Who will pay for online news?

With the revenue downturn for Fairfax Media being announced on Monday, I got the call from Ashley Hall at the ABC’s PM program to give my opinion. At 2.45pm I may not have been sure that I had an opinion, but the nature of the relationship between news journalists and academics is that it would be good for all concerned if you could get an opinion, and give that to us to put on air. With Crikey publisher Eric Beecher and former ACCC head Allan Fels also offering their opinions, I was in good company on the PM program.

My comments were picked up by Shaun Carney, the associate editor of The Age, for his opinion piece on Wednesday. In Carney’s view I am one of those who argues that the future of digital media is free content, as we are moving from an environment of information scarcity to one of information abundance, and that is driving down the price of online content of all sorts. The editor of WIRED magazine, Chris Anderson, is another seen to be holding to this view, in his most recent book Free: The Future of a Radical Price.

Carney disagrees with this, arguing that the era of free online content will be seen as a short-lived phase, since commercial businesses ultimately need to set a price for their content or they will go out of business. Carney is also of the view that consumers will ultimately accept the need for this. Just as what were once free sample bags given out at the various Royal Shows around Australia (Easter Show, The Ekka etc.) became show bags with a price attached, so too will once free online news become a commodity for which consumers will pay.

Since Rupert Murdoch said the hares running on this issue earlier in August by declaring that News Corporation sites around the world will move to a pay model, there has been a lot of commentary on this. Among those offering views have been Brian McNair, Roy Greenslade and James Harkin. The jury is clearly out on what will happen next, with there being some high profile examples where a subscription model for premium content has worked, such as the Financial Times and the Wall Street Journal, and some high-profile failures, most notably The New York Times.

I wanted to pick up on a specific criticism that Carney makes of my claim that we have been moving from information scarcity to information abundance in ways that affect the ability to charge for access to online news:

It's true that there are a lot more places where people can get information ''about'' news, such as boutique political websites and one or two email newsletters, but when it comes to finding actual news he's wrong. So far, the Internet has not ushered in any substantial new news organisations; the vast bulk of Australian online media consumers still rely on Fairfax, News, ninemsn and the ABC for their news. Scarcity still applies.

Carney is right to argue that the big news organisations continue to dominate the online news space in Australia, and no substantial new players have emerged that are Internet only. News, The Age, SMH, ninemsn and the ABC are all sites that are in the Alexa top 25 most accessed Internet sites in Australia, and probably account for about 80% of traffic to Australian news sites, even allowing for a relatively flexible definition of news. While it is difficult to compare the number of users of a site such as Crikey to that of theaustralian.com.au as more people get the former in a “push” format via emails, it would be somewhere in the range of 10-20% of page views for Crikey as compared to that of The Australian, which in turn is well below the site statistics for The Age, ninemsn or the ABC.

Carney has pointed to what is known as power-law distribution, where the majority of an activity tends to cluster around a minority of possibilities, Also known as Pareto’s Law (after the Spanish economist Vilfredo Pareto) or the 80/20 rule, it has been a feature of media industries that the majority cluster towards a minority of options, be they TV programs, Britney Spears CDs, Dan Brown novels or whatever. Put differently, of course the ABC would love to put more arts programs to air, but with a 1 to 2 per cent audience share, it has to be on Sunday afternoons, not Monday nights.

What the Internet has changed, and what Chris Anderson points to with the long tail concept, is that as digital media distribution costs tend towards zero, the less popular options also can become commercially viable. Social media can intensify this by promoting new ways of gathering a reputation, through ranking systems, word of mouth, shared links via Facebook, Twitter feeds etc.

Moreover, Anderson also suggests that assumptions about popularity may have been an artefact of distributional limits. When the number of books for sale was determined by the size of the store, that set physical limits to the number of titles that could be held; there is no such capacity constraint on the Internet, and so more specialist tastes and interests can be catered for through online book catalogues.

What Shaun Carney points to – as does Rupert Murdoch – is that the business of getting news is not free. As economist Tyler Cowen puts it, all of the major news providers have found that their revenues are falling below their average costs curves, and they are not prepared to make losses indefinitely. The problems are that no-one knows what the price should be, what is the best approach to charging (subscriptions, pay-per-view, freemiums, or what?), or whether enough consumers will pay to offset the losses arising from those who will inevitably opt out once some form of charging for news is introduced.

At this point, two further complications emerge. One is the possibility that new opportunities may emerge for commercially viable free news services that capture the convenience users who opt out of pay models. This may be a new provider who also captures the imaginations of those who are now vocally critical of what they term the "mainstream media", and who access sites such as The Huffington Post in the U.S.

