There has been digitally-driven turmoil and disruption the Australian media industry — as in other advanced nations — for more than a decade, but the announcement that Fairfax and Nine are merging is a true watershed moment.
Last year, with the support of Pauline Hanson’s One Nation and Nick Xenophon in the Senate, the federal government scrapped the so-called “two out of three” rule on reach for media companies, which barred a single person or company from owning commercial radio, commercial TV and a newspaper in the same city.
A critical regulatory hurdle for mega media mergers was removed. At the time, Business Insider reported that it cleared the way for a revolution in the way Australians get their news.
As of today, that revolution is underway.
Fairfax Media will be absorbed by Nine Entertainment, creating a $4.2 billion media behemoth, although it’s worth noting that just a decade ago, Fairfax had a market cap of around $5 billion, and when James Packer sold a half stake in Publishing and Broadcasting Ltd, which owned the Nine Network and ACP Magazines, to private equity in 2007, the business was valued at around $9 billion.
In a message to staff, Nine CEO Hugh Marks described the deal as a “truly momentous development for Nine’s future”, calling it a “ground-breaking merger” and adding that the scope of the deal “is genuinely quite breathtaking”.
This is correct on all counts.
The company will combine three of Australia’s best-known print mastheads that also have huge digital audiences; a free-to-air TV network in Channel Nine; Australia’s No.2 streaming video service in Stan; Nine’s video on demand platforms; leading metropolitan radio stations, and a vast real estate media business in Domain as well as other lifestyle verticals.
If the deal goes ahead as proposed by the boards of both companies, it will mean the end of Fairfax as a company in its own right after more than 150 years in operation. The new business will be called Nine.
The flagship titles of Fairfax, The Sydney Morning Herald and The Age along with the Australian Financial Review, will still be published, but by Nine.
Potential deals like this have been the subject of rumour and speculation for years, with a Nine-Fairfax tie-up being among the most regularly floated theories.
Just over a year ago, US private equity was nibbling at Fairfax with a $2.76 billion bid before dropping the offer last July. The following day Fairfax announced it was spinning off Domain.
Prime Minister Malcolm Turnbull said when the media reforms were passed, the laws “finally recognise the enormous disruption that has been caused by the internet”, adding that the Australian media industry “has been united in its support for these reforms and will now be given the fighting chance they need to secure their future.”
This was of course a reference to the impact of Facebook and Google, which over the past decade have been gathering strength as advertising platforms in the Australian market.
This arrival of global players vastly changed the dynamics of the advertising business, with Facebook and Google securing increasing amounts of dollar spend at the expense of traditional companies.
Existing players were able to defend their bottom lines by a combination of growing digital revenue and gutting costs from the more established parts of the businesses that were in decline. This involved laying off hundreds upon hundreds of journalists from major newsrooms over recent years.
But what has happened sooner than most were expecting has been that digital revenue growth has slowed down, and sooner than expected. As Business Insider reported last November, some media companies had seen a brutal start to the year.
More recent agency ad spending data reviewed by Business Insider shows that May and June this year also saw significant year-on-year declines in spending by certain agencies, running into tens of millions of dollars a month. (Some of this is offset for media companies by more direct transactions with advertisers through the likes of automated buying, which reduces the size of agency-related spend.)
The reality remains, however, that while some media companies dramatically reduced their cost bases, the fierce competition in digital and the lower margins associated with it have meant the pressure on operating models hasn’t gone away. Even when so many costs have been cut, high quality journalism remains very expensive to produce.
There is an added complication now in place for the Australian media market with the arrival of Amazon. Consider how many times you’ve watched television or opened a newspaper and seen an ad for a retailer’s sale or a range of offers from a big-name retailer. Amazon has the ability to start eating into that advertising spend as well.
And here’s the thing: if the next challenge doesn’t come from Amazon, it will come from another source, because barriers to entry across publishing, broadcasting, and advertising will continue to fall without regulatory intervention.
Critically, what the Nine and Fairfax merger provides is a single company through which advertisers can reach audiences across television, print, radio and mass-reach digital. This is a huge development for the Australian media market, creating a business of the scale that’s required these days to support the creation of high-quality content at a large an innovative scale.
The vital question that remains is whether it will work.
As Morgan Stanley’s Australian media analyst team led by Andrew McLeod wrote in a note to clients just two weeks ago, one way to look at the power of a merger is that the savings have a short term impact on the bottom line of the new company. The challenge of defending revenue lines and executing on a growth strategy remains. The analysts wrote (emphasis added):
We think the key debate is whether on the other side of any M&A, higher growth/better quality Media companies emerge … or if after one year’s costs savings are banked, the downward trajectory in earnings and shareholder value resumes. We can envisage a few genuine re-invention opportunities, but in most cases its more likely the latter. In our view, these changes were long overdue and arguably too little too late but, nonetheless, we think industry consolidation makes sense and should occur. It is better than the status quo.
The Fairfax-Nine deal is indeed huge, and transformative for the Australian media industry which has just been through a pretty painful decade of change.
But given the pressures on the industry, this is likely to be the start of a significant wave of change in which there is likely more consolidation to come.
Disclosure: Business Insider is published by Allure Media, a wholly owned subsidiary of Fairfax Media.
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