Why Fairfax needs Rinehart redemption

Like any other business, media companies have just one mission: to maximise shareholder returns. Fairfax has lost sight of this and has no entitlement to survival in its current form.

Gina Rinehart will probably be the best thing that ever happened to Fairfax. And anyone who thinks Fairfax has a responsibility to produce a certain type of journalism should find the cash to fund it. Because the rest of the world is saying they don’t want to.

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. As I argued in this op-ed over at the ABC in 2010, there are reasons why we only see products like Four Corners aired on public broadcasters. Many ABC programs would never be manufactured in the private sector, which rightfully produces whatever it thinks is most commercially lucrative. These companies are not providing a 'public good'.

A public good is something that when consumed by one person does not reduce its availability to another (we can all study as much ABS data as we like, but food is a finite resource), and once it is made available it is hard to restrict others from accessing it (the only way to stop you from benefitting from the military is by kicking you out of the country).

In economics, the 'public good problem' arises when we cannot be certain that private markets will supply the quantities of these services desired by the community. And so we pay taxes and elect politicians to ensure that government gives us the hospitals, roads, rail, water, sewerage, electricity, and emergency services that Australia requires to function in the manner we expect.

One service that all western democracies have decided must be freely available is regularly transmitted and unbiased news and current affairs. Almost all countries have established a 'public broadcasting service' (PBS) with this in mind. In the UK they have the BBC, Canada has the CBC, New Zealand TVNZ, and the US a decentralised network of stations called the PBS.

In each nation the PBS is freely accessible to members of society via the main mediums: originally it was radio, then TV and now the internet. While private markets have always supplemented this core news with a great deal of other, more monetisable 'content', policymakers have universally concluded that the state must produce, and protect the integrity of, a minimum level of objective information. In Australia, this manifests most strikingly in the form of the Australian Bureau of Statistics and the ABC.

In contrast, a durable private media business does not obsess about public goods. That is ABC managing director Mark Scott’s problem. Great media businesses consistently maximise the returns realised by the stakeholders that fund them – ie, the suppliers of debt or equity capital – while assuming the least execution risk required to do so.

The owners of Fairfax and News Limited should be free to run those organisations as they see fit. The mistake many make is confusing them with government enterprises. They are not asking for taxpayer handouts. And if these companies lose sight of their obligations to their stakeholders, they will cease to exist.

Financial markets have rendered a clear conclusion on Fairfax: it has been poorly managed, and has no innate entitlement to survive in its current form. It therefore has no choice but to radically modify its business model, which it is pro-actively doing under the leadership of Greg Hywood. That will mean recalibrating the content it creates, and the manner in which it is priced and delivered, so as to meet the financial needs of those who are ultimately underwriting it.

Commentators complaining about Gina Rinehart’s investment in Fairfax do not get it. They should get a job working for the ABC if they want to pursue a public mission. Fairfax has only one mission, which is to pay its creditors and furnish the highest risk-adjusted returns to its shareholders.

There is a persuasive case that Gina Rinehart and her advisors are likely to be much more effective catalysts for compelling the company to lift its profitability than individuals who have not been willing to invest their wealth in it.

All successful, private media businesses have distinct product biases that are reflections of their corporate strategy. Crikey and The Monthly echo the preferences of their owners, servicing the political centre and centre-left, respectively. Business Spectator and The Australian tend to advocate the interests of free enterprise.

Seven Group and the Nine Entertainment broadcast whatever products yield them the most attractive returns. If that means ambulance-chasing current affairs, a dumbed-down 60 Minutes, or purveying skin-pics in tabloid magazines, then so be it. It has been, and always will be, the owners’ prerogative.

Christopher Joye is a leading financial economist and a director of Yellow Brick Road Funds Management. The author may have an economic interest in any of the items discussed in this article.

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