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June 27, 2012, 8:12 a.m.
Business Models

The newsonomics of the News Corp. split

If Murdoch’s empire cleaves in two, his newspapers will no longer be able to count on the latest blockbuster to disguise their financial woes.

Are two Ruperts even better than one? We may soon find out, as News Corp. moves forward today to clone itself.

The cloning, or splitting, of the $34 billion company certainly has its logic. Hive off those pesky newspaper assets and the company’s book arm HarperCollins into a separate company. Then let the News Corp. entertainment conglomerate — satellite, cable, broadcast, movies, and more — focus on global opportunities as both the Internet and old-fashioned pipes offer seemingly unlimited upside for the distribution of entertainment content. (Fox News, best understood for its entertainment value, would go appropriately with the entertainment company, not the publishing one. That raises the question of whether those two operations, to be owned by separate companies, would continue to uneasily share prime Times Square office space. And who gets the News Corp. name? The company with the news or the company without it?)

The split made sense even before Hackgate. Viacom, Belo, and Scripps all split off growing assets over the last several years to investors’ cheers. This sequestering of no-growth — what the newspaper business, charitably, has become — businesses has its logic. Media ain’t what it used to be. And now it’s businesses like Fox Sports, Searchlight Films, and Sky Italia more than old newsprint-based life forms.

News Corp.’s high-end Wall Street Journal and lowlier Sun may still be turning some small profits. But other News Corp. properties — from The Times of London and Sunday Times to the New York Post to The Australian — are in bad shape. Just last week, News Corp. announced a major restructuring of its Aussie operations, while the Times properties and Post have hemorrhaged money for a long time. The newspapers have become a drag for News Corp., literally and figuratively.

Of course, Hackgate has upped the pressure to do something. Investors who had disdained the earnings impact of the newspapers on the company’s bottom line, watched in amazement as the whole lowly news trade allowed insolent MPs to upbraid and condemn it publicly. They’ve seen a News Corp. leadership distracted by the mess.

More importantly — and to the point here — is Murdoch’s relentless goal to dominate global entertainment and sports distribution.

Expect the new publishing company to last as a Murdoch-family-directed enterprise as long as Rupert lasts.

This split is a new play, a long play — an end-around, really — to finally buy full control of SkyTV. That goal was apparently upended by Hackgate, but one that Murdoch still pursues. News Corp. has considered placing the U.K. papers in a trust (“The newsonomics of trusts, news trusts, and Murdoch trustworthiness”) and now a company split looks like Plan B. The entertainment News Corp. can say to authorities — not now, but later — “Sure, those untrustworthy news guys did awful things, but that was them, not us.”

Expect that in the split, of course, the Murdoch family will do quite well financially. Investors will be happier, as they showed Tuesday in bidding the stock up 8 percent. The new road to BSkyB will be paved. And Rupert will still be able to play publisher.

Rupert, the old newspaper man, has been the one-man barrier to sale of the newspapers and to this kind of split. Rupert the Gamesman gives a little ground here and there, only as he needs to, keeping his eye on the big game. We can see that game playing out around the world.

News Corp. has been a relentless juggernaut, building mighty entertainment/sports businesses, TV distribution, and movie franchises. In Australia, Rupert’s home base, even as his press operations (which have an astounding 70 percent market share there) prepare for significant cuts, he’s making a $2 billion bid to gain control of the largest pay-TV operation there. Earlier this year, he made satellite moves in the Middle East to add to his holdings across Europe, Asia, Australia, and New Zealand.

Unleashing the bigger business from the annoyances of news simply lets News Corp. double down on its five-continent plan to dominate entertainment programming. Let’s take a brief look at the newsonomics of what the News Corp. split may mean to its newspapers.

What would become the publishing company generated just 10 percent of News Corp.’s total profits in its last fiscal year. That’s even though it accounted for 27 percent of News Corp.’s revenues. Those revenues are down another 4 percent so far this year.

For the next full year, it should generate about $8.3 billion in revenues and $600 million in profit. Even with HarperCollins’ revenues (of about $1 billion) separated out, the new company would still be the largest news company in the world. Second-place Gannett reported $5.2 billion in revenue and $458 million in profit in 2011.

The Journal/Dow Jones would be about a seventh of the publishing company, but clearly its jewel, the newspaper trophy mistress that Rupert can’t give up. Those old Dow Jones operations — including Barrons, Marketwatch, All Things D, Factiva, and other business research lines — account for about $1.3 billion in revenues. The Journal and news businesses make up about $1 billion of that.

Just last week, the Journal/Dow Jones operations saw a major shakeup. (The Dow Jones name remains attached to that spate of properties, though for most consumer-facing purposes, the Wall Street Journal Digital Network is gaining favor as the umbrella term for its mouthful of brands.) Five years after Murdoch bought the Journal, all its products have been brought under one leadership for the first time. New CEO Lex Fenwick, appointed to replace Hackgate-tainted Les Hinton, put fast-rising Alisa Bowen in charge. The Reuters grad will now bring unified business management to the newspaper and print businesses, as well as newswires and the Factiva/B2B businesses.

