News: Analysis & Commentary: MAGNATES
MAN BUYS WORLD
Outside Rupert Murdoch's office suite at Twentieth Century-Fox studios in Beverly Hills, the hallway is lined with movie posters from such Fox classics as The Sound of Music and Butch Cassidy and the Sundance Kid. Inside, though, Hollywood gives way to Murdoch's personal tastes. Australian abstract paintings share wall space with Warhol-esque press plates from Murdoch's racy London tabloid, The Sun. "Up Yours Delors" shouts one headline. "Freddie Starr Ate My Hamster" blares another.
Murdoch may spend much of his time in Tinseltown these days, but he has always seemed best suited to the pugnacious world of Fleet Street. As rain spackled the windows of his Fox offices one recent afternoon, he let his mind drift far from Los Angeles and the movies. Standing before a four-foot- wide map of the world, he zeroed in on Europe and Asia, the latest of his many battle zones. "That's where the money is," he said, pointing to Germany, then Japan.
If Rupert Murdoch knows anything, it's where to find the money. And at 64, he has never been better positioned to go mining for it. After a remarkable decade of financial brinkmanship that almost landed him in bankruptcy court, Murdoch is suddenly the one media mogul loaded with resources. While rivals such as Tele-Communications Inc. and Time Warner Inc. wrestle with mounds of debt and other obligations, Murdoch's News Corp. is flush with cash from its global stable of newspapers and broadcast assets. Its $5 billion in debt is half of what it was five years ago.
Plenty of media executives have visions of superhighways dancing in their heads. But during the past few weeks, Murdoch has shored up a media empire focused squarely on nut-and-bolts expansion. Since April, he has rebuked the Federal Communications Commission and its challenge to the financial structure of his seven-year-old Fox Broadcasting Co. network. He also has hooked up with MCI Communications Corp. Chairman Bert C. Roberts Jr. in an interactive-technology deal that is amorphous in all but one respect: It will supply Murdoch with a fresh $2 billion. "We certainly intend it to be an acquisition vehicle," he told BUSINESS WEEK.
LIGHTNING ROD. Where exactly Murdoch will place his bets is still partly a guessing game. But the News Corp. chairman already is angling to buy the Fininvest TV and advertising empire owned by former Italian Prime Minister Silvio Berlusconi--a deal that would greatly enhance News Corp.'s presence in the rich European market. Murdoch says he also has his eye on distribution assets in Latin America. In the U.S., he hopes to buy more television stations for his feisty Fox network and more cable channels to go with his nascent f/x network.
The most important use of Murdoch's newfound wealth, however, will be to plow it into the projects already at hand--while reining in the more reckless side of his entrepreneurial nature. A close look at what he has on the table--from his Star satellite television operation in Asia to his Vox TV channel in Germany--indicates that the capital investment in front of him runs well into the billions. These are complex businesses, and Murdoch is trying to build them in the face of fierce competition in Europe and Asia. The latter, says Viacom Inc. Chairman Sumner M. Redstone, "has the biggest potential payoff of any market. But it is also the most expensive."
Murdoch, meanwhile, faces a unique challenge. More than anyone else in business, he is a lightning rod for political and regulatory scrutiny. The FCC battle--though successful--was only the most visible of his recent political entanglements. In the past month, he has battled British politicians over his attempt to win a license for a new TV channel and Chinese authorities over restrictions on the sale of satellite dishes. Governments worldwide are wary of his gaining too much influence.
"GREAT SEDUCER." Murdoch, of course, has made a career of defying odds--financial and political. Two years ago, his $1.6 billion bid to take National Football League games away from CBS Inc. was thought to be reckless. But the payoff in ratings gains and ad revenue at the Fox network has been substantial. As for politics, using both the power of his newspapers and publishing contracts from HarperCollins, his book publishing company, he has cultivated lawmakers masterfully. Says Frank Barlow, managing director of British media giant Pearson PLC: "He's a great seducer."
MCI's Roberts, for one, was captivated. His pledge to buy 13% of News Corp. for $2 billion looks to be more an investment in Murdoch's vision than anything else. The first step of their joint venture will likely be to merge News Corp.'s Delphi online service with MCI's new Internet operations. But despite all the "superhighway" hoopla surrounding the May 10 announcement, Murdoch makes it clear that the vehicle mostly will be used to raise money for bread-and-butter media acquisitions. "I think [interactivity] will happen," he explains. "I'm just very cautious about when." Says Roberts: "I would be the first to tell you that he knows what he is doing and we are going to look to him for expertise."
For now, Murdoch will add MCI's $2 billion to the nearly $3 billion it already has in cash and receivables. The Berlusconi deal, if it happens, would be financed through European operations that can raise money on their own. Otherwise, he will buy opportunistically. "I don't think you'll see him on a buying spree," says one Murdoch intimate. "But he has liquidity and resources now to take advantage of the opportunities that arise."
Murdoch's last big acquisition was the one that brought him into Asia two years ago. He spent $525 million for a 64% stake in Star TV, a struggling satellite network service. Star potentially could beam programming to 220 million households. The problem is nobody really knows for sure how many people receive it. And getting viewers to pay for service is another question altogether.
