ANALYSIS - News Corp on digital strategy and advertising revenue

Chris Pash
By Chris Pash | 8 September 2020

News Corp, in separating for the first time the results of its robust Dow Jones business, has highlighted shrinking advertising in the rest of the media empire, including Australia.

Dow Jones, which includes the Wall Street Journal -- a newspaper which has always charged for access to its content on the web -- managed to grow EBITDA (earnings before interest, taxes, depreciation, and amortisation) by 13% to US$60 million in the June quarter, a stunning result in a media challenged world.

The company as a whole reported fourth quarter EBITDA of US$195 million, a 28% fall compared to the previous year, with the economic fallout from the coronavirus a key factor.

Analysts at Macquarie say advertising continues to be a drag on News Corp, increasingly so in a COVID-19 world.

“While the separation of Dow Jones is a key positive, it also brings to the fore the structural challenges at the remaining News Media (those other than Dow Jones) assets that operate at thin margins and with challenging revenue headwinds,” write the analysts in a note to clients.

In Australia, advertising revenue was down 42% in the June quarter compared to the same three months last year.

“Unfortunately, the transparency on Dow Jones also paints a dire picture for the rest of the businesses in the former news and information unit,” says Brain Han, senior equities analyst at Morningstar.

He says the likely continuation of COVID-19's impact on the revenue environment is forcing management to continue its cost-cutting and business right-sizing drive.

For example, Foxtel's cost base is expected to fall in 2021, aided by reductions in the recast sports rights -- an expected saving of $AU180 million over the next three years.

News is also planning to recognise at least another US$100 million in cost savings from the 2022 financial year in a shared services program.

“All this is commendable, albeit we stress such forecasts come with greater-than-usual uncertainty given the precarious environment we are in,” says Han.

“Despite this, we do not see a return to pre-COVID-19 earnings level until fiscal 2022.”

News Corp, with digital uptake accelerating during the pandemic, is now making its run at a digital, not print, world.

According to PwC's Global Entertainment & Media Outlook 2020–2024, the COVID-19 pandemic has accelerated and amplified ongoing shifts in consumers' behaviour, pulling forward digital disruption and forging industry tipping points that wouldn't have been reached for many years.

Digitalisation, one of the major forces shaping all industries, has been intensified by social distancing and mobility restrictions.

New Corp CEO Robert Thomson told analysts: “Without doubt, digitisation has accelerated. And without doubt, all of our businesses have been affected and responded with customary ingenuity.”

News now gathers its mastheads and digital information properties under a segment, News Media, excluding Dow Jones. This includes the Australian titles, plus The Times, The Sun and Sunday Times in the UK.

“It may be called News Media, but obviously, the segment is increasingly digital in personality, and virtually all of our mastheads had record audiences during the year,” says Thomson.

In a briefing with analysts, he foreshadowed further cost cutting to bring overheads down to a level where digital revenue and subscriptions can support titles.

“We are continuing to focus on acquiring digital subscribers and audience while rightsizing our businesses to be digital-first, which is necessarily resulting in significant cost reductions.

“The closure in Australia of many of our storied print editions and the emphasis on digital was further evidence of our willingness to be decisive at an epochal moment.

“We are very proud of our traditions, and we will always invest in the very best journalism. But the format is less important than the function.

“And we firmly believe that the digital reincarnation of these titles will ensure a profitable future and a continuing role in their community.”

A key reason for separating Dow Jones’ numbers from the whole is to prove to the market that it is just as valuable, and probably greater, than competitor the New York Times.

“The creation of the Dow Jones segment allows us to make a direct comparison with The New York Times, and on most important measures, the Wall Street Journal and the Board of Dow Jones performed far better,” says Thomson.

“The Journal is both the most trusted general newspaper in the US according to Reuters Institute and the world’s leading business use provider. And a vast, well-healed, well-informed audience provides an opportunity to upsell value-added lucrative business products to serve a specialist need.”

An investor day is planned for later this month to spruik the value of Dow Jones.

In the June quarter, overall subscriptions to the flagship The Wall Street Journal were up 15% to 3 million. Digital-only subscriptions were up 23%. 

News CEO Robert Thomson: “The presentation of Dow Jones as a separate segment highlights what we believe are two incontrovertible facts: the substantial and growing value of that business; and its superior profit profile and prospects compared to those of our nearest competitor.”

One unknown, and one with potential upside, is revenue from the big digital platforms, Facebook and Google.

News Corp is already in “deep” discussions with the platforms in Australia.

“The ecosystem has absolutely begun to evolve,” says Robert Thomson.

“For News Corp, which has been pursuing this issue for well over a decade, this favourable outcome would simply not have been possible without the leadership of Rupert and Lachlan Murdoch and the support of a board which backed advocacy even when News Corp often stood alone in pursuit of the principle of a premium for premium content.”

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