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OPINION: Old media battles to make cents out of new media

By Melanie Carroll

Friday 16th February 2007

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When Wellington man Sam Morgan set up his TradeMe auction site in 1999, he probably didn't expect to become the saviour of the soon-to-be $10 billion media company, Fairfax.

But without TradeMe -- which monstered international giant ebay in New Zealand -- Fairfax would be in a sorrier state than it is today after losing its dominance in the lucrative classified market to hungry online competitors.

Fairfax -- which owns New Zealand newspapers including The Dominion Post, The Press and Sunday Star Times -- has been forced with other media companies to ramp up its focus online, to offset profits leaking from its newspapers and magazines.

The issue here is how long profits from old media will hold up while companies work on finding how they will flow from new media.

Fairfax's New Zealand publishing assets are more profitable than those in Australia. Margins on earnings before interest and tax (ebit) are 29%, compared with Australia's 18% margin. Fairfax Digital's ebit margin is nearly 26%, up from less than 1% in 2005.

Circulation at Fairfax's New Zealand newspapers and magazines rose 1.9% for the latest half-year, compared with Australia's 0.3% increase.

Chief executive David Kirk said at the interim results that a stagnating economy and weaker advertising was responsible for the 9.3% decline in New Zealand ebit, although its Australian publishing division saw earnings slide 3.8%.

If advertising is the problem, then this year should see an improvement in profits. After a soft 2006, better demand is already evident for television airtime, with an expected overflow into other media, says strategist Michael Carney at advertising agency G2.

"It looks like the expected collapse in the housing market didn't happen, the oil shocks have been contained, unemployment continues to be real low, we're not in election year so there won't be any radical bribes, so I expect it to be a fairly steady as she goes year," he said.

Rising interest rates this year are not expected to scare advertisers.

"This time last year, most commentators were anticipating a slowing down of the market place going into 2006, and that became self-fulfilling. But it's heating up again, at least a bit," Carney said.

But the future for Fairfax is its ability to dominate classified advertising, in particular online classifieds.

"Their main flagship publications in Australia are just being sliced to death slowly," said analyst Ivor Ries at EL&C Baillieu, a former Fairfax journalist.

"I don't think there's any company in the world that's ever dominated classified advertising in the way Fairfax has done traditionally -- they would have 65 to 70% of the classified advertising market in Australia. So when you see those big streams of revenue cross to the internet, they suffer disproportionately to everyone else."

In 2000, the Sydney Morning Herald and The Age together produced earnings before interest, tax, depreciation and amortisation (ebitda) of about $A260m. This year, Ries estimates they will probably make about $A123m, and are heading rapidly to sub-$A100m.

"They really, really need those online businesses to keep growing to replace those lost earnings."

Fairfax bought the New Zealand newspapers to reduce its traditional reliance on Australian metropolitan titles, and the online expansion is part of the same strategy.

In 2005, then-CEO Fred Hilmer hailed the 10% increase in revenue at its New Zealand assets bought two years earlier for helping the company post a 26% rise in net profit.

But even then they underestimated how nimble their small focused internet competitors would be. Ries believes that Fairfax is unlikely to recover its lost market share, giving up between $A2 billion and $A3 billion worth of shareholder value in the process.

"Many newspaper companies around the world have had the same thing happen to them -- I have to say the American newspaper chains have done a much better job of holding onto that online revenue."

But TradeMe, New Zealand's top internet site purchased for $700 million in 2006, is on track to report a full-year ebitda of $45 million after notching up $23.3 million in the first half.

"If they hadn't gone out there and paid those prices for those online assets like TradeMe, they would be in one hell of a mess at the moment," Ries said, noting it would cost far more than $700m to buy TradeMe today.

"Certainly if their push into employment advertising and real estate keeps going at the rate it has done in the last six months, those will become quite meaningful revenue generators for them."

In fact, TradeMe's most recent listings are performing better than expected, and better than offshore experience would show, he said.

Aside from trying to recover momentum in lost classifieds, many newspapers internationally continue to struggle with resistance from readers to pay for online content. In contrast, many people happily pay for premium television content on SKY.

"The offshore experience has been if you produce premium (internet) content, people will pay for it. I think that day is inevitably coming for them," Ries said.

Despite its $US300 a year fee, the Financial Times has succeeded in educating its readers to pay.

However, New Zealand and Australian newspaper companies would first have to suffer a loss of online readership, as did FT.com.

"It's painful when you go from not charging to charging for it -- all your key performance indicators, which are unique monthly visits, the thing they sell to advertisers, drop off the cliff," Ries said.

At the other extreme, Arthur Sulzberger, publisher of the New York Times, said at the World Economic Forum in Davos he wasn't sure if the New York Times would be printed in five years.

"I really don't know whether we'll be printing the Times in five years, and you know what? I don't care either," he said.

The "long journey" would end when the company stopped printing the newspaper.

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