Why the watchdog’s ruling doesn’t matter

Bernard Hickey argues the Commerce Commission’s decision is irrelevant while New Zealand’s two largest news producers are locked in a group-think about how to make money out of news. Until Fairfax NZ and NZME abandon their collective view that online ads will pay for news, the trajectory towards fewer journalists and a weaker fourth estate will continue, regardless of whether the merger is approved or rejected.

After almost a year of intense and welcome debate over the future of New Zealand’s media landscape, the Commerce Commission’s final final decision on the NZME-Fairfax merger application today is shaping up as a kind of D-Day for the news industry, where we’ll learn of its survival or destruction. Or is it?

Opponents of the merger argued against the creation of a monopoly with more than 90 percent of the nation’s newspapers as an anti-competitive move that could damage the fourth estate’s role in an open and contested democracy. They warned it would concentrate power in the hands fewer editors and further reduce the number of journalists on the ground covering the nuts and bolts of public life in council meetings, Parliament and the courts.

That’s all true. A merger would weaken the fourth estate in New Zealand, but saying no to the merger won’t change that. A ‘yes’ decision to the merger would actually slow that weakening, but only marginally, and not in any long term sense. A ‘no’ decision would actually speed it up slightly because both groups would be forced to cut journalists faster and more aggressively to arrest their sharp falls in profitability. Those cuts could be further accelerated under possible new private equity ownership, which would have less transparency or commitment to the public good aspect of the fourth estate.

Proponents for the merger argued it was the best way to find cost savings that would buy time for Fairfax NZ and NZME to come up with a new business model to compete with the likes of Google and Facebook for advertising. It is true that Google and Facebook and other platforms such as Trade Me and Amazon are hoovering up most of the advertising spending that is now shifting online, and they won almost all of the growth in that online advertising spending in the last year. These online-only firms are doing that without producing a skerrick of news because the link between news production and advertising spending has been shattered.

It seems to make perfect sense for NZME to Fairfax NZ to team up to take on the goliaths of the online world. They have essentially argued that the news and advertising businesses are the same business and that this combined business is now truly global and hyper-competitive. After all, they argued: ‘how could we create a monopoly for news and advertising when almost all New Zealanders have a world of new choice in the phones in their hands and advertisers large and small can reach their customers via Facebook and Google?’

That is also mostly true. There is plenty of free news available online globally and, to a lesser extent nationally. Advertisers also have plenty of choice both locally and nationally, and at increasingly low prices. The biggest national banking advertisers and the smallest local plumber can reach their target audiences easily through Facebook and Google. The missing part of this argument is local news, which is mostly provided by NZME and Fairfax newspapers and paid for by local subscribers and advertisers. But the Commerce Commission could accommodate for that by forcing NZME and Fairfax to sell their newspapers in smaller towns and cities, which would probably be acceptable to them because they’ve been either winding them down (the Marlborough Express) or selling them anyway (the Wairarapa Times-Age).

But the trouble with the arguments on both sides of the debate is that they’re irrelevant.

Saying ‘no’ to the merger on the grounds it would reduce plurality would be a wasted effort with the current views of the major players. Their revenues and profits and staffing levels would keep falling and sources of real news (as opposed to the fake versions) would become even less diverse. That’s because both NZME and Fairfax New Zealand have insisted they would continue to give away all their news on their websites in the hope they can make enough money from online advertising to pay for it. The current leadership teams of both companies have said they would not put paywalls on either Stuff or NZ Herald, regardless of whether or not the merger is approved.

Their collective view is that they have to keep their websites open and free to all and keep barreling on down the route of hoping that someone will come with a model that makes advertising pay for the news. That means creating websites with big audiences and broad appeal, which they have both now successfully done. This view has now ossified into a kind of group-think that is barely challenged any more within the companies.

The trouble is the facts of the advertising industry keep getting in the way. They have built the broad audiences, but the advertising has not come. In fact, it’s actually going away. NZME and Fairfax said in their last submission to the Commission that spending on display advertising online, which is the revenue that Stuff and NZHerald.co.nz rely on, actually fell three percent in the December quarter of 2016 from the same quarter a year ago.

“It is accepted in the industry, based on both New Zealand and overseas developments, that the current growth in digital revenues is not sustainable, and is likely to slow significantly in the coming years – in particular for publishing-based businesses such as NZME and Fairfax NZ (as opposed to for Google/Facebook who together are taking 80 percent plus of new advertising expenditure),” NZME and Fairfax wrote.

So why are they still ploughing ahead with their strategy of running big, broad websites that are funded by online display advertising?

Almost every other large newspaper-based publisher in the world decided several years ago to abandon display advertising on free sites as a strategy and focus on other revenue sources, including corporate sponsorship and revenues from subscribers and supporters. Other news firms overseas have focused all their efforts on building strong and direct connections with those paying subscribers, supporters and corporate sponsors, rather than punting on online advertising or peripheral businesses such as e-commerce.

While the leaderships of NZME and Fairfax pursue this groupthink about ad-funded news, a ‘yes’ or ‘no’ decision won’t make much difference to their trajectories for revenues and journalist headcount in the long run. However, there are two wild cards to this view.

If a ‘no’ decision triggers the sale of one or both of them to new private equity owners, they could change the leadership teams and break the groupthink about online advertising paying for news. That could force one or both to focus on building paywalls and protecting their print subscribers and advertisers. That could arrest the decline in both print advertising and subscription revenues.

Secondly, a ‘yes’ decision that forces Fairfax NZ and NZME to sell its Sunday newspapers and its regional newspapers could create more diversity and allow for individual owners to also break out of the groupthink and arrest the revenue declines. The best recent example of that is the Wairarapa Times-Age, which was sold last year to a local publisher, Andrew Denholm. He has since revived advertising sales and employed extra journalists to write for the newspaper, rather than a freely-available website.