Media Meltdown or New Era @ Dow Jones

The ongoing negotiations surrounding the sale of Dow Jones to Rupert Murdoch offers a fascinating glimpse on the future of the media business.   

On one side Rupert is offering $60 per share which values the group at $5b when the 52 week low has been $32.16 which would be only half that which is partly why the takeover scenarios are so exciting.

The question of mission “What business are you in?” is absolutely key. The transition from a newpaper centric business to a fully digital stream  with 60% of 2007 revenue being from print and a transformation plan to get below 50% (by 2009) are well underway.

At the recent shareholders meeting the CEO Rich Zannino had this to say: (PDF p.6 18th April, 2007)

“As you know, the media business is undergoing what can only be described as revolutionary change. A relentless convergence of technology and content has led to an explosion in the number and availability of news sources. Consumers have never had as many choices available to them. And advertisers have never had so many ways to reach them. This is wonderful for them but threatens traditional media business models.

Fortunately, we see many opportunities in this new media landscape. True, traditional media usage is on the wane, but digital media is rising faster. This is not a zero sum game: total consumption of media is way up.

And we all know that an unhappy side effect of this digital revolution is that there is simply too much information out there today for any one of us to sift and process, let alone act on.

At Dow Jones, our competitive advantage is based on the reputation of our brands for authority and accuracy and the quality and differentiation of our content. When we’re at our best, our readers find us indispensable. We help them cut through this information overload to find what they need.”

Richard alos offered these examples of turnaround improvements in the business – “acquisition of Factiva will increase our Enterprise Media Group revenues by about $300 million, or 75%. It will create a strong platform for profitable growth in the attractive B2B market” and they have achieved $65m in cost savings in 2006… 

One of the salvos fired by the Murdoch team in recent negotiations went like this. “Close down all the newspapers and put everything online for free.” 

There is no doubt that distribution and printing is expensive and around 7% of costs comes from newsprint alone so lowering the physical “footprint” of the paper makes a great deal of sense but Rupert’s suggestions were even more radical as pointed out by 24/7 analyst writer Douglas McIntyre. In an edition of Time magazine Rupert said:

In his own words: “And then you make it free, online only. No printing plants, no paper, no trucks. How long would it take for the advertising to come? It would be successful, it would work and you’d make … a little bit of money. Then again, the Journal and the Times make very little money now.”

The notion may seem insane, but it is not. Last year, the consumer media group at Dow Jones (DJ), made up mostly of the WSJ, had a profit of $33 million on over $1.2 billion. Almost none of that money came from overseas. Several securities analysts have said that The New York Times (NYT) newspaper breaks-even at best.

Putting an entire newspaper online means dumping the huge costs of printing and distribution. At a newspaper with a circulation of 1 million, this can certainly be $1 a paper, depending on where it is printed as where it has to go to be sold.

At one level, such a scenario needs to be taken with a truckload of salt. This is after all the very same Mr Murdoch who has offered $5b for the company; but the plan is not as radical as it sounds. 

It all comes down to the change timetable and new management who appear to be making headway with improved profitability at the business.  (Maybe Factiva is the key? full control of Factiva has been approved and that represents an extra $300m in revenue.)

The true value of the enterprize has to be way more that the $32 per share offered previously but the share size and scale of the transaction is daunting to many.

Huge changes to newspaper advertising revenues were certainly behind Fairfax’s buy of TradeMe (an auction based website which outperformed eBay -for US readers) for NZ $700m in March 2006 which was seen by many as too expensive even though the price represented 15-16 EBITDA. In hindsight this looks to have been an inspired deal with earnings growth and ongoing expansion still going strong more than a year later.

This is from a report in February 2007. (Note: Fairfax market cap was $A8.9b at that time. They are reported to have 65-70% share of the Australian classified ad market.)

“Fairfax’s New Zealand publishing assets are more profitable than those in Australia. Margins on earnings before interest and tax (EBIT) are 29 per cent, compared with Australia’s 18 per cent margin. Fairfax Digital’s EBIT margin is nearly 26 per cent, up from less than one per cent in 2005.”

and in the same article

“Arthur Sulzberger, publisher of the New York Times, said at the World Economic Forum in Davos he wasn’t sure if the New York Times would be printed in five years.

“I really don’t know whether we’ll be printing the Times in five years, and you know what? I don’t care either,” he said.

He may just get his wish as on July 3, last week 24/7 Wall St noted:

“Goldman Sachs made about as brutal a call as it could have on The New York Times Company (NYT). It added it to its American Investments Sell List. The price target was set at $18. On Friday, the shares closed at $25.40, so Goldman believes the shares will drop almost 30%.”

The other high impact development in this space looks to be Ebay’s new classified ad site. From 24/7 Wall St

eBay (EBAY) has started a free classified advertising site. It is not unlike the highly successful Craigslist. The site is called Kijiji”According to The Wall Street Journal, eBay may start to charge for display advertising at the website at some future point in time. The real loser, if the site becomes successful, is the large newspaper chains like McClatchy (MNI) and Gannett (GCI). They hardly need more competition for their flagging print classified sections, which are already being bled dry by online sites that charge for ad that compete with them. “Free” makes the competition even harder.”

At this point DJ are scouting for an alternative deal but indications are that $5b is still a huge premium to pay for a newspaper empire transitioning online when the online kings are already eating their lunch as already shown by the Trademe example.

I doubt that Rupert is going to get his wish of going 100% online with Dow Jones but here is the highly incentivised opportunity for the management to dramatically accelerate their transformation programme now that the new media roadmap is becoming much clearer.

Perhaps Mark Cuban has some ideas when he wrote this back on May 20

“Riddle me this Batman: Rupert Murdoch has figured out that Print and TV can be combined to be a vertical news organization and is willing to pay 5 billion dollars to do it. Why has no one else realized the value of combining big news brands and organizations ?

Why isn’t a CBS News merging their news department with a NY Times and rebranding itself as the 6pm NY Times News ? Or with Time Magazine News ? Or NBC News and ???

I recognize the arrogance factor. That each wants to be the defacto source of news in this country and lever what little editorial power they still have left (Does anyone other than the people who write editorials or are written about really read the editorials in newspapers these days ?). But its time to realize that drastic change is necessary and that ego needs to be put aside.”

What do you think? Does Murdoch know more about the DJ brand than the current management team? Is Mark Cuban right? Do you have a another / better analysis.

Update: 13th July from June Traffic For Major Business Websites

Brand or Channel            Unique Audience (000)       Time Per Person (hh:mm:ss)
Yahoo! Finance  (YHOO)            14,878                              0:24:11
Wall Street Journal  (DJ)              7,852                              0:20:12
MSN Money  (MSFT)                  11,190                             0:17:39
AOL Money & Finance (TWX)     9,827                             0:16:08
CNNMoney                                     6,263                             0:15:49

All of the other sites were around the 5 minute mark for time per person.  It is probably significant that Wall St Journal as the flagship of (DJ) rates at 20 minutes per person.

If I was investing $5b – I would want to understand that. The 33 Pulitzer prizes probably help too.