Why News Corp isn’t doing as well as its results suggest

Foxtel is moving towards a lower profit business model.

Foxtel is moving towards a lower profit business model. Photo: TND

Rupert Murdoch’s News Corp hit the headlines on Friday announcing its net profit of $US389 million ($526 million) was the best in over a decade and in stark comparison to the $US1.5 billion it lost last year.

It also said revenues for the fourth quarter were 30 per cent above the June 2020 quarter.

Well, as independent media analyst Peter Cox said, those earnings would want to be up.

“That’s compared to the June quarter in 2020, the worst three months suffered when the coronavirus hit and everything was closed down.”

“In the June quarter this year mostly everything was open,” Mr Cox said.

There were some bright spots in News’ performance. The online real estate operation which includes, saw its revenues up 31 per cent and pre-tax earnings up 49 per cent as property boomed post-lockdowns.

Its Dow Jones business, which includes the Wall Street Journal and business data operations, saw revenues up 7 per cent and pre-tax earnings up 41 per cent to $US332 million.

Currency values

But overall News Corp revenues were up 4 per cent, to $US9.36 billion, while it earned profits of 6 per cent from positive movements in foreign exchange (FX) which means the actual cash situation was 2 per cent lower than the previous year.

The way most Australians relate to News Corp, through its newspapers, was not a good story.

The newspaper business, which has outlets in Australia, the US and the UK, saw pre-tax earnings fall 2 per cent, to $US52 million, and Australian newspaper operations fall 1 per cent.

Dropping regional papers cost News money

The actual decline in Australia was 6 per cent but a stronger Australian dollar masked much of that, delivering a 5 per cent valuation benefit.

Australian operations were hit by a $US90 million revenue loss caused by the closure or move to digital production of a number of regional papers, a move which gained adverse publicity during the worst of the pandemic.

Who’s paying TV?

Another important interface for Australians, News’ Foxtel pay-TV and streaming video on demand (SVOD) businesses had a negative result that was totally masked by foreign exchange movements.

Its revenues were up 10 per cent but a 12 per cent foreign-exchange (FX) gain means it really fell 2 per cent.

Pre-tax earnings for Foxtel, which rose 11 per cent, were complemented by an 11 per cent FX gain. In other words, nothing really happened in the business.

There is a major shift underway in Foxtel as the business moves from pay-TV to SVOD. For a couple of years that meant overall subscription numbers declined, but that has changed in 2021.

While Foxtel subscriptions continued to decline, sports channel Kayo and movie outlet Binge jumped dramatically, putting on 1.1 million viewers between them. So Foxtel’s overall viewership is now at 3.89 million paying guests, more than was the case in 2019.

There’s a problem with that move of course.

“No-one wants to pay for a $150 per month subscription like they did a few years ago, when two million people were doing that,” said telecommunications consultant Paul Budde.

Now people are moving to SVOD deals where Foxtel’s highly valued sports coverage can be bought on Kayo for $25 a month and you can add Binge at $14 a month to watch movies and TV series. All up, the $149 premium Foxtel subscription can now be bought on SVOD for $40 a month.

Or people can desert the Foxtel ship and get a $10 sports add on to their $14 Stan subscription – for respectable, if not comprehensive, coverage.

“Sport was the key market for Foxtel and now that is undermined with various players offering a bit of sport,” Mr Budde said.

Foxtel is putting the best face on the situation, saying the June quarter saw “higher revenues from streaming products more than offset the revenue declines from the broadcast product.”

But that was helped by the subscription run-up during the pandemic – but the pre-tax profit for the business took a dive as the result of extra costs to buy sport content and the extra costs born by business as pandemic restrictions lifted.

All that saw pre-tax earnings fall 37 per cent in the last quarter, to $US66 million, for the Foxtel businesses.

Back in the pub

Despite the major shift to lower-yielding streaming, News said its overall Foxtell revenue per user in was up 4 per cent to $81.

However that was likely influenced “by the move back to commercial subscriptions to Foxtel by pubs and clubs once the lockdowns lifted late last year,” Mr Cox said.

During the pandemic, pubs mainly stopped paying their high-cost sports subscriptions. And the shift back to payment can only happen once (although it’s under threat again now).

The consistent erosion of Foxtel’s traditional domestic pay-TV memberships, which News referred to in its release, will undermine those margins-per-viewer in the future.

Overall Mr Cox said, “I think they’re trying to put a very positive spin on this report and the question you’d have to ask is ‘Does the [Murdoch] family want to sell not just Foxtel but the whole box and dice?’

The Murdoch family controls some 40 per cent of News Corp voting shares and, as the ageing Rupert Murdoch’s influence wanes along with the newspapers it owns, his heirs could be looking to get out.

The Murdochs sold down their stake in the giant 21st Century Fox to Disney Corporation in 2017 in a $US66 billion deal.

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