News Corp: Murdoch's Tragic Flaw

Jane is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The scandal about alleged bribery at The Sun in the U.K. was a perfect opportunity for News Corp (NASDAQ: NWS) Chief Executive Officer Rupert Murdoch to shutter it.  That’s what he had done with NEWS OF THE WORLD, also based in the U.K, after the hacking scandal.  Instead, Murdoch hotfooted it to London to oversee the launch of THE SUN ON SUNDAY which will replace the NEWS OF THE WORLD.  That means THE SUN is intact and a new publication has been added to the News Corp portfolio of newspapers.  Murdoch also rallied the employees, telling them, reports THE NEW YORK TIMES, that THE SUN has been “part of me and is one of our proudest achievements.”

Some investors don’t agree that THE SUN or any newspaper in the News Corp publishing segment is something to be proud of.  They also have become increasingly disgruntled that it is obviously such a “part of” Murdoch.  His affinity for publishing or having ink in his veins may well turn out to be his tragic flaw.  Like a Greek Chorus, investors and the financial media are warning him to be careful.  But, notes Jonathan Berr in INVESTOR PLACE, few expect Murdoch to abandon publishing. That’s what could bring him down, not the current or any future scandals.

Some of you might object.  You argue that Murdoch’s purchase of Dow Jones isn’t floundering. However, many media watchers were and are puzzled why a shrewd media tycoon would have made that move.  Dow Jones is a mature business, laden with overhead, facing growing competition from digital sites like BUSINESS INSIDER with probably lower cost.  In addition, there is Murdoch’s seeming obsession with what goes on at THE NEW YORK TIMES, owned by The Times Company (NYSE: NYT).  Isn't it a distraction? That’s yet another activity which leaves Murdoch watchers puzzled.  For 2011, The Times reported a $39.7 million loss versus a profit of $107.7 million in 2010.  Less and less to track over there, it sure seems.

Indeed, it might be an embarrassment to investors that News Corp is often grouped with THE TIMES as well other newspaper companies. All of them are under a death watch. That’s not the game a media game-changer should be in.

What Murdoch has to deal with is that the publishing part of News Corp is the weakest and most problematic segment of his empire. For the second quarter of fiscal 2012, the publishing segment had losses.  Its operating income had been $218 million versus $380 million the same time the year before.  The hit publishing is taking is global. Part of the reason for the loss, for example, was lower ad revenue from News Corp newspapers in Australia. In addition, the hacking scandal in publishing had cost News Corp $87 million just for that one quarter.  No surprise, News Corp’s operating margin at 15.3 percent and gross margin at 37.33 percent are low for the media industry. 

Its other segments – film, television, and cable – are doing well.  For the quarter its film niche more than doubled to $393 million.  TV was up 20 percent to $189 million.  Cable up 20 percent to $882 million. But the question is for how long will these mediums bring home the bacon. 

Some media experts predict that television and cable will fade as distribution channels as online video takes over. Remember that the SuperBowl was streamed, including by NBC.  It wasn’t without bugs but it was still operational. In addition, in the future, it's also predicted that film will be primarily streamed, not delivered as a DVD at a Redbox kiosk in the lobby of Wal-Mart. Can News Corp films be transmitted online with quality for the multiple platforms of PCs, tablets, and handsets?  The elephant in the room here is this: News Corp would be a late arrival to this digital arena of online video which is repurposed for a growing number of venues, including Facebook, cabs, hotel rooms, and medical facilities.

Netflix (NASDAQ: NFLX) already dominates streaming film.  The big flap regarding pricing last year, when it lost 800,000 subscribers, was about the growing role of streaming versus DVD.  Amazon.com (NASDAQ: AMZN), as usual, could wind up eating everyone’s lunch in streaming.  Coinstar (NASDAQ: OUTR), the parent of Redbox, and Verizon (NYSE: VZ) recently formed a joint venture for streaming.  The core issue for News Corp is: How soon will its TV and cable eventually go the way of the DVD?

The future of News Corp depends on its strategy for and investment in online media. That’s true also for all its current competitors ranging from Time Warner to Walt Disney Company.  Until it does that its stock will continue to be undervalued. Hedge fund Baupost Group only invests in assets which are undervalued.  No surprise, it owns 15 million Class A Shares and 10.66 million Class B of News Corp.

Had News Corp been paying enough attention to digital it probably would have figured out what to do with MySpace which it purchased for $580 million six years ago and then sold to Specific Media for $35 million last June. In his book “Plan B,” David Murray contends that MySpace withered and Facebook thrived primarily because of MySpace's faulty management.  Those at MySpace stuck to a rigid strategic plan.  At Facebook leadership played the game tactically, that is, stayed open to the need to have to veer off course and cook up a Plan B or C. For example, as most of us know, it saw and aggressively responded to the social networking threat embodied in Google+ from one-time search firm Google. That possibility was probably not in Facebook's Plan A. Could the problem have been that Murdoch was having too much fun with newsprint to pump the resources, with talent at the top of the list, into MySpace?

A crisis of confidence in Murdoch’s ability to emerge as a leader in online technology could force him to hand over the reins to his current number-two man Chief Operating Officer Chase Carey.  


Motley Fool newsletter services recommend Amazon.com and Netflix. The Motley Fool owns shares of Amazon.com. janegenova has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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