By Andrew Main
It was probably just unfortunate timing, but this week’s new near-$1 billion asset write down by Fairfax came on the same day that ABC’s Media Watch noted how the big US tech stocks are enjoying big lifts in ad revenue at the expense of traditional media companies.
As Australian online pioneer, Eric Beecher, told the program, “It’s extraordinary. The forecast is that Facebook and Google will have 90% of digital advertising revenue by 2020. There will be almost nothing left for the rest of us.’’
Host Paul Barry noted that both The Guardian and The New York Times had just reported losses, despite being in the top 10 news sites worldwide, then threw in that the Guardian has just started asking readers for donations.
Fairfax CEO Greg Hywood’s move to knock $989 million off the carrying value of its mastheads was just the latest recognition of how the book values don’t represent modern commercial reality. It follows a $2.8 billion write down in August 2012, some $444 million in impairments a year later, and another $19.4 million write down in February of last year. And no one’s saying it’s the last.
The announcement on Monday was laying the groundwork for the full-year 2015-6 results to be announced next Wednesday, August 10.
Bear in mind it’s now clear that Fairfax will sooner or later cease midweek printing of its two big capital city papers, the Sydney Morning Herald and the Melbourne Age, which in turn will land the weekday editions of the Australian Financial Review with higher per copy distribution costs. Oh, and they’re also looking to axe the weekend AFR.
So what’s the good news? Not a great deal, as evidenced by the Fairfax share price falling 1.9% or two cents to $1.03 on Monday, and a further two cents yesterday to $1.01.
But Mr Hywood made much of the fact that the Domain real estate division, something of a pearl amongst the jetsam, has been pulled out to report separately.
Indeed, a good part of the asset write down was to give Domain a suitable amount of space on the balance sheet. According to Fairfax, “the impairment charges reflect the separation of the business units and the outcome of the review process including the allocation of assets between Australian Metro Media and Domain.’’
There’s clearly a move afoot to spin it off, particularly as Domain’s EBITDA earnings jumped almost 74% to $65.7 million for the six months to December last year.
Compare and contrast that with the Metro division, holding the three previously mentioned metro titles, down almost 33% at $46.9 million by the same measure, for the same period.
Traditional media owners are now being forced to tell investors to look at the tail rather than the dog, given that the financial running is now being made by advertising-based divisions, while the editorial side wilts visibly.
I’ve worked both for Fairfax and for News and the latter is doing the same. News holds 62% of REA Group, which operates realestate.com.au, an arrangement which allows the spinoff to be more highly rated while head office enjoys most of the returns.
Incidentally, News will be reporting on August 9 – the day before Fairfax – and that’s unlikely to be much of a champagne affair either.
Fairfax CEO, Greg Hywood, hosed down talk of a spinoff by noting that “Domain makes a significant earnings contribution and remains an integral and growing part of Fairfax. We have no plans for that to change.”
That’s not to say it won’t, but just not yet.
The big phrase that Fairfax has been wheeling out is “transition to a sustainable publishing model”, which gets two canters in this week’s announcement. That’s code for the fact that it’s all still heading south overall, but there should be good times ahead.
Given that the Fairfax share price was around 50 cents two years ago and is now $1, there are obviously believers out there.
But like gold shares, Fairfax shares are better suited to buying and selling, not holding. As one Fairfax source noted a while ago, they’re not for putting in the bottom drawer.
Just to put it all in perspective, Guardian Group’s annual revenue is now 1% of Facebook’s, and Facebook’s quarterly advertising revenue was up by 63% over the last year to $US6.4 billion, while Google’s equivalent revenue jumped 24% to $US15 billion.
For most of the last decade, newspaper proprietors have promised jam tomorrow as the growth in digital advertising revenues takes over from classified and broadsheet advertising. It’s certainly the case that the growth is there, but unfortunately, it’s mostly going to the US tech giants.
As we found out when Google raced past Yahoo to become the world’s first port of call in checking information online, there only seems to be room for the biggest players as consumers around the world play “me too” in finding ways to get their news.
Yes, there are going to be exceptions with local advertising and local editorial input, as Warren Buffett has shown by buying up local newspapers in the US, but the risks around the world to the intermediary purveyors of information in the middle appear to be growing, rather than shrinking.
If you liked this article you'll love the Switzer Report, our newsletter and website for trustees of self-managed super funds. Click here for a FREE trial and to hear more of Peter’s expert commentary and advice.