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Management Side
The trend is definitely not your friend

The CEO of Fairfax Media, one of two dominant print media groups in Australia (News Corporation being the other) spoke the unspeakable at a recent Investor Conference. He signaled an end to weekday print editions of The Sydney Morning Herald and The Age (Melbourne) in the face of falling advertising revenue. He said these iconic papers, which have been in print since 1831 and 1854 respectively, would eventually become weekend-only print publications, as those editions generate 65% of advertising revenue. In a frank assessment the CEO acknowledged accusations of pessimism about print but suggested "it is more a case of being too honest. We prefer telling it like it is and preparing for it".

This articulation comes as no surprise to anyone involved in the paper print or media space but until now neither of the two big media groups wanted to be the first to blink.

If any other evidence was needed it was provided by the release of the annual Norske Skog report in April. Although Australasia continues to be the "jewel in the crown" of Norske Skog, the crown is somewhat tarnished. The company's auditor gave an adverse opinion on the financial statements of the Parent Company and of the Group. The Auditor and the company have agreed to disagree but understandably there will be a new auditor next year!

Australasia represents about one quarter of Norske's business in revenue and capacity (705,000 metric tonnes annually out of 2,695,000 tonnes in total). Australasian financial results for 2015 exceeded the previous year with higher revenue and improved operating earnings--or more correctly, lower losses).

However the first two months of 2016, saw Australian demand for newsprint decline about 2% against the same period in 2015. This continues the dismal trend of the last decade, during which newsprint consumption fell by over 50% in Australia, with a 9.9% decline from 2014 to 2015. By comparison New Zealand consumption fell less than 30% over the decade. The per capita comparison is starker, with Australian consumption of newsprint falling from 35.6 Kg/person in 2005 to 14.6 Kg/person in 2015 and in New Zealand from 41 to 26Kg. This disparity is perhaps the subject for another column.

The good news aspects reported by Norske Skog concentrate on social responsibility aspects and "market balance" issues, couched in suitably nebulous language.

"The market balance for newsprint and magazine paper in Europe continues to improve with recent capacity closures and conversions adding to the benefits experienced from closures last year. Reflecting closures and planned conversion projects out of publication paper, European operating rates for newsprint and LWC are expected to remain above 90% in both 2016 and 2017, after taking into account an expected secular decline in demand. This gives momentum to the positive pricing environment.

"The European SC market is gaining support from US closures and US import duties on Canadian paper. The Asian export market for newsprint, of increasing importance to Norske Skog due to the smaller domestic market in Australasia, is encouraging with prices improving. Demand for regional newspapers in India are strong".

So where to for newspapers in Australia? Fairfax has devised new publishing models to offset plummeting revenue, which has already led to widespread job losses. Both Fairfax and News Corporation have dramatically trimmed printing capacity by closing huge purpose-built metropolitan print facilities and adapting regional presses to produce metropolitan newspapers. So many journalists have been laid off it is a wonder there is any content at all.

Quoting the Fairfax CEO, "The SMH and The Age newspapers could potentially offer a differentiated consumer experience designed for the weekend, which fits with what consumers want--24/7 digital and print with more lifestyle and contextual information on the weekend when there is more time to engage. Across the developed world we are seeing deep changes to the traditional seven-day-a-week publishing model that signals a new future: 24/7 digital and reduced print frequency. Inevitably Fairfax would move to a new business model, though it may be some time away. The model will take shape over the coming years as our transformational journey continues."

Fairfax's latest revenue figures illustrate the challenges, with third quarter Metro publishing revenue down 6%. In fact the latest Standard Media Index (SMI) report reveals Australasian newspaper third quarter advertising spending plunged 20.9%, and magazine advertising 18%. Newspapers now represent only a 7.8% share of Australian media spending, with magazines at 3.1%. Digital advertising at 23.4%, is up by a fifth over the year.

At its peak (lasting many decades) Fairfax was hugely profitable due to the "rivers of gold" generated by its large classified advertising revenues. News Corporation has won a lot of the remaining business (due to its higher circulation) but Australian companies have also been pioneers in developing hugely successful on-line marketing platforms. Realestate.com.au, Carsales.com.au and SEEK.com.au have essentially redefined the market place for houses, cars and employment. These companies and a growing raft of competitors are the go-to sources for buying and selling houses, and cars and finding a job. Newspapers have their own versions of these platforms but were initially blindsided by the rate at which the market embraced these options and, short of acquiring these companies, will be playing catch-up for a long time to come. News Corporation has become a large stakeholder in Realestate.com.au.

A recent PricewaterhouseCoopers report confirmed the challenge for print media groups, predicting that "Internet" advertising will exceed half the total Australian paid advertising market within five years. By 2019 internet advertising, in its various forms, will represent $8.2bn - or 51% of paid marketing spend on all media ($16 billion).

PwC paints a gloomy picture for the print sector. Newspapers advertising revenues are projected to continue falling, from $1.93 billion in 2015 to $1.47 billion by 2019. Circulation revenue is projected to halve to $612 million but digital revenue will not fully substitute despite rising from $76 million to $372 million, or 38% of total revenue by 2019.

This is the conundrum that Fairfax and its competitors face, that despite declines in print media revenues they cannot generate enough total revenue to allow print to go to its grave just yet.

Consumer magazines revenues are expected to decline less, (8.7%) but digital editions of print magazines have not become the panacea anticipated by some publishers.

The picture is not all of doom and gloom and some of the other conclusions of the PwC study are interesting:

• Consumer and educational books continue to buck the trend with print editions growing from $1.97 to $2.16 billion in 2019.
• Digital book sales will continue to grow but print remains dominant with a current "e-book plateau" at about 20% of Australian sales. In the US it is about 30%.
• Australian cinema advertising spending will grow to $115 million by 2019 from $100 million today.
• In-store rental markets will decline from $70 million to $51 million by 2019, as video on demand through streaming services and OTT (over-the-top technology) will more than double by 2019 from $125 million to $270 million.
• Free-to-air television advertising revenues are forecast to stagnate. Sports rights remain big business but "sports bodies are allowing delivery directly to a viewer digitally."
• Mobile internet access revenue surpassed wire in 2014 and is forecast to continue growing. Mobile devices penetration is predicted to increase from 80% to 90% by 2019 while tablet penetration will increase from 40% to 70%.
• Search will continue as the dominant form of internet advertising rising from $2.4 billion to $3.9 billion by 2019.
• Video advertising will be the star performer, tripling in five years to $608 million.

This landscape is shared by most developed economies. The specifics may differ but the trend is consistent and inevitable. It seems that for print media it is no longer a matter of if, but rather when.


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