Brian Gaynor: As advertising moves, so must the publishers

Does the proposed NZME/Fairfax NZ merger signal the inevitable end of daily newspapers in Auckland, Wellington and Christchurch? Photo / Jason Oxenham

Success depends on combining print expertise and digital growth.

The proposed merger between NZME (formerly known as New Zealand Media and Entertainment) and Fairfax New Zealand is a further sign that media companies continue to look for viable business models in a rapidly changing world.

This week's merger announcement follows the recent resignation of MediaWorks' chief executive Mark Weldon and Sky Television's revelation that it has lost 45,000 core residential subscribers in its current financial year.

The traditional media sector continues to face more and more competition from digital sources and its future remains challenging, particularly for newspapers. Fairfax Media's Australian chief executive Greg Hywood told a recent investor conference: "It should surprise no one, and certainly not us, that the seven-day-a-week publishing model will eventually give way to weekend-only or more targeted printing for most publishers."

These comments signal that the Sydney-based company will focus on 24/7 digital publishing and its Sydney Morning Herald and The Age (Melbourne) newspapers will eventually move to weekend editions only.

Does the proposed NZME/Fairfax NZ merger signal the inevitable end of daily newspapers in Auckland, Wellington and Christchurch?

The main features of this week's announcements were as follows:

• Sydney-based APN News & Media announced the separation of its New Zealand operation, NZME, from its Australian activities. APN shareholders will receive one free NZME share for every existing APN share and NZME will list on the NZX, with Sir John Anderson as chairman. A special meeting of APN shareholders will be held on June 16 to approve the split and, if it is endorsed, NZME will list on the NZX in late June or early July.

• At the same time, APN and Fairfax Media announced that they were in exclusive discussions to explore a merger between NZME and Fairfax New Zealand. Fairfax NZ will be separated from its Sydney parent only if the proposed merger with NZME is approved by shareholders and the New Zealand Commerce Commission. If these approvals are granted, Fairfax NZ will be listed on the NZX as part of NZME.

Simon Tong, the managing director of Fairfax New Zealand, was quoted as saying: "As the tastes and habits of media consumers continue to evolve, so too do the needs of advertisers looking to reach these audiences. The depth and breadth of the combined business would be a win for audiences, and also enable us to create innovative solutions for advertisers based on the best of both of us."

NZME chief executive Michael Boggs said: "NZME has already demonstrated the significant benefits that can be achieved by combining news media, digital, e-commerce and radio operations. This merger offers a compelling opportunity to develop these important media brands in providing relevant and innovative news, sport and entertainment content for New Zealanders long into the future."

These comments, together with the problems at MediaWorks and Sky Television, confirm that the traditional media sector is facing huge competition, particularly from digital and offshore sources. Advertising trends are changing rapidly and old media companies have to be responsive and innovative to survive. This includes reducing employee numbers and cutting other costs.

The latest McKinsey Global Media Report shows that newspapers' share of total global advertising has fallen from 12.7 per cent in 2009 to 8.9 per cent at present and is forecast to decline to just 6.9 per cent by 2019.

Meanwhile, digital/internet advertising has accelerated from 24.4 per cent of global advertising in 2009 to 34.7 per cent at present and is forecast to increase to 41.5 per cent by 2019.

In the early 1980s, when five newspaper publishers were listed on the NZX, newspapers accounted for 27 per cent of total global advertising and digital advertising was nonexistent.

Figures compiled by the Advertising Standards Authority show that newspapers' share of total NZ advertising has plunged from 40.1 per cent to 20.3 per cent since 2000. Digital/internet advertising has risen from virtually nothing to 24.7 per cent over the same 15 years, while television's share has fallen from 33.7 per cent to 25.7 per cent and radio from 12.8 per cent to 11.7 per cent.

NZME comprises two traditional media operations -- newspapers and radio -- and a new digital media operation. The core radio operations were the commercial arms of Radio New Zealand, which were privatised in 1996 with NZX-listed Wilson & Horton acquiring a minority stake. In 2001 Wilson & Horton was acquired by APN for $809 million.

NZME now has full ownership of the radio operation, which includes Newstalk ZB and Radio Sport, and a large number of newspapers including the New Zealand Herald, Weekend Herald and Herald on Sunday. Publishing represents 68 per cent of NZME's revenue, radio 28 per cent and e-commerce 4 per cent.

Fairfax Media acquired the publishing business of NZX-listed Independent News for $1,188 million in 2003. Fairfax NZ now consists of a number of newspapers, including The Press in Christchurch, Wellington's Dominion Post and the Waikato Times, as well as Stuff.co.nz. Stuff is the largest NZ-based website in terms of audience, followed by Trade Me and nzherald.co.nz.

The big questions are whether the Commerce Commission will approve the NZME/Fairfax NZ merger and, if it does, what impact it will have on consumers.

The key role of the commission under Part 111 of the Commerce Act is to prohibit "mergers and acquisitions that substantially lessen competition". The proposed merger would reduce competition among newspapers but that is not a major competitive issue as newspapers are facing fierce competition from digital. An NZME/Fairfax NZ merger would probably enhance competition because it would allow a combined newspaper group to compete against digital media for longer than they would otherwise be able to do as standalone entities.

Stuff.co.nz is the most popular New Zealand website and nzherald.co.nz is in third position but their unique audience is much lower than a number of overseas sites, including Google and Facebook. Google and Facebook have 60 per cent more NZ visitors than Stuff.co.nz and nzherald.co.nz.

NZME and Fairfax NZ do not - and will not - dominate the total media market. They are now worth far less than their combined acquisition valuation of $1,997 million in the early 2000s, which clearly indicates that they have faced fierce competition from alternative media sources, both New Zealand and overseas-based.

The ailing Sunday News would probably be the first newspaper to go if the NZME/Fairfax NZ merger is approved, with the Sunday Star-Times serving the upper end of the market and the Herald on Sunday the middle market.

There is a strong probability that the print edition of most daily newspapers will eventually disappear, just as the Auckland Star, Wellington's Evening Post and most other major metropolitan evening newspapers did in the 1990s and early 2000s. However, the weekend and Sunday editions should survive for much longer.

Fairfax Media's CEO Hywood recently told investors that the Sydney Morning Herald and The Age would potentially "reset to focus on the 65 per cent of advertising revenue which is generated on the weekend".

He said investors should not be concerned because Fairfax Media sees a "future sustainable, profitable publishing model" based on digital, weekend and Sunday publications rather than the daily print editions.

Publishers face a challenging future, but innovative companies could have a bright future if they can successfully combine their print expertise with their expanding digital operations.

Brian Gaynor is an executive director of Milford Asset Management.