Rinehart doesn’t get Fairfax’s digital challenge – but neither does its board: Kohler

I wonder whether Fairfax shareholders are hacking into chairman Roger Corbett’s email account and sending Gina Rinehart rude messages under his name to try to inflame her.

Maybe, they’re thinking, if we could just get her angry enough, she’d actually bid the price up just to have the pleasure of firing Roger the Grocer and replacing him at the head of the board table.

Certainly the world’s richest woman is their best hope of getting a decent price in the short term, and if, God forbid, she sold out of Fairfax and turned her terrible gaze towards, say, The New York Times, well, the share price could finish up anywhere the way things are going.

Long term Fairfax is in the process of becoming a digital business, which is risky and challenging (thus the 90% fall in the share price since 2007) and which is also something, I would hazard a guess, about which Australia’s richest person, steeped as she is in iron ore, knows very little.

But going by her public statement on Monday she thinks the current chairman knows even less about it than she does, and that the company would only be improved by her arrival on the board and his departure.

It is a fair bet she would soon end up surveying a table of empty chairs. She is a woman who likes to get her own way, which is why Hancock Prospecting remains aloof from equity funding to avoid all the corporate governance nuisances that go with it, so professional directors like Linda Nicholls, Jim Millar, Peter Young and Sandra McPhee would be unlikely to put up with her for very long.

Fairfax is not just any company, though, and La Rinehart is not just any investor, which is what makes the situation so interesting, and so significant.

This week she has been very critical of the decline in circulation at Fairfax, which means no one has told her that that’s actually the plan: the “Fairfax of the Future” strategy being pursued by CEO Greg Hywood involves reducing the print circulation of the major metro dailies by gradually cutting out unprofitable newspaper sales.

Advertisers are no longer interested in numbers for their own sake. They have been educated by the more sophisticated customer acquisition tools available on the internet and now value targeted, data-heavy advertising rather than mass circulation.

The problem is that this is a fraught and competitive business because on the internet users and publishers are creating advertising inventory much faster than advertisers can fill it. The result is constant pressure on prices in a world where the only outfit with pricing power is Google, and it auctions the ads and lets the market do the pricing for it.

Even Facebook is struggling, despite having 850 million users worldwide. Last night its share price fell 9% to less than US$29 and it’s now lost 25% since last week’s IPO.

The media blog “Monday Note”, written by Frederic Filloux, says the bumpy IPO debut of Facebook “signals the end of a collective hallucination”, and it seems to me the questions being raised around its ability to deliver an effective digital advertising machine apply equally to publishers like Fairfax.

Fairfax and Facebook both rely on traditional advertising creativity to interrupt the user’s experience so that they notice, and act on, an advertisement. Google’s AdWords, on the other hand, fit seamlessly into what the user is already searching for.

As Filloux points out, the reason the TV ad market is holding up pretty well is its lasting ability to create price tension, because there is a fixed number of ad slots available over a given period of time.

But in general, what you might call the interruption, or distraction, in the advertising business is very challenged indeed, which is why so many publishers are trying to get their content behind paywalls, so that customers pay something and publishers can get more information about them to better “qualify” them so they become higher-yielding advertising targets.

Meanwhile traditional print publishers like Fairfax are trying to pull off the creation of a new digital business based on old mastheads, while also trying to milk their print businesses for every last drop of cash.

That means ensuring optimal circulation – not too big that you’re printing and delivering papers into markets that advertisers don’t want to reach, but not too small that you don’t fall below critical mass, whatever that might be, and enter a death spiral.

It’s probably fair to say that neither Gina Rinehart, nor Roger Corbett, nor the bloke he chose as a director over Ms Rinehart, James Millar, understand very much of this. Even those who are steeped in digital publishing every day are struggling to keep up, but in any case arguably Corbett should at least try to bring in one or two digital experts onto the Fairfax board, and not Rinehart or Millar.

But Rinehart has her cutlass between her teeth and wants to board the good ship Fairfax and shake it up, while at the same time, presumably, enhancing her own prestige and community standing and getting the journalists to write what she regards as sensible stories.

They are now in a slightly noisy standoff: she seems unlikely to go away and Corbett really, really doesn’t want her on board. The only way this gets resolved peacefully, it seems to me, is that she gets sick of it, or realises she is in the process of losing a lot of money for no good reason, and finds someone else to harass.

For what it’s worth, my money is on Rinehart because she has both the money and, apparently, the motivation. Would she be good for Fairfax, as the hamburger king Jack Cowin argued this morning? Definitely not, but possibly no worse than some of those who are now on the board.

This article first appeared on Business Spectator.