Fairfax was first on the streets with an inferior product, then News Ltd responded just hours later as Melbourne’s giveaway newspaper wars exploded into action this week.

After making all the noise about being first onto the market, it was Fairfax that was throwing money away first with a 32-page tabloid giveaway on the streets of Melbourne at 8am on Monday morning.

Unfortunately, the product was clearly cobbled together and was not a patch on the News Ltd MX papers that hit the streets around 3pm.

Crikey picked up his Fairfax Express at 9am from a group of four backpackers in blue Express tee-shirts. They reckon Fairfax is paying them a handy $16 an hour to hand them out, which is better than the $13.50 that News Ltd has agreed to pay the pom who gave an edition of MX to Crikey near Spencer St station at 3pm in the afternoon.

Interestingly, Fairfax has appointed Marilyn Webb as the general manager of its project. She has worked effectively and successfully with new Age publisher Greg Hywood on the Fin Review, the SMH and now down in Melbourne at The Age.

Herald Sun editor Peter Blunden wasted little time dusting the gloves off when he went into the ABC studio with Jon Faine and claimed Fairfax’s Express should be called the MP – Melbourne Plagiarist – because the Express’s page 3 yarn was a lift of the Hun’s morning splash about 18 people dying from deep vein thrombosis over the past eight years.

When Faine asked Express editor Andrew Holden about this charge, he agreed, saying: “Of course, it was a fantastic story and one that we would want our readers to know about”.

The Fairfax paper was not nearly as polished as its News Ltd rival although it did have the usual range of news, sports, business, horoscopes, crosswords, TV, a gossip page called Express, a commuter column by Age columnist John Elder, a letters page and half-page cartoon. Fifteen minutes would be more than enough time to get through it. It’s front page splash about Sydney’s Olympic stadium being too small for footy was a bit weak for a Melbourne commuter paper. By way of contrast, MX splashed with a funding dispute between the AFL and Melbourne City Council which threatens the Grand Final parade in nine months. It is hardly a fast-breaking news story in the middle of summer but it says a lot about Melbourne that both papers went with footy in the middle of another boring cricket season.

Fairfax appeared to narrowly win the advertising battle although you’d have to query how many of them were credits on other deals across the Fairfax group. That said, there were full page in Express for The Hyatt Food Court, the Melbourne Symphony, Barbecues Galore, Julia Ross Recruitment, ANZ Bank and Macquarie Bank.

By comparison, News Ltd’s better designed MX, which is produced by a team of 12 in editorial and relies mainly on reporters drawn from News’s suburban group Leader, had full page ads from Sanitarium, Shell, Connex Trains (which would have to be a freebie given News has bought exclusive distribution rights from them), Kraft and Seek.com.au.

MX is produced on better stock newsprint, has more color and more bite size design chunks and is clearly targeted at young women. The double page spread on the inside back called MX Goss and Glam features no less than 10 pix of attractive young women, including a very big cleavage from Copacabana Beach in Brazil.

Interestingly, the Optus pay-TV schedule gets a run alongside Foxtel in MX and the Fairfax Express has only given Foxtel a go. MX has also gone to the trouble of getting a page of cinema guides under the attractive banner of MX Flicks which sits opposite “MX Night Out”.

MX is 32 pages of colour and includes features such as “Downunder: Around Australia in five minutes”, and lots of bite size chunks with nice wide-measure columns of briefs. Sport is the centre spread and there is also a MXTechno page and even MXChicks. How groovy!

The two papers have certainly had a huge run in the media. I did interviews with ABC Sydney and ABC Brisbane and both the editors were out there doing interviews along with HWT chief Julian Clarke. All the TV bulletins gave it a big run as did the ABC all day.

Julian also did a press conference for the TVs against a bright yellow but unbadged backdrop whilst Express editor Andrew Holden had the bright blue backdrop promoting the new Express brand.

The big question now is whether the Swedish group Metro and London-based DMG, the most cashed up newspaper company in the world, will respond and take on the incumbents. Afterall, they have triggered this war and it seems like we have the same situation as Toronto at the moment where the incumbent players have launched a big pre-emptive strike against the foreigners.