That B2C/B2B integration has bedeviled Dow Jones, as it has Reuters. However it plays out under Bowen’s leadership, it’s just one of numerous transformations to watch. Dow Jones shares the same menu of intriguing challenges and opportunities with its peers.

At the top of Bowen’s list, she told me this week:

  • News-everywhere strategies. The company’s been a leader in Facebook-connected TV and just announced a Pulse deal Tuesday. Expect to see more deals like the recently announced NYT/Flipboard deal as digital subscription pass-throughs become more common.
  • Video, video, video. WSJ Live, its tablet app now available on the desktop web, is a hit. Bowen notes recent shows launched from Hong Kong, London, and Washington. Video is doubly satisfying audiences and advertisers.
  • International expansion. The Journal launched a German language site in January, and Bowen says there’s more to come later this year.

Everywhere. Video. Global. The words are both highly strategic and increasingly commonplace, especially in the hypercompetitive business news marketplace.

The new company would face Bloomberg’s voracious competitiveness in business news and data. Giant Reuters, with the largest single journalism workforce globally, is (again) reorganized to do battle in the news and financial spaces. Its most head-to-head competition comes from the Financial Times. Both aim at the global business class, newly digitized and energized.

Comparing the circulations of the two “papers” isn’t easy. The FT reports about 600,000 combined circulation, 285,000 of it digital. The Wall Street Journal reported 2,118,315 “total average circulation” in its last report. One thing we can count here is numbers; the other, reader revenue. The FT, with majority reader revenue, is a high-priced buy, an aggressive price leader. The Journal has a long, continuing history of discounting, which boosts sales, but results in significantly lower yield per customer. Will the next-gen Journal price more like the FT?

The new company’s New York-based branch (minus the Post) starts to look a lot like the FT and its parent, Pearson. With a leading business news franchise (the Journal and the WSJ Network), a consumer book publisher (HarperCollins) and an education business (headed by Joel Klein, who may take on a larger role within the new company), it looks a lot like Pearson’s lineup — though Pearson, of course, is a leader in the education market, while Dow Jones’ efforts are more startup-like.

For the new publishing company’s general interest newspapers — and doesn’t that term seem increasingly outdated year-by-year? — the future is much murkier.

In the print turndown, the New York Post, The Times, and Sunday Times have been largely saved from the worst fears of their news peers, who now stare extinction in the face. The deep pockets of News Corp. provided a soft pillow against those night terrors. The proceeds of Titanic and The Descendants have been offsetting many journalists’ salaries for years.

In the absence of that constructive subsidy, how much and how well will the publishing company be capitalized, and where will the liabilities go? It’s common for the struggling spinoffs in these media company separations to be set up without debt, to give them a better chance at resetting themselves. For News Corp., it’s a unique question, with an open liability issue attached to the newspapers themselves due to Hackgate-related suits that may well stretch on for some time and number more than 500.

As to cash, News Corp. has about $11 billion on hand. Certainly, some can be apportioned to the new company — but the entertainment conglomerate’s appetite for big, expensive acquisitions is only growing.

What will newspaper resources look like in 2013 and 2014? Without deeper and deeper cost-cutting, given print advertising’s continuing spiral downward, the new publishing company’s thin 7 percent profit margin would disappear quickly. Even with a Murdoch squarely in charge, it looks a major round of Australia cost-cutting is imminent, but that may not be enough in Sydney or London.

However capitalized, we can assume the standalone publishing company would be more subject to the market pressures than it has been as a division of a singular company. Sure, we know Rupert plans to keep feeding all his newspaper children for the foreseeable future. Still, the creation of a news-plus-books company increases the performance pressure on these newspapers; no longer can their subpar performance be obscured in the larger News Corp. quarterly reports.

Such pressure could lead to sale, closure, or deeper cutting of costs, no matter which Murdoch or non-Murdoch is running the company. Don’t expect Warren Buffett to be a buyer. In fact, as U.K. analysts assessed who might buy News Corp. properties there if Hackgate forced Murdoch from the market, only a few distant possibilities were raised — and their interest lies primarily with The Sun.

Expect the new publishing company to last as a Murdoch-family-directed enterprise as long as Rupert lasts. After Rupert, the Journal (and Dow Jones) plus whatever remains of his regional newspapers, will pass to someone else. The next Murdoch generation has made it abundantly clear it wants to focus on the global entertainment business.

For us, as readers who care about serious, well-reported, well-weighed journalism, done by talented people, it’s another long game. The hope: The Journal’s journalism, in scale and quality, survives this next change and is still here in 10 years.

POSTED     June 27, 2012, 8:12 a.m.
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