Tuesday, June 21, 2011

Fairfax: dinosaur or unpolished gem?

I keep a watching brief on the fortunes of Fairfax, one of Australia’s largest and oldest media companies. Fairfax is a very interesting case study for any aspiring media mogul. In fact, for any business operator, since Fairfax’s rollercoaster run illustrates how business fortunes are closely linked to ever changing operating environment and management response to changes. All in all, valuable lessons can be learnt from Fairfax history, regardless of the industry the business operates in.

For many, Fairfax is a dinosaur at the brink of extinction. Changes in the business environment significantly affected its revenue stream and majority of pundits fail to see any growth prospects for the company. It is reflected in Fairfax share price, barely 16 cents above its all time low reached in 2008, at the peak of the Global Financial Crisis gloom. However, last year investment into Fairfax by fossicker / explorer Gina Rinehart may indicate that there is some hidden potential in this company.

An interview with Fairfax CEO Greg Hywood, screened on the ABC’s Business Insiders, prompted a few reflections. The comment that caught my particular attention was a frank admission by Mr Hywood that Fairfax business was never about the news and journalism(!): “…the old business didn't really need the journalism. It created a market around jobs, homes, cars in print, and the company drew further audience into that through the journalism, but it wasn't completely dependent upon it.” Finally someone from the media camp acknowledging what this business is really about – advertising dollars!

Although it is relatively easy for the outsiders to define the true nature of media business, the most prominent industry insiders, like for example Mr Murdoch, still insist it is all exclusively about “quality journalism”. Hence, they are pinning their hopes on locking the content behind pay walls and earning revenue from access fees. But this model cannot replace revenue lost from lucrative advertising deals. What works for Bloomberg will not work for the News, Fairfax and the like. It is simply because they are trading in different commodities, ie. Bloomberg is providing market-moving information for the finance industry participants while others just general news, gossip, entertainment, etc. - primarily for general public. Clearly, the value proposition is so much different.

I believe that properly defining what business print media operators are in is the first and most important step towards finding the right business model which will ensure their long term survival and prosperity in the new environment. Hence, I am encouraged by Mr Hywood's comments as it demonstrates that Fairfax management is not shying away from naming the things as they are: “…what we do is we create audiences, and we leverage that into advertising and digital transactions… not just in print, but across audiences.” And that’s exactly what Fairfax’s business really is! [See my earlier analysis for further insights.]

However, there was a comment that made me question whether Fairfax management fully recognised implications of the above definition for their business: “…Now our business is about the journalism and the content.” If this comment was just to appease unions and editorial staff at Fairfax, it’s totally understandable. However, if it is a reflection on the prominence of journalism in the overall Fairfax business then I have doubts whether there will be any material change in company’s fortune. Why? Because journalism is only a small part of the overall business activity (see my earlier comment above, it’s not about journalism, it never was!).

Let me give you an example. I recently subscribed to a special offer from Fairfax: 6 weeks of daily home delivery of The Canberra Times for $10. Unfortunately for Fairfax, I will not be renewing my subscription. Even at 24 cents per printed and home delivered paper I cannot find enough value there to justify spending another $10. And I suspect I am not alone with such assessment of the local newspaper. There is simply “nothing there” for me… Building business around such defined “journalism” is bound to fail.

In the further part of the interview Mr Hywood went on to say “…fundamentally, those little print classified advertising which made up the Sydney Morning Herald, The Age for a hundred-plus year, that business has gone online, and Fairfax has captured a portion of that, not all of that.” Well, this is another frank admission that Fairfax failed to adjust to new environment quickly enough to capitalise on its dominant position in classified advertising. But what is a worry now is that Mr Hywood failed to reiterate company’s commitment to fight for the dominant position in that lucrative market segment.

With hindsight, it is easy to see what went wrong in the past. The company had too good with printed classified ads business and was reluctant to sacrifice part of the revenue to compete aggressively in an emerging online environment. The result is that, after all, they lost on both fronts: in print and online. Their online competitors (seek.com.au $2.17B, realestate.com.au $1.6B, carsales.com.au $1.12B) are now worth collectively more than twice as much as Fairfax ($2.2B). Fairfax has a range of quality assets to use in competing for higher market share in those segments. I have no doubt that more focused and aggressive approach would bring substantial results. After all, it would be the easiest strategy to adopt, with the largest pay-off potential for the company.

Fairfax silence on strategies to regain market position in classified advertising is even more surprising if you consider that the company is under new attack, and this time round in print segment. Again, I would like to quote a local example. In Canberra there are two free magazines, Canberra City News and Canberra Weekly, that are published and distributed around the city once a week. They contain almost exclusively advertising material from local businesses, as well as real estate listings. And Fairfax is doing nothing about it. It is a re-run of the online scenario: the company is reluctant to undermine its current revenue stream so, it allows competitors a free reign with weekly magazines. If these publications grow in prominence, Fairfax will lose again since advertisers and real estate agents will use those alternative publications and not Fairfax assets. And the same is happening in other cities as well. Again, journalism has nothing to do with company fortunes.

Meantime, Fairfax is distracted with consolidating eg. holiday rentals transactional services. It is a good side show activity but not the main game. Again, it has nothing to do with journalism. Then there is a talk about disposal of radio assets. The company has fingers in many pies, and some “pies” are more attractive than others, some even offer great potential for the future, but it is hard to see where Fairfax is going with them.

I believe Fairfax is like an unpolished gem that with proper treatment can be turned into a precious and glittering stone that anyone will want to own. Unfortunately, the company was unlucky with continuous strategic reviews that came to nothing and subsequent lack of clear direction for the future. It behaves like looser, chasing scraps on the media market, rather than like a market leader it used to be, aggressively defending its prime position and fighting for every user/customer with its competitors. The focus on preservation of the old business was the main cause of its demise and unless this approach changes, it is very unlikely that Fairfax will return to its former glory. There is some hope that Gina Rinehart will take on a more active role within the company structures, instigate setting the proper strategic direction for Fairfax and reinvigorate the management team to implement the new vision with a greater zeal for success. Otherwise, I would not be surprised if sooner or later Graeme Hart or other suitor buys the company for next to nothing and cuts it to pieces to extract maximum value from individual parts. Fairfax has so much potential… it’s such a pity to see it all going to waste. But what do I know, I am just an “outsider”. I would gladly contribute to improving Fairfax fortune, or at least cooperate on some content generation projects, but this is very unlikely to happen without a sizeable investment in the company. So, back to my online experiments and keeping under the radar…

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