Australia | Aug 27 2008
By Greg Peel
I note that my local metro Fairfax offering, the Sydney Morning Herald, has today published a souvenir celebrating 100 years of Herald photography. While the role of the media photographer will live on, the role of the broadsheet newspaper, in which all photos were originally published, is not quite as secure. Digital media forms are challenging the hegemony of the daily newspaper and have been for some time now. As a result, circulation figures have been quietly slipping.
Not that this means the end is near for the Herald, but rather its costly delivery in “hardcopy” form. And not that Fairfax Media ((FXJ)) has not been cognisant of this fact for some time, and responded accordingly. Merrill Lynch makes note that in the company’s recently released FY08 result “metro” earnings were down by 9% year on year, yet group earnings were up a net 7%. “The FY08 result confirmed our belief that diversification is finally paying off,” the analysts offered.
If it is not bad enough that the internet and other media forms are rapidly chipping away at the newspaper’s longstanding domain, it is now coming at a time of economic downturn – when the advertising cycle is on a negative trajectory. Placing ads in a newspaper can still be an expensive business and cheaper options thus become more attractive when times are tight. Falling target audiences are a consideration for advertisers whatever economic conditions may prevail.
Fairfax is on the right track, as far as Merrills and most analysts believe, in reshaping its structure in the digital world. However, tough times have also called for cost cuts, and if costs are to be cut, the most obvious area in which to do so is that which is both highly labour intensive and in decline. Thus, the company has announced it will cut 550 jobs, or 5% of its workforce. There will be some cuts at head office, and some in New Zealand, but most redundancies will come from amongst the editorial staff in Australia.
Echoing the sentiments of management, Credit Suisse analysts this morning declared “our research shows that a reduction of staff numbers does not necessarily have a negative impact on editorial quality”.
This statement sparked great amusement amongst the (few) staff at FNArena. For at FNArena we understand the challenges of producing a quality publication without a whole back-up team of skilled sub-editors poring over the details. That’s why speling mistakes and other typos occasionally get thru (for which we apologise). But there is more to subbing than just proof reading, particularly when it comes to laying out a broadsheet as opposed to an e-zine.
Having said that, we also have an ex-AFR journalist on our part-time team who can regale with stories on the lengthy and convoluted sub-editorial process that ultimately results in publication at Fairfax. Quality control? Absolutely. Efficient? Not in the twenty-first century, and certainly not according to the Credit Suisse analysts:
“Our proprietary research on the Australian research [sic] sector has revealed FXJ’s metro mastheads as laggards among their peers when it comes to editorial productivity levels”.
Exquisite isn’t it? They meant to say “media sector”. Can’t you just hear the howls of “Ah hah!” from subbies across the country? But unfortunately the statement, as intended, is likely true.
[Stock analyst reports are, incidentally, often amongst the poorest forms of “journalism” one might ever have the misfortune to have to read and comment upon. Rarely do many reach even the giddy heights of “decipherable”. But we don’t expect analysts to be great communicators (unfortunately) whereas we do expect our newspapers to be of the highest standard.]
The relevant unions will no doubt disagree with Credit Suisse’s findings and brand me as a traitor for supporting them, but from a cold hard investment perspective, CS was the only broker to even raise the issue of editorial quality in this morning’s reports. For the rest, a cost cut is a cost cut and this 5% reduction is seen as a positive measure, and a responsible one, in today’s media world. As to whether the quantum is enough to fully offset expected earnings losses in the down-cycle, is a matter of disagreement, but no one is arguing necessity.
Fairfax scores a 6/3/1 B/H/S ratio in the FNArena database. The Buy-raters believe Fairfax shares have been oversold in the relative context of the media sector, given the company’s diversification and cost control capacity should mean it will not be as hard hit in the advertising down-cycle as other media names (particularly television). The average target is $3.36 against a last traded price of $2.82.