• by Diane Mermigas , April 25, 2008

What does Rupert Murdoch know that everyone else is missing?

That question is vexing News Corp. investors, news purists and media peers as chairman and CEO Rupert Murdoch continues to feed his lifelong fixation with newspapers at a time when their long-term viability is in doubt. Murdoch contends that newspapers are their own worst enemy in failing to respond quickly and innovatively to changing technology and consumer trends.

Murdoch is willing to pay about $6 billion to defy print media's sacred cows. The press on both sides of the pond is riveted on News Corp.'s concentration of power and potential violation of ownership rules. Neither concern is new or likely to be restrictive. Surely News Corp.'s frustrated investors have a right to complain. Although News Corp. stock is undervalued like its peers, its global diversification could be strapped by a weakening advertising outlook. The company has yet to detail achievable cost savings with Newsday and the New York Post in the same market.

More importantly, News Corp. must communicate a clear long-term strategy for generating returns on its rising newspaper investments, observes Pail Research analyst Richard Greenfield. Such concerns overshadow an anticipated 16% growth in operating income on a 14% increase in revenues in fiscal 2008, with newspaper operating income growing 20%, second only to Sky Italia. Its newspapers in the U.S., U.K. and Australia are the largest contributor--about 21%--to News Corp.'s total revenues, and represent $11 billion in assets.

Murdoch won Dow Jones--and now, most likely, Newsday--in fair fights. He was the only bidder who stuck it out to the end. He is paying a fair price, dictated by the market--$5.2 billion for Dow Jones late last year--and bid an estimated $580 million for Newdsay, one of the assets that new Tribune Co. owner Sam Zell is selling to reduce debt.

Controlling Newsday's unique corner on suburban Long Island would tighten News Corp.'s overall grip on the New York market where it owns the New York PostThe Wall Street Journal, and the Fox-owned TV stations. Monetizing these newspaper and television assets will require bold moves in the digital interactive world.

If Murdoch finds a way to make newspaper content profitable on the Web and on portable devices, his proponents will be forgiving. The self-righteous Wall Street Journal had plenty of time before it was sold to be more enterprising on the Web. Other rivals, like The Economist and The Financial Times, are trying to salvage serious-minded journalism with new online applications and approaches.

Just as News Corp.'s Fox created a worthy competitive alternative to the Big 3 TV networks, the company has positioned itself to fashion journalistic alternatives to keeping newspapers alive. Murdoch may be a savvy opportunist by taking advantage of the Dow Jones ownership fiasco, and now Tribune Co.'s need to sell assets. But he may prove himself a visionary--although those working at The Journal might consider that suggestion heresy.

Through all of this, Murdoch may turn out to be his own worst enemy as he strives to reshape The Journal into a general-interest subjugator of The New York Times. The last-man-standing battle is being dramatically and colorfully played out. However, sacrificing The Journal's rich tradition and reputation as the global business niche leading player may ultimately cost it hardcore paying subscribers and advertisers. And that would depress overall newspaper industry revenues and profits even further--although for now, newspapers still represent the largest advertising sector at $43.5 billion, declining an average 7% annually. Online revenues are steadily growing for newspaper companies, but not fast enough to offset the loss of traditional revenues.

Change is never easy, but it is essential for newspapers to survive. Simply put: newspapers represent the distinctive content that is in high demand in the digital marketplace. It is the kind of specialized content sought by interactive consumers: local news and sports, business and politics. It should be able to transition itself into a profitable commodity. In fairness, some newspaper players are making a valiant effort to leap the digital divide--most notably Gannett, Hearst, Belo, The Washington Post and The New York Times. News Corp.'s contrarian contributions can only make things more interesting, and perhaps, more financially viable.

There is a chance News Corp. might not get it right. After all, it was smart enough to acquire MySpace for a song long before its rivals understood the value of social networking. But it is still struggling to make MySpace a profitable, commercial endeavor. News Corp. also was driven by Murdoch's vision for a global satellite network into its acquisition of DirecTV, which it recently unloaded to Liberty Media.

If News Corp. fails to devise and implement successful alternative business models for its newspapers, the concentration of power issue will be mute for an industry in shambles. All detractors best put their money where their mouths are and the best ideas to work--or leave quietly out the back door.