News Ltd has everything to lose in this exercise because the Herald Sun has the highest penetration of any newspaper in the world, with 40 per cent of Victorian homes getting the upmarket tabloid.

Far from it being a visionary initiative by HWT, this is a wholly defensive strategy designed to protect the HUN’s 560,000 sales. The afternoon editions are looking pretty shaky as why would you pay $1 for it when you have a free alternative that is a better, fresher product.

Back when Crikey worked on the PM edition, there were about 30 staff involved. Now it is down well below 10 and they are only really changing the front couple of pages and sport.

Julian Clarke’s claim that the PM sells mainly in the burbs and MX was aimed at the city is a pretty thin argument. Most of those people getting off the trains in the burbs will now not bother to buy the PM edition of the Hun.

Both Fairfax and News have been claiming that each is prepared for the long haul but it is unlikely the market will be sustainable. Based on the first editions, News is throwing more resources and quality at their product and stand a better chance of succeeding. Afterall, young readers have deserted newspapers in droves across Australia and this looks like a genuine attempt to win some of them back.

Now, these are the thoughts of a former Herald Sun insider and senior newspaper executive who emailed Crikey with an analysis of the situation.

Just caught up with the impending free-sheet battle in Melbourne. V interesting. It speaks volumes about the comprehensive failure of the Herald -Sun’s PM edition. It must be circulating less than 60,000 – which is barely enough to justify a press crew anyway. But the interesting thing is how the withdrawal of the PM edition would affect the H-S’s overall circulation and therefore ad rates. News must feel its dominance over The Age in morning sales alone will justify its current ad rates/revenue.

I’d be surprised if agencies were that interested in the publication. Surely they will get all the demographic segmentation they need from radio and TV – so what’s a mere 200,000 readers of MX going to deliver that the other two media don’t – even if MX achieves its readership objectives? Still, always a hard market to pick for a new publication and it’s difficult to say who will have the upper hand.

I would say it’s the ultimate no-win situation that both would have been better off leaving to DMG. After all, DMG doesn’t have a press and would have had to buy the printing from someone!

Here’s why I think MX and Melbourne Express are doomed: The papers’ different cycles are probably irrelevant and are explained mainly by cost. A morning paper has the advantage of hanging around longer during the day the advertising appears – traditionally a huge selling point for advertising in morning papers. On the other hand, that hasn’t stopped advertisers placing their money into the high-selling TV spots around PM prime-time. Afternoon papers also have a definitive news advantage – especially in Australasia where big world stories break in the wee hours and can’t be printed until, say, 7am at the earliest. The splits are probably explained by the two companies’ available press slots. The Herald-Sun is already paying for an afternoon press crew for its PM edition. Assuming that continues – and it probably will have to unless it wants to take a big hit on its Hun ad rates – it has an underutilised crew with plenty of time to crank out the piddling 60,000 MX copies. With its presses, a print-run like that would take, say, 30 minutes. Fairfax must be tacking on Express to the end of its (falling) Age run in Spencer St. Its only alternative is to print at one of its suburban operations, which are generally day-time operations and would therefore require an expensive overtime payment, not to mention freight cost and time to ship from the ‘burbs.

The biggest problem, though, won’t be readership. It will be the ad sales which make or – more likely – break the papers. There are three sources of it: agency/national display, local display and classified.

I stand by my earlier comments about the agencies’ position on demographics. The only reason they might be persuaded is if either paper can deliver higher penetration in Melbourne than either of the existing paids. There is some merit to this, considering the large amount of country sales that contribute to the circulation totals of The Age and The Herald Sun. This has to a large extent, put off agencies in the past. Why “buy” 300,000 country readers when they’re pretty unlikely to visit your Melbourne CBD store? The local CBD frees published by Text Media and Pearl and Dean (I think) got started on this argument and it’s sound. But remember, they also trade mainly only local display advertising.

