Fears about the future of newspapers, intensified by the advertising downturn during the global financial crisis, have depressed Fairfax’s share price with two results: the company’s board and management has been constrained in the ways they can respond to the company’s difficulties, and Gina Rinehart has been able to acquire a significant parcel of shares at a relatively low cost. Neither pressure — the demands of shareholders nor the ambitions of Rinehart — is likely to go away.
In Australia we’ve tended to worry most about media proprietors who want to use their outlets to gain political influence and shape public opinion. But developments at Fairfax over the past few weeks have highlighted how an open share registry can be just as corrosive to good quality journalism. At a time when Fairfax needs to develop a long-term strategy for survival, its owners — who are mainly large investors with no particular interest in the media as a key part of a democratic political system — treat the company like any other investment and make judgments every day about whether to shift their funds into higher yielding investments.
The shift away from sole proprietors to publicly listed newspaper companies began in the United States in the 1960s, well before the internet began to eat into audiences and revenue, and only became a feature in the Australian press after Warwick Fairfax’s disastrous attempt to take over the family company in 1987. In America, the underlying causes of the shift were the inheritance taxes faced by family-owned newspaper businesses and the need for extra funds to finance investment in emerging newspaper technologies.
During that decade a series of privately owned newspapers went public: among them, Dow Jones in 1963, Times Mirror in 1964, Gannett Co. in 1967, and Ridder Publications, Knight Newspapers and the New York Times Company in 1969. The shrewd Sulzberger family, long-term owners of The New York Times, made sure their company came out of this process in the best shape for preserving its values — a two-tiered ownership structure gave the family, which holds 19% of shares, 70% of voting power.
Over the following decade, financial deregulation fuelled a vast increase in share ownership and trading, accompanied by increasing demands for greater returns on investments. The newly exposed newspaper companies were under increasing pressure to deliver higher profits.
To gauge the impact of the ownership shift, three researchers, Gilbert Cranberg, Randall Bezanson and John Soloski, interviewed newspaper executives and editors and studied the financial reports of the major newspaper groups in the United States. In their book Taking Stock, published in 2001, they concluded that “the American newspaper is undergoing fundamental change, and that the change is compromising the newspaper’s continued role as a fiercely independent source of information and opinion judged relevant and necessary for public understanding in a free, democratic, capitalist society”. Publicly traded media companies “are a major, though not the only, force in producing this change”, they wrote, because the publicly traded newspaper:
“… adds something new, something very powerful, and something that is not economically or technologically predestined, to the equation. That something is (i) widely distributed ownership, (ii) in a highly competitive and liquid financial marketplace, by (iii) persons and institutions whose interests are strictly financial and whose expectations are by definition short term because of easy access to alternative investment at a moment’s notice …
“Investors in the firms are concerned with revenues, margins, continuously improving profitability, and stock performance. They are indifferent to news or, more disturbingly, its quality… The most important short-term strategy for increasing margins is cutting costs, and this consists largely of cutting personnel.”
The three researchers found that operating margins in the industry, once running at between 10-15%, “now range between 20% and 30% and higher in the newspapers owned by the public companies”. The cost-cutting yielded obvious benefits for shareholders but created instability in an industry that would be challenged in the decades ahead. Consolidation and rationalisation was also a feature of this period: the number of daily newspapers published in the United States fell by over 250 to 1489 between 1980 and 1998.
Cranberg, Bezanson and Soloski were contrasting the publicly owned companies with their predecessors, the family-owned newspaper. But they didn’t have any illusions about the virtues of private ownership: some family controlled companies have produced high-quality journalism and played a valuable role in a democratic society; others — as more recent revelations in Britain have underlined — haven’t. There seems little doubt that a Fairfax fully owned by Gina Rinehart would fall into the latter category.