News Corp - an exponential evolution?
The company's annual report was published yesterday. There are plenty of clues about how the organisation is thinking about the world
Welcome to Unmade, written on a meteorologically mediocre morning at Sisters Beach, Tasmania.
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Today’s writing soundtrack: Ancient Heart, by Tanita Tikaram, a fellow alumni of Queen Mary’s College, Basingstoke. It would be a better anecdote if I could remember anything about her.
News Corp - a good year?
We get our kicks in different ways.
I feel a tiny surge of anticipation whenever I get an alert from my ASX app that one of the 11 local media and marketing stocks I watch has issued a market update.
Mostly, there’s no dopamine to be had, as usually it’s routine compliance stuff. The daily HT&E share buyback report just doesn’t do it for me.
Then there are the high adrenaline days when a company issues its quarterly, half yearly or annual updates.
Facebook did that in the US yesterday, incidentally. Global revenues up for the quarter by 35 per cent from $21bn to $29bn. For the quarter. Holy moly. Google’s parent company Alphabet did it about an hour ago - up from $46bn for the quarter to $65bn. Zoinks.
And then there’s the more relaxed high of a company annual report. Generally, it follows on a few weeks after the headline full year update. Much of the information is already in the public domain, but there’s more reflection and detail. The annual report rarely moves the market.
And annual reports are also where in some cases the CEO gets to show a little personality. When I read WPP (and now S4) annual reports, I used to hear Sir Martin Sorrell’s voice in my head as I did so.
The same goes for News Corp, which dropped its annual report yesterday. Proprietor Rupert Murdoch may get a look in, but it’s mainly the province of CEO Robert Thomson, the Aussie-made-good who runs the organisation from New York.
No CEO loves an alliteration more than Thomson.
Remember his statement when the News Media Bargaining Code shakedown forced Google and Facebook to start paying off Australian media companies? “Rupert and Lachlan Murdoch led a global debate while others in our industry were silent or supine as digital dysfunctionality threatened to turn journalism into a mendicant order. This digital denouement has been more than a decade in the making."
Yesterday’s News Corp annual report offers plenty more of that. “The stresses and strains of a pandemic have stretched the social fabric and the commercial canvas.” And that’s just in the first paragraph.
The annual report also underlines how much the world has changed for News Corp over the last decade. The company is much smaller now. It split into News Corp and 21st Century Fox eight years ago. And Disney gobbled up 21st Century Fox just over two years ago.
As a result, while News Corp’s centre of gravity hasn’t entirely shifted back from the US to Australia, it’s at least metaphorically moved (alliterations are great, huh?) towards Hawaii. That process was accelerated when the company sold its coupon business, News America Marketing last year. Nowadays, of the three legs to the company’s stool, Australia and the US are the longest in the news segment, while the UK is a bit shorter. Which admittedly makes for a wobbly stool.
Rise of real estate
And nowadays, real estate is more significant to the company’s profits than news.
That’s underlined by the image on the first page of the annual report - featuring realtor.com and realestate.com.au.
And now that Dow Jones, which includes the Wall Street Journal among the financial data business, is split out from the rest of the company’s news media, News Corp looks less like primarily a news company.
According to the annual report, which is written to the US dollar, digital real estate services contributed $514m towards the company’s profits for the 2021 financial year. Next biggest was subscription video services - the Foxtel Group - with a $359m contribution. Then came Dow Jones on $332m and book publishing - mainly HarperCollins - on $303m. News media’s contribution to the profits was a measly $52m.
In large part, that’s because news is a hard business to make a profit from. It was actually the segment to deliver the biggest revenues, at $2.2bn. By contrast, the real estate revenues were the smallest of the five main segments at $1.4bn, despite being the most profitable.
And what’s absent in the 2021 numbers, but will be present next time, is the cash from the Google and Facebook shakedown. Thomson reveals - for the first time, I think - that they’re worth more than $100m to the company. “These deals, the financial terms of which are confidential, will add significant revenue annually - clearly into nine figures - and are a profoundly important part of the ongoing transformation of the content landscape.”
If most of that drops to the bottom line, the $50m profit from the news segment will look a lot bigger this time next year.
There’s also up to date data around progress on news subscriptions in Australia.
It seems an odd coincidence that The Tele, Hun and Courier Mail are all so close, with all three having around 147,000 paid subscribers each.
But what is also striking is how much printed circulation most have dried up since the audit was killed off. Even four years ago, the Daily Telegraph was claiming sales of 240,000, just for the print edition. Now it’s little more than half that across print and digital.
And - as they so often were with EMMA, my eyebrows were raised by the total monthly audiences being claimed by all the titles.
Take The Tele. A supposed monthly audience of 4.6m, but subscribers of 146,761.
That’s 32 readers for every subscription. Most of the digital content is paywalled, so where are all the readers coming from?
And just as challenging, where is all the newspaper advertising going? The company’s news segment saw a drop in advertising for the year from just under $1.6bn to just under $900bn. Covid was obviously a major factor, but wider trends are at play too. In Australia, advertising fell $79m, in large part because of the closure of most of the company’s regional and community papers.
The company revealed that in Australia, News Corp is no longer a US$1bn revenue company. It saw revenues of US$997m, a fall of $8m on the year before. That’s less than half the turnover of biggest rival Nine and about the same as Seven West Media.
All about optionality
Meanwhile, the word of the year for media companies has been “optionality”. HT&E used it to describe its rational for buying a four per cent stake in Ooh Media. Southern Cross Austereo said something similar around its decision to only sign a two-year affiliate deal with Ten ready for deal making when the Seven-Prime arrangement expires.
The word appears a couple of times in Thomson’s message in the News Corp annual report.
“Our strong cash return has given us increased optionality”.
And on the growth of Binge and Kayo streaming offerings: “That success has naturally given us much optionality as we consider Foxtel’s rather favorable future.” Optionality and alliteration, all in one sentence.
A Foxtel float is afoot.
Not that I accept everything Thomson had to say about Foxtel.
“The Foxtel narrative is particularly positive, as our early emphasis on streaming and on securing long-term sports and entertainment rights has put the company on a decidedly upward trajectory.”
“Early emphasis on streaming”? It’s another alliteration, but it’s a stretch. Foxtel was initially reluctant to cannibalise its high value broadcast subscribers, and is only just getting its act together with Binge and Kayo in the nick of time.
Foxtel did pass a milestone though. The company now has more streaming subscribers (2.006m) for Kayo, Binge and Foxtel Now, than its does for its broadcast set top box customers (1.885m).
The drop in residential broadcast subscribers - who are worth far more than streamers - has been rapid: Down from 1.903m to 1.651m. Thats a loss of a quarter of a million in a year. However, the average revenue per user among those who stuck around improved slightly - up from AU$78 to AU $80.
Playing into the thinking around the desire to float Foxtel is the question of News Corp’s borrowings. From a clean slate when the company split eight years ago, it’s quite the achievment to now have borrowings amounting to nearly $2.3bn.
There’s no immediate pressure - the company is cash flow positive, and there’s nearly a billion dollars in the bank - but nearly $600m comes due next year, and another $574m in 2024.
But overall, for a company with its roots entirely in traditional media, staying afloat in the same ocean as the digital behemoths.
It may not be the “exponential evolution” that Thomson claims, but it still looks like a company that came out of a tough year stronger than it went in.
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