You can really only appreciate what the 76-year-old magnate is doing right about managing his $72 billion empire through the chaos by understanding the risk-reward tenets that generally have guided him. Murdoch is willing to risk short-term earnings declines for long-term earnings gains by making investments necessary to advance, buy and build businesses to fill market voids (Fox Network Television, MySpace, SkyItalia). He remains in businesses that others are writing off--like newspapers and broadcast television--on the bet they can be reinvented for the digital age. He has seized opportunities not immediately clear to others (MySpace, launching television networks. He knows when to cut his losses when a strategy falls short of expectations (DirecTV), especially if it means getting a nemesis major investor such as John Malone off his back.
Murdoch also has crafted News Corp. to play in all of the significant global sectors of traditional and emerging media and revenue sources from a position of power that includes strong brands, an entrepreneurial respect for change, and deep global intelligence.
Although News Corp.'s latest quarterly earnings were punctuated by many of the factors generally vexing the industry, the conglomerate's near-term balance sheet and outlook are laced with uncommon promise in areas where its peers still struggle.
About one-quarter of News Corp.'s total revenues are generated by early-stage growth assets (MySpace, Fox News and other cable channels, SkyItalia and Star) that soon will zoom beyond their below average, start-up growth margins of a modest 3.3%. About 66% of News Corp.'s fiscal 2007 revenue was generated by film, television and newspaper assets with mature to declining growth, with another 9% coming from cable networks growing mid-to-high single digits.
However, the remaining 26% of News Corp.'s total revenues were generated by its fledgling assets on low double-digit income growth, accounting for more than half of the company's overall revenue growth. While these early-stage Internet, cable and satellite entities generate only about 6% of News Corp.'s operating income today, that should triple by decade's end.
Fox Interactive Media alone will generate more than $250 million in operating profit on more than $1 billion in revenues in fiscal 2008, the lion's share coming from MySpace. Despite all the hubbub about Facebook threatening MySpace's competitive edge, MySpace is assured at least about $250 million in search revenue from its search pact with Google. The new Self-Serve small business tools and user hyper-targeting will continue to advance the social network's 32% growth in advertising, all of which should benefit from MySpace's participation in Google's new OpenSocial networking platform. While not publicly discussed, the time may be nearing for News Corp. to bring MySpace (which comfortably outdistances Facebook in unique users and page views) and Fox Interactive Media out from under the "other" category on its balance sheet to be designated as stand-alone, fast-growing businesses, or better yet, spun off into a closely-held Internet company whose stock could be used for expansion deals.
Nearly half of News Corp.'s total revenue (or more than $13 billion in fiscal 2007) is generated from international markets, led by stand-alone businesses in Latin America, Italy, the UK, Australia and India. Its international cable networks are ramping up--having generated $120 million in profit in fiscal 2007, and up 80% from the prior year. The projected 16% to 18% operating growth from its faster-growing foreign businesses and investments should provide an unrivaled hedge against the slowdown in the U.S. economy. Viacom's $2.8 billion international revenue base is nearly one-fifth the size of News Corp.'s. Walt Disney Co.'s $7.2 billion international revenues, 21% of its overall revenues, are rooted in its co-ownership of Euro Disney and Hong Kong Disneyland.
Also ahead of most of its peers, News Corp. has earmarked at least $340 million for new business initiatives in fiscal 2008 (double what it spent in fiscal 2006). That is consistent with its track record for building successful businesses like MySpace, cable networks, SkyItalia and BSkyB into profitable enterprises, often in just two to three years. Of the $650 million News Corp. is investing in new businesses over three years through fiscal 2009, $145 million is being spent to develop the Fox Business Channel, $140 on eastern European TV investments, $55 million building its Big Ten Network (another of Murdoch's long-time dreams), and $290 million is being spent on new color printing plants in the UK (underscoring his ability to reinvent the newspaper industry). The company expects to see healthy returns on those investments in the form of cost efficiencies and profits by decade's end.
In other words, News Corp. is not just betting on the same old periodic strength of its cyclical film and television businesses, but on its ability to revitalize those traditional media businesses in the digital space--although it has yet to fully explain its strategies. For instance, it is unclear how Fox will make the most of television's mandatory digital conversion in early 2009 at its broadcast network and local TV stations, the largest owned group in the country. While it is hedging its bets on the digitization of network content with such enterprises as Hulu.com, its online partnership with NBC Universal, all local television stations are in desperate need of an interactive survival plan that News Corp. has the wits to devise. Perhaps placing the Fox television stations' Web sites and Internet exploits under Fox Interactive Media is a first step.
Murdoch also has yet to detail his plans for more aggressively expanding The Wall Street Journal and other Dow Jones data-rich properties into international markets and interactive mobile platforms. The deal underscores how News Corp. is willing to place big bets on a media sector being written off as dead because he has a strategy for leveraging its brands and data services strength in new ways in the digital space for premium consumers. Naysayers fearing the worst about the change in ownership need to remind themselves that there were no other bidders for Dow Jones (so much for putting your money where your mouth is). Murdoch's career-long passion for the newspaper business will be a constructive catalyst for change, and Murdoch has wisely and lucratively leveraged other acquired brands such as Fox.
News Corp. is expected to maintain strong mid-teens operating profit growth over the next several years, even as its management "makes difficult near-term investment decisions to benefit long-term value creation," according to Bernstein Research analyst Michael Nathanson. But much of that is coming from new and rejuvenated businesses. News Corp.'s estimated 15% organic operating income growth for fiscal 2008 (from Fox Interactive Media, its cable networks and SkyItalia) exceeds an estimated 13.5% growth of its overall operating income on a reported basis, excluding the Dow Jones acquisition set to close December 31.
The profit from these organic growth enterprises--which are generating new business models and new revenue streams--will more than offset the estimated decline in filmed entertainment as the division (which contributes 27% of News' total earnings) comes off its studio margin industry high as a result of future releases and a maturing DVD market.
That rebalancing of a media juggernaut's business portfolio is how to gradually transform and shift the economics of even the most sprawling global concern in order to set a course for success in the digital age.
Murdoch is the first to concede that he is not infallible. He learned a stark lesson in financial frugality 15 years ago when he nearly lost his company by overextending it. Today, he runs a tight ship. He is in the midst of raising an estimated $3.5 billion in pretax proceeds from the sale of its 41% stake in the scandal-ridden Gemstar, eastern European outdoor assets, and six domestic television stations. Having missed the mark on his vision for putting an advanced set-top box in every home and using DirecTV as the last leg of a global satellite network, News Corp. is trading the leading U.S. satellite service to buy-in of Liberty Media's major stake--second only to Murdoch's. The trade will be a constructive exit from the competitive domestic pay TV market that will be 10% accretive to News Corp. earnings. Murdoch may well be the last of the legendary media moguls who is not only a true visionary, but a tireless pioneer. He is the company's single most important growth catalyst. That also makes his aging leadership News Corp.'s single biggest liability. News Corp. COO Peter Chernin and his management team are as capable and steady as any media conglomerate has; but there is only one Rupert.