News Corp Dabbles Into Different Segments To Restore Profitability

In a bid to restore profitability, media giant  News Corp (NASDAQ:NWSA) is dabbling in various arenas simultaneously. The ongoing shift from print to digital has upended the media industry, dragging many key players (including News Corp) into deep losses. Despite the company keeping a firm hold over its expenses, it suffered losses worth $147 million in fiscal 2015 due to a lackluster growth in net revenues. ^[1] Fiscal years end with June.) To counter the negative effects of a digitally inclined customer base and replace revenues from print side of the business, News Corp is accumulating technology that should help it bolster the digital business by attracting more customers. The acquisitions of Unruly, Checkout 51 and Storyful are example of the company’s efforts on this front. News Corp is even undertaking digital innovation to drive its book publishing business, which slowed  in Q1 fiscal 2016 due to a fall in e-book sales.

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Wave Of Change In The Media Industry

Over the past few years, media companies have witnessed a trend away from print media, the traditional revenue source that formed the bedrock of the business. Most publishing houses are grappling with this change by trying to shift their focus from print to digital media and cutting costs. Historically, over 70% of News Corp’s revenues came from news and information services. However, in the coming years we expect the print side of this segment to register a significant decline and eventually become irrelevant.

Advertising revenues have been the primary revenue generator for News Corp, accounting for over one third ($3.8 billion) of the total revenues in fiscal year 2015. However, the company is witnessing considerable headwinds in this business segment, where revenue fell 5% in the last fiscal year due to the changing behaviors and preferences of customers. ^[1]

In an attempt to increase its user base, and thus, digital revenues, News Corp has made multiple acquisitions in recent years including:  1) Checkout 51 (2015), which is a mobile savings app; 2) publishing house Harlequin (2014); 3) Storyful (2013), which specializes in verifying and distributing user-generated content; and, 4) Unruly (2015), which predicts the potential for video advertisements to go viral based on historical behavior. More recently, News Corp Australia has acquired a 25 % stake in the so-called tradie search site hipages, which helps people find and hire tradespeople such as plumbers, electricians, painters and builders. ^[2] These initiatives are expected to attract more subscribers to the company’s platforms, thus, providing it with the much needed support for advertising revenues.

Other Initiatives To Expand Its User Base

• Digital Real Estate Segment Holds Promise

The digital real estate segment is one of the most promising areas for News Corp, contributing approximately 35% to its value as per our estimates. The acquisition of Move Inc. (2014), a leading provider of online real estate services in the U.S., was a step taken to augment revenues from this source. In late 2014, News Corp entered the Indian residential market with the acquisition of an online residential real estate platform, PropTiger.com. To build a stronghold in Asia, it also acquired online real estate company, iProperty, which operates in Malaysia, Hong Kong, Indonesia Macau, Thailand, Singapore and the Philippines. ^[3] Owing to these acquisitions, we expect this division to do well and consequently, forecast the revenues to grow at a compound annual growth rate (CAGR) of 7% for the next six-seven years.

• Cable Service Programming Clinches Significant Deals

News Corp has been making significant strides to transform itself into a more digital centric business. In a latest development, News Corp Australia secured a five year deal with the National Rugby League (NRL), which will allow its subsidiary Fox Sports Australia to show every game live and ad-free for the 2016-22 period. ^[4] Also, the publisher is on the cusp of clinching another remarkable deal with Australia Olympic Committee (AOC), to showcase 2016 Rio Olympics, the 2018 Winter Games in South Korea and the 2020 Olympics in Tokyo. ^[5] Deals with NRL and Australian Football League (AFL) will augment the advertising revenues it derives from its cable network programming segment, thus pushing overall revenues higher. However, higher sports programming rights costs may lower the profitability, if News Corp fails to increase subscriber and carriage fees and advertising rates to offset the increase. Consequently, we project revenues from cable service programming segment to increase at a modest CAGR of 1.5% for the next six-seven years.

• Book Publishing Business To Get Its Zing Back

The fiscal year 2015 saw the book publishing business as the primary revenue driver for News Corp. This development occurred on the back of Harlequin acquisition (August 2014), resulting in a year over year growth of 16% to $1.67 billion in June 2015. However, the much raved about end of paper books did not occur as industry wide e-book sales declined 11% year over year, as estimated by the Association of American Publishers. ^[6] In addition to the drop in e-book sales, the rising use of mobile devices and tablets to read was responsible for the decline. Given that paper-less or digital books are considered the way forward, publishers are looking at digital innovation and becoming increasingly independent of retailers like Amazon which sell Kindle.

Digital sales at News Corp, comprising of e-books and digital audio books, made up for only 20% of its consumer revenues in the quarter ended September. This represented a 12% decline in digital sales in Q1 fiscal 16 as compared to the year ago period. To make it big in 2016 and grow its digital books segment, the company is looking at a multitude of digital partnerships. One of the most talked ones is HarperCollins’ partnership with Insurrection Media to adapt HarperCollin books into web based series and television series. ^[7] In addition, it has partnered with various startups like Curriculet to test the concept of e-book rentals for schools, and Inkling to try its enhanced digital publishing platform. The HarperCollins team is also working with Accenture to sell e-books directly to consumers, starting with the works of C.S. Lewis at cslewis.com and Narnia.com. ^[8] On a related note, HarperCollins also managed to grab rights to exclusively distribute Lonely Planet India, a customized international travel series for Indian travelers, in India which is HarperCollins fastest growing arm. ^[9]

We expect these partnerships to drive revenues for News Corp in 2016, along with the impressive line-up of young adult books like The Word For Yes by Claire Needell, Seven Black Diamonds by Melissa Marr and Yellow Brick War or Dorothy Must Die Series by Danielle Page. ^[10] Accordingly, we forecast the book publishing revenues at the second largest publisher in the world, HarperCollins, to increase to $2 billion by the end of the Trefis forecast period.

• Other miscellaneous deals

In addition to the aforementioned deals, News UK has signed a deal with the Australian gaming giant Tabcorp through its biggest daily, The Sun, to develop an online wagering business in the U.K. and Ireland under the banner of Sun Bets. ^[11] News Corp also hinted at entering financial consultancy business with its acquisition of India based digital financial service firms BigDecisions.com (2014) and VCCircle (2015) which aim to help Indian consumers make smarter financial decisions.((News Corp acquires BigDecisions.com, Business Standard, December 2014)) The media firm hopes to give its business a digital stimulus through these endeavors.

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1. News Corp Annual Report, The Sec, July 2015 [↩] [↩]
2. News Corp takes stake in tradie website, skynews.com, December 2015 [↩]
3. News Corp owned REA acquires iProperty for $414 million, mediannama.com, November 2015 [↩]
4. News Corp Australia in a $1.8 billion deal to cover rugby, Seeking Alpha, December 2015 [↩]
5. News Corp inks deal with AOC, adnews.com, December 2015 [↩]
6. e-books have declined 11% in 2015, goodreads.com, December 2015 [↩]
7. HarperCollins books are coming on TV, bustle.com, December 2015 [↩]
8. Beyond e-books: HarperCollins looks for the next big thing, mashable.com, December 2015 [↩]
9. HarperCollins to exclusively distribute Lonely Planet India, televisionpost.com, December 2015 [↩]
10. Most anticipated YA books for 2016, bustle.com, December 2015 [↩]
11. Tabcorp strikes agreement with News UK to set up a punting venture, mumbrella.com, December 2015 [↩]