The Fairfax broadsheet newspapers are bleeding so fast and so deep that it is now not inconceivable that some time this year they could stop making profits.
If that sounds like just another hard-luck recession story, or a beat-up, consider this: last financial year The Sydney Morning Herald and The Age each made a bit more than $40 million, and it was only a few years ago that they were raking in more than double that amount.
The reason for this catastrophe is that their classified advertising base — the source of their profitability — is collapsing. Goldman Sachs page-count figures released on January 8 revealed the extent — SMH down 28% and The Age down 42% in classified ad pages in December compared to the previous year.
To understand the financial impact of this trend, each classified ad page makes a clear profit (after all costs) of at least $20,000. If this kind of decline continues, both papers could see their profits fall by $30-40 million in calendar 2009 — which isn’t much less than their annual profits a year ago. (Fairfax does not release a breakdown of each newspaper’s financial performance, so these figures are based on broker estimates, which are based on company guidance).
The idea that the two most historically profitable newspapers in Australia are heading towards break-even is a shuddering event — for Fairfax shareholders, the future of newspapers and the prospects for Australian journalism.
It also raises the question of what these once-great newspaper properties are actually worth. It is understood that Fairfax has them included in their balance sheet directors’ valuations at $1 billion or more each (Fairfax doesn’t reveal the value of its individual assets, only a total amount). Almost no-one except Russian billionaire hobbyists is buying newspapers these days — but in the US the current earnings multiple is pegged at around 3-5x profits. Despite their grandeur, it’s unlikely the SMH or Age would fetch more than $200 million (if that) if they were on the market today.
Sadly, this is not just a recession story. It is the latest chapter in the migration of classified advertising from newspapers, overlaid by a collapse in job advertising and a severe downturn in the property and automotive markets. No-one seriously believes that when the recession is over the historic classified volumes will return to newspapers. To understand why, look at the five-year Goldman Sachs page-count figures: the papers are each down something like 80 classified ad pages per week — that’s 4000 pages @ $20k per page profit annually — compared with 2003. The erosion of newspaper classified advertising is endemic and structural; the current recession is only accelerating that trend.
So what can Fairfax do? Fortunately, their two broadsheet flagships are no longer the mainstays of the company (if they were, there would be no company). But annual profit leakage of $60 million, combined with the impact of the recession on their other properties (rural, regional and suburban newspapers in Australia and New Zealand; radio; magazines; business publishing — which is also bleeding — and online) means Fairfax has no option but to accelerate its large-scale cost cutting. Here are some of the main bits of their cost-reduction shopping list:
- Sack hundreds more journalists
- dramatically reduce the size of the company’s head office
- outsource more content, sub-editing and editorial production (possibly to India)
- cut page volumes
- eliminate traditional newspaper “service” elements like sharemarket tables and racing form guides
- amalgamate the stand-alone SMH and Age Canberra, business, sport and foreign desk operations
- force segments of staff to convert to four-day weeks
- eliminate most foreign bureaus
- together with News Limited, devolve responsibility for more content, production and editing to AAP
- reduce the audited circulations of the SMH and Age by cutting back on discounted copies
- merge the internet and newspaper operations
- merge their printing plants with those of News Limited
- convert BRW into a monthly or close it
- dramatically reduce sponsorships and suspend expensive overseas trips for key advertisers like real estate agents
- increase cover prices (which will reduce circulation and, therefore, printing costs)
- reduce the margins paid to newsagents
- reduce the margins paid to advertising buying agencies
- trim the page sizes of the newspapers to use less newsprint
- and probably start making noises about selling assets to placate the banks.
The SMH and The Age are now effectively the number-two newspapers in their respective cities (measured by circulation, profit and stability) — a precarious position in the early stages of a recession. Very few large cities anywhere have more than one newspaper any more, and in those rare places where they do (New York, Boston, Chicago for example), only one paper makes a profit and it is in free-fall.
The brains trust at Fairfax has been arguing for the past few years that their broadsheet newspapers are different to the deteriorating UK and US newspapers. Now they have been proved right. They are different: due to their much higher dependence on classified advertising for profits, they are actually in a much worse position than their international peers.
And it used to be so much fun being in the newspaper business.