journalism and that Fairfax’s dedication for independence has less to do with its decline than the internet does.
But Joye is correct that Fairfax’s very survival is at stake. If you want to see someone really missing the point, check out this segment from the ABC’s Lateline last night, where Coalition Senator George Brandis managed to blame the 1900 job losses at Fairfax on the carbon tax. Should we therefore exonerate past management decisions, Senator Brandis?
Meanwhile, The Australian’s Mark Day says Fairfax’s move brings forward the likely date when Australian printing presses will run silent.
Veteran Fairfax political reporter Michelle Grattan brings the word of Communications Minister Stephen Conroy and his opposition counterpart Malcolm Turnbull, who both say that Fairfax readers are in some way drawn to the editorial independence that Gina Rinehart wants to undermine. This might have been a somewhat odd experience for Grattan to have senior politicians explaining why it is that her employer has readers.
It mightn’t feel like it now, but something else did actually happen yesterday. The Australian’s George Megalogenis writes that Europe’s relationship with Germany is akin to America’s relationship with China. The former in both will be at a disadvantage until the latter begins to share their gains from the GFC. The Distillery wishes that Megalogenis would drift into the business section of his newspaper more regularly.
Fairfax’s Adele Ferguson reports that there’s been some short-covering in the last 24 hours as investors that were betting of a Greek disaster backpedalled. The Australian’s Richard Gluyas agrees.
Fairfax’s Insider columnist Ian McIlwraith reports that the head of the Australian Securities and Investments Commission, Greg Medcraft, has admitted the regulator is having problems with its new business name registration service.
And finally, The Australian’s Paul Garvey reports, with some regret, that the people of Burma who have been deprived of foreign investment for decades thanks to the mindless rule of the military junta are now finally in line for genuine reform, but foreign investors are cautious about moving in.
THE DISTILLERY: Fairfax flailing
Jotters pore over the details of Fairfax Media's dramatic restructure and find hope, despair, good and bad timing, while several others look at investment in Greece.
Want access to our latest research and new buy ideas?
Start a free 15 day trial and gain access to our research, recommendations and market-beating model portfolios.Sign up for free