Can Rupert Murdoch adapt News Corporation to the digital age?
Jan 19th 2006 | from the print edition
In his 74th year, Mr Murdoch is very much in charge of the global media group he constructed over the last four decades. But he and his firm face two fundamental issues that relate to News Corporation's traditional media businesses. The first is what to do about the emergence of the internet, both as a medium in its own right, and as a way to distribute media content. The second is how News Corporation's portfolio should be best configured in response to rapidly shifting technologies related broadly to digitisation. Its film and television production units are vulnerable to digital piracy; its broadcast-television business is losing advertising revenue to the internet; and the satellite-television distribution businesses face a stronger cable industry and new entrants. The company's challenge is typified by, but not limited to, its newspaper business—it owns dozens of titles. Last year Mr Murdoch warned in a much-noted speech that the industry would inevitably decline if it fails to adapt to the internet.
Searching for answers to these problems, Mr Murdoch spent $1.4 billion on three young internet companies in 2005, which, together with News Corporation's existing websites, now form Fox Interactive Media, the division that Mr Levinsohn runs. On the internet, News Corporation has now moved ahead of its big traditional media rivals, with the exception of Time Warner, which agreed to be taken over in 2000 by AOL, an internet-access provider. But can News Corporation lead the way for other “old” media and successfully navigate its way forward?
It might seem an unfair question. Compared with its past, News Corporation is calm and profitable. It is convinced that it needs scale and a broad range of businesses embracing both content and distribution—it has no intention of splitting itself up. In the past couple of years it has made heavy investments in satellite television in America and Italy. Those bets seem to be paying off. Most of its businesses are thriving and many are throwing off large quantities of cash. The company's revenues and profits are growing at a double-digit rate, faster than rivals'.
Investors are unimpressed, however. That is partly because they are so gloomy about traditional media companies' prospects: they reckon that the internet is stealing its audiences and that new technologies will combine to wreck established business models (see chart).
Some of the reason has to do with Mr Murdoch himself. Investors are fearful about who will lead the company after him (see article). But the really big issues are how the company will adapt to the internet and the rise of digital media. The problem with creating new business models for the internet and a digital environment is that these can cannibalise existing, more lucrative businesses. One of the biggest problems for News Corporation's film- and television-production business is digital piracy. At the moment Hollywood film studios wait for five months after releasing a film in cinemas before sending it out on DVD, which leaves their content extremely vulnerable to pirates. News Corporation is looking at bridging that gap by offering video-on-demand. But it is difficult to price such an offering to be as profitable as a DVD, and without angering powerful retailers, such as Wal-Mart.
Keeping up with technology in one bit of News Corporation's business sometimes damages another part. To maintain the attractiveness of satellite television, for instance, News Corporation has subsidised digital video recorders for its customers, which allow them to record programmes and watch them when they like. DVRs, as they are known, are disruptive for advertising-funded television, however, because they allow people to fast-forward through advertisements.
“In content, we could not be happier,” says Mr Murdoch. News Corporation's film studio came second for box-office receipts after Warner Brothers in 2005 and it claims the highest margins in Hollywood. Its TV studio is a leading producer of prime-time programmes. Its cable channels are growing fast, and Fox News, especially, continues to benefit from America's divided politics and the war on terror.
“Distribution systems, on the other hand, are proliferating,” says Mr Murdoch, and “while that is great for content, it raises questions about the long-term economics of distribution.” The internet is emerging as a distribution system in its own right, and telecoms firms are already trying to deliver television using internet technology. News Corporation has spent enormous amounts of money and energy over the years on satellite-television platforms in America, Britain, Italy and Latin America. Now investors are worried that satellite is losing its competitive advantage.
Its most immediate challenge is from the cable industry, which has invested heavily in its infrastructure and is now offering a bundle of digital television, broadband and voice service. At the moment, satellite cannot offer this “triple-play” option: it has only TV. Neither can it sell as full a video-on-demand service, because it beams the same television signal across whole regions. That will become a serious drawback as video-on-demand quickly becomes a standard product, says Craig Moffett, an analyst at Sanford C. Bernstein in New York. In Britain and Italy satellite also has to vie with attractive free digital-terrestrial television services.
In response, News Corporation is rushing to add broadband and voice to its satellite-television products around the world. In Britain BSkyB bought Easynet, a broadband internet-access company, for $385m in 2005. News Corporation is also working on a way to add broadband to DirecTV's portfolio, and expects to announce a solution in the near future.
As for video-on-demand, News Corporation plans to store as many popular television shows and movies as it can on digital video recorders for instant playback. For more obscure material it will provide a broadband option. In Britain it took a first step in this direction on January 10th by allowing its subscribers to download films and sports highlights from the internet on their home PC free of charge.
The most challenged of all of News Corporation's divisions is its newspaper business, which contributes one-fifth of its operating income. Newspapers are suffering from the internet more than the rest of “old” media, as classified advertising moves online and young people are using the net to get their news. No other media conglomerate owns newspapers in any significant number. Mr Murdoch recently sold the educational supplements of the British Times because he thought they were too dependent on classified advertising. But he does not appear to have any bolder solution. “Despite his speech, only a tiny fraction of News Corporation's energy appears to be going into securing its newspapers' future online,” says Simon Waldman, director of digital publishing at the Guardian. In Britain the Murdoch-owned Sun, Times and News of the World together attracted 6.7m unique visitors in November 2005, only the same as the Guardian alone, and far fewer than the 21.4m who visited the news site of the BBC, a publicly funded broadcaster.
