Fairfax should do what?

A Macquarie analyst has recommended that Fairfax should shut down the print editions of The Age and the SMH and move them entirely online.

Full story here – http://www.theaustralian.com.au/business/city-beat/axe-fairfax-media-daily-print-editions-to-boost-earnings-says-macquarie-analyst/story-e6frg9no-1225901059221

“Macquarie’s analysis suggests full-year 2010 revenue from The Sydney Morning Herald and The Age, including their Sunday editions, would be around $600m.

“But with costs estimated at $550m, this leaves earnings before interest tax deprecation and amortisation at $50m.

“Pollack said costs could be reduced to $275m if print editions were axed, and should 40 per cent of advertising revenue be retained under the new model, full-year EBITDA would be $55m.”

So if the papers are bringing in revenue of $600m PA … and 40% of $600m is $240m … this person is saying that Fairfax could effectively improve EBITDA from $50m to $55m

$240m is a lot of money to migrate. Let’s say 20% of the $240m is from ‘subscriptions’. That’s $48m. At a $5 a month access fee that means around 800,000 people would need to be full year subscribers to the electronic edition. Tough challenge.

The remainder would be ‘ad revenue’ … around $192m. Making $192m in ad revenue across those two sites on top of their current ad revenue would be ambitious to say the least. Translating the CPMs and extraction per reader the print editions achieve to current online consumption (less pages, less frequently) would be a huge task. I’m not even sure there would be sufficient inventory at current market rates to bring in an extra $192m of net advertising revenue. (don’t believe me, do the math and work backawards based on traffic and effective cost per pageview)

Here’s the issue – advertisers will not be prepared to pay the same amount for ipad eyeballs as they do for print eyeballs. Why? Because in digital channels they want a more accountable model that just CAB audits and Morgan figures – they want third party evidence the user has SEEN or had the opportunity to see the ad and will only pay if this is the case. Early on advertisers will test these devices – and when you test you generally take a leap of faith … but ultimately advertising investments on tablet based advertising will come under the same sort of scrutiny as advertising within the browser (or on TV, or in a magazine) and as a result it will need to adapt its pricing to remain competitive. On top of this, as the channel is a ‘digital’ one … advertisers will demand to know results and ROI around purchases, traffic etc.

I’m all for bold claims but this one by Macquarie misses the mark for me. It’s either a naive claim or has been incorrectly reported by the media. There is absolutely no way EBITDA could improve by doing this. Fairfax would be broke before seeing any upside.


5 responses to “Fairfax should do what?

  1. Ben, I’ve been rolling some numbers around too (surprise, surprise).

    Based on the most recently published circulation data and current cover prices, these two publications (all editions, M-F, Sat, Sun) would generate $305.3m in cover-price revenue. Given that subscriptions are generally discounted and taking into other reduced price copies etc., I would peg actual cover revenue at around $280m.

    This would put advertising revenue at somewhere between $300m-$320m. This means that 40% retention of ad-revenue would generate $120m-$128m, rather than the $240m you used which was based on 40% of total revenue.

    Re-working the Macquarie data (i.e. accepting their data and assumptions) if you remove $275m of cost you still have a remaining cost base of $275m. To earn the projected $55m profit (ignoring that it would be a much improved margin) they would need revenue of $330m.

    If they could retain 40% of the existing ad revenue (and this is a pretty big assumption given the lower online CPMs), this would generate $120m-$128m under the Macquarie model. That is, online subscriptions would need to pick up the other $200m to achieve the $50m profit required.

    Using your $5 a month subscription fee (which I think is low because that feels like a weekday only fee to me) they would need 3.3m subscribers! If we say it is $5 per month for each of weekday, Saturday and Sunday (which already have higher cover prices), we’re still looking at over 1 million subscribers to each. I can’t see that happening when the weekdays (combined) are doing around 400,000 copies a day, Saturday is doing around 620,000 copies and Sundays are doing around 660,000 copies.

    Can someone please point out the error in my logic? Are the assumptions wrong? Are the suggested subscriptions costs wrong? Or did Macquarie grab headlines on a sensationalist analysis that doesn’t appear to stand up to even moderate interrogation?

  2. talkingdigital

    hey john – my numbers were relatively ‘loose’ … but still showed that there possibly wasn’t much analysis applied by the, erm, analyst.

    migrating 40% of the ad revenue from print to digital is ambitious for many reasons – is there market demand for one, and secondly … can they maintain the same yield. the answer to both is no in my opinion.

    the second stream is around subscription/cover price and as you’ve pointed out, it requires huge volume. Selling 1m tablet subs (to the weekday, sat AND sun editions) feels like a task that is destined to fail. to do that you probably need 4-5m total tablets in AU at the very least … or looking at it another way, you need around 1 in 10 people (children and adults) who live in SYD and NSW to be fully paid up subs to the papers weekday, saturday and sunday editions.

    the question remains – was this reported incorrectly or was the analyst just looking for a quick headline?

  3. Are you suggesting that the media looks for sensational, uninspired research as a way to increase user engagement?
    Shame on you sir!

  4. Les. Your point is well made – duly berated.

    However, conversely are you suggesting that the article qualified as ‘research’?

  5. I would never suggest anything so rash my good man

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