News Corp: Bewildered Pioneer

News Corporation is a $27 billion diversified media and entertainment company. The Company operates in eight business segments: Filmed Entertainment (Twentieth Century Fox), Television (Fox Television Stations), Cable Network Programming (Fox News Channel), Direct Broadcast Satellite Television (Sky Italia, BSkyB), Magazines (The Weekly Standard) and Inserts, Newspapers (The Sun, New York Post), Book Publishing (HarperCollins), and Interactive (Fox Interactive Media) primarily in the United States, Continental Europe, the United Kingdom, Australia, Asia and the Pacific Basin.

News Corp. has been a media and entertainment company focused on newspapers and television until it acquired MySpace two years back for $580 million. Since its acquisition, MySpace has experienced record traffic and at the latest count had registered 40.4 billion unique page views per month (comScore January 2007 page views) but it has failed to generate revenues to that extent, which has left the top brass at News Corp. bewildered.

According to Jessica Reif Cohen of Merrill Lynch, “MySpace currently generates nearly 9% of the page views in the US and yet its share of online branded advertising was only 3% in CY06.”

Compare this – The New York Times Company and the Gannett Co. Inc. earned online advertisement revenues of $274 million and $400 million respectively in FY 2006 whereas MySpace managed a paltry $90 million in FY 2006 with all those page views. Surely all is not well at News Corp. If reports are to be believed the CPM rates at MySpace in 2006 were a pathetic $1.5.

So what did Mr. Murdoch and his boys do to grow the revenues?

Well they went straight to Google and signed a multi-year (three years nine months) advertising deal for $900 million. Under the agreement Google AdSense will provide search and display advertising for the site. However, there was bad news on the online video front as the rapid growth experienced by YouTube and other video sites meant that the Company had to integrate video into its site, which it did. It had a stock pile of user generated video, but the only problem was that it was not earning Mr. Murdoch $40 CPMs which other video sites were earning. MySpace’s ad rates continue to linger in the junk CPM ranks.

News Corp. had to look elsewhere and guess what, NBC was also looking. The two decided to jointly launch an online video portal that will offer consumers with premium movie, television and other video content. The idea is great as both the companies have a large library of unique content and with advertisers willing to pay premium for high quality video (not user generated trash), this could become the perfect break that News Corp. had been waiting for. There are some segmentation issues, however. MySpace’s largest user segment are young adults (Teenagers and College Kids). But Fox is not the leader in entertainment for young adults. Viacom is.

News Corp. has been working overtime to monetize MySpace and to this end it has also launched a wireless MySpace application along with Cingular, which has been receiving tremendous response and there are plans to roll this out on a much larger scale with other operators across the US and in Europe. The Company recently acquired a majority stake in Jamba, a wholly-owned subsidiary of VeriSign, for $188 million to provide mobile entertainment. The Jamba acquisition will enable the Company to enter the multi-billion dollar ringtone business, one of the most successful segments of the mobile entertainment business.

What I like about News Corp. is the continuous focus to be a pioneer in digital media. While most media companies were waiting in the wings, Murdoch came in and picked up MySpace, arguably for cheap, and has benefited because of the tremendous learning it has generated inside of Newscorp, as well as the huge buzz. Hopefully, monetization would follow.

All these initiatives have resulted in Fox Interactive Media (FIM) having its first profitable month in December 2006 and it expects to earn a small profit in 2007 on revenues of $500 million. Future growth at FIM will be driven by better monetization of it web properties (MySpace & other sites), rollout out of other properties (the video portal to be launched in the summer of 2007), entry into the international markets and significant contribution from the Google deal.

“After bringing in a relatively meager $90 million in ad revenue, MySpace is poised to generate ad revenues of $271 million this year a 201.1 percent increase, according to a forecast by Merrill Lynch analyst Jessica Reif Cohen. Not only that, she also predicts that in 2008, Fox Interactive Media, of which MySpace is the largest piece, will produce its first profit: an estimated $208 million (including help from an ad sharing deal with Google)”, BW reports.