One can’t take much comfort from the London experience, either. There, all the paids are nationals – except the Evening Standard which focuses on London. In other words, agencies support the Standard because it is the most cost-effective way to reach London-only readers via a paid paper, which is their natural preference in the print game. The sheer size of the market there (5m plus people?) created ample opportunity for some London frees to trade on the local display market using the same argument. Crucially, they also had the benefit of a gap in the London-only morning market. The same applies to the Swedes’ European experiences.

If the Age and Herald Sun are to get any agency dollars then, they must succeed in switching their Melbourne readership to the frees. But imagine the enormous potential cost to both if they do so! The only other way of getting the agencies on board is by combo-selling packages with the paids. That’s terrible for existing margins and will, if the experience of radio networks is any guide, only confuse and distract the existing sales teams from filling the paids.

So if the agencies won’t advertise, that leaves local display. That’s a big market and not to be ignored. But it’s also being served by a variety of existing frees, including the aforementioned Text Media and Pearl and Dean titles. MX and Express will only win that one by proving they have higher readership. They might get there but it will take at least two surveys to prove it – that’s 12 months. No wonder both publishers are promising to be in for the long haul. To be fair, they also have the advantage of being able to offer combos with the paids but, again, that hurts existing margins.

Finally, one certainty is that neither paper can count on classified revenue. Classified revenue theoretically goes to the biggest selling paper, assuming cost per line is the same. However, demographics have played a part in Australia with professional classified buyers. The Age has done better than the H-S over the years by snaffling all the property and motor lineage – where wealthy readers are assumed to have more disposable income. The Herald Sun has the advantage in the personal classies where it has converted its huge blue-collar readership into Valentine’s Day specials and Hatches Matches and Dispatches.

So what about the new freebies? Neither offer real mass. And even if MX gets its target audience – so what? They would still be better to advertise in the paids where they are guaranteed a larger pool of potential buyers/readers. Given that most private advertisers are only selling one item, more buyers means best price. Demographics are totally irrelevant in the classified pages to private buyers.

Obviously, this analysis is pretty negative for both. In fact, it’s hard to see how either can make a go of it. Still, they only have themselves blame. Both – and Fairfax in particular – have created the gap by underinvesting in local reporting for years. Court, council and local business coverage is woeful. It is also in direct contrast to the US cities, where city paids have been beefing up their local newsdesks hugely (viz Boston Globe).

The Australian papers have also ignored the experience of the UK and US Sunday papers that the circulation dampening effects of fatter papers must be offset by more content. In other words, newspaper buyers have a clear perception of value. If papers are bulky only because of advertising, they will return to their general preference for thinner papers.

So what could News and Fairfax have done otherwise? Logically, and considering this was a pre-emptive strike on DMG and the Swedes rather than a desperate defensive move, maybe launching the papers as paids might have been smarter. If ad revenue is going to be a hard haul, and if both publishers believe there is an untapped readership market, then they should have launched them as paids. The difference might be that, instead of selling them at $1, they were sold at, say, 20c. The pick-up might be lower but the accounts would have looked a lot better. Ironically, the agencies might be inclined to support them with lower paid circulations than higher free ones. This approach is similar to the US where, for instance, the LA Times sells for just 25c. Trying to establish a paid circulation base might be riskier strategically against the foreigners and in a publishing sense generally. But running that risk compares pretty favourably against the absolute certainty of just throwing the shareholders’ money down the drain.

West Australian Newspapers shares are looking better every day!

Cheers, Crikey’s Newspaper Expert

Now, let’s look the SMH’s business commentator Liz Knight missed the point recently in her column about this issue. She makes it out as if John Hartigan is getting on the front foot. The reality is that neither News or Fairfax want to do this. They were forced into it by the impending foreign competition. DMG is looking at a giveaway platform to augment their recently acquired Melbourne FM radio licence and the Swedes are simply rolling out an identically laid out and designed product around the world. The only thing different between the publication in Stockholm, Toronto and Brazilian cities is the language.

Anyway, this is what Liz told SMH readers a couple of weeks back.

