The scuppering of the NZME/Fairfax merger is the latest in a long line of bad news for traditional media. But the landscape ahead may not be as bleak as it appears from here.
Inside the new, glass-fronted NZME headquarters, journalists from the Newstalk ZB network sit in the same area as reporters for the New Zealand Herald – newspaper and website. A couple of years ago, they were in separate buildings and would barely have called one another colleagues.
About 2km away in the affluent city-fringe suburb of Ponsonby, reporters for the Fairfax suite of websites and newspapers share flash new Auckland digs. And on the edge of Mt Eden and the CBD, MediaWorks has combined reporters for the loss-making Three and its profitable radio operations on a single site, where a new joint news operation, Newshub, was launched in February last year.
Meanwhile, NZME and its rival Fairfax share printing presses up and down the country and all four media groups jointly sell advertising through the KPEX network.
The Commerce Commission decision, announced on May 3, to reject a merger proposal from Fairfax and NZME stunned the applicants, perhaps in part because the forces of consolidation that drove the plan had already been operating – indeed, accelerating – for years.
“If you park the regulatory issues, when you have mature to declining industries, it’s common to see consolidation as the natural order of things. Because of market scale and structure, that has been problematic in this market,” says Kenrick, who fought against New Zealand’s other recently failed media merger – between Sky TV and Vodafone – but was a sympathetic bystander for the NZME/Fairfax bid.
Both traditional newspaper publishers are still making profits, though they are swiftly declining, and the competition regulator chose not to believe that one or both might fail commercially if the tie-up proposal was rejected.
The commission accepted that commercial benefits could be worth as much as $200 million over five years if the merger went ahead, but thought that was less significant than the loss of journalistic “plurality” – alternative voices and points of view – that a merger would cause.
The applicants have until May 30 to lodge an appeal and they may do so just to keep the option alive, without ever going to court. (Sky and Vodafone announced in mid-May that they would press ahead with court action to overturn the Commerce Commission decision rejecting their merger bid.)
In part, that’s because circumstances have changed for Fairfax. Within days of the merger’s rejection, Fairfax in Australia found itself targeted by two competing US-based private equity investors with reputations for picking distressed businesses clean. Existing shareholders were keen to see a sale at the right price.
In this play, Fairfax’s New Zealand assets were so off the radar that the first bid didn’t even include them, leading one investment banker to label the unwanted bits of Fairfax as “CrapCo”.
Simply put, New Zealand-based news producers in whichever medium – print, radio, TV or online – are simply too small to matter in the current, highly disrupted global media environment.
“The commercial realities will demand collaboration by local players,” says Kenrick, an experienced chief executive in several unrelated industries and a non-executive director of the Bank of New Zealand.
TVNZ is as much about local entertainment as local news, but Kenrick sees locally produced news as a key part of what TVNZ offers in its fight to retain viewers as more and more people switch to video on demand. Its major 1 NEWS exclusives include the Serco “fight club” story and the controversy over alleged fake driver’s licences.
“If we no longer had quality local journalism, would we be poorer as a nation? Unquestionably,” he says. “But most New Zealanders don’t perceive that potential likely outcome. The risk is greater than most people perceive.”
That said, Kenrick’s enthusiasm for news isn’t entirely altruistic. It’s expensive to produce, but it also delivers consistently very large audiences in an otherwise small market, making it attractive to advertisers who are locked out of ad-free subscription video-on-demand channels such as Netflix.
Merger by another name
At NZME’s headquarters, virtually across the road from TVNZ, chief executive Michael Boggs points to a local media future in which sharing one another’s content will produce something very like the proposed merger anyway.
“It would be fair to say that all the media players regularly discuss what options [there] are to leverage each other’s assets, grow audiences or reduce costs. That will continue and will intensify every day.”
However, instead of combining players in the same part of the media, as the proposed merger would have done, such collaborations will be across different media platforms. TVNZ learnt that last year when another commonly discussed merger option – welding together the profitable TVNZ operation and the long-unprofitable Three – was torpedoed by then Prime Minister John Key. “Aside from where the [Commerce Commission] appeals get to, recent determinations would lead you away from mergers and acquisitions,” says Kenrick.
However, cross-platform partnerships such as one between, say, NZME and TVNZ are far from forbidden. Fairfax’s Stuff website already carries 1 News video content, Radio New Zealand is sharing its content with just about anybody and NZME provides its news to the independently owned Otago Daily Times and republishes material from entertainment and opinion site The Spinoff.
“There are so many dynamic changes occurring that you have to keep all options open,” says Kenrick. “On any given day, some look more attractive than others. Every month, there’s a material change that would lead you to reassess that.”
The job of New Zealand media executives requires nimbly picking their fights. As ants in a jungle full of elephants called Facebook, Google, Amazon and Apple, they need to avoid scrapping among themselves. Avoiding slow-moving regulators rather than seeking their permission is emerging as the better strategy.
