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Is now the time to buy Fairfax?

Times move quickly and Fairfax Media (ASX: FXJ) has been at pains to persuade investors it’s moving with them. Its flagship online publications, the Sydney Morning Herald and The Age, have both recently introduced digital subscriptions requiring readers to pay for their content.

Subscription rates range from $15 to $44 per month, after a reader has accessed a limit of 30 free articles a month. The theory is that a limited number of free articles per month allows casual usage while forcing regular readers to subscribe. Rival operator News (ASX: NWS) has adopted a similar metered model.

Described as the most significant development to the group’s digital strategy since the shift online, the success of the paywalls will be fundamental to the group’s future. Unable to reverse the long-term decline in its print business and advertising revenues, emphasis has been placed on the paywalls to grow revenues.

Paywalls have seen mixed success internationally, as faced with a choice, consumers often switch to free digital content providers. Guardian Australia, a free news website, has recently started operating in Australia, and this may shortly be followed by a second, which is unfortunate timing for Fairfax.

UK media group the Daily Mail and General Trust, owners of the Mail Online UK and US websites, are said to be intent on launching their own free Australian news website. The American website is now the most visited in the country and this success could be a serious issue if replicated in Australia. The fact that the Guardian Australia and any potential Australian Mail online offering would cover opposite ends of the news spectrum, would add further competition to Fairfax’s paywall offerings. Only the business daily, the Australian Financial Review may escape this competition.

Like other media organisations, the Ten Network (ASX: TEN) and Seven West Media (ASX: SWM), Fairfax has been slashing costs — by June 2015, annualised cost savings are projected to be $311 million. Like its peers, Fairfax’s share price has reflected the market’s doubts over structural headwinds, including, increased competition. However, the stock offers a 4.7% dividend yield, reflecting a share price already looking discounted at around 50 cents and trading on a price-to-earnings ratio of just over 9.

Foolish takeaway

Digital earnings through paywalls are central to the group’s earnings growth plans. Competition on this front could spell further trouble and investors should factor this into future assumptions. All is not lost though and any signs of success in the group’s transformation to the digital-age will make the stock attractive again at present valuations.

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Motley Fool contributor Tom Richardson does not own shares in any of the companies mentioned in this article.

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