The latest quarterly results from News Corporation contain compelling evidence about why the company is hiving off its publishing businesses into a separate company and going it alone with the rapidly growing content and distribution operations: publishing is a millstone around the revenue and earnings lines of News’ financial account.
It’s a pyrrhic result for Rupert Murdoch in a way. He has fought off his critics in the UK and elsewhere (we are still waiting for the US Justice Department and FBI to complete their probes of the UK breaches) of the way he has run, and allowed his trusted executives to manage, his newspapers. But he’ll lose those newspapers for cold, hard financial reasons.
News Corp’s chief operating officer Chase Carey has reportedly led the push to give publishing the chop from the empire, over the reluctance of chairman Murdoch. And these results give Carey fodder for his cause. Publishing of newspapers, books and other odds and sods are now financial minnows in terms of their growth, revenue and earnings, both current and potential when compared to the rapidly expanding cable TV business in the US (plus film and free-to-air TV).
It is significant that the investment decisions made lately at News relate to cable, satellite or terrestrial TV businesses. Nothing for newspapers, except the decision to send them into a new company, supported by pay TV operations and some content in Australia and NZ. A very poor cousin abandoned by the turbulent currents of technology with a billion dollars in cash as a dowry/lifeline.
The latest report shows clearly that broadcast and content business dominates News. It accounted for all but $US53 million of the group’s quarterly operating profit of $1.580 billion, with that $53 million the net contribution from publishing and “other” which will be in the new News Corp. That was a slight improvement on no contribution to the $1.490 billion earned in the first half of 2011-12.
In the six months to December 2012, publishing contributed nothing to the operating profit of $2.958 billion (against $28 million to the $2.882 billion earned in the first half of 2011-12). On revenue, publishing had sales of $2.149 billion in the second quarter, up a whole $19 million for the second quarter of the previous year (did Harper Collins sell more books or was it the sales of the Sun on Sunday in the UK?).
Publishing had operating earnings of $234 million in the latest quarter against $218 million in the second quarter last financial year. For the six months to December, the division had earnings of $291 million, down from the $328 million in the first half of 2011-12. The other business to be included with publishing, called ”other”, made a loss of $181, down from $191 million. For the six months, “other” had a loss of $397 against $290 million.
“Other” includes odds and sods, such as the Amplify education business and, from November, 100% of Fox Sports Australia. It does’t include the 50% stake in Foxtel. Both Foxtel, Fox Sports (and the stake in Sky in NZ) are to be included in the publishing company after the split into a new company to be called News Corporation.
The contributions from publishing pale in both absolute financial terms and growth when compared with other parts of News’ empire. The growth, revenue and earnings heart is the US cable business. It lifted revenues 16% in the latest quarter after a 14% rise in the September quarter. Cable earned $945 million in the second quarter against $882 million a year earlier, and $1.898 billion for the first six months against $1.657 billion.
Revenues climbed to $2.55 billion from $2.161 billion and topped $5 billion in the half for the first time (against $4.22 billion). The contribution from free-to-air TV was almost as strong in growth terms, (publishing though earned more than TV, but didn’t have any growth) thanks to the US election spending, which peaked in the second quarter. Film was static reflecting a lack of mega-hit movies.
Overall News had operating income in the quarter of $1.580 billion against $1.497 billion, and $2.958 billion for the latest December half, and $2.882 billion for the six months to December 31. The second quarter results included $56 million of costs related to the ongoing investigations initiated upon the closure of The News of the World compared to $87 million in the corresponding period of the prior year.
This year’s second-quarter results also included $23 million of costs related to the proposed separation of the company’s entertainment and publishing businesses. Excluding these costs from both years, second-quarter adjusted total segment operating income of $1.66 billion increased $75 million (or 5%) from S1.58 billion reported in the second quarter of the prior year.
The shares jumped after hours treading water in the US after the results were released, rising 2% to $28.22. They are up 11% this year alone and have more than doubled since the phone-hacking scandal drove the price sharply lower in late 2011. And looking at the commentary provided by News, the Australian newspaper interests were again a weak point, as the company pointedly made clear:
“Increased contributions from the UK newspapers which benefitted from the launch of the Sunday edition of The Sun in February 2012, integrated marketing services driven by higher custom publishing revenues, and book publishing businesses related to the acquisition of Thomas Nelson, Inc., a Christian book publisher, more than offset lower advertising revenues at the Australian newspapers.”
Contrast that to the commentary about the cable business in the US:
“Cable Network Programming reported quarterly segment operating income of $945 million, a $63 million or 7% increase over the prior year quarter, driven by an 18% increase in revenue …”
(Offsetting this was a sharp 26% jump in costs thanks to higher sports rights costs.) Normally those higher costs would be a worry but News can recover those from subscribers and advertisers through higher fees and sponsorships. Publishing costs are being slashed because there is no way News can offset those by higher advertising or circulation revenues. They just don’t exist any more.
Faced with that reality, it’s no wonder the hard heads on the News Corp board want to ditch Rupert’s great love in newspapers and go deeper into content (newspapers are content, but the wrong sort) and its distribution. Content includes Fox News, which is Murdoch’s newspapers in an electronic form. News pointed out in the statement that Fox News experienced “double digit revenue growth” in the quarter. That’s growing and profitable — and why the board wants more. Newspapers aren’t, and that’s why the board doesn’t want them.
And that’s the great irony. If the board of News had shown the same hard-headed approach to its London newspapers at News International, especially the News of The World, from an early stage, Murdoch may not be a forced seller of his beloved newspapers.