Where they think it makes sense, local publishers will try to profit by using the global players’ platforms. For example, both NZME and Fairfax seek audiences through the Facebook Instant Articles format, and TVNZ puts short news clips on to Google-owned YouTube.
Just how much they do so is a question of judgment and is driven by commercial results and differing business models, says Boggs. The Guardian, which has no paywall, has recently withdrawn from Instant Articles; the Washington Post publishes every story as an Instant Article, but blocks access to non-subscribers after a few free stories.
AUT media researcher Merja Myllylahti notes that content-sharing will reduce the range of opinions and news covered, in much the same way as an NZME-Fairfax merger might have. “The consequences in both cases are quite similar,” she says. “I’m worried that we recycle the same material over and over again, so as an audience you get the same stuff. The whole idea of having multiple voices – this eats away at that – but the other reality is that they have to collaborate.”
Boggs believes that shared content is the only way to save resources for deeper, more exclusive journalism that can build a news producer’s brand and drive subscription revenues. “The two can co-exist,” he says. “If an accident happens outside our building and nine [journalists] turn up, that is less valuable than … putting some of those resources back into the planned and the unique, which is something completely new and innovative and engaging that the Herald can provide.”
To combat excessive duplication of this so-called “commodity news”, he believes there’s scope for rebirth of a New Zealand Press Association, the national agency that shared news from around the country for 132 years. It closed in 2011 when the two main newspaper groups still saw their future as competitive rather than collaborative.
“There’s nothing actively happening [about NZPA] at the moment,” says Boggs. “But my sense is that all parties are interested in making things more efficient. I’m confident of being able to do things together.”
Making it pay
Radio New Zealand chief executive Paul Thompson, who helped drive NZPA’s closure as head of news for Fairfax in New Zealand, says he’s reflected on that decision. “What actually drove it was the inability of the shareholders to work together to get the agency to change its strategy and approach. And with no change, we wanted out. However, there’s no reason its essence couldn’t be reborn quite quickly and easily.”
RNZ can now chase revenue from shared content since a tweak to its Government mandate last year. But revenue isn’t the main aim. “Primarily the content-sharing is designed to grow and diversify audience, raise our profile and create more value for the public,” says Thompson.
“RNZ and TVNZ have shown an ability to work together – for example, with the Panama Papers coverage. We successfully share content with them and there certainly is even further scope to co-operate and collaborate in future for the benefit of audiences.
“The content-sharing is critical to grow RNZ’s impact, but not for commercial reasons. That’s the icing on the top, and it’s pretty thin icing at that.”
Commercial players are less ready to concede that content-sharing will struggle to produce significant revenue gains other than for the social media and search giants that deliver news and other content without paying for it.
TVNZ’s Kenrick says the trick for local players is finding and focusing on what they have to offer to other locals in the same boat.
In commercial radio, the medium appears to be internet-proof, continuing to attract audiences and advertising that make it profitable. NZME’s wider attraction, says Boggs, is its ability to reach a large chunk of the New Zealand public online, in print and on radio. That’s valuable to advertisers and hard to duplicate.
In TVNZ’s case, Kenrick says its ability to produce short- and long-form local video content – both news and entertainment – will still draw viewers and therefore advertisers despite the growth of audiences for ad-free streaming online video programming.
TVNZ can’t be “the Westfield mall of entertainment”, he says, because Netflix has far more content than TVNZ OnDemand could ever offer. If TVNZ tried to join the “shoot-out between global players”, it wouldn’t be long before the state-owned broadcaster was “incinerating cash”. But TVNZ has scale in the New Zealand market for local video content and he’s sceptical about the quality and potential of some other local players’ video efforts.
“There’s no point in being niche if you’re up against global players. Yet you have a number of players putting things online.”
He won’t name names, but examples that spring to mind are NZME’s “WatchMe” online video channel and RNZ’s experiment in televising John Campbell’s evening news show, Checkpoint.
Armed with these insights, Kenrick’s arguing to the Treasury and his ministerial shareholders that TVNZ should be allowed to plough its profits into securing its future rather than having to pay dividends of a size that will make virtually no difference to a Government already awash in Budget surpluses.
TVNZ’s local content will be a differentiating factor, and the growth of its streaming video service will be an attractive venue for advertising that subscription online video providers can’t provide. “A quiet month for us would be five to six million streams [programme viewings],” he says, and TVNZ OnDemand “readily supports advertising in a way that’s acceptable to viewers and better for advertisers”, as opposed to the very short ads that no one watches before YouTube clips.
His shareholders are taking a “realistic and pragmatic” approach to those discussions, he says. The potential to put together the two state-owned broadcasters, TVNZ and RNZ, is also touted as a possibility to create something akin to the BBC.
Kenrick notes that TVNZ is structured as a purely commercial entity, unlike the Beeb and RNZ. Yet a hybrid exists already in Australia’s ABC, which, he notes, mixes A$1 billion of federal funding with commercial operations.
