Fine print of media merger
Taking on Facebook and Google will demand a profound transformation.
The proposed merger of Fairfax and NZME to create a near monopoly in newspapers and a dominant position in New Zealand media fails a simple test.
The two companies don’t explain how their new entity will make more money. Without money, they can’t provide more and better journalism as they promise. Without better content, they won’t make more money.
Thus, the merged entity would be stuck in the same doomloop destroying many media companies worldwide. Content providers get poorer while content aggregators such as Facebook and Google get richer by accumulating users and capturing advertisers.
The few successful exceptions among media companies are typically wildly creative, highly specialised or widely international. Very few are former newspaper publishers because they usually fail to make the extreme cultural and commercial transformations required.
Take the UK’s Daily Mail. Global traffic to its website has soared by 550 per cent since 2009 to more than 14 million daily users. But it generated only £73 million ($150m) of revenue from them last year (up 18 per cent on the year), compared to £499m (down 7 per cent) from its 1.7m print readers.
Fairfax and NZME cited this example from an article in Management Today, a UK journal, in their application to the Commerce Commission for permission to merge.
A recent NZME investor briefing described the similar landscape in New Zealand. Advertising revenues here grew by 5 per cent a year 2011-14. Within that, newspapers’ share fell by 22 per cent over the four years to $484m, while online’s rose by 79 per cent to $589m.
But Fairfax and NZME are mainly missing out on this online growth. Each has only a 6 per cent share of the online market, while Facebook has 16 per cent and Google has 37 per cent.
Facebook is brilliant at keeping its users on its site by bringing content to them; and globally it has mastered the difficult art of making money from mobile users, who increasingly dominate online activity.
Google is also exceptional at creating loyal users and selling ads tailored to them. Both companies know vast amounts about their users, and deploy extremely powerful analytics to drive content and advertising to them.
NZ media companies, in common with most of their counterparts overseas, are failing miserably at both strategic imperatives.
Fairfax and NZME say they won’t have much of a future if they remain competitors. Unfortunately for their readers, this interesting analysis is redacted from the public version of their application to the commission.
But together, they say they can take on Facebook and Google. With combined revenues of $802m and operating profits of $133m, they’ll have the resources to generate more and better content, and thus attract more users and advertisers.
Their application talks a lot about cost savings and synergies but is unconvincing on both.
On costs, some can be saved on sales and administration, although NZME has just added $7.5m a year in head office costs thanks to its demerger from APN. There is little overlap in newspaper printing and distribution around the country.
On content, the companies say a merger will reduce some duplication such as journalists from both organisations covering the same stories.
What they don’t say is that the biggest cost savings by far would come from a sharp reduction in journalist numbers. But this would run counter to their promise of more and better content.
Certainly, the merged company would have lots of online users signing up being the first step in knowing more about them to interest advertisers. Fairfax has some 650,000 online users, and NZME some 887,000 from the NZ Herald site and internet radio, plus 1.6m from GrabOne, its special offers site.
But how would it make money from them? Their application shows little hope for paywalls and subscriptions, while shedding no light on the advertising revolution it would need to pull off to tackle Facebook and Google.
To stand any chance of success, the merged entity would have to transform itself very rapidly into a very different company, culturally and commercially. It has a vast amount to do, starting with rationalising Fairfax’s six websites and NZME’s 38. Internal politics will stunt progress.
The commercial case is unproven.
Disparate shareholders and fierce internal politics will stunt progress.