• by Diane Mermigas , December 14, 2007

No sooner did Rupert Murdoch seize control of The Wall Street Journal Thursday, than he openly declared war on his longtime nemesis--The New York Times and its controlling shareholders. In truth, the real battle for News Corp.'s chief is to save the newspaper industry (his lifelong passion) by reinventing it for digital advertising-supported consumption and distribution.

The boldest way to accomplish that mission is to catapult a formula-powered, self-important business titan like The Wall Street Journal into a broader, livelier interactive financial filter. Murdoch has his sights set on more than the mere online extension of the daily paper edition, flanked by token streaming video outtakes to double Dow Jones' pretax cash flow to about $600 million within three years--making it a contributor to News Corp. profits in 2009, as some analysts suggest. By this time next year, a free Journal online will be a full-fledged ad-supported rival to Yahoo finance--which analysts say has 30 times more users than WSJ.com and generates as much as $300 million in annual ad revenues.

The irony is that Yahoo finance, like Google, heavily relies on name newspapers as reliable content sources. Google said Thursday that The New York Times was the most-searched of all Web sites for news in 2007.

At a time when the newspaper industry is being simultaneously crippled and saved by the Internet, News Corp.'s newspaper holdings are growing profits better than 25% annually to more than $650 million on $4.5 billion in revenues (and a 15% margin). It must be doing something right.

By comparison, The New York Times, USA Today and other major newspapers owned by E.W. Scripps and Belo are expected to post a combined 5% decline in revenues in 2007 and a 4% decline in 2008, an election year. However, Credit Suisse analyst John Kim, who follows the newspaper stocks, contends that these near-term challenges are mostly cyclical. He says the solution is to take what remains of their profitable operating parts and aggressively transplant them into a new digital body.

An estimated 10% of newspaper revenues are being generated by their digital operations, growing at better than 15% annually--a solid indication that consumers still want their content and advertising, even if it is received in a different medium. The fact that most newspaper stocks collectively have lost about 50% of their value in the past five years over obsolescence concerns has made it possible for Murdoch to snatch up Dow Jones for $5 billion. Analysts at Goldman Sachs and at the Fitch ratings firm maintain that newspaper revenue declines are secular, or permanent--and that there will be no quick fixes for 20% dips in ad revenues, such as Dow Jones has reported.

Many detractors contend that the radical makeover Murdoch could impose at Dow Jones could do harm in the long term. If anyone wanted to stop Murdoch, they had their opportunity. No counter-bids for Dow Jones materialized, although deal capital is plentiful. Murdoch's muscle cannot be underestimated. Before he officially took control Thursday, he had already subtly begun making his imprint on all aspects of Dow Jones from an on-site office. He announced new managers and executive editors, and begun collapsing and expanding newsroom operations. In the coming weeks, he will launch an aggressive ad effort for WSJ.com and other Dow Jones online endeavors, ratchet up political and international coverage, and establish a new newsroom culture.

It is also expected that the tentacles of the Dow Jones remake and expansion will reach into the profitable News Corp. operations in Asia and Europe, now under the command of James Murdoch--a younger son who is part of the conglomerates' inner circle, which also includes News Corp. COO Peter Chernin. James has been a bold engineer of News Corp.'s digital media strategy abroad, and is well-suited to assist with a formidable U.S. makeover. In fact, having interviewed and written about both of the Murdoch for many years, I can say that their combined drive and vision is the most impressive weapon News Corp. brings to the global media table.

It is a growth-driven global media landscape that relatively few others in the U.S. media industry truly comprehend--much less know how to monetize. Murdoch continues to put his money into media in a big way; he can envision the future digital applications of many undervalued assets. It is the same motivation behind J.P. Morgan recently establishing a $200 million media investment fund and for Dubai International Capital, headed by Dubai's ruler, to invest an estimated $1 billion in Japanese-owned Sony, one of the world's largest consumer electronics, video game and film players.

There is every reason to believe Murdoch will eventually succeed, and in doing so, lift the entire newspaper sector. He successfully recast Twentieth Century-Fox, the Times of London and Sky Italia. He created The Fox broadcasting and cable networks and BSkyB from scratch. He knew when to get out of costly endeavors--like News Corp.'s near-death refinancing several decades ago, and its DirecTV and its Gemstar TV Guide acquisitions. But Dow Jones is nothing like those latter challenges, in that it has a collection of branded gems (led by The Wall Street Journal, Barron's, Dow Jones Newswires and Factiva) whose content and advertising value needs a compelling translation to a large-scale digital interactive plain. That would put Dow Jones in competition with everyone, everywhere. News Corp. has years of familiarity with newspapers, broadcast and cable TV, inserts, social networks and filmed entertainment--and Murdoch's bold and well-articulated vision to make it happen.