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Copyright © 2003, MCB UP Limited
Rupert the Conqueror
Rupert the Conqueror
On the whole, it is fair to say that Rupert Murdoch and his minority-owned vehicle, News Corporation, which is based in Australia and the USA and has interests encompassing terrestrial TV, cable and satellite operations, including digital interactive channels, are viewed unfavourably by the media. Right now, however, he is entitled to feel that his longer-term strategy is coming together very nicely and that it is those who have sought to marginalise him who are counting the cost. Most obviously, the seemingly never-ending saga over the ownership of DirecTV was resolved in his favour in April, a mere week after he finally obtained approval from the European Commission to use his Italian pay-TV operation, Stream, to take over loss-making rival Telepiù to create Sky Italia. In addition, the war in Iraq has boosted the ratings of his Fox News network relative to AOL TimeWarner's CNN in the USA and Sky News relative to BBC 24 in the UK.
At the beginning of 2002, things looked far less auspicious. Not only was advertising suffering a global slump, but News Corp.'s investments in KirchMedia and, indirectly via BSkyB, in KirchPay-TV in Germany, as well as in Gemstar in the USA whose share price fell from $90 to $4 necessitating a $4 billion write-off in August, were about to prove very costly – Mr Murdoch referred to them as his two "black eyes". Net debt was rising sharply and the share price persistently traded at a discount to the implied value of the (mostly publicly listed) subsidiaries. Eighteen months on, however, the outlook is much more positive.
News Corp.'s European interests have so far been largely confined to the UK where it operates via the News International newspaper group and a 36.3 per cent stake in satellite operator BSkyB. Although being a minority shareholder in BSkyB has long been a source of some frustration to Mr Murdoch, he is unwilling to be forced by the regulator into making a bid for the entire company and it has anyway been doing extremely well in competition with its cable rivals NTL and Telewest, both of which have needed debt-for-equity swaps to say in business. A crucial factor is that BSkyB is largely dependent upon subscription income rather than (much more volatile) advertising revenue and has managed the switch from analogue to digital transmission with great success. Meanwhile, early in 2001, News Corp. attempted to merge its Italian pay-TV venture Stream with Telepiù but fell foul of the regulators given the potential abuse of the consequent monopoly. However, given endemic subscription piracy, that Vivendi Universal subsidiary Canal Plus had become desperate to sell Telepiù in order to ease its debts, that News Corp. was willing to make some concessions over the likes of football and movie rights and that Sky Italia is not expected to move into profit until 2005, letting Mr Murdoch increase his footprint in the Italian market ultimately seemed a lesser evil than the total demise of pay TV – except perhaps to rival Silvio Berlusconi. Telecom Italia will hold a 19.9 per cent stake in Sky Italia once all regulatory hurdles are cleared in Italy.
When General Motors chose to reject News Corp.'s bid for Hughes Electronics and its subsidiary DirecTV in favour of one from EchoStar, this appeared at the time to be a serious setback to Mr Murdoch's ambitions for a global ring of satellite-TV operations. However, the regulatory risk was known to be considerable as was the opportunity to lobby against the takeover, so he could afford to step back and wait for the opportunity to reappear, especially since the price would be lower second time around. This strategy has now paid off, subject to (almost certain) regulatory approval for News Corp.'s proposed 34 per cent stake, together with management control, in Hughes Electronics. The acquisition of DirecTV is a key piece of the jigsaw representing Mr Murdoch's media empire. It will provide him with a profitable distribution platform in the USA which can be used to counteract the growing influence of the large cable operators such as Comcast. It will also yield potential economies of scale and scope via the pooling of development costs for new applications across a much larger subscriber base and additional clout in the purchase of equipment and programming. True, the company faces fierce competition from Comcast and Time Warner Cable, the Latin American operations are loss-making and the whole company performs badly compared to BSkyB, but sufficient lessons should be drawn from the BSkyB experience to suggest that DirecTV's performance will show a rapid and marked upturn if under the control of News Corp. – annual savings of between $610 million and $765 million are predicted.
Many of Mr Murdoch's rivals in the sphere of media empire building have recently departed under a cloud, including Jean-Marie Messier at Vivendi, Thomas Middlehoff at Bertelsmann, Leo Kirch at the KirchGruppe and Gerry Levin and Steve Case at AOL Time Warner. The attrition among CEOs of telcos has been even greater. So what is the secret of Mr Murdoch's success? As indicated above, opportunism combined with patience is arguably his greatest virtue. When initially rebuffed – a not uncommon occurrence – he is prepared to wait and hope that those preferred to him eventually fall by the wayside, possibly as a result of regulatory intervention. This then leaves the way clear for a second attempt – at a much reduced price – which is likely to succeed given that his rivals are no longer in the game and the nature of his interests is such that regulators tend to end up accepting that he is the lesser evil compared to domestic companies – and possibly whole sectors such as pay-TV in Italy – going under. He is also prepared to take heavy losses up front in the expectation of longer-term gains. In Asia, for example, his satellite-TV business, Star TV, made losses for several years before moving into profit at the end of 2002. In the UK, BSkyB struggled for a long time, in part because of a calculated risk that if digital set-top boxes were distributed free, the service would gain sufficient momentum to dominate the digital arena. With 6.6 million subscribers and a falling churn rate, it is now generating a sharply rising free cash flow and is unlikely to be seriously troubled by its cable rivals even though they will shortly have the advantage of having most of their debts written off. A further point is that Mr Murdoch and his favoured executives spend a good deal of time lobbying for support for proposed mergers and acquisitions and for favourable changes in the law such as those relating to media ownership and digital piracy in the USA.
In February 2003, News Corp. reported earnings up 25 per cent for the fourth successive quarter, and with the big write-offs taken in 2002 and net debt on a falling trend the balance sheet is looking far healthier. It remains true that News Corp.'s market value is less than the sum of its parts, but investors with long memories have not forgotten the crisis of 1990-91 when News Corp. teetered on the edge of bankruptcy and the structure of the company remains opaque and complicated. It may be added that Mr Murdoch's position is so dominant that there is a niggling fear that he could yet put recent advances at risk, although he has recently made clear that the immediate strategy is to absorb and improve DirectTV and Telepiù rather than make further acquisitions. Nevertheless, like John Malone of Liberty Media – incidentally, News Corp.'s largest individual shareholder other than the Murdoch family with an 18 per cent stake – who, despite suffering heavy losses at the likes of The Netherland's UPC, is now firmly in the predator camp, Mr Murdoch has good reason to believe that he has finally proved his many critics wrong and that his long-term strategic approach has finally, and successfully, reached the long term. There are those who, like Lex in the Financial Times, continue to argue that Mr Murdoch's dream of the Sky Global Network of global satellite interests is a dead duck, citing the intention to fold the stake in Hughes Electronics into Fox Entertainment to beef up News Corp.'s US distribution, but it is possible to go along with News Corp.'s argument that this will preserve its credit rating and leave it with $1 billion in cash. Either way, with over 100 million households as potential subscribers after the purchase of Hughes, Mr Murdoch can reasonably argue that his dreams have largely now come true.