MEDIA: Sputtering Phoenix New Media Cuts Staff, Charts New Course

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Bottom line: Phoenix New Media’s retrenchment could produce some short-term improvement for its profits, but won’t halt a longer term decline due to its inability to adapt in a rapidly changing new media environment.

Phoenix New Media in big job cuts

After stumbling badly in its latest quarterly report, a sputtering Phoenix New Media (NYSE: FENG) is making major job cuts and rolling out a broader retrenchment, as it tries to avoid getting sidelined in China’s rapidly evolving media market. This particular story has an interesting parallel in a mostly forgotten company called Tom Group (HKEx: 2383), which was backed by Hong Kong billionaire Li Ka-shing who hoped to build it into a regional media giant when he launched the company during the Internet boom of the late 1990s and early 2000s. But more on that shortly.

Phoenix also began its life as a traditional media company, and the lesson from all this is that such media are having a hard time adapting to the rapid pace of change in the Internet age. That said, I’m not at all optimistic that Phoenix will be able to chart an effective new course, and it could just be a matter of time before the company becomes a non-player on the Chinese Internet or disappears completely.

The latest reports say Phoenix began informing employees about the layoffs around a month ago, about same time it reported its disappointing quarterly earnings. (Chinese article)  The company formally announced the move in an internal memo to employees this week, and at the same time said it was taking steps to transform itself. The exact size of the cuts wasn’t given, but it was quite large and ranged from one-third to half of all employees, the reports say.

No details were given on the nature of Phoenix’s transformation, but clearly the company is in need of change. Phoenix reported only 3 percent revenue growth in the second quarter, and forecast revenue would actually contract by about 10 percent in the current quarter. (previous post) Even worse, the company’s profit contracted by more than two-thirds, as it failed to anticipate a big movement of advertisers to mobile platforms like smartphones.

Phoenix shares have fared poorly as its situation steadily worsened following its 2011 IPO. The company sold shares in the offering for $11 each, and has seen them lose more than half of their value since then to currently trade at $4.64. Perhaps the stock will get a brief lift on this retrenchment news, though I have serious doubts about management’s ability to turn things around.

A Tale of 2 Media Companies

As I said at the outset of this post, Phoenix’s current plight looks quite similar to Tom Group’s. In both instances, each company began its life more focused on traditional media and later moved into new media. In the case of Tom Group, the company made a splash with its Tom Online new media unit, which it briefly listed separately in New York before later privatizing the company.

Phoenix New Media’s parent is also a traditional media company, Phoenix Satellite Television (HKEx: 2008), a TV station operator that later opened an Internet division and spun it off in a separate listing. In both cases, failure to quickly adapt in the fast-changing online realm was a major factor behind the steady declines of Tom Online first and now Phoenix New Media.

So, how will this latest story involving Phoenix New Media end? It’s quite possible we could see the company follow a path similar to Tom’s and get privatized and re-acquired by its parent. Such an outcome would be consistent with a broader wave of similar privatizations for undervalued US-listed Chinese firms. But in Phoenix New Media’s case, the company’s low valuation is probably justified, and it may end up suffering a drawn-out and slow death in New York as its parent struggles with its own sinking fortunes.

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