News Corp Splits Dead Tree Media Arm

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In a recent SEC filing ahead of its split, Rupert Murdoch's News Corp (NASDAQ: NWS) revealed that its publishing arm had suffered a loss of $2.1 billion for its last reported fiscal year, which included a $1.3 billion write-down of goodwill.  Does that mean that even conservatives don’t buy what Fox News is selling anymore?  The split, which should be completed by the middle of the current year, involves the separation of its publishing arm from the rest of the company.

Dow Jones Editor-in-Chief and Managing Editor of the Wall Street Journal (WSJ) Robert Thomson will head the new company, which will take the name of News Corp (his tenure has already begun from the start of the New Year). The entertainment arm, which includes 20th Century Fox and the Fox Network will be renamed the Fox Group. Rupert Murdoch will be the chairman of both of these companies and the CEO of Fox Group. What is significant here is that, at least technically, Rupert Murdoch will not have any operational role to play with the publishing side of his business empire.

Up until the current SEC filing, the financial aspects of the publishing business of News Corp, such as the WSJ or the New York Post, have remained shrouded in secrecy. The SEC filing has now revealed that the revenues of its publishing arm have fallen to $8.65 billion, which shows a decline of 4.85% from 2011 and a decline of 3.31% from 2008.

The two main sources of revenues for the new News Corp are ‘Advertising’ and ‘Circulation and Subscription.’ Both of these have fallen by 5% and 7% to $4.7 billion and $2.4 billion respectively from the previous fiscal year to 2012, while its latest quarterly results for the three months ending Sept. 30 2012 have shown stagnant subscription revenues and a 10% fall in advertising from the same quarter last year. In short, this is analogous to a Resolution Trust arrangement – split off the bad business from the good one to improve its attractiveness to investors.  The new business will be relying on its bigger brother for survival.

Meanwhile, Murdoch’s paid-subscription-only tablet-based news venture called ‘The Daily,’ which its founder claimed would sell “millions” turned out to be the colossal failure anyone who has eyes to see could have predicted.  The subscriber base barely reached 100,000 and was finally shut down. With The Daily, News Corp was charging its customers for receiving news every day, something that is already available for free all over the Internet. Delivering news content is not a value-added business model when transmission costs are near zero.  But those in media refuse to accept that the consumer is what drives these trends, not brand loyalty. Boutique services can charge for information, but the rates are really low and only the most dedicated of consumers will pay the cost.

In its quarterly results for the period ending Sept. 30 2012, News Corp’s revenues increased by 2% to $8.14 billion while adjusted earnings per share increased by $0.10 to $0.32 per share. The business’ cable network, film and television division have posted strong results, but this rise was offset by the fall in operating income of its ‘direct broadcast satellite television’ and ‘publishing’ divisions, which have dropped by 80.7% and 48.2% respectively. News Corp also incurred $67 million in costs related to the investigation of the News of the World’s phone hacking scandal. The net effect of this was that its overall segment operating income fell slightly by 0.5% to $1.38 billion.

Similarly, the New York Times Company (NYSE: NYT), the owner of WSJ’s rival the New York Times, has not reported any revenue or profit growth either. Its last quarterly results showed a slight drop of 0.56% in revenues to $449 million while its net income fell by 85% to just $2.28 million. Its last annual results also revealed consistently falling sales with total revenues of $2.32 billion, a drop from $2.9 billion in 2008 while it recorded a net loss of $39.7 million in its last fiscal year.

Publishing continues to be a business that is dying the death of a thousand little cuts, and the transition from opinion makers to opinion purveyors has been in place for years.  The real value-added information sources are the ones building on the work created by the large new services.  When 70% of your content is a rehash of a Reuters or UPI article why in the world would anyone pay for it?  In trying to replicate the old business model by pulling the print brand to the Internet the old publishers have made it clear they still do not have a clue as to how this model works or accepted it as the new reality.  Newsweek published its last paper issue recently.  This trend is bad for paper stocks and good for forest reclamation projects.

In the past six months, News Corp has risen by 18% while SPDR S&P 500 ETF has been up by 6.53%. News Corp’s rise is coming in anticipation of the split and better performance from the entertainment division.  And while subscriptions and viewership may be off in cable news, CPM rates for Fox News in 2011 were still higher than CNN, HLN or MSNBC, according to the annual report from the Pew Research Center.  But, Fox is far behind both CNN and MSNBC in online presence and viewership, and this is where the future is. For Fox News its audience is tied to the TV versus the Internet.  Fox News carries approximately 25% of News Corp’s Cable Network operating income. All in all, splitting off the publishing arm to unencumber the entertainment division was not only shrewd but necessary to properly assess the value of the company going forward. 

<table> <tbody> <tr> <td> <p> </p> </td> <td> <p>NWS</p> </td> <td> <p>NYT</p> </td> </tr> <tr> <td> <p>Stock 6m</p> </td> <td> <p>18.03%</p> </td> <td> <p>8.76%</p> </td> </tr> <tr> <td> <p>P/E</p> </td> <td> <p>24.71</p> </td> <td> <p>89.48</p> </td> </tr> <tr> <td> <p>EPS</p> </td> <td> <p>1.09</p> </td> <td> <p>0.1</p> </td> </tr> <tr> <td> <p>Yield</p> </td> <td> <p>0.60%</p> </td> <td> <p>N/A</p> </td> </tr> <tr> <td> <p>ROA</p> </td> <td> <p>5.86%</p> </td> <td> <p>5.81%</p> </td> </tr> <tr> <td> <p>ROE</p> </td> <td> <p>10.51%</p> </td> <td> <p>0.36%</p> </td> </tr> </tbody> </table>

 


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