If I worked for The Wall Street Journal, the split-up of News Corp. (NASDAQ:NWSA) would scare me deeply.
Rupert Murdoch’s newspapers, including his Pulitzer Prize-winning crown jewel, will now have to stand on their own as income-producing enterprises. The Journal and its corporate parent Dow Jones & Co. probably are profitable. Unfortunately, many Murdoch papers including the New York Post, and the Times of London probably are not.
Therein lies the problem. As currently constituted, the losses at the papers are pretty much underwritten by News Corp.’s successful entertainment and TV businesses, which are going into their own, separate company.
As The New York Times noted, the new publishing company — which owns about 175 papers — would be worth less than the $5 billion Murdoch paid for Dow Jones in 2007. The business is expected to generate $8.3 billion in revenue and $600 million in profit next year. This means that the pressure for the Journal, Barron’s and the MarketWatch website — along with related blogs — to produce will be greater than ever because, quite frankly, there isn’t much else there. Analyst Ken Doctor estimates that these businesses generate about $1 billion annually.
Sure, there’s also Harper Collins, but the economics of the book publishing business is lousy and getting worse as sales of physical books plunge and publishers lose control over their control over their content to e-book sales. The other assets include about 150 newspapers in Australia. Though Murdoch got his start in that business, it’s easy to envision a strategy where the new company would try to unload some if not all of those titles.
The same goes for the U.K. titles. Murdoch, as everyone knows, is passionate about papers, but he is a realist. Being heavily invested in those countries doesn’t make much sense, particularly as the economies in the U.K. and Australia continue to slow.
Dow Jones has plenty going for it. Murdoch has hired the hyperkinetic former Bloomberg executive Lex Fenwick to run the company. Fenwick (who I met a few times when I worked at Bloomberg) may be a decent choice to run the new company. Dow Jones was smart to diversify its advertising revenue base beyond financial services firms by adding coverage of New York City and bolstering its network of bogs.
Advertising, though, is one of the first things that companies cut when economic times worsen, and some signs point to that starting to happen. A new wave of layoffs on Wall Street, which some say may hit 21,000, won’t help matters either.
“The Journal has a long, continuing history of discounting, which boosts sales, but results in significantly lower yield per customer,” Ken Doctor writes on Neiman Journalism Lab, adding that the new publishing company would face fierce competition from Bloomberg, which has the edge in digital news, along with the Financial Times.
The real challenge facing Dow Jones lies outside the Journal. The company acquired MarketWatch for $519 million in 2004, and it has been a strange fit ever since. Murdoch takes great pride in not giving away content for free, which is what MarketWatch does when it summarizes Journal stories. Barron’s has been able to adjust to the digital world in recent years, but publishing a weekly newspaper is a costly and time-consuming process. The new company probably will fold the print edition.
SmartMoney as a print magazine recently bit the dust for those reasons. AllThingsD is a very good blog, but one has to wonder how much money it makes given the high-price talent it employs.
Murdoch already is giving hint of the challenges that lie ahead, saying the Journal will be operating “as efficient as we can” as costs will rise while it tries to improve coverage. Whether investors give the Australia-born tycoon enough time to execute his strategy remains to be seen.
Jonathan Berr does not own shares of any securities mentioned here. Follow him on Twitter @jdberr.