News Corp. Split Signals Bigger Is Not Better

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Both the publishing business and the film and television division will be better off once they are uncoupled, analysts say, because synergies now must be more strategic

News Corp.'s decision to split itself in two indicates its recognition that the film and television brands will grow and thrive if they are separated from a publishing division, including the Wall Street Journal and HarperCollins, that is struggling to cope with a rapidly changing media landscape. 

Simultaneously the move allows a collection of News Corp. papers, which earned $864 million of News Corp.'s $4.85 billion income in 2011, to make the often painful transition into the digital era without facing the same level of shareholder scrutiny.

Though the reasons for the fissure are different, like Viacom, the New York Times Co. and to some extent Time Warner before it, News Corp. is about to realize that in the 21st Century, there is value in being a nimbler, even smaller company focused on core brands. In today’s Wall Street, bigger is not necessarily better, and synergies have to be more strategic.

Also read: News Corp. Officially Announces Split Plans

“There is no question that the times and attitudes that were prevalent in 80’s and 90’s when these conglomerates emerged are very different today,” Hal Vogel, a media analyst and CEO of Vogel Capital Management, told TheWrap. “In those days the thing was to buy up all the assets you could. I  think the moguls understand that you don’t have to acquire everything you can get your hands on anymore.”

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In a conference call with investors Thursday following the historic announcement, News Corp. chief Rupert Murdoch proclaimed himself proud and excited by the push to split in two the media empire he spent six decades building.

But the move to spin off the company’s newspapers — Murdoch's great passion — might not have arrived as soon or even within his own lifetime had it not been for pressure from investors and nearly $1 billion in legal fees stemming from a phone-hacking case in the United Kingdom involving his newspapers that refuses go away.

Nearly a year ago, as Murdoch was embroiled in the British scandal, The Economist predicted the octogenarian media magnate was a "man out of time," but also in some ways, a man out of step with his own time. The magazine reported that nervous investors were beginning to see him as an impediment to a smooth-running News Corporation in the wake of the scandal that caused him to shutter the News of the World, his most popular tabloid.

Also read: For Rupert Murdoch, Parliament Report Could Spur U.S. Legal Woes

But now, Murdoch announced officially Thursday that he is ready to give shareholders two public companies that analysts tell TheWrap are more likely to thrive as distinct entities that stick to their core businesses, relieving the cash-cow entertainment unit of the less lucrative publishing properties and allowing publishers to focus resources on going digital.

Under this arrangement, the entertainment company can continue to grow without the financial and licensing burden of the publishing brands. In turn, the publishers can concentrate on transitioning to more digital productions without having to be as concerned with pleasing the shareholders who want the stability of the entertainment company.

The general consensus is that, at least in the short run, the television and film company will emerge the stronger of the two. Not only will it no longer have to shoulder the burden of making up for a constricting publishing market, it will be inoculated from the potentially $1 billion in legal liabilities that News Corp. faces in the U.K. phone-hacking scandal.

“The television business’s future is much better especially as it continues getting further into the pay arena, into mobile and into digital downloads,” Bill Carroll, vice president and director of programming at Katz Television Group, told TheWrap. “I haven’t heard a positive story about the publishing business in nearly five years, so its value is going to be exponentially greater.”

By unhooking itself from the scandal engulfing the U.K. publishing operations, Murdoch’s television and film division can better avoid any legal ramifications that might arise in the United States when the time comes to renew broadcasting licenses. Those efforts might have been derailed because of a Federal Communications Commission clause that says broadcasters must have good character.

It could also embolden News Corp. to make another push at acquiring full ownership of the British satellite company BSkyB. Its takeover attempt last summer was aborted after a new wave of hacking revelations made it unlikely that it would receive governmental approval.

Though the publishing unit is something of an unfavored stepchild, it could benefit from being separated from the sexier television and film business. A pared-down publishing unit, comprised mostly of newspapers and associated online properties, will be able to focus on leveraging more profitable digital businesses in the more limber new company.

"What you're looking at with most media companies is they're basically doing an extension of their core product or service," Bill Grueskin, the dean of academic affairs at the Columbia Journalism School and a former managing editor at the Wall Street Journal, told TheWrap. "'The Simpsons' is a great TV show but it's not exactly an extension of the Wall Street Journal or the Dow Jones newswires."

Though for Murdoch, newspapers are an asset of power more than profitability, analysts said.

Indeed, a recent investigation into SEC filings by TheWrap revealed that News Corp.'s publishing arm was responsible for just 14.2 percent of the company's $4.85 billion in operating income last year. But the prestige that comes with owning some of the publishing unit’s Tiffany brands cannot be quantified in dollars and cents.

"The Journal has the largest circulation of any paper in the country and is read by most of the movers and shakers of this country," Grueskin said. "If you're at the New York Post, it gives you a certain amount of influence in New York."

That's why some predict Murdoch and his family will buy out stake from shareholders over the next decade, ensuring a majority control over the stock to the point that one analyst suggested the company could become private. This would allow Murdoch to sell any seriously ailing companies and command the powerful fleet of newspapers.

"In 10 years, if you took a look at the print the Murdochs would own it all," Laura Martin, a media analyst and managing director of Needham & Co., told TheWrap. "If he wanted to sell he could sell."

But this will not be a cash-hemorrhaging publishing group like competitors at the New York Times Co. Media experts estimate the new company will be valued at $5 billion with a yearly cash flow of $1 billion.

For his part, Murdoch said that the decision to cleave the company in two had been under consideration for three years and was not prompted by the damaging hacking scandal. In a conference call with analysts Thursday, he said that the new arrangement would make the companies easier to manage and would provide more opportunity for growth.

Still, the decision could not have been easy. No one would accuse Murdoch of being publicly emotive, but in announcing the streamlining of his media conglomerate into smaller fiefdoms, he did indulge in a few moments of self-reflection.

"We've come a long way in our journey that began almost 60 years ago with a single newspaper operating out of Adelaide," Murdoch said.

“I don't want to hide the fact that I've spent most of my life on this. It is a very big move and a very big decision for me," he added.

Even for kings, change is hard.