Leading media analysts have savaged Fairfax CEO Brian McCarthy’s five-year plan to save the ailing publisher from the scrapheap, rounding on yesterday’s investor briefing they say amounted to little more than an organisational chart change.
In the marathon session yesterday, McCarthy announced the company’s major metropolitan mastheads and websites would be tipped into a new business bucket, Australian Metro Media, to be headed by an as-yet-unnamed chief, with Jack Matthews’ former Fairfax Digital fiefdom junked.
The company’s earnings before interest and tax would apparently benefit from $10 million through efficiencies, presumably including job cuts. However, it is on the broader strategy questions, including the perennial problem of how to monetise online content, that have analysts questioning whether the plan was anything more than window dressing.
In a note to clients, Alex Pollak from Macquarie Equities highlighted Fairfax’s continued reliance on the printing press in Australia and New Zealand regional areas, despite McCarthy using the slumping revenue contribution from The Age and The Sydney Morning Herald — from 80% 10 years ago to 20% today — to suggest he had embraced a digital future:
“The simple point is FXJ’s metropolitan display revenue stands at $600m, with online display between 10% and 15% of this.
“The challenge is to harvest as much as possible in the online transition. The regional platforms, by contrast, are not under threat at present from online, a significant positive for the company. As long as broadband speeds remains relatively low, FXJ regional papers in Australia and NZ have good profit potential although it should be noted that over 70% of the company’s valuation is still dependent on the printing press.” (emphasis his)
FXJ was heading in the right direction by re-joining print and online in the metros, Pollak said. However, “the process is slow compared with the speed of change in the online space”, with Macquarie rating the stock as “underperform”.
Cox Media principal Peter Cox described the briefing as “underwhelming”: “The structural reorganisation on the Fairfax charts looked impressive but the actual number of changes were small, with many of the business units remaining the same.
“The main one was putting the suburban newspapers into the one group but the main problem I had is that Jack Matthews has driven that side of the business. That growth could dissipate now it’s back in the main group.”
Cox echoed Pollak in his questioning of the media giant’s diversification strategy: “There was really nothing revolutionary on offer. I think they were sadly lacking in showing strategic outlook for the future.
“The problem is that they talk about their three major papers comprising 22% of the business as evidence for the success of diversification, but I actually think this demonstrates how they have failed to develop that side of the business, especially given that a classifieds company like Seek, which represents real diversification, is actually bigger than the whole of Fairfax.”
The media veteran slammed the current makeup on the Fairfax board as inadequate and uninvolved. The great shortcoming, he said, was at board level.
“I don’t think that the board have an appreciation on what the performance of the company is,” he said. “If you spoke to most of the analysts in the room, the board didn’t seem to have the ability to guide Fairfax managers. You take someone like [Australian Financial Review editor-in-chief] Michael Gill who talked yesterday about bigger penetration of The AFR among high income earners. But the real question is why is his newspaper’s circulation falling?
“These are fundamentals and there’s no explanation as to how they’re going to monetise and no demonstration on how they’re going to build a business model for the future.”
Goldman Sachs JBWere’s Christian Guerra also questioned the strategy, noting there had been no trading update, no explanation of recent circulation declines and no new news on monetising digital content. Guerra estimates the broader ad market will grow 12% in the second half of next year, dwarfing Fairfax’s internal projections.
“The extent of underperformance of FXJ’s structurally challenged publishing businesses is clear … quite simply, these businesses are failing to leverage the ad market recovery. We believe investors can garner better ad market exposure elsewhere in the media sector,” Guerra said.
Speaking exclusively to Crikey this morning, CCZ Statton Equities Media Director Roger Colman blamed the “market-share losing culture” in Fairfax under McCarthy. The company has failed to outline a future beyond the “sunset game” of newspapers.
“Fairfax in the Australian media landscape has been losing market share. It’s a cultural issue inside Fairfax which has to be addressed by [more than] changing a few organisation charts and moving people into positions,” he said. Colman notes online classified revenue has slipped 5% at Fairfax while competitors are up some 13%.
“This is a company that’s lost its competitive cultures, The SMH and The Age are losing market share against their News Corporation competitors and The Australian is gaining against the others.”
Colman also expressed concern over what the growing free classifieds market could mean for Fairfax’s bottom line, describing sites like RSVP-competitor Oasis Active and Yahoo 7’s Total Travel as a “cancer that’s coming” and the “gorillas next door”. “Even their transactional online model can be subject to massive price cuts because there are too many competitors,” he said.
Colman reiterates other analysts’ advice that the growth of broadband in the bush is a grave threat, with 30% of EBIT under a significant profitability downgrade threat. But the veteran observer also drew attention to the coming holocaust when metropolitan TV stations expand into online news.
“This will the final destruction of what they thought their future was,” Colman said. “Just as News Limited complained about the ABC coming into their markets, this is exactly what they should fear.”
Fairfax shares continued to flatline this morning at $1.36, with no appreciable response to yesterday’s announcement.