Fairfax highlights the media’s digital dilemma: Bartholomeusz

Fairfax Media’s decision to cut 550 jobs this week is a good example of the digital dilemma confronting newspaper publishers around the globe. They are damned if they do slash jobs and costs, and damned if they don’t.

The Fairfax response to what in the past would have been a cyclical downtrend in advertising revenues as the economy slows, has been the biggest cost-reduction program in its history.

It is a fairly dramatic response because the downturn isn’t just cyclical but structural, with the impact of the continuing erosion of the group’s once-fabulous classified advertising revenues as they shift online being exacerbated by the impact of the cycle on display ads.

Cutting costs in line with declining revenues is, of course, a response rather than a solution to the challenge created by the continuing decline in the relative profitability of Fairfax’s flagship broadsheets.

It buys some breathing space from demanding investors in the near term, and blunts the impact of lower revenues, but risks accelerating a spiral of declining quality, revenues and earnings in the longer term. Financially, the Fairfax metro newspapers are already in a quite steep and long-term decline.

For the past decade, the Fairfax strategy has been to control that rate of decline in the metro mastheads’ profitability while busily diversifying away from them to give the organisation, rather than the metros, a long-term future.

The purchase of the New Zealand community papers, the Rural Press merger and the Southern Cross acquisition have dramatically reduced Fairfax’s dependence on the metros, which now probably represent only about 15% of its market value.

Leaving aside the role that newspapers, and broadsheets in particular, play in societies, that would be a rational business strategy if an element of that diversification strategy wasn’t to transition their mastheads and their audiences into a digital future.

Fairfax reports Fairfax Digital’s performance quite separately to the physical papers whose content it leverages. Its numbers, and growth rate, look quite impressive. Revenue was up 30% for the year to June and earnings before interest, tax, depreciation and amortisation (EBITDA) were up nearly 54% to $54.3 million. Digital is valued by analysts at something close to 70% of the metros’ values – and those relative values are closing rapidly.

That looks pretty impressive but, as The Age’s Matthew Ricketson has pointed out, appearances can be deceptive because it doesn’t appear that Fairfax fully allocates Digital’s share of the cost of the content it shares with the physical papers. Digital generates only a relatively small proportion of its own content.

That’s savvy, because broking analysts attribute higher multiples to on-line businesses – 10 or 11 times prospective EBITDA for Digital versus about 7 times EBITDA for the metros.

The more Fairfax can maintain the costs of generating content for Digital within the metros, and swell Digital’s reported earnings, the greater its own value. A different approach to cost allocation would, of course, make the metros look more profitable and make them smaller targets for cost-cutting. The market can be shallow.

In the longer term, however, if the metros continued to wane and Fairfax continues to reduce its cost bases in tandem with its revenue bases, Digital would be affected. There is a symbiotic – some would say parasitic – relationship between the metros and Digital, given that they provide, cheaply, most of its core content.

If the metros were unable to provide as much content as they have, it would damage Digital’s competitiveness and prospects. If it had to pay a growing share of the cost of content generation, its economics would be far less attractive.

The longer term future of serious journalism is almost certainly online. While the economics of the major media titles online are suspect at this point, it is a more efficient and flexible distribution channel while also being lower-cost and not capital intensive.

Unless the traditional media have some really serious and compelling and unique content to offer in an environment where content is generally free, however, there would be no point in even attempting a migration into such a crowded and competitive space.

Fairfax may be able to cut 550 jobs including, it appears, more than 100 editorial positions in the two big broadsheets, without unduly affecting the quality or quantity of coverage.

It is possible, although perhaps not probable.

Fairfax has already funded more than $100 million worth of restructuring and redundancies over the past seven or eight years – it has already carved into its cost base and the metros, which generate about a third of the entire group’s costs, have been on the receiving end of their fair share of that.

Do nothing and the market would savage the group. Cut too deeply and the future of the metros will be truncated and the eventual opportunity to transition the distribution of their content from the historic formats to an online environment might be jeopardised.

It is a dilemma, but not that tough a one for managers who are pressured, and rewarded well, to manage to short term market expectations. Sadly.

This article first appeared on Business Spectator