For now, Kenrick appears more interested in offering video services to new entrants to the video content market, referring a question on a merger with RNZ to shareholding government ministers. Minister of Communications Simon Bridges, who is responsible for TVNZ, says the idea “has not been considered and is not being considered”.
Less certain future
For traditional newspaper publishers, especially the Fairfax stable, the future is less clear-cut. Even before the bids for the whole of Fairfax emerged, the company was signalling a withdrawal from regional news coverage in New Zealand, fewer editions for smaller papers, and the potential sale of some of them, assuming buyers can be found.
The Marlborough Express is already moving to three print editions a week and the Nelson Mail may soon follow.
As to possible buyers, Auckland-based printer Horton Media and Otago’s Allied Press have both expressed interest in principle, and NZME can’t be ruled out as a player, especially if it wanted to establish a South Island presence, which it currently lacks.
Management buyouts may also emerge. NZME’s sale of the Wairarapa Times-Age to its local manager in 2015 is an early example. The paper claims to be profitable, enjoys lower corporate overheads and doesn’t put anything online that it hasn’t already tried to sell in the daily newspaper.
And there may be brave, deep-pocketed entrepreneurs who see a future in locally focused news or just fancy the “big fish in a small pond” status that owning a local title has traditionally conferred.
Millionaire Owen Glenn took a close look at the Herald in 2012 and walked away, but since then, both NZME and Fairfax have deleted hundreds of millions of dollars off the book value of their traditional mastheads as their value has plunged.
The result is that, for the right buyer with a clear strategy, news-media investment plays need not be bank-breaking. At 80c a share in late May, NZME had a market capitalisation of just $156.8 million. By comparison, Spark’s market value on the same day was $6.7 billion, more than 40 times larger. Even Sky Network Television, also facing a future disrupted by online content, is still worth more than eight times more than NZME, at around $1.3 billion.
It’s a reflection of the challenges they face that news publishers, for all their perceived influence, are hardly expensive today, although they may become attractive to investors only when sustainable business models start emerging.
“Their constant problem is that investors don’t see mainstream traditional media as having addressed the fundamental economics, which appear to be dire,” says one investment banker, who declined to be named but has worked closely with several local media players. “There’s always a concern that if you give them any money, they will just go and spend it on the wrong stuff.”
That includes the decision by traditional news publishers all over the world to pursue so-called “digital-first” strategies. Wrongly believing that websites would replace the advertising revenue lost from print, news publishers gave away their costly news online. “They sell the wrong stuff,” the banker says. “They give away the new stuff and they sell the old stuff.”
Matthew Horton, a scion of one of the families that once owned the New Zealand Herald, now owns Horton Media, a contract newspaper printer. He is scathing about the decision to chase online growth, where advertising revenues are tiny compared with print, without instituting paywalls. It’s a global trend, but he has no sympathy for the local decision-makers who took that path.
“It’s a pretty elementary error,” Horton says. “They made a discrete local decision to perpetuate that. No one denies the impact of digital on advertising revenue, but what the local managers are guilty of is not coming up with a more creative or determined response.”
Although NZME came close to implementing a paywall on the Herald website in 2015, it pulled back when Fairfax vowed never to put one on the Stuff site.
NZME has just implemented software used by the Washington Post, which would allow it to charge for articles, but Boggs doesn’t think a paywall across the whole of nzherald.co.nz is the answer.
“For the future, I do see it as an opportunity for specific verticals [specialist topics] or content where there may be an opportunity to monetise content. We’re driving for more and more of our content to be planned and unique. It’s less about something that just happened and reporting on it and more about investigations or work where we’ve planned it in advance.”
Around the world, the slide of newspapers is turning into an avalanche. In the UK, the Guardian Media Group has announced compulsory redundancies for the first time in its history, after its losses last year topped £200m. The company has already cut more than 250 jobs through its voluntary redundancy scheme. Now the Guardian, which appears to have lost its halo effect, is scaling back its US operation and will likely reduce its newspaper format to tabloid. Although the paper has made significant progress in its membership scheme, with more than 50,000 paid subscribers, digital revenues were down last year, along with print advertising revenues. This year, the paper has warned staff to expect further heavy losses. It refuses to rule out charging for some material online.
Meanwhile, in the US, the Washington Post is still making a loss, the Wall Street Journal has cut staff and is trimming sections, and even the New York Times, which received a “Trump Bump” circulation increase, is expected to shrink its newsroom in 2017 amid plummeting print-ad revenue. The Atlantic reports that between 2000 and 2015, US print advertising revenue fell from about US$60 billion ($86 billion) to about US$20 billion, wiping out the gains of the previous 50 years.
For the record, The Listener’s readership rose 8.4% for the most recent period measured by Nielsen. At the same time, our circulation fell 1.5%, but it remains almost double that of the next publication in the current affairs & business category.
This article was first published in the June 3, 2017 issue of the New Zealand Listener.