Murdoch admits his strategy is a high-risk gamble. Generating substantial revenues means starting from scratch in many markets and breaking down political opposition in others. Murdoch has made headway selling the service in India, largely because in 1993 he bought a 49.9% stake in Asia Today Ltd., which broadcasts India's popular ZEE TV. But China and Malaysia have been off-limits. The reason: Murdoch made the mistake early on of saying that satellite delivery of information would topple totalitarian governments. Even India, with its relatively lax political climate, has proved troublesome. Star recently was forced to suspend one of its more popular talk shows when a guest mildly slurred Mahatma Gandhi.
LOCAL FODDER. Unable to meet audience projections, Star has lost advertising revenue. Murdoch says the operation won't be profitable for five years--but even that is probably optimistic. Already, this year's projected $20 million loss has ballooned to $50 million, on estimated sales of $120 million. Winning new viewers will cost bundles more.
Digitization will eventually create hundreds of new channels for the service, and Murdoch plans to use them to customize programming for different markets--say, an offering in Mandarin for China and another one in Cantonese. He is also creating and sponsoring sports leagues to give him local fodder to televise: badminton and basketball in China, cricket in India. The problem, says one rival TV executive in Asia, is that localization of programming "sends your costs through the roof."
Murdoch got a break when a rocket carrying the satellite for a rival service blew up last year, delaying a service sponsored by ESPN, Time Warner, and others. That gives him some breathing room. Still, ESPN has made inroads elsewhere in Asia. And Viacom's MTV, which left Star a year ago because Murdoch wouldn't give up a slice of Star equity, formed its own music station with PolyGram.
Britain, however, shows what can happen when a big satellite investment pays off. British Sky Broadcasting, his satellite service there, may have lost a staggering $1.2 billion between 1989 and 1993. But largely because Murdoch paid $456 million to telecast Premier League soccer games starting in 1992, BSkyB now has 4 million subscribers, and for the first nine months of the current fiscal year, it earned $164 million on $892 million in sales.
Ahead of most of his rivals, Murdoch plans to offer digitally compressed Sky signals sometime next year that will increase the service's 22 channels to 200 almost overnight. With that many choices, he plans to offer pay-per-view movies every 15 minutes.
Expanding the News Corp. banner to the rest of Europe will be much more difficult. For starters, BSkyB doesn't own the rights to its popular movies outside Britain, and British soccer matches won't lure many viewers on the Continent. Relatively few Italians and French own satellite dishes. Competition already is heavy from the likes of Viacom, U S West and French pay-TV giant Canal Plus. In other areas, state-controlled cable companies aren't likely to welcome Murdoch with open arms. "Europe will be an uphill battle," says Pearson's Barlow, the former chairman of BSkyB.
"WE'VE GOT THE MONEY." Murdoch's major beachhead outside Britain is the stake he owns in Vox, the German pay channel News Corp. took control of from Bertelsmann last year after losses mounted to $215 million. But with more than 85 channels in Germany, over 25 of them nationwide, competition is fierce for the $37 billion advertising market. Still, armed with technical advice from BSkyB, Vox hopes to break even by 1998, according to Chief Executive Markus Tellenbach. Murdoch figures he can increase Vox's 3% market share to 10%. Rivals, of course, aren't so sure.
The source of Murdoch's strength at the moment is his profitable newspapers and his eight Fox-owned TV stations--which will throw off $300 million in operating earnings this year. Indeed, the seven-year-old Fox network has become the fulcrum of Murdoch's media empire. That's why, in the wake of the FCC victory, News Corp. executives are scurrying for ways to expand. In Washington, lobbyists have been fighting for telecommunications legislation that would allow Murdoch to increase the number of TV stations he owns. "If we're able, we're going to try to buy something out there," says Chase Carey, chairman of the broadcasting unit.
The reason is simple enough. With the hefty costs of the NFL games, the Fox network barely broke even this year. Additional stations would allow Fox to spread its costs. Moreover, as the world goes digital and viewing choices explode, Fox needs the strongest distribution network possible to cut through the clutter. With racy offerings such as Melrose Place and Married With Children, Fox appeals to the young viewers advertisers crave. Boosted by football, ratings rose by 7% this year. And Carey hints that Fox will bid on the Sydney Olympics in the year 2000. "We've got the money to be opportunistic," he says.
While opportunism is, in many ways, Murdoch's religion, he insists he has become more cautious in its practice. Time will tell how cautious. Meantime, rivals will watch his every move. "Anyone who bets against Murdoch is making a mistake in my point of view," says Viacom's Redstone. Especially when he has a few billion burning a hole in his pocket.
An Octopus From Down Under
News Corp. holdings, 1995 sales*
Britain: The Times, The Sunday Times, Today, The Sun, News of the World
U.S.: The New York Post
Australia: 100 papers including The Australian, Daily Telegraph Mirror, and The Herald-SunBy Ronald Grover and Michael Oneal in Los Angeles, with Paula Dwyer in London, Dave Lindorff in Hong Kong, and Mark Lewyn in Washington