News Corp & Warren Buffett's "Moated Business"
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The force of international public opinion is not likely to bring News Corp (NASDAQ: NWS) down. Despite British Parliament’s harsh words about the chief executive officer (CEO) Rupert Murdoch, the stock stands at 20.08, near the high of the 52-week range of 20.79 to 13.83. Of course, some see that price as undervalued. But that’s a long-term problem, mostly related to pessimism about the company’s global newspaper business. If that segment were sold, goes the thinking, the stock would likely be where shareholders want it to be. But that assumption might not be on the money. Also the current scandal, while a crisis, may not be the company’s most severe one. In 1989, it faced possible insolvency.
The bottom line is this. News Corp is a classic example for what Berkshire Hathaway’s CEO Warren Buffett calls a “moated business.” That is, it’s an enterprise which is both profitable and whose territory can not be easily invaded. This is somewhat analogous to former GE CEO Jack Welch’s imperative that the company will only hold onto lines of business which were number-one or number-two in their field. And it's a direct fit for the uncontested space management consultants W. Chan Kim and Renee Mauborgne named the “blue ocean strategy."
Let’s look at some of this. The subsidiary News International dominates the volatile gossip niche. Its SUN has been and remains the leader in the U.K. and Ireland. Perhaps it was the company’s organizational culture about keeping the businesses behind a moat which generated the mindset and then the actions which led to the hacking and bribery scandals.
The scope of this victory becomes clear when one looks at how dominance is being undone in mainstays in the U.S. gossip industry. For example, celebrity-gossip leader VANITY FAIR, owned by Advance Publications, has had a decline in circulation in 2011. American Media, parent of the NATIONAL ENQUIRER and GLOBE, is still struggling post-bankruptcy. The problem isn’t simply technology but also the proliferation of media properties. News International frequently rises above the competition to peer down from a protected place.
The highly profitable Fox News, which introduced in 1986 the novel concept of total conservative broadcasting, also is surrounded by a moat no entity has been able to penetrate. Although mature, it hasn’t gotten tired like much of the programming of CNN, owned by Time Warner (NYSE: TWX). In 1980, CNN founder Ted Turner introduced the then bold concept of 24-hour news. According to the April numbers, reports DEADLINE HOLLYWOOD, CNN has had the lowest ratings in daytime viewers in a decade and its evening ratings were also significantly down. Meanwhile Fox was up 2% in total viewers. Part of the formula for keeping fresh and viewership up at Fox seems to be stirring up controversies which go high profile. The business is also well managed. It quickly ferreted out the mole Joe Muto hired by GAWKER and initiated legal action.
In the tough U.S.newspaper industry, the Dow Jones subsidiary has been making progress in creating a new kind of moat based on leveraging apps from tablets for interactive advertising. Others experimenting with that such as the New York Times Company (NYSE: NYT) haven’t gotten as far as THE WALL STREET JOURNAL. Unlike the Times Company, it saw that a digital strategy such as paywall was not going to be enough for survival and sustained profitability. The real money is now in digital advertising. The challenge for the U.S.newspaper industry has been how to get a bigger piece of that. Actually, their competition isn’t each other. It’s the five top digital companies like Google (NASDAQ: GOOG) which this year, estimates eMarketer, will earn 72% of the U.S. digital ad revenue, up from 63% three years ago. In this, Google is itself worried. With apps an option to search, during 1Q Google reported it had lowered the price for its search driven text ads.
Yes, experts agree the paywall at the flagship THE NEW YORK TIMES has been a success. According to the Audit Bureau of Circulation, Sunday numbers are up 50% from last year and weekday 73%. However, the Pew Research Center’s Project for Excellence in Journalism found even the most visited news websites are not capturing anywhere near enough of the digital ad dollar. According to an article in the NIEMAN JOURNALISM LAB by Outsell news analyst Ken Doctor THE WALL STREET JOURNAL invested the needed resources such as working with top agencies to build apps which exploit the tablet’s ability to create an interactive engaging commercial conversation. THE WALL STREET JOURNAL could be the go-to for advertisers which want that. By the time other media properties decide they had better catch up, they may be out of business. The NEWSPAPER DEATHWATCH observes that while readership of news content on websites surges, the business collapses.
News Corp stock might rise without lopping off the newspaper segment. That could happen if the company tells its story of the vision and execution of its blue ocean strategy. And that does it include newspapers which will get a significant piece of the digital ad dollar.
janegenova has no positions in the stocks mentioned above. The Motley Fool owns shares of Google. Motley Fool newsletter services recommend Google. 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. If you have questions about this post or the Fool’s blog network, click here for information.