Is Rupert Murdoch Mad?

To Murdoch, this is a world gone mad. It's as if printers and delivery truck drivers had got together to buy out his family newspaper interests. As ever, we believe the real valuation of News Corp comes down to whether you are prepared to back Murdoch's judgment on the big picture. To decide we must try to get into Murdoch's mind and work out whether the old boy's lost his grip - or if he is just showing his usual contrary genius.

Convergence is the catchcry

Investors have criticised Murdoch's lack of Internet interests and an increasing number of them conclude that he's lost it or is too old to understand what's going on. Significantly, the News Corp share price rallied strongly after the AOL/Time Warner merger, perhaps because of a belief that it would force him to change his mind. When it became apparent that no such thing would happen, the share price fell almost as fast as it had risen.

'Convergence', rather than content, is thought to be king. By this the e-Masters mean the way traditional entertainment, news and film industries come together with the transmission vehicle of the Internet to make a new commercial force. Although NASDAQ groupies may not think so, this is not a new concept. Journalism converged long ago with the print industry to give us newspapers, storytelling's convergence with photography became movies and Mozart wouldn't have died so poor if he'd 'converged' with the plastics industry and burnt a few CDs.

Scepticism about this buzzword is, we suspect, behind Murdoch's reluctance to leap into costly Internet purchases. It is not his style. After all, he only invested in a transport company to beat the UK's bloody-minded delivery drivers' union, not for the business itself.

Harsh realities

What Murdoch does understand is that Internet companies have a hard row to hoe to produce a profit. They and their shareholders may be rolling in it now, but the float money will not last forever. Without it, commercial realities will be harsh. Hundreds of small ISP operators with low fixed costs, undercutting the prices of the big boys, could make it a horrible penny-pinching business. Meanwhile, companies with e-commerce operations will book Internet time in much the same way as they book advertising time or freight services - looking for the cheapest option.

Murdoch won't be scratching round for these slim pickings. He will still be in television, newspaper, book and magazine publishing and making movies. He'll be selling material to the Internet companies which, having spent their float money on unprofitable market share, won't have anything left to attract people to their sites. He will have moved into datacasting - although not in Australia for a while - and taking the cream from highly focused advertising. In less developed countries, his conventional television will reach billions of viewers.

This doesn't mean an easy ride for News Corp shares. Murdoch's audacity, the diversity of his interests and their global reach, and uncertainties about the technology sector will keep the News Corp share price as volatile as ever. Long-term, however, we think the biggest risk to profitability is Murdoch's own longevity.

Long live the king

It's unlikely that Murdoch's offspring have anywhere near his talent, News Corp execs are notorious yes-men, and squabbling over the spoils will be like watching cats fight in a bag. His new, intelligent and ambitious young wife, Wendy Deng, introduces a whole new line of potential tension. That aside we are prepared to go along with the Murdoch instincts because it has a logic that makes more sense than any of the new paradigms sprouted by the Silicon Valley Sun Kings. In issue 44, we recommended a hold. Now, we believe you can ACCUMULATE on weakness, but you'll need to learn to live with the volatility.