The second is that it is unlikely that the public service media providers – ABC, BBC, SBS, NPR etc. – will charge for news, as it is contrary to their Charter obligations of providing universal access. At any rate, I doubt that Shaun Carney is right that consumers will simply accept paying for what they are currently getting for free simply because they recognise the costs that exist for the established news providers.

Declining classified advertising for Fairfax mastheads

Report from Eric Beecher on Crikey about classified advertising decines at Fairfax. I doubt if the problem is largely cyclical.

Here's a story you won't read in The Age or The Sydney Morning Herald tomorrow:

This newspaper is publishing 50 fewer classified advertising pages each week than it was a year ago, according to the latest research by Goldman Sachs JB Were. This reduction in advertising translates into at least $1 million off this newspaper's profits every week compared to a year ago.

That is the picture that emerges from the latest Goldman Sachs JB Were page-count statistics of Fairfax's major newspapers, released today. They present difficult reading for anyone who cares about the future of newspapers, and raise further doubts about the competence of the Fairfax management and board as trustworthy custodians of Australia's two greatest newspaper mastheads.

According to Fairfax CEO Brian McCarthy, speaking three months ago, the problems afflicting newspapers are purely cyclical.

"I have been around long enough to know this is only a short-term thing," he said.

"The law of economics will take place ... It's just a matter of working through the cycle."

He also argued that Australian newspapers are not affected by the same structural problems afflicting US and UK newspapers because Australian newspapers are better managed.

Today's page-count numbers -- continuing a trend that has been unfolding throughout this year -- show that average classified advertising pages in The Age, SMH and Financial Review were down 55% year-on-year in April, following declines of 47% in March, 41% in February and 40% in January. At the SMH, employment ads fell 60%, real estate 50% and autos 80%. At The Age, employment and auto ad pages declined by around 65% in April, while the decline in real estate pages fell 65% compared to last year. At the AFR, display classified property ads fell 62% and employment fell 49% on a year ago.

Another alarming trend to emerge from today's Goldman Sachs research is a large reduction in the total pages being published by the three Fairfax flagship newspapers. Each paper is running around 100 fewer pages each week than it did a year ago -- supporting the anecdotal evidence that as well as lopping off pages they no longer fill with ads, The SMH, Age and AFR are cutting hard into editorial pages to save costs (and deprive readers).

Every stakeholder in Fairfax -- readers, staff, shareholders and Australians who value their newspaper institutions -- should be praying that the company's CEO is correct in his thoughtfully historic analysis that the collapse in profits at his flagships "is only a short-term thing". And that he is also right about his contention that great management will save Australian newspapers from the maelstrom that is decimating the American press.

They should also be praying that Rupert Murdoch was wrong in his prognosis of newspapers last week:

There is no doubt the traditional newspaper business model has to change, even though the present situation I think has been greatly exaggerated by the current recession ... classified revenues are undoubtedly migrating to the web, probably not to return.

If Murdoch is right about classifieds never returning to newspapers, the $100 million+ that has evaporated from the annualised profits of The Age and SMH will also never return -- and that would raise a troubling question about the viability of the two newspapers that used to be the best in Australia.

More media trouble: Tribune and Fairfax

This item from Tuesday's Wall Street Journal via The Australian:

TRIBUNE Company has filed for bankruptcy protection, in a sign of worsening trouble for the newspaper industry.

In recent days, as Chicago-based Tribune continued talks with lenders to restructure its debt, the newspaper-and-television concern hired investment bank Lazard as its financial adviser and law firm Sidley Austin to advise the company on a possible trip through Chapter 11 bankruptcy, people familiar with the matter say.

Tribune owns eight major daily newspapers, including the Los Angeles Times, Chicago Tribune and Baltimore Sun, plus a string of local TV stations.

A Tribune spokesman said the company doesn't comment on rumours or speculation. A spokeswoman for Lazard didn't respond to requests for comment. Representatives of Sidley Austin couldn't be reached for comment.

Tribune's latest actions underscore the deepening distress enveloping Tribune and other newspaper publishers. Their businesses are being battered by dwindling advertising sales, and many are carrying debt loads that are unmanageable in current market conditions. Industry insiders expect some papers will need to fold in coming months or seek protection from creditors to reorganise.

Tribune has been on wobbly footing since last December, when real-estate mogul Samuel Zell led a debt-backed deal to take the company private. Tribune has stayed ahead of its $US12 billion ($18 billion) in borrowings with the help of asset sales. Now, however, shrinking profits are tightening the noose.

