Opinion: Why the 'StuffMe' merger isn't any solution at all
The Commerce Commission’s final decision on the proposed merger between Fairfax New Zealand and NZME is finally due tomorrow morning, after a number of delays.
The commission has received many submissions during its almost year-long deliberations. In the view of several NBR staff, the most compelling of these was from an anonymous source who, in advocating against the proposed transaction, demonstrated a sophisticated understanding of the day-to-day realities of media companies’ internal processes as well as the competitive local and international environment in which they operate.
On the eve of the decision being released, the anonymous submitter responded to a few final questions from NBR about the merger and why they believe it being allowed would in no way provide the remedy to their current woes that the applicants are seeking.
You’ve expressed some doubt about which way the Commerce Commission will jump in its decision on the merger. In the event it does allow the merger, what do you think the reason/s will be?
If the merger were approved, a key factor shaping the outcome would be the influence of submissions made to the commission immediately prior to their decision.
Since the beginning of March, all public submissions have been closed. This means that for two months, the final swathe of material being evaluated by the commission has consisted of one-sided submissions directly from the applicants. These contain hundreds of pages of material heavily weighted in favour of the merger, without any opportunity for external rebuttal from the public.
As we have seen within previous submissions and conference transcripts, the applicants and their lawyers have provided some misleading information on key points. They have also provided the occasional piece of information that is demonstrably false (for example, a claim made several times during the conference that "Only 13% of New Zealanders get their news from print").
I don’t think the applicants have lied or misled the commission deliberately but their mindset is so deeply in favour of the merger that their cognitive bias may have skewed their submissions.
Without the final submissions being subject to the counterbalance of public scrutiny, the commission may end up getting swayed in favour of the merger based on the arguments within these one-sided submissions.
Another significant factor to consider is that the lawyers of NZME and Fairfax have at times taken a hostile and aggressive approach towards the Commission.
At several points throughout the process they have accused the commission of being incompetent, while claiming there are legal flaws within its analysis. The applicants have also strongly implied they will pursue legal action if the merger is declined.
When you combine the threat of legal action with a proliferation of one-sided submissions, it greatly increases the likelihood of the merger being approved.
Given the way the owners of both Fairfax and NZME appear to misunderstand what their primary competitive market is, and representatives for the applicants misinterpreted their own study of the ongoing reach and importance of print, is there any evidence to suggest the merged entity would fare any better than the individual entities have?
There are undoubtedly some financial benefits to be gained from the merger. However, there are several key questions to consider.
Firstly, are there are alternative approaches that result in greater benefits to the applicants and the wider journalism industry?
Secondly, do the costs of approving the merger outweigh the benefits?
Thirdly, do the benefits of merging actually solve the revenue crisis faced by the applicants?
Within my submission, I outline a number of reasons why I think the answer is ‘no’ to each of these questions.
On my first point, there are a number of collaborative strategies that the applicants could pursue in partnership with the wider journalism industry. Through collaboration, I think the applicants could achieve far greater financial benefits than those derived from the merger.
By collaboration, I do not mean consolidation. Corporate consolidation creates a range of inefficiencies and also skews the market in a manner that is anticompetitive.
I also do not mean the formation of a cartel. Once again, cartels have negative impacts that undermine markets for both producers and consumers.
Instead, I mean genuine collaboration via initiatives that seek to find economies of scale within key areas across the journalism industry.
Collaborative initiatives need to be open and inclusive, including partnerships with both small and large media outlets. Collaboration also needs to be conducted in a way that maintains the operational independence of each publisher.
Key areas for collaboration, as outlined within my submission, include:
- pooling editorial resources (similar to the NZPA or the AP);
- pooling technical resources (to achieve economies of scale with technical infrastructure);
- and the development of an innovation task force focused on evaluating and implementing new business models.
None of these forms of collaboration require consolidation.
Furthermore, genuine collaboration across the New Zealand media industry would be far more beneficial than the limited gains (and significant losses) resulting from the merger.
On the other key question – do the benefits of merging outweigh the costs? – evidence suggests the answer is no. The negative impact on the competitive landscape of New Zealand journalism far outweighs the minor efficiency gains, especially when there are strong alternatives to achieve greater benefits.
Finally to my last point, does the merger actually solve the revenue crisis faced by the applicants?
Once again, the answer is no. The applicants provide no evidence of how the merger would improve their long-term sustainability. Instead, their key argument is that the merger would ‘extend the runway’ of their operations by a few months, allowing them to identify a new business model in the future.
Meanwhile, they don’t outline any robust strategies to innovate and experiment with new business models beyond the failing model of digital advertising.
If NZME and Fairfax are to achieve financial sustainability, it will be through the adoption of new revenue models. The most promising revenue models globally are based on generating income directly from readers.
NBR VIEW BACKSTORY: The StuffMe merger decision from NBR Radio on Vimeo.
For example, The Guardian now has 200,000 readers paying for voluntary online memberships – in addition to 100,000 one-time donations in the past year. Meanwhile, the largest and fastest growing source of digital revenue for major international publishers, such as the New York Times, are paid subscriptions.
The adoption of new business models will be key to the success of NZME and Fairfax and will have a far greater financial impact on their profitability than any of the proposed financial gains from the merger.
The hardest part for me is that I empathise with the applicants quite a lot. Their financial situation is depressingly dire, and they have passionate teams of talented journalists and executives who are genuinely striving for what they believe is right.
It’s tough watching them get distracted by the hope of merger, which really is a short-term band-aid. Instead, they should be focusing their attention and resources on tangible long-term solutions.
If the merger is rejected, I really hope they don’t waste more time and money on this. Their limited resources should be invested into the sustainability of their journalism, not on lawyers’ fees and merger-related expenses.
The loss of institutional focus at this critical time could have severe consequences for their future.
What do you make of the applicants’ insistence that their future rests on digital advertising, despite all the evidence to the contrary?
There is no economic modelling that I have seen, anywhere in the world, that suggests digital advertising can sustain the future of online journalism.
In New Zealand and internationally, legacy news organisations still generate between 80-90% of their income from print newspapers. Conference transcripts confirm NZME and Fairfax generate approximately 12% of their revenue from digital sources, of which online advertising is only one component (NZME and Fairfax have a financial stake in a range of digital ventures such as Neighbourly, Stuff Fibre, GrabOne, and iHeartRadio).
Online advertising simply can’t sustain the news operations of these companies. The only reason they have free online content is because print sales are heavily subsidising the production of their journalism. Their business model is unsustainable.
Economic forecasting highlights that the situation is only getting worse for digital advertising.
The Pew Research Institute in the US has estimated that for every $1 gained in new digital advertising revenue, $16 of print revenue is lost. In New Zealand, the figure is even higher. The Standard Media Institute has estimated that $18 is lost in print advertising for every one dollar gained online.
As the applicants have highlighted themselves, Google and Facebook are now collecting 85% of all new digital advertising revenue. This means that the economic viability of online advertising is only getting worse, at an extremely rapid rate.
NZME and Fairfax need to quickly adopt reader revenue models, rather than focusing their attention on merging and restructuring.
If they don’t adapt new revenue models soon, they are at very real risk of financial collapse – regardless of whether the merger is approved.