Alan Kohler: So Greg, perhaps we should just better deal with the Monday to Friday, Sydney Morning Herald and age printing issue which everyone keeps talking about. You said recently that it was inevitable that the metros will be weekend only. Have you got a timetable on that?
Greg Hywood: Oh no, we don’t have a timetable on that. I mean, we are just sort of made it clear to both our people internally who want to know what’s going on. I mean people in the media have a sense of this massive destruction going on, which is absolutely correct, so where we’re headed as a company. And of course our investors want to know. So, we just made two points recently. First of all, the massive cost that we’ve taken out of the business over the last five years has mean we’ve essentially de-risked the metro publishing business, so if we walked away from it, that would be a manageable cost. But also, our view of the future was – and this is fundamentally based upon consumer behaviour – that people want a 24/7 high quality digital experience with their news and information because they are very time poor Monday to Friday, but on weekends, when they have more time have more time, they enjoy the print experience, which is a different consumer experience. Also note the point that 60-70% of our print revenues lie on the weekends. So, given the fact that that’s what consumers want, given the fact that there are significant cost benefits and we can hold significant revenues on the weekend; we thought that that was inevitable. You can’t go into denial in this game. You have to be frank and that is why we say that in the future, but timing is really dependent upon the market place, the advertising market place, where that goes and where consumer behaviour goes.
AK: Given the amount of costs you’ve taken out – and you’ve said in May that metro operating costs are down 33%, employee numbers down 35% – is it possible to tell us whether the Monday-Friday editions of The Age and the SMH are actually profitable or not?
GH: We have never revealed that and we never have in the course of the company’s history. The profitability of any weekday has always varied. The Financial Review has always been profitable on a Friday, and the Herald and the Age on the weekend, and it’s varied during the course of the week. Clearly, with fixed costs and printing plant and equipment, putting revenue through the system, you do continue to have positive cashflow through the week. What we will be doing, though, is to get the full cost out of the system over time – we will be trying to variabalise our printing and production and distribution costs as much as possible and that’s very much going to be part of the future.
AK: Are you saying that the cost reduction is still ongoing? That you haven’t reached an end yet?
GH: Oh absolutely. If you look at the model I’m talking about, I’m saying that if you don’t print for five or six days a week, you take that significant printing production cost out of the system. While we have done a lot in terms of cost out – nearly half a billion dollars through the group in five years – there is still a significant amount in printing, production and distribution that you can take if you do move to a hybrid model of weekend print and 24/7 digital.
AK: This is a question that not necessarily applies to you: do you think there is newsroom size below which you can’t really go without closing the business?
GH: Absolutely you need what I call ‘at-scale’ journalism. The competitive differential for the SMH, The Age and the Australia Financial Review is its ability to dig deep and quite broadly across the community to get stories. And you do need warm bodies to do that and a substantial number of them, so any model that we are talking about in the future assumes significantly sized news rooms. Exactly what size depends on content models that change over time. We have always outsourced. We have always brought in contributor copy and wire copy. The mix of what you use will change and also there is absolutely no doubt that user generated content is also much more valuable resource. So content model will change over time, but there is absolutely no doubt that you need significant number of bodies as well as high levels of specific expertise. I think there is a very strong future for high quality journalists who can bring specific expertise and expect to get very good incomes.
AK: I must say, after the last lot of redundancies, I have noticed that the papers have thinned out quite a lot. I mean this is just as a reader. Do you get voted to a particular point that you might give into some kind of spiral where you are chasing your tail reducing costs, and that lead to further revenue falls?
GH: Our judgment around the number of stories we run is based around the data we get. Across the course of a month in the metropolitan mastheads, we were running around 9000 stories a month. We found that nearly 25-30% of that were barely read by people, so you were producing a lot of journalism that people weren’t reading, so our focus is increasing on making sure that we target. As you know, Allen, as an editor of a print product, you never really knew who read what. But now that we have the content up in digital form, we do know who reads what and we can now make those judgements a lot more effectively than we did in the past. So we produce the stories that we do right.
AK: The stories that aren’t being read and the stories that are being read, what are they? Are the stories that aren’t being read the ones that you might call serious or public interest journalism, and the ones that are being read the ones everyone calls ‘click bait’?
GH: No, far from it, and in fact quite the opposite. What people come to our brands for is that serious end: they come for national politics, they come for state issues, they come for business. Sure they come for entertainment as well, but the serious end of entertainment. There has always been a demographic skew in our brands to people who are relatively well off and well educated, and they come.
There is also another aspect of it. Obviously we get a lot of traffic through search engines, and the search engine algorithms have a quality component within them, so they direct the searcher to quality journalism, and it’s very important for us that, if we are to maintain our traffic, to keep the quality journalism going. If we went into click-bait, we wouldn’t get the quality of audience that we do get. And that is a very important part, not just in terms of our ability to generate advertising but we use our audience to drive our other businesses – domain, Stan, Drive, and the other businesses – so it’s important we keep the quality end going.
AK: Which is a good Segway to talking about domain. Obviously, that’s to a large extent where your growth strategy is focused. In fact, I was talking to the fund manager the other day. He said that if Fairfax changed its name to domain, it’s share prices would go up 20%.