The company's cash flow may not be enough to cover nearly $US1 billion in interest payments due this year, and Tribune owes a $US512 million debt payment in June.

One of Tribune's most pressing concerns: The company is likely to be in violation of debt terms that limit borrowings at the end of the year to nine times its adjusted profits. The ratio stood at 8.3 at the end of the second quarter, before Tribune reported an 83 per cent decline in operating profit for the three months ended September 28.

Violations of such debt covenants have become commonplace for newspaper companies as their profits have ebbed. Lenders so far have been willing to give the companies a pass in exchange for higher interest rates and other concessions, but Tribune has little wiggle room. Terms of the company's debt already are so loose and its financial standing so unsteady that a covenant waiver may not help.

Tribune's hiring of Lazard, meanwhile, brings it a firm experienced in debt restructuring, and one that has become a go-to adviser for newspaper companies in financial distress.

Even as its financial performance worsens, Tribune has some options. A sale of its Chicago Cubs baseball team is under way, and Tribune owns valuable stakes in businesses including the cable-TV channel Food Network.

Tribune already has auctioned off pieces of the company, including the Long Island, New York., daily Newsday to raise cash. Now, frozen credit markets have depressed sale prices.

Selling off more newspapers may not be a viable alternative because buyers are scarce and Tribune may be better off holding onto the profits from its papers.

And cost cutting is most likely afoot at Fairfax under new CEO Brian McCarthy:

SPECULATION is growing that likely new Fairfax Media chief executive Brian McCarthy could restructure senior management.

It is likely he will elevate more former key Rural Press executives to top positions in the Fairfax group.

It is understood Mr McCarthy will be formally anointed as CEO of Fairfax at a 9.30am board meeting in Sydney today.

The meeting comes after broking firm Goldman Sachs JBWere revealed last night that Fairfax's weekly page count across its main metropolitan newspapers, The Sydney Morning Herald, The Age and The Australian Financial Review, fell by about 5 per cent. This was led by a 20 per cent fall in classified ad pages across all mastheads.

Today's board meeting will also discuss how it plans to pay down $2.5 billion in debt. It will examine immediate options that include cutting dividends, selling off assets and more cost cuts. Mr McCarthy's former role as CEO of the leanly run Rural Press, taken over by Fairfax last year, is seen as the perfect training for Fairfax's necessary belt-tightening.

Fairfax is moving on from its expansionary phase of recent years -- which saw it clock up debt by making a number of takeovers -- to one of getting the best out of existing assets.

Speculation has centred on the possible elevation to more senior roles of a raft of former colleagues of Mr McCarthy at the regional newspaper group, all schooled in what has been dubbed the Rural Press "School of Cost Management".

As one media analyst at a broking firm put it yesterday: "Some of the Rural Press team have effectively been the shadow cabinet since the merger with Fairfax. But following the landslide election win of Brian McCarthy as Prime Minister of Fairfax, they are now likely to move to the front bench."

Those possibly in line for elevation under such a policy could include: Brian Cassell, currently Fairfax's group finance general manager; Allen Williams, head of community newspapers for the Hunter and Illawarra regions; and Allan Browne, CEO of regional publishing, southern and western.

Mr Cassell is particularly in touch with the McCarthy approach, having been his trusted finance lieutenant as general manager, accounting and finance, for Rural Press, a company famed for its lean approach.

Mr Cassell's current finance role at Fairfax sees him as No2 to the company's current CFO, Sankar Narayan. Mr Narayan was appointed in April 2004, under the former Fairfax regime of Fred Hilmer. Like Mr Hilmer, he had a management consulting background.

Mr Narayan is broadly viewed by analysts as a "strategic" CFO who was appropriate for the company's expansion of recent years. However, as one media boss put it yesterday, Mr Narayan is not regarded "as an operational CEO".

Alternatively, informed sources say, while Mr Cassell is viewed as a "numbers guy, not a strategic CFO", this could be an appropriate choice for the company in the finance area as it moves to a belt-tightening phase under Mr McCarthy.

Already, Mr McCarthy -- who for 20 months has been Fairfax's head of Australian operations -- has had another former Rural Press executive as a key right-hand man, with Lloyd Whish-Wilson CEO of Fairfax's NSW and ACT metropolitan publishing.

There have been suggestions of a restructure of roles at the top of Fairfax under a McCarthy regime. Mr McCarthy may look to restructure national and metropolitan newspapers to break down silos within the business.

One more radical scenario could see a return of Fairfax to a single national management structure, as opposed to the state-based silos now in place.

Late yesterday, it was revealed Fairfax's departed CEO, David Kirk, completed his term still owning a total of 1.97 million of the company's shares.