Instructors Manual

CASE TEACHING NOTES

The News Corporation

Julie E. Cooper and Aidan McQuade

1. Introduction
This case provides the opportunity for students to examine the corporate logic of an organisation from multiple perspectives, both rational and non-rational. On one hand the business logic of an organisations strategic development may be considered from the rational perspectives of potential value adding roles of the corporate centre, or responses to changes in the external environment in the case of NewsCorp particularly the effects of technological or political changes. On the other hand it may be considered in the light of the attitudes, values and resulting strategies of the key management officers of the business: In the case of NewsCorp the dominant personality of Rupert Murdoch profoundly influenced the corporations strategic development.

2. Position of the case

The case may be used to cover a number of issues in Exploring Corporate Strategy. Three major uses are recommended: first, to consider the development of corporatelevel strategic decisions and the environmental context within which they take place; second, to show how the values, aspirations and style of a dominant personality influenced this development; third, and perhaps most significantly in this case, to consider any tensions that exist between the first rational perspective on strategy and the second much more subjective approach which some of Murdochs decisions demonstrate. Students should therefore have a good understanding of the basics of strategy before address the issues raised in this case.

3. Learning objectives
Students should draw the following lessons from the case: That the corporate centre can fulfil a range of logics for the subordinate businesses, not all in the best interests of the business, and not all rational, business logics (chapter 6); An understanding of the processes, including human intent and environmental understanding, that contribute to emergent strategy in a business; An appreciation that it is not only the desire for profits that lead to business growth.
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4. Teaching scheme
The suggested questions may be discussed in plenary sessions, with or without prior small group working, or used for group presentation purposes, with or without assessment, or as written assignments.

5. Questions for discussion

1. Identify and summarise the key stages of development of NewsCorp as depicted in the case. 2. (a) What environmental changes during the period of the case have created opportunities for NewsCorp? (b) What impact have these environmental changes had on the time-based media industry? 3. What corporate strategies have NewsCorp adopted during the period of the case? 4. What role does Rupert Murdoch play in the strategic development of NewsCorp during the period of the case? 5. What are the key unresolved issues for the future of NewsCorp?

6. Case analysis
6.1 Identify and summarise the key stages of development of NewsCorp as depicted in the case The case covers the development of the media company The News Corporation (NewsCorp) for the period 19802004. This initial question is designed to re-familiarise students with the case and open it to more insightful discussion. At the beginning of the case (i.e. by 1980) NewsCorp was established as a multinational print and time-based media business. The company had interests in Australia, the UK and the USA in newspapers, periodicals, and free-to-air television broadcasting. Thus it had both content and distribution expertise. At this time the print-base media interests were the dominant contributors to revenues and profits. During the 1980s the company expanded all its media interests but the case emphasises: US time-based media expansion into television broadcasting and film, in areas relating to both content and distribution with the purchase of Twentieth Century Fox and Metromedia

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UK time-based media expansion into television broadcasting (distribution), with the establishment of Sky Television. Financial difficulties at the beginning of the 1990s. Further global expansion in the 1990s in the area of time-based media with television broadcasting (distribution), e.g. STAR Television. By the end of the case, the time-based media interests of the company and its US interests were the dominant product and geographic contributors to revenues and profits. STAR TV had just become profitable indicating the growing potential of the Asian market and NewsCorp had, after a number of failed attempts, obtained a satellite distribution channel in the USA. Rupert Murdoch had been chief executive throughout the period of the case. James Murdoch, architect of the success of Star, had just been appointed CEO of BSkyB stimulating shareholder anger and leading to renewed speculation regarding the future of NewsCorp, particularly relating to Ruperts succession.

Despite his periodic claims not to have had a strategy, the growth of NewsCorp during this period may be seen to be a realisation of a clear strategic intent of Rupert Murdoch, which he implemented over a period of years as the opportunities have presented themselves. Sometimes the opportunities have been easier to grasp than others, and Murdoch appears to have risked the whole company on more than one occasion. But occasional recklessness does not contradict the impression that he has had the patience to focus on a long-term strategy, and a sufficient understanding of both NewsCorps competences and development of the contextual and competitive environments to realise the strategy. 6.2(a) What environmental changes since 1980s have created opportunities for time-based media businesses? Time-based media companies, i.e. those that work in broadcasting, such as radio or television, or film, currently find themselves operating in dynamic and complex environments. These have created particular opportunities for such companies, but also pose particular challenges. The opportunities for time-based media industries have been influenced by all of the traditional PEST factors. The following can be discussed and supplemented by information from the text, previous case studies and discussions. Evidence for some of these points can be found in the case.
Social change

In the Western world a postwar (i.e. post 1945) trend relates to the increase in leisure time as the working week and year shortens. A more recent trend relates to increasing individualism in relation to leisure activities. This has resulted, for example, in
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increased time spent watching television. A further recent trend at the global level has been the convergence of certain markets. This has implications for the demand for timebased media products.
Economic change

