News Corp's healthier pallor

A year ago, experiencing what he described as the worst economic crisis in News Corp's history, Rupert Murdoch remained optimistic about the prospects for his giant media conglomerate once the advertising recession ended. Today that optimism was largely, although not entirely, validated.

News Corp's second quarter results, if a $US500 million settlement of a law suit is excluded, showed hockey stick-like rebounds in most of the group's key divisions, which excited the market.

The rebound was most notable in News' film and cable network programming businesses but also featured an impressive performance from its Wall Street Journal properties, where higher advertising and circulation revenues and lower costs helped the broader newspaper division increase operating income by 30 per cent.

A year ago, however, Murdoch's optimism was qualified. While he expected advertising revenues to come back strongly once the recession eased – because it always came back stronger, he said – he also made it clear he wasn't predicting a return to record levels when this recession ended.

That was interpreted as a reference to the structural shifts occurring within the newspaper industry in particular, but also in free-to-air television, as a result of the growth in online media and the fragmentation of television audiences.

News' television revenue growth was modest and earnings equally so. The newspaper division's performance was boosted not only by the performance of Dow Jones but by favourable currency movements and to the significant cost-cutting News embarked on a year ago.

The UK papers experienced flat advertising revenues and falling circulation revenues, although the cost-cutting did enable them to improve earnings. The Australian papers experienced a 5 per cent fall in advertising revenue and a 3 per cent decline in circulation revenues in Australian dollar terms. Second quarter earnings were lower than in the December quarter last year when the financial crisis was worsening.

While the group's recovery is impressive, particularly when so far it has had all the launch costs of the blockbuster Avatar but only a trickle of the record flood of revenue it is generating, the patchy performance of the newspapers suggests that the pressure isn't easing for the beleaguered industry. The Wall Street Journal is a unique property.

The advertising recession has exacerbated and accelerated the structural shifts in the media landscape that have destabilised and indeed shrunk the sector. The UK and Australian experience would suggest that while the economic cycle might be improving there isn't the usual leveraged recovery in advertising revenues and newspaper earnings yet underway.

News Corp remains committed to shifting the online versions of his newspapers to subscription models (see News Corp begins rollout of pay-wall, February 3 and Murdoch gains on Google, November 23, 2009). However, the detail of the models and the timing of their introduction remains vague, although Murdoch did refer to "the coming months" when talking about the roll-out of pay walls for News' sites.

The declines in the circulation revenue generated by his UK and Australian papers might be regarded as evidence that newspapers need to charge for their digital versions to both slow the drift of audiences online and replace the income streams lost when they do migrate. The erosion of paid circulation, however, might also represent a broader disinclination to pay for content, given how freely news and information is now available and accessible online.

The newspaper groups are between a rock and a hard place. Their traditional audiences and revenue bases are steadily and probably irreversibly shrinking but charging for digital content is to risk reducing the potential audiences and revenue streams of their growing online products.

The New York Times recently announced plans to erect a pay wall, but won't do so until sometime next year. With the exception of the Journal and the Financial Times, both highly specialised properties with peculiar brand loyalty, none of the major newspaper groups is rushing to be the first to introduce pay walls for general content.

Apart from the reality that there will continue to be competing free content from other major commercial media groups – The Guardian, for instance, remains very committed to not charging for access to its site – there are also highly authoritative publicly-funded websites producing comparable content.

The big publishers are waiting for Murdoch, who's prone to bold and sometimes industry-transforming moves, to go first. When and how he does that could determine the fate of newspaper groups around the globe, including his own.

The fact that newspapers are, even after the acquisition of Dow Jones, a relatively modest proportion of News Corp's resurgent earnings base does, of course, mean that he can more easily contemplate experimenting than can less diversified rivals. That won't , however, help make the launch of a roll-out of the subscription model an easy decision.