The giveaway afternoon newspaper war is set to flare again. By Elizabeth Knight

The last thing John Fairfax and News Ltd need is a newspaper war. But it looks like Rupert Murdoch’s new headman in Australia, John Hartigan, is looking to start one.

Over the past few days he has let major advertisers know of News’s plans to launch an afternoon/evening giveaway in Melbourne. So that informal “keep off the grass” agreement with Fairfax has been ignored again.

The last time this was tried – less than a year ago – it was Fairfax taking the pre-emptive move.

But when News became aware of the Fairfax plan it moved straight into battle mode and began to fast track its own product for the afternoon market.

It became a Mexican stand-off. Both backed down and nothing was lost, other than a bit of face.

This time News has been the aggressor. And there is an expectation that if successful in Melbourne, News will migrate this idea to Sydney. It is estimated that this exercise will cost News around $10 million a year.

The concept of the afternoon giveaway has been proven successful in several overseas markets so the validity of News’s attempts to try it out in Melbourne are sound enough. But more on that later.

Right now the sharemarket will be focused on the Fairfax response.

The bottom line of the economics is that two giveaways in one market can’t make money.

Fairfax pulled out in May last year for exactly that reason. Its internal numbers on this scenario is that for the first couple of years the afternoon newspaper would lose around $5 million a year – assuming it had no competition.

However, if News entered the market Fairfax was factoring in losses of between $10 and $15 million. So its decision to back off was not surprising.

The strange part of that whole exercise last year was that Fairfax could have thought for a minute that News would have let them have the market uncontested.

But this time it is different. Fairfax will need to make a response.

If it decides to contest this market in Melbourne it will be hammered by investors. Why? Because it doesn’t have to.

Publishers have three issues of concern: Circulation, advertising volumes and advertising rates.

The Fairfax broadsheets, The Age and The Sydney Morning Herald, are morning newspapers. The number of papers sold to afternoon commuters would be negligible. The type of advertiser who uses the SMH and Age, with its national brands, display and classified advertising, would not be using an afternoon giveaway with limited circulation. (It is guaranteed to be 60,000).

And because there is no cross-over in readership or advertising, it is hard to see how the new paper’s cheaper rates would put pressure on the ad rates for the SMH or Age (assuming it migrated to Melbourne).

This is why the market would frown on any attempt by Fairfax to take on News in the Melbourne market. There is little upside but significant downside.

For News the picture is somewhat different.

In the first instance it is already in the afternoon market in Melbourne and Sydney with the late editions of The Herald Sun and The Daily Telegraph. And the reality is that while there is pressure on the circulation of all newspapers, those with the big falls are the tabloids.

In other words, taking a new product into the afternoon segment is a defensive move by News.

Clearly the Herald Sun and Telegraph are not selling much in the afternoon and a giveaway could boost revenue in terms of circulation and better utilise the printing presses. The key to this whole exercise is to keep costs low.

At this stage it appears that this new product will be running editorial from other News publications or wire service copy. It will be low on cost and quality.

The success of this product will be determined by the extent to which it will be embraced by advertisers.

The media buyers believe it will not attract branded advertisers or classifieds but will be looking for local advertisements. And the sales pitch is aimed at the young white-collar worker. If it is pitched any lower it would encroach on News Corp’s tabloid market.

But the reality is that News seems to be pitching its new product at the younger market, who are clearly not natural readers of newspapers.

The higher intellectual demographic are happy enough with the Age, SMH or The Australian but the rest of the less professional white-collar brigade are abandoning newspapers.

In the past they read tabloids either in the morning or the evening.

This new paper has been successfully pitched at this market offshore and will probably respond in a similar fashion in Australia.

But this is not the Fairfax market. If Fred Hilmer thinks he will suffer from this type of competition then the market will simply make him suffer.

Hartigan is about to put his mark on Murdoch’s Australian empire with the launch of an afternoon giveaway newspaper in Melbourne, and the Australian Competition and Consumer Commission’s Allan Fels will be wearing a wry smile as he watches the informal “keep off the grass” agreement between the press giants Fairfax and News.