In the Western world the postwar trend of increasing disposable income offers the possibility of a wider range of goods and services and luxury items gaining mass-market appeal. While led by the Western world, this is a global phenomenon. This has implications, for example, for the sale of time-based media distribution hardware such as digital television technology and the sale of premium packaged content.
Technological change

With respect to time-based media industries, technological change has had a profound effect on the industry. This may remain the case into the foreseeable future but other factors such as the growing political cohesion of the European Union or the need to placate the Chinese government to maintain access to that market may emerge as more significant in years to come. At the beginning of the case television was dominated by terrestrial television television distributed via the transmission of an analogue signal from ground broadcasting stations. The result of technological changes over the period in question is an enormous increase in the amount of content that can be distributed to the end recipient and the possibility that national oligopolies could be bypassed.
Political change

The impact of technological changes may have been lessened had it not also been for the political manifestation of economic liberalism in the Western world since the 1980s. This has resulted in significant deregulation of time-based media industries, with rules on the cross-ownership and foreign ownership of media assets being relaxed. The issue of the regulation or deregulation of information and entertainment is also one that other countries around the world have begun to address. Technology has been the key driver of change within the industry, providing the complexity currently faced. However, without political deregulation the rate of change would have been much slower. Whether this political deregulation continues remains to be seen. Certainly the European Union, as a whole, has not been such a whole-hearted adherent of deregulation as the USA. With the increasing size and political coherence of Europe the trend for deregulation may yet be reversed. In Asia while technology has allowed for a narrow casting strategy that has led STAR into profits, the company has also had to address particular political and cultural sensitivities in China and India two huge growth markets which technological advances alone cannot overcome. All three of these sets of political problems have been met with broadly political responses by

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NewsCorp from offering censorship rights to NewsCorp content to the Chinese government, to campaigning against the political convergence of the European Union. Absent of clear strategic intent and understanding of the core competences of the business, environmental scanning can be an interesting but purposeless exercise. Students should be encouraged to conduct their own environmental scanning exercise and to consider what potential threats and opportunities exist for NewsCorp in the external environment. 6.2(b) What impact have these environmental changes had on the timebased media industry? The general environmental changes identified above and the key drivers therein have had a particular impact on the time-based media industry. These presented opportunities for increased revenues but brought with them new complexities and risks to the market. Figure 1 presents a simplified approach to discussing the problems that have arisen and the industrys response. Figure 1

Impact of environmental changes

Generic industry objective

Corporate strategies

Corporate activities

Industry effect

Increased demand for content Increased costs Increasing choice of distribution system Spread costs over as large a revenue base as possible

Vertical integration

Joint ventures and partnerships Acquisitions and mergers

Globalisation Consolidation Convergence

Horizontal integration

Subscriber acquisition

First, for companies traditionally involved in acquiring and packaging content, the increased number of television channels has resulted in a fragmentation of the audience, making it harder to reach. At the same time it has resulted in a dramatic increase in the demand for content. This has led to contents becoming increasingly more expensive to produce or purchase (with key elements and skills being in short supply). With fewer people watching each channel, and with content costs rising, margins have weakened considerably. However, while it is unclear which system of distribution will dominate, all systems have to be serviced. For companies traditionally involved in distribution, the development of competing systems has again increased the cost of acquiring good or unique content, as there are now more competing buyers. Those companies that have created the new systems of distribution have had to invest significant sums of money to do so. All in all, the time308
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based media industry has seen a significant increase in its costs in all areas of the industry value chain. Access to the US market has been seen as fundamental to ensuring profitability for any global time-based media organisation, as it is only through success in the US market that a company could obtain the economies of scale necessary to succeed world-wide. The generic industry response has been to look to spread those costs across as large a revenue base as possible. The case with respect to NewsCorp details the three general corporate strategies adopted by companies in the industry. These strategies are not mutually exclusive, and their adoption, emphasis and change over time for any company depends on where in the industry that company is located with respect to its products, markets and position in the industry value chain.
Vertical integration

Vertical integration allows for further control of the industry value chain, resulting in less of the revenue from the value chain leaking out of the company. NewsCorp has moved backwards and forwards along the supply chain acquiring both content providers and various means of distribution towards this end. Different competences are required in distribution and in content provision, which can create problems, such as loss of focus, for an organisation. The expansion of businesses in either of these areas can create problems for the corporation. For example, expansion of distribution channels, aside from the up front costs, increases the demand for content to attract a subscriber base. Expanding content production capabilities increases demand for distribution channels. The shifting focus of NewsCorps strategy over the years may be viewed as an effort to manage this tension in the corporation.
Horizontal integration

