Wherever he is now, Kerry Packer must be quietly amused.
Back when the Packer family owned the Nine Network, much to his frustration Packer was prevented from taking control of ancient enemy Fairfax (ASX: FXJ) due to the cross-media ownership laws at the time.
Of course, the Packer family no longer owns the Nine Network after Kerry’s son James shrewdly sold it for a bundle to private equity just before the GFC.
After a brief and disastrous stint under private equity ownership, the Nine Network returned to the ASX (ASX: ASX) as Nine Entertainment (ASX: NEC) in 2013.
Due to the repeal last year of cross-media ownership laws that restricted media companies to owning any two out of a television station, radio channel or newspaper in a particular market, Nine has announced a merger with Fairfax.
Shadows of former selves
Of course, both companies are shadows of their former selves and, to his credit, James Packer saw the writing on the wall earlier than most and sold up.
Starting with the introduction of Pay TV to Australia in the 1990s and accelerating with the rise of the internet and alternative viewing platforms such as Netflix (NASDAQ: NFLX) and Youtube (owned by Google parent Alphabet (NASDAQ: GOOGL), free-to-air TV’s market power has been greatly eroded.
Along with the movement of advertising online to the likes of Google and Facebook (NASDAQ: FB), this has led to declining numbers of viewers and falling revenue for free-to-air TV stations like Nine. Nine’s operating income fell 23% in the three years to 2017.
And due to management arrogance and incompetence, Fairfax lost its “rivers of gold” – classified advertising – to upstarts REA (ASX: REA), Carsales (ASX: CAR) and Seek (ASX: SEK). Between 2012 and 2018, newspaper advertising revenue declined at an average of $300m per year in Australia.
To be fair, though, Fairfax has lately made a decent stab of recovering part of its lost classified advertising via its highly successful investment in real estate portal Domain (ASX: DHG). However, 40% of Domain was spun off to Fairfax shareholders in November 2017.
Fighting the behemoths
Even so, this appears to be a sensible transaction.
Due to their greatly reduced market positions, it makes sense for Nine and Fairfax to combine to cut costs and also likely gain revenue synergies. For instance, as well as cross-marketing its various properties – a reason why Domain shares have risen 9% since the announcement – the merged entity can coalesce its various groups of journalists into one newsroom and pump out videos, articles and other content across the group’s television, radio, newspaper, magazine and online video streaming assets.
The companies also argue that it will help them fight Google and Facebook, the current behemoths of advertising, but it is going to be an uphill battle.
Unfortunately, like all Australian TV stations, Nine can’t cut programming costs that go to satisfying Australia’s local content regulations (which essentially serve as a job protection racket for local actors, writers and so on).
Moreover, unlike The New York Times (NYSE: NYT), which is the US’s dominant non-financial newspaper and which has benefitted as the decline in advertising revenue has slowed and been more than offset by increasing subscription revenue as the demand for quality news has risen in the era of Facebook and “fake news”, Fairfax’s mastheads aren’t as valuable.
So The Sydney Morning Herald, The Age and the Australian Financial Review are likely to find it harder to emulate The New York Times’ success due to the crowded nature of the Australian newspaper market.
Overall, the combined group’s most attractive asset is Domain but, as already noted, unfortunately it will only be 60%-owned.
In any case, assuming the merger succeeds – and there’s a chance that it won’t given the ACCC will review the merger on competition grounds – this is likely just the start of media consolidation between Australasia’s “old media” companies.