Will Murdoch Find A Model To Rescue Newspapers?

Rescuing the newspaper industry from disintegration is a tall order even for Rupert Murdoch, whose career has been defined by bold media moves.

Seizing control of Dow Jones and its flagship Wall Street Journal will give Murdoch an unprecedented platform on which to mold a more ad-dependent, digital template for news publishing--and the entire newspaper industry can benefit. It goes way beyond giving a big lift to News Corp.'s just-launched Fox Business News Channel, or even redefining the business news sector.

The most important task at hand is designing new ways to nip the growing disparity between newspapers' $60 billion share of a $235 billion U.S. ad pie--second only to total television--and their rapidly declining foothold with readers and classified ads. By 2011, newspapers will have lost that ad-spending edge to the Internet without any hope of transferring their content value online unless they embrace new solutions.

Veronis Suhler Stevenson estimates online advertising will top $62 billion, while newspaper advertising musters $60 billion by 2011. Even with the infusion of ad dollars from the presidential elections and the Olympics next year, newspapers' share of the global ad market will continue to decline to 26% in 2009 from 29%, according to Zenith Optimedia.



Failed paid content exercises by The New York Times, Financial Times and other newspapers dashed hopes of generating meaningful online subscription revenues. Murdoch has indicated plans to make free. Among the big culprits are search engines like Google that blow through the firewalls of some proprietary content, giving savvy consumers a way around payment.

On a more dire front, newspapers have lost about 60% of their classified ad business to Craigslist and other Web destinations. Newspaper classified advertising continues to decline 10% to 20%, depending on the category. Craigslist, whose founder maintains that newspapers are to blame for their own demise, now racks up about $150 million in annual revenues by charging for job listings in several big cities. The Conference Board recently announced job seekers use the Net more than newspapers to seek employment.

As a counter, Murdoch is sure to infuse more video on Dow Jones' online outlets, building on the fact that 30% of online consumers watch news video clips--making it the most widely viewed video genre, according to Jupiter Research.

The schism between old-line print and online media was never more dramatic than this past week. Dow Jones reported an 87% drop in third-quarter net income, while Google (which aggregates newspaper and other online content) announced a 46% rise in 3Q net income, primarily on search advertising, which it is beginning to provide to radio, television and newspapers. Plummeting third-quarter earnings for many newspaper companies were dizzying: McClatchy down 55%, and Gannett down 10%.

Murdoch is expanding News Corp.'s mature newspaper empire, which generates about $650 million in operating income on $4.5 billion in annual revenues, when the newspaper industry is at its lowest patch. With all its cachet, the WSJ, like other newspapers, suffers from a lack of interactivity and few mobile applications. They have not adequately integrated user-generated content, citizen journalism, social networking, vertical online communities and e-commerce.

Some of the exceptions include privately owned publisher MediaNews Group. It plans to triple Internet sales by 2012 by catering to younger readers with new Web sites created separately from its 57 daily newspapers, including The San Jose Mercury News. Yahoo's advertising and content consortium with seven newspaper companies could generate positive revenues for the print partners as early as 2009, based on increased online inventory and traffic, higher pricing from Yahoo's behavioral targeting, and its affiliation with online classified player HotJobs, according to Deutsche Bank.

Clearly, newspapers must become more aggressive digital game players, with more sophisticated interactive relationships with readers and advertisers. Murdoch makes no secret of his intension to "hyper target" the upscale readers of Dow Jones' print portfolio--which also includes Barron's, MarketWatch and Dow Jones Newswire. That means drilling through layers of content and marketing to drive consumers to buy products and services that add to Dow Jones' coffers. While the intellectual and prose treasures of the best newspapers must be protected, the commercial maneuvering will keep these print franchises alive for future generations, who currently get more of their news from the Web than other media outlets.

As third-quarter earnings have been some of the weakest on record for newspapers, companies such as Belo Corp. and E.W. Scripps announced plans to separate their growing cable, Internet and newspaper operations. Hearst Corp. may give its recently bailed buyout plan another try.

Despite the pending $8.2 billion sale of Tribune to real estate investor Sam Zell, which could become stalled over potential FCC ownership changes, newspaper company valuations and transactions are tenuous at best. McClatchy Co.--which acquired Knight Ridder for $6.5 billion last year--today has a market cap of just over $1 billion, based on its depressed newspaper stock and debt. Analysts note that Belo's trading multiple is barely higher than that of pure-play newspaper groups; its 20 local TV stations and local cable channels are worth $3 billion in enterprise value compared to $670 million enterprise value for its newspapers.

For many newspaper-based media companies, online revenues are rising 20%-plus per quarter, while newspaper ad revenues continue to fall close to 10%. Morgan Stanley--which may discontinue its coverage of newspapers altogether--estimates newspaper advertising print expenditures will decline 7.2% this year and more than 4% next year, while online advertising revenues continue to grow roughly 20% annually. However, analysts say all forms of newspaper advertising could take double-digit hits if real estate sales continue to tank.

Lehman Brothers analyst Craig Huber says he expects newspaper stocks to generally trade down 5 to 5.5 times forward earnings, given the secular headwinds facing the industry. "We think there is 20% to 25% downside risk potential over the next 12 to 8 months" in newspaper stocks, which are down more than 16% year-to-date. That triggered, in part, Morgan Stanley's decision to unload its 7.2% stake in The New York Times Co. Other frustrated institutional investors could follow.

As a career-long newspaper aficionado, Murdoch may use his Dow Jones prize to revitalize newspapers, just as he regenerated the broadcast network television and cable programming businesses. He's the only one of 21 prospective buyers for Dow Jones who bid to win with a sweeping 67% premium. Even now, Murdoch is the only one talking about a rich, untapped global market for business news and data, and a way to make newspaper content as popular as music for iPod downloads. Maybe there is a win-win in this one for all concerned.

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