This strategy broadens the value chain and would be combined with aggressive crosspromotion of corporate products or services. The promotion of NewsCorp products and companies through other NewsCorp companies is an example of this.
Subscriber acquisition

The fragmentation of the time-media market has perhaps made it a less attractive medium for advertising. BSkyB revenues, for example, break down roughly 70:30 subscriber:advertising. This means also that competition for subscribers becomes fierce as the distribution companies seek to increase their subscriber base. Successful strategies towards this have demanded unique or quality content, hence fuelling pressure for vertical integration backwards along the supply chain to acquire content. The demand for content has pushed up the price of content, particularly premium sports, and this has led to joint ventures and partnerships, particularly on content acquisition. This has also led to increased globalisation in the search for subscribers and economies of scale. There has also been increasing consolidation, as only very large companies can
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provide the balanced portfolio needed to survive, to offset costs, reduce risk and achieve economies of scale. Finally, the industry has witnessed increasing convergence. Markets are converging as the Western supply of content is distributed to a global market. Whether this trend of convergence continues remains to be seen, as NewsCorps Asian operations have begun to customise their operations with increased indigenous Asian programming and submission to political controls and cultural sensitivity in India and China.1 6.3 What corporate strategies have been adopted by NewsCorp? This issue is a central theme to chapter 6 of Exploring Corporate Strategy, and it may be sensible to break the question down into the same constituent elements as the chapter does. However, this has been done in reverse order.
What is the extent and type of diversity undertaken by NewsCorp?

During the period of the case NewsCorp became a highly diversified media company. From its initial Australian print-media base the company undertook geographic diversification via print-media acquisitions in the UK and the USA in the 1970s and 1980s. Horizontal integration followed in the 1980s in the USA with the acquisition of timebased media businesses (20th Century Fox and Metromedia). Within the time-based media business vertical integration has also occurred with the acquisition and/or development of both content (20th Century Fox) and distribution systems (television stations, BSkyB). The 1990s have seen the globalisation of these time-based media interests (STAR, Sky Italia) and the first moves towards the convergence of the time-based media industry and the communications industry (Open, TIVO). This has been achieved increasingly via joint ventures and strategic stakes. As a result NewsCorp has become a vertically and horizontally integrated global media business, capturing revenues at each step of the value chain. Of importance also has been the desire to obtain prime mover and gatekeeper status to create barriers to entry to competitors. As discussed earlier, this growth strategy was supported by the environmental opportunities provided by deregulation of broadcasting markets and technological change with respect to the distribution of content.
What is the logic of the mix of businesses in NewsCorps portfolio?

From a financial point of view, the principal sources of revenues in 2003 are from its time-media operations. Establishing these operations as such required a careful balancing of investment in both content and distribution, particularly in the USA. The position of that market in the 1990s meant that success there was vital in order to

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establish the sort of economies of scale that were necessary to allow for global expansion. Over the last decade time-based media have surpassed older NewsCorp businesses, particularly print media, in financial importance. The more traditional media businesses in NewsCorp provided the financial basis for the corporation to make the significant and long-term investment in content, distribution and subscriber growth required. Part of the problems for NewsCorp in the early 1990s related to this balance being upset when economic decline affected the returns from print-based media assets, requiring greater outside funding at a time when banks were suffering liquidity problems. However, considering the mix of businesses purely from a perspective of financial logic misses a central aspect of what NewsCorp is about: news. A significant part of the logic of NewsCorps mix of businesses may be related to not only horizontally and vertical integrating in order to increase revenue streams to the business, but also horizontally and vertically integrating to ensure dominance of the news agenda across wide swathes of the world. The print media retain an importance in this that arguably exceeds its importance in revenue generation for the corporation. The Times in Britain, The New York Post in the USA, The Australian, and the South China Morning Post, while perhaps no longer at the most respectable end of the newspaper spectrum (some retain a scurrilous reputation), remain important titles in journalism. Print-based media retain a central role in setting news agendas that even rivals must follow.
How does the corporate centre seek to add value?

There is evidence that the corporate centre may play a number of roles in NewsCorp: Portfolio manager. Identifying and acquiring under-valued assets or businesses and improving them has been a role of the centre, e.g. early UK and US newspaper acquisitions and Metromedia television stations. The financial control procedures in place, the small size of the centre and resultant individual business autonomy and the importance of the balance of the portfolio also indicate this type of role for the centre. However, NewsCorps centre is not a pure, and probably not predominantly, portfolio manager: it does not act on the basis of profitability analysis and does not speedily divest itself of under-performing businesses. It is because of factors such as this that some perceive that the principal motivation of Murdoch is not purely rational, such as the attainment of profits, but is also coloured by a desire to build a corporation as an end in itself. Parental developer. From the earliest days Murdoch had the reputation as someone who knew intimately his businesses, particularly in print media. His particularly ruthless approach to business organisation and marketing was central to making his earlier print-