Murdoch’s Paywalls

A recently released study estimates U.S. advertising spending to have grown 5.1% over the year in the first quarter of 2010. This is the first quarterly increase since the first quarter of 2008. Ad spending was driven by spending by the auto, retail, and financial services sectors. Television media saw the greatest growth in ad spending of 10.5% over the year. Overall radio media ad spending grew 7.4% over the year, and Internet display ad spending grew 5%. But print ads remained a disappointment, spending for which fell 3.2% over the year for magazines and 3.7% over the year for newspapers.

The growth in cable and television ad revenues helped drive News Corp’s (NASDAQ:NWSA) stellar Q3 performance. Additionally, the company benefitted from the success of the 3D movie “Avatar,” distributed by 20th Century Fox, which News Corp owns. As of Q3, “Avatar” had made over $2.7 billion in revenues worldwide and almost $750 million domestically since its release in December 2009. NewsCorp’s revenues for Q3 grew 20% over the year to $8.8 billion, surpassing the market’s expected $8.24 million target. EPS of $0.32 was also significantly higher than last year’s $0.15 and the market’s projected $0.25.

The success of “Avatar” and “Alvin and the Chimpunks: The Squeakquel,” also distributed by 20th Century Fox, helped News Corp’s filmed entertainment segment report 65% growth to end the quarter with $2.4 billion in revenues. News Corp saw 19% growth in advertising revenues in the cable segment. For the quarter, cable revenues grew 16% over the year and television revenues remained relatively flat at $1.1 billion.

News Corp is focusing on monetizing new distribution streams for its content across TV programming, movies, newspapers, and other media. The company is expected to soon announce an “innovative subscription model” that will be able “to deliver content to consumers whenever, wherever they want it.” The company is also exploring revenue models on the iPad to add to its portfolio. The WSJ.com iPad application has already attracted over 64,000 users and, unlike with its deal with Kindle, News Corp retains all revenues earned through iPad. For Sky News, News Corp recently updated Sky Mobile TV iPhone application for iPad. The application comes with a big price premium and costs nearly £35 a month to non-Sky TV customers compared with £6 a month for the iPhone application. However, the cost for existing Sky TV customers has been kept much lower at an extra £6 per month. The pricing strategy clearly spells out News Corp’s attempt to drive subscriptions to the satellite pay-TV service as a whole, instead of selling the iPad application in isolation.

NewsCorp’s biggest move on the online revenue front comes with the paywalling of its UK newspapers, The Times (London) and The Sunday Times. Rupert Murdoch has long believed in the possibility of being able to charge for superior content for an online model. Recently, both The Times and The Sunday Times launched separate websites. Within a month, these sites will be paywalled, and access will cost £1 a day or £2 a week. The rates have been kept low initially and are expected to rise once the sites establish a captive readership. Murdoch believes that such a move is necessary for quality journalism to survive. However, many estimate that 90% of The Times’ and The Sunday Times’ viewership will move away instead of paying to access information. In fact, blogger, Jeff Jarvis comments that trying “to transpose old business models to this new business reality is simply insane. Just because people used to pay in print they should pay now—when the half-life of a scoop’s value is a click, when good-enough news that’s free is also a click away, when the new newsstand of Google and Twitter demands that you stay in the open, searchable, and linkable? This argument I hear about pay walls comes from emotional entitlement (readers should pay—when did you ever see a business plan built on the verb should?), not hard economics.”

Even aggregators and search engines such as Google won’t have access to these sites. The existing Times Online will remain online and visible to search engines for a time period that has yet to be disclosed. News Corp wants aggregators to either pay for accessing news on newspaper sites or start doing their own reporting. It will be interesting to see how this experiment unfolds to help assess the revenue potential of online journalism. But, even Rupert Murdoch knows that its success is highly dependent on all newspaper publishers joining in. Quality journalism can be independent and self-sustaining, as is evident in the models of independent nonprofit investigative newsroom ProPublica, funded in part by the Sadler Foundation, and the country’s oldest general interest monthly, Harper’s Magazine, at first part of the publishing house that is now HarperCollins but now published by the Harper’s Magazine Foundation. But the question whether online journalism can turn profitable will be answered by News Corp’s bold experiment.

Meanwhile, things continued to look glum for MySpace. Analsyts estimate that the site is losing around $10 million a month purely because of free music streaming. But management claims that “trends are improving.” MySpace is enabling third-party mobile developers to integrate MySpace into their applications, which will enable users to log in to their accounts and update their statuses without leaving the application. The MySpace mobile network is helping growth, and the number of MySpace unique users has jumped 230% over the year. MySpace is aiming to turn profitable by 2011. During the current year, it is going to focus on improving the customer experience and growing its online user base.

News Corp also recently acquired Irata Labs, a developer of social games across Twitter and Facebook. News Corp will focus on developing a location-based platform for social gaming through the Irata acquisition.

News Corp’s stock is trading at $13.20 with a market capitalization of $35.38 billion. It touched a 52-week high of $18.80 in April of this year.

Contrary to popular belief, I happen to believe that Murdoch’s paywall experiments are important to conduct. Quality content does cost money, and Murdoch has succeeded thus far in making Wall Street Journal readers pay subscription fees. However, the bar for differentiated content is extremely high, and it remains to be seen how many media companies will be able to jump over it.

Those who cannot, I am afraid, will need to figure out other business models to monetize their audiences beyond advertising, which simply will not suffice.