News Corp. Goes Digital

Rupert Murdoch, the ink-stained media mogul, is going digital. Actually, he's trying to convince Wall Street that he already has.

In the months since Time Warner (TWX) and America Online (AOL) detonated the line separating old media and new by announcing their $150 billion merger, Murdoch's News Corp. (NWS) as well as Viacom (VIA) and Walt Disney (DIS) have responded mostly by claiming they are big enough and bad enough to compete with the new behemoth without big deals of their own.

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On Tuesday, News Corp. is hosting an investor conference in New York to highlight its new media assets as well as its strategy. "The workshop should help provide some clarity as to the efficacy of its strategy," Jessica Reif-Cohen, media analyst at Merrill Lynch, wrote in a note Thursday.

News Corp. touts that strategy as three-fold: to leverage its content across as many distribution platforms as possible, to increase the capability of the distribution vehicles it currently owns and to make strategic investments in new media. (News Corp. is a minority shareholder in TheStreet.com Inc. (TSCM), publisher of this Web site, and News Corp.'s Fox News Channel televises "TheStreet.com" television show on weekends.)

In the next couple of months, News Corp. plans to introduce a new umbrella company showcasing its broad satellite holdings, unofficially named PlatCo. Both Yahoo! (YHOO) and Microsoft (MSFT) have been mentioned as possible investors in that new company, each of whom could reportedly take up to a 5% stake in the new unit. Peter Chernin, chief operating officer of News Corp., however, threw cold water on those theories this week by telling analysts that any partnership discussions are "minor" and not at the center of the company's plans for PlatCo.

Cohen in her report said that Liberty Media (LMG.A), and its chairman, John Malone, could also play a role in PlatCo. Liberty owns an 8% stake in News Corp.

Even without partnership deals of that magnitude, PlatCo. would be the first major response to AOL/Time Warner, and it could add a credible sheen to News Corp.'s proclamations that it is furiously remaking itself into a digital company.

The combination of Time Warner's cable operations with AOL's 22 million Web subscribers is widely regarded as the key to that marriage, because it gives AOL direct access to the biggest cable operator in the U.S.

Satellite TV's Threat

Satellite television is considered to be the only potential competitive threat to cable as a broadband distributor of Web and video content. News Corp.'s satellite holdings, which will eventually be able to offer Web access, give it some ability to compete with AOL/Time Warner, and PlatCo. will highlight that ability to investors. Indeed, shares of PlatCo. could eventually be offered to the public.

With that said, much of the company's satellite holdings are abroad, and its presence in the U.S. satellite market is negligible. Indeed, News Corp.'s weakness in that market led in part to a report on CNBC in March that the company was considering a bid for General Motors (GM) in order to gain control of its DirecTV subsidiary, the No. 1 satellite TV provider in the country. News Corp. called that report "entirely false."

News Corp. Satellite Holdings
Public Investments	Shares
BSkyB	114 (40%)
TV Guide (pre-Gemstar)	133 (44%)
NNDS (Technology)	42 (80%)
Private Investments	% Owned
Stream	35%
Fox Tel	25%
Sky Perfect	10%
Sky LA	30%/36%
Star TV	100%
Star TV/HK JV	30%/40%
Source: Merrill Lynch Estimates

Hal Vogel, the longtime media industry analyst who is now running the media/entertainment hedge fund Vogel Capital Management, says the move to create a satellite company, among others, is an attempt by Murdoch to clean up News Corp.'s structure and make investors aware that the company has these sizeable Internet and digital assets.

Even before AOL/Time Warner was announced, News Corp. was trying to force the spotlight onto its digital assets. Last fall, the company promoted Murdoch's son James to head worldwide digital operations, giving the unit a much higher profile internally and externally. In December the company reached a much-publicized deal to invest $1 billion in the Internet health care company Healtheon/WebMD (HLTH).

But the company turned things up a notch in the weeks after the AOL/Time Warner merger was announced. In early February, Chernin spent nearly 20 minutes of his company's earnings conference call with analysts painstakingly detailing his company's "exhaustive" efforts to transform itself into a new media central.

"There has been a greater sense of urgency" following the merger, Murdoch told the Financial Times earlier this year. "We do not need to be equal to them in size, but we do need to maximize" News Corp.'s size.

The company has been making some moves, although in baby steps. British Sky Broadcasting (BSY), Britain's No. 1 pay-TV provider, of which News Corp. owns 40%, said earlier this year that it would pump some $400 million in the next year or so into sky.com and skysports.com to transform those sites into the leading news and sports sites, respectively, in Britain. This week BSkyB announced a deal to spend some $460 million in stock for a majority stake in Sports Internet Group, an online sports betting service, to bolster skysports.com.

Some Aren't Convinced

News Corp.'s recent flurry of Internet activity still leaves some analysts unconvinced. "I think it is more sizzle than steak," says Jim Penhune, analyst with Boston-based research firm Yankee Group. The company's basic problem is it has not established a dominant position on the Web. Unlike Disney, which can boast leadership positions in ESPN.com and Disney.com, or Viacom, which has MTV.com and CBS.Sportsline.com (SPLN), News Corp., which owns everything from venerable movie studio Twentieth Century Fox to the fledgling Fox television network to the infamous tabloid New York Post, is not claiming Web space as its own in any meaningful way.

"If you look at the most visited sites on the Web, you don't see any News Corp. or Fox sites on that list," says John Schreiber, assistant portfolio manager who follows media/entertainment at Janus Funds, which does not own any shares in News Corp.

With that said, the company is well positioned, mostly through those satellite holdings, to deliver digital and Web content to consumers. BSkyB alone has been adding 50,000 digital subscribers a week. "If you look at BSkyB, they're doing what AOL has been talking about for the last 18 months," Penhune says. Also, the 44% stake in TV Guide that News Corp. acquired last year gives it access to the largest electronic programming guide in the U.S.

"The size and scope of News Corp.'s global content and distribution assets can make for a phenomenal global new media empire, if the company can implement these plans successfully," Richard Bilotti, media analyst at Morgan Stanley Dean Witter, wrote earlier this year. Bilotti, though, warned that News Corp. would likely have to form a partnership with a big Internet portal to drive up traffic to its own content sites.

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