Last week, News Corp. (NYSE: NWS ) delivered its third-quarter earnings report, which, if expressed in the simplistic dialect of a Hollywood-envisioned caveman, could be summed up thusly: "Revenues -- good. Earning -- bad." Let's check out some talking points.
The good part is a 17% increase in overall revenues, to $6 billion. The bad part is that annoyingly demanding bottom line, which investors like to scrutinize; it decreased nearly 8% to $400 million, or $0.13 per diluted share on a combined basis. (The news release also breaks down the income available to each share class.) The blame was laid at the feet of a $77 million restructuring transaction relating to the regional programming partners venture, which involves regional sports networks.
Looking through the operating segments, we see some hits and misses. Take Fox, for example: It used to be a separately traded vehicle, majority-owned by News Corp., but it's been taken back into the fold. The Fox movie slate performed well, taking operating income up 15% to $251 million. The company credited home-video products (movies such as Alien vs. Predator and Napoleon Dynamite) and theatrical releases like the animated Robots as driving forces. Cable programming saw a 55% increase in operating income, bringing in a beautiful bounty of $172 million. Fox News Channel continues to shine in this area. (In the interest of synergy, though, Fox should get a movie going that pits Bill O'Reilly against Al Franken -- forget all the Alien-and-Predator shenanigans.)
Now, alas, we get to the tough one: Fox Broadcasting Company hampered the television segment, contributing to a 15% decline in operating income, to $221 million. One of the biggest factors hindering all large networks is the cost of programming. It requires a lot of dough, even if you do have the Super Bowl. Cable networks are easier to grow, since volatility in advertising sales can be mitigated by fees paid to the content providers for the privilege of carrying them. That's why Viacom (NYSE: VIA ) loves MTV, Time Warner (NYSE: TWX ) loves TBS, and Disney (NYSE: DIS ) loves ESPN.
News Corp. needs to address the inflation of programming costs seriously. It's a difficult situation, because major networks -- FOX, NBC, ABC, and CBS -- are trapped into shelling out huge amounts of capital to keep successful shows on the air. Unlike, say, an MTV, where economical programs come and go on a whim, the big networks must strike multimillion-dollar deals with star producers or celebrated comedians to ensure solvency.
Of course, one of the advantages of the Fox empire -- and other big networks -- is owning the content alongside multiple distribution channels. And this is happening more and more these days, as TV networks have merged with Hollywood studios and other entertainment ventures. Great content can be offered in primetime, on DVD, or even in syndication reruns to generate multiple revenue streams. But there are no guarantees. And with cable and video games competing for viewers' free time, big, bulky broadcasters with high costs can exert a gravitational pull on a company's stock price. (I know all too well how ABC acted as a ceiling on price appreciation with Disney, since I own shares in the company).
If News Corp. can keep the celluloid hits coming, its Fox network has a chance of synergizing with that product flow down the line and improving results. For instance, you just know News Corp. icon Rupert Murdoch is hoping the joint Fox-Marvel Enterprises' (NYSE: MVL ) Fantastic Four film does extraordinarily well when it opens in theaters this July. That would enable Fox's broadcasting asset to capitalize on it when -- or if -- the movie is finally available to run on TV. The last Star Wars film presumably will help later on as well. Of course, it will be a long time before these films even have the chance to be catalysts for increased viewer levels.
The major takeaway here is that shareholders in this sector need to become more vocal about how their companies address programming inflation. They also need to be very patient and realize that not every segment of a large media empire will be fired up all the time. In one sense, all of the various parts of a huge company like this can limit growth, but in another sense, they provide diversification. It's up to each individual investor to see whether synergy is right for a portfolio.
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- We also have the News Corp. discussion board.