GH: That fund manager can just look at the numbers and make that call without having to change the name. Domain is a very good business. It’s an interesting story, actually. Here was a business was created in 1998. It did have significant market share; in fact, I think majority market share up until about 2002-2003, and the board at the time decided then to disinvest, not only in terms of real estate but also in terms of jobs and cars, and the pure players came in over the top. But what happened was that Domain kept ticking over and it had a decent position in inner Sydney and inner Melbourne. But what it needed was a definitive strategy, a strong leadership and some investments. Over the last few years that has occurred and it has been a profound success story.
AK: In fact, in the past two years, Domain has gone from 67% of listings to 89% of listings.
GH: Absolutely, which is effective parity with the competition. Because there are some geographic parts of Australia we don’t intend competing in- in the major cities and in the major regional areas we have effective parity.
AK: Does that mean that you think you are happy being just a profitable number two or do you think you can knock off REA and become number one?
GH: It’s not about becoming number one, it’s about building a very profitable business. It is our view that online real estate listings, be they Domain or REA, is underpriced category. So if you look at a $20,000 member spend on a significantly priced property, you can get a premium domain listing and a premium REA listing for well under $5000, which is only a quarter of the market spend, and it’s the only way that the vendor and the real estate agent really knows where their leads come from. We believe that, as well as the significant upsell opportunity for premium listings means that domain has a very strong future. You look at the REA’s share price, it’s very strong, and that’s reflective of the strength of the category.
AK: I don’t really understand what s going on here. It used to be in the times that you talked about, there was only one place for real estate classifieds and that was The Age and the SMH and in the past recent times its been REA and there has always been the feeling that it is a winner-take-all business. Are people looking in both places for the same houses?
GH: They do and it’s a market structure issue. What happens here is, remember that the real-estate agent is still in a preeminent position here, in terms of creating a market for each house to be sold. They do that in a variety of ways: they do it through their little black book, they do it through online real-estate listings, they do it through print advertising, which particularly local print advertising picks up the passive buyer in the market, and they create a market so that the price of your house, at auction you’ll get a good price if you have four people bidding but not so good if you’ve only got one or two. You’ve got to create this market. What the agents do is they want price competition, and they’re basically selling these marketing services through the vendor financed marketing to the vendors, and they certainly believe that you should be on both sites, and they certainly have in interest in making sure there is price competition for REA, and Domain is providing that competition. So it’s very much a market structure issue. And what we’ve done also, Alan, we’ve invested very heavily in mobile technology. So our user experience, once we got the listing in terms of effective parity, once we got the subscriptions in terms of effective parity, and we’ve provided a high quality user experience, the vendor wants to go to the two major sites. And because we’ve invested very heavily in mobile technology, ahead of REA, we’ve got effective parity in audience share across mobile devices – that puts us in a very strong position in the future. Our user experience in mobile is of the highest quality.
AK: Is something like that also going on with cars as well, with Drive and Car Sales?
GH: The Drive strategy is very much focused around new cars. Car Sales, we believe, hasn’t been providing the level of service that new car dealers want – they want people to come in a drive the cars, which gives them an opportunity to up-sell and provide other services to purchases. So Drive, which has always had high quality content, and has been the place where people have gone to find out which car is best, we’ve now translated that content into a new car lead generation business for, predominantly, dealers who want to sell new cars. So it is a differentiated strategy; it’s not going head-on. Clearly, Car Sales is very strong in the used-car side of the business. We believe that there is a market in the new-car side of the business.
AK: So back when I was running The Age in the 90s, and I think you were too in a different way.
GH: Bit later.
AK: Bit later, and you were the actual boss.
GH: Not that anyone cared.
AK: Classified advertising subsidised the journalism and it was always to figure out which came first. Were people buying the paper for the classifieds or were they buying it for the journalism?
GH: Certainly on the weekend. I remember there was research done: 40% of the people would dump the front of the paper and keep the classifieds. So there was absolutely no doubt that the classified business could have been a business on its own right without journalism.
AK: And that has happening again. SO the question is that are we turning a full circle now. The classified business domain and drive, mainly domain, is going to subsidize the journalism?
GH: We’re not subsidizing anything. They stand on their own two feet in terms of their ability to generate display advertising, subscriptions and they drive audience and have marketing that we can use to drive our businesses like domain and driver and STAN, and so there is an economic value attached to the mastheads. It is a bit of a strategic stretch from where we were, but you can do that with this much lower cost base. I think one of the big mistakes that people made when looking at our business 5 years ago is that they had no idea how much legacy cost they could take out of publishing. A perfect example of vertical integration where you did everything from create the content to produce and distribute and everything in between, and that was a legacy of oligarchic legacies from the past. Once you actually script the business down and determined what you need to do internally, and what level of resources you needed have internally, you could take huge costs out by outsourcing and off-shoring.
AK: In that case, does serious journalism have a future? As a final question.
GH: Absolutely it has a future. It drives our business in many respects. Certainly domain can stand on its own two feet, and it should without the publishing business, but certainly its helping drive STAN, its helping drive drive. They will stand on their own two feel. That is the metro model. That is what I said to the market place in an environment where you have a hybrid environment where you can hold a substantial part of your print revenues on weekend, on a much lower cost base, and generate significant audience as well as using market inventory to drive businesses – you’ve got a new model for journalism. It’s a different one. It’s a leaner one. You think of this: we got all that cost out of our business over those years and our audiences have never been greater. So, this whole ‘is the quality of journalism going down’ is a moot point because, fundamentally, people are delivering the answer, which is they love what we do, and they see what we do as high quality and necessary.
AK: Great talking to you Greg. Thanks very much.
GH: Thanks Allen.