Many investors would like Mr Murdoch to reduce News Corporation's exposure to newspapers. The main reason that he does not, says a shareholder, is that he's “an empire builder who refuses to sell things”. This investor would also like the company to sell its television stations, which are struggling to grow because America's advertising market is mature and because advertisers are moving money away from TV to the internet. One executive at the company agrees that “we've never been very good at selling things, except under duress.”
Mr Murdoch says that he will not get rid of newspapers. “That may be emotional”, he says, “but we're a communications company, not just a content company, and we want to improve the world.” Owning newspapers, of course, has given the group clout with politicians and regulators. He argues that a sale would lose a large slice of value on capital-gains tax.
If he is a stickler on that front, there is no denying that Mr Murdoch appears to have become an internet evangelist for his group as a whole. The first time he invested enthusiastically on the internet, everything ended disastrously. During the boom of the 1990s, he refused to join the frenzy until 1999, then spent hundreds of millions of dollars on ePartners, a dotcom investment division, only to wind it down a year or so later.
This time around, his interest in the internet started last year after he noted that America's economic growth was not showing up in advertising on TV, radio or print, but that the internet was starting to grab a meaningful share. At the same time, he saw that broadband internet access was becoming widespread. Once most people have broadband, he reckons, they will want video as well as music, still pictures and text. News Corporation owns a huge amount of the entertainment and sports programming that young people are likely to want to access via broadband.
A flurry of deals followed that insight. None of them is transformative—the amounts involved remain small by comparison with News Corporation's huge turnover or its $54 billion market value. But the message is clear: News Corporation “gets” the internet and is determined to embrace it.
This came across loudest in July 2005 when News Corporation surprised everyone by buying Intermix Media, owner of MySpace.com, a social-networking site, for $580m. The following month it acquiredScout.com, a college sports site. And in September it bought IGN Entertainment, a video-gaming and entertainment site, for $650m. More such acquisitions are likely to follow. Richard Bilotti, media analyst at Morgan Stanley, says the firm may spend $500m to $1 billion a year in the next three to five years.
Do you have a MySpace?
The sites' combined traffic, added to News Corporation's own web properties, FoxSports.com,FoxNews.com and Fox.com, has pushed News Corporation up among the giants of the internet (see chart 2). Google, an internet search firm, is taking note of News Corporation's purchases. Mr Murdoch has passed on to colleagues that Eric Schmidt, chairman of Google, told him that buying MySpace.com will prove to be the best deal of his life. That News Corporation has chosen to buy an unusual site where users create the content shows that the company is not merely reproducing itself online, but thinking differently about the future of the internet.
Since May 2005 the number of people who visit MySpace.com each month has grown from 16m to 27m, and 150,000 people are registering each day. Like Google before it, MySpace.com has entered the English language. Its appeal is that its members create an anarchic mix of their own content. The site is a collection of individuals' homepages with photographs, music, links to friends and blogs.
As an internet business, MySpace.com considers itself to be an entirely new breed. Chris DeWolfe, its co-founder, says he wanted the company to take inspiration from sociology as well as from technology, and for that reason he based it in Los Angeles rather than Silicon Valley. The community has grown virally, with no advertising. Some of the photographs verge on the pornographic, and MySpace.com has about ten people in a room at its headquarters in Santa Monica, Los Angeles, weeding out explicit photographs. With its young members, its 24-hour discussion groups on everything from graffiti to independent film-making, and its thousands of undiscovered bands, MySpace.com has the ambition not just to be useful, like Google, MSN or Yahoo!, but cool.
While no one doubts that News Corporation has tapped into a powerful social phenomenon, some people question if there is much money to be made from it. The company expects to make $300m of revenue on the internet this year, and Mr Murdoch said he wants the company to make $1 billion from it in five years' time. “MySpace has been run by creative types who have not thought much about earnings and are frightened of being corporatised,” says Mr Murdoch, “but now their job is not just to grow but to monetise traffic.” MySpace.com is profitable, but it has not translated its popularity into big advertising revenues. IGN, on the other hand, the most popular site on the internet for young men, has a more developed business model based on advertising. Together the sites make modest tens of millions of dollars in profits.
Now News Corporation will try to convert their traffic into more advertising revenue. If it does so too obtrusively, there is a risk that their free-spirited members will move somewhere else. To avoid that happening, Mr Levinsohn plans to create scarcity of space and to charge a high price. The premium will be justified, he says, by the attractively young demographic—predominantly 13 to 34—of the audiences, and the amount of information News Corporation has about each user, which will allow advertisers to target precisely. Despite its huge audience, MySpace.com still has a lot to prove to advertisers, says Rob Norman, director of interaction at Group M, the media-buying arm of WPP. “It's not yet clear what the value of user-generated content is to brand owners,” he says.
Owning internet properties is also a way for News Corporation to establish its content online. Before the company started talking to MySpace.com, the biggest four discussion groups on the site were about three programmes made by Fox, its subsidiary—“Family Guy”, “The OC” and “The Simpsons”—and a film from Fox Searchlight Pictures, “Napoleon Dynamite”. IGN has developed technology to allow the downloading of large video files from the internet. In 2006, as a start, News Corporation will use this to distribute “Family Guy” episodes made exclusively for the internet across Fox's websites. The company is already feeling a marketing benefit from its web communities. One of Twentieth Century Fox's films, “Transporter 2” did far better than expected after being promoted on MySpace.com and IGN.
Nevertheless, it is News Corporation's big legacy businesses that will mostly determine whether the company can adapt to a new era for the media industry. That is why Mr Murdoch will need to keep focusing on making money from television, films and newspapers as well as his trendy new web communities.
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