The separation of News Corporation into ‘new News’ and 21st Century Fox should shed more light on the breadth and depth of the content in both companies.
Part of the rationale behind the separation was the perception, mostly by US investors, that the publishing businesses within News Corporation were a drag on the valuation and earnings of the group.
That perception worked against a higher valuation for the very high growth Cable Network Programming division relative to its US peers. By separating the ‘publishing’ assets from the ‘entertainment’ assets, the market would be better able to value the components.
[1]That’s the theory, but the reality is actually more positive.
There are two popular misconceptions about News Corporation – that it is mainly a newspaper company and that its earnings are dominated by advertising.
In fact, the group earnings of News Corporation are a mixture of subscription and advertising, with the common element of compelling content. The content is distributed across a range of platforms from print (newspapers, books, magazines) to pay TV, television and movies.
In this note, we look back at the creation of News Corp and its evolution into new News Corp. We will leave aside the 21st Century Fox business for another time.
The old News Corporation
Most of us are familiar with the Australian roots of Rupert Murdoch’s newspaper empire, started by his father in Adelaide in the 1950s. That empire grew by acquisition to include some of the world’s best known mastheads in the UK and America, as well as Australia.
Back then, it was true to say News was an advertising-based print company.
But the key to understanding News Corporation, is that it is a content company first and foremost.
Throughout the 1980s, the company began accumulating content (such as the English Premier League through BSkyB, and American Idol) and creating content (such as the Fox News Channel and The Simpsons) that formed the basis of the content powerhouse that drives it today.
In 2007 when News Corporation initiated a prolonged US$5 billion hunt for Dow Jones & Co., the owner of The Wall Street Journal, most observers declared that Murdoch’s renowned tabloid journalism would kill one of the most prestigious titles in newspapers.
But the critics were wrong, as Mr Murdoch set about expanding the quality journalism at the WSJ to take on its nemesis, the New York Times. The strategy propelled the WSJ past the NYT and then beyond USA Today to become the largest newspaper by circulation in America.
The strategy was even more exciting given the early establishment of a paywall at the WSJ, which now boasts more than a million subscribers around the world.
Dow Jones, however, is much more than a collection of mastheads – it is a global financial brand.
It was the beginning of the recognition that although News Corporation was already a global company, in order to survive it needed to be a digital company as well.
The company made some mistakes along that digital road, including cooking more than US$500 million on the investment in MySpace.
News Corporation has adapted much of its content for a digital world that is now dominated by mobile devices. That has enabled advertisers to follow the audiences and users into broadband and mobile platforms.
New News Corp
The new News Corp will be a combination of print publishing, digital and mobile and broadcast assets across Australia, USA and the UK. Roughly half its revenue will be generated from advertising with the balance from circulation, subscription and other sources. Geographically, its revenue will be spread across Australia (36%), the US and Canada (41%), Europe (21%) and other countries for the balance.
Its news and information services business includes the Dow Jones and Wall Street Journal brands that are expanding globally and digitally.
The News International division houses the UK newspaper titles of The Sun, The Times and The Sunday Times which form the core of a leading position in UK publishing.
A good example of how the company can leverage its content is the launch of mobile highlights of all English Premier League matches to subscribers of The Sun’s digital product. The same is happening at the other titles, encouraging new subscriptions and hanging on to existing ones.
Australia contributes its newspaper and magazine assets along with the key assets of Foxtel (50%), Fox Sports Australia and REA Group (61%).
The Harper Collins book publishing business remains a global leader in a consolidating industry. The advent of eBooks has allowed the business to evolve and compete in a market that is thriving, not dying, as is often thought. It’s not well known, for example, that Harper Collins is the number one Christian publisher in the world.
New News Corp also has an education business called Amplify that is targeting an under-resourced US education market. News believes this market could be worth US$17 billion in instructional materials and technology alone. Intuitively, the opportunity seems plump but execution will take time and some cunning ideas to extract value. We doubt the market will attribute any value to this nascent business for some time yet.
Should you own it?
To some extent, new News Corp has to prove that it can flourish without the cash flow protection of its former ‘entertainment’ stable mates now in 21st Century Fox.
The company begins its new life with a clean balance and about $2.5 billion in cash.
With pro forma revenue of just over $9.1 billion in the 2012 financial year to 30 June, it generated operating earnings (EBITDA) of $1.1 billion in that period.
The company has a proven management team headed by Robert Thomson.
We think this company may be underestimated and even disregarded by some investors as the rump of the old group. But it could turn out to be the Cinderella story of the family company.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
Also in the Switzer Super Report
- Peter Switzer: Getting in doesn’t mean I got out [2]
- Paul Rickard: Which Bank – NAB or ANZ? [3]
- Rudi Filapek-Vandyck: ANZ upgraded – pegged to benefit from QE tapering [4]
- Tony Negline: Yes you can run a trading business [5]
- Penny Pryor: Property market the place to be [6]