Many of its equally challenged newspaper industry rivals, who do not benefit from the same brand cache of The Wall Street Journal, have better managed their cost and monetized their resources online.
That is why News Corp. Chairman and CEO Rupert Murdoch may actually have grabbed Dow Jones at a "deep discount to its true earnings power," according to Bernstein Research analyst Michael Nathanson. Most importantly, he makes the point that improving the Journal's lagging profitability by as much as $400 million rides less on cutting costs and more on making strides in international, domestic and online advertising and circulation. Murdoch has said potential initial synergies should top $100 million.
The Journal--which, along with Dow Jones' other newspapers contributes 62% of overall revenues and 23% of overall operating income--performs so poorly in critical operational areas that there is plenty of room for gains. (Its 3.5% profit margin is actually an improvement over 3% the prior year, reflecting heavy cost cuts.) Conversely, Dow Jones Enterprise Media assets--including the lucrative Factiva online database and Dow Jones Newswires and Indexes --contribute 77% of the company's overall operating profit, although it comprises less than 40% of the overall revenues.
The most formidable obstacle may be the famed newspaper's editorial history and culture, which Murdoch himself referred to Dec. 13 when he closed the deal: "...change is often difficult and creates nervousness." The business side of the Journal enterprise is a whole other story.
Improving its profitability and creating incremental income at Dow Jones, now a subsidiary of News Corp., depends on Murdoch capitalizing on three opportunities, according to Nathanson. He must grow domestic and international advertising and subscriptions and expand its online reach. Leveraging the Journal's brand, as well as News Corp.'s existing global print and distribution assets, will be key.
Improving U.S. circulation revenues by $49 million and advertising revenues by $236 million--while growing online advertising $92 million and international revenues $21 million--will initially grow News Corp.'s incremental equity value 7.6% or $1.58 per share. It would dramatically lower the original purchase-price multiple of nearly 36 times 2007 earnings to a more reasonable 11.8 times multiple, he said.
It is a simple--and not so simple--case of "the wealthiest daily mass audience in media undercharging its subscribers and under-monetizing its audience," Nathanson explained.
Although Murdoch publicly has declared an all-out newspaper war with The New York Times, the Journal already has lost the first battle. The newspaper's average paid circulation is 63% higher than the NYT, yet the Journal revenues base (comprised both of advertising and circulation), is 44% smaller than the NYT. The Journal woefully under-earns the NYT, generating 65% less advertising per customer and 68% less circulation per customer. One-quarter of the Journal's paid circulation pays at a discounted rate nearly half the newsstand price, compared to only 4% of paid subscribers to the NYT, getting a 15% discount. Despite similar upscale readership demographics, the Journal's advertising also is priced at a discount to the Grey Lady, which has a much wider universe of advertisers.
The discrepancies represent a huge opportunity for the Journal and "justification for broadening its news coverage." For instance, expanding the "Weekend Journal" could narrow the $300 million circulation revenues variance between the Journal and the Sunday NYT, which is the single largest contributor to the NYT's overall advertising and circulation revenues, Nathanson said.
Murdoch's aggressive retransformation of WSJ's online presence may seem more risky on the surface, but is actually a no-brainer. The WSJ's largest subscription news site on the Internet debuted in 1996; its nearly 1 million paid subscribers generate $60 million in annual subscription revenues. WSJ.com generates about $45 million in advertising revenues, or $27.31 per average monthly unique page view. A free WSJ.com Web site should be able to attract 3.8 million monthly unique page views based on the performance of rivals, Nathanson said. Murdoch has said he expects a free WSJ.com to be able to attract upwards of 20 million monthly unique page views globally, which would yield an estimated $400 million in incremental operating income. Even if the Web traffic only equaled the nearly 6 million unique page views averaged monthly at CNNMoney.com, WSJ.com could generate $115 million in incremental advertising and $92 million in incremental operating income.
However, it is on the world stage where The Wall Street Journal, and all of Dow Jones, stands to make the most gains over time. The European and Asian editions of the paper--launched in 1983 and 1975 respectively--account for less than 5% of Dow Jones' total revenue. "In theory, the WSJ Europe and Asia are logical mechanisms for monetizing the fixed cost, global reporting assets that are required for the flagship U.S. edition," Nathanson said. The European and Asian editions of the WSJ lag The Financial Times by nearly 78% in annual advertising revenues, and lag by 72% in average daily circulation. Even as they improve on both fronts, the heavy cost of producing newspapers abroad will make the international editions a break-even venture at best. Although he does not address it in his report, there should be big long-term gains from the digital extensions of WSJ editorial content and advertising on cell phones, PCs and other portable devices, in tandem with related interactive data and activities that have special appeal to the high-end business traveler.
The report also does not explore the potential financial synergies that could come from eventually combining Dow Jones' branded business news-gathering resources with other companies' operations, such as The Fox Business Channel, The Times of London and BSkyB. Understanding the rapidly unfolding global media market better than most of his peers, Murdoch is likely to find a gold mine of revenue and profit gains buried there.