Veteran media analyst Peter Cox is campaigning to be elected to the Fairfax board at the struggling company’s AGM next week. Here, he presents his take on where Fairfax went wrong …
1. Building new printing presses
Evening papers had been closing down in the 1970s and ’80s from the competition of TV and newspaper circulation per capita was falling in the US, the UK and Australia from the 1970s. Yet Fairfax invested over $220 million in a new printing facility at Tullamarine in Melbourne in the late 1990s. The plant may bring $20-30 million today for a loss of some $200 million.
2. Creating free online sites
Fairfax has been the self-proclaimed leader since the late 1990s in a dash to convert fee-paying newspaper subscribers into free online readers. This has reduced newspaper circulations and advertising and converted dollar newspaper readers into dime online readers. The cost of this is being borne by the industry worldwide but threatens the survival of many, including Fairfax.
3. Losing the “rivers of gold”
Fairfax dominated the classifieds business in Australia until the early part of this decade when new digital start-up companies attacked the real estate, employment and motor vehicle markets. Stock market valuations at June 30 were: Seek at $2.13 billion, RealEstate.com.au at $1.8 billion and CarSales.com.au at $1.4 billion, for a total over $5 billion. Fairfax is now capitalised at under $1 billion.
4. Not investing in digital start-up opportunities
Fairfax had the opportunity to invest in Seek, in which Packer was to invest $33 million and make $400 million. Fairfax rejected investing in RealEstate.com.au but News invested $2.2 million for a 44% interest which is now worth over $900 million. Again, PBL bought into CarSales.com.au and made $560 million.
5. “Diversifying” into same media
Fairfax confused diversification with expansion. Under the guise of diversifying Fairfax expanded into the traditional declining industries of newspapers and radio in Australia and New Zealand. Meanwhile Murdoch expanded into international newspapers in the UK and the US but then into movie studios, pay TV around the world and finally free-to-air and cable channels in the US. The cable channels are now the most profitable part of the News Corp business.
6. Merging with Rural Press
Fairfax in 2006 expanded into the same core mature industry of newspapers with falling circulation and advertising by investing $2.3 billion in Rural Press. A falling EBITDA in 2012 of $159 million could value the regional assets (including previous regional assets) at between $650 million and $950 million for a loss of about $1.5 billion.
7. Investing in radio stations
Fairfax bought into a low growth, low margin and highly competitive radio industry by buying the AM radio assets of Southern Cross Broadcasting for about $360 million in 2007. With EBITDA of $13.9 million in 2012 and ratings, revenue and profitability declining the stations could be valued today as low as $55 million to $80 million, a loss of up to $300 million.
8. Marginalising The SMH and The Age
The board has set about reducing the importance of some of the best media brands in Australia to only 30% of the revenue of the company. Further, the board and management have not aligned the editorial approach to target the most beneficial socio-economic targets. With escalating falls in circulation and advertising the newspapers on a true cost allocation basis are probably just breaking even or incurring operating losses. The board has written off $1.9 billion in masthead values and The SMH, The Age and The Australian Financial Review may be worth nothing.
9. Mismanaging The AFR
The Fin has many problems, including the poaching of leading journalists by News Ltd, the loss of market share to The Australian business and media sections and to Business Spectator/Eureka Report, competition from international business newspapers online, few if any international affiliations, too many staff and overheads, poor and overpriced online strategy, falling circulation and advertising. Operating at break even and a loss in the future.
10. Board failure
Roger Corbett has been on the board since 2003 throughout the series of disastrous decisions outlined above and has been chairman for the last three years, during which the three major newspapers and radio stations have lost market share, circulation and advertising. Only one other director has provided continuity and seven new directors have been appointed since 2010, largely without each having a combination of media experience or expertise.
Christopher Joye in his column in The AFR recently wrote: “The board repeatedly made costly mistakes, decision making has been sluggish and risk averse, had no incentive to adapt and executives saw their mission as providing a public good, or editorially independent journalism.” Mark Day in his column in The Oz described the chairman’s knockback to me as being “a classic piece of corporate pomposity and myopia”.
Adam Schwab writing in Crikey listed a series of directors culminating in Corbett who “have mismanaged one of Australia’s great companies through not one, but a series of inexcusable blunders … a truly remarkable achievement in incompetence”.
During the period the chairman, Corbett has been on the board the share price has fallen over 90% from a peak of $5 to under 50 cents, losing shareholder value exceeding $5 billion and endangering Fairfax’s very survival.
*Peter Cox’s detailed pitch to institutional investors on why he should be elected to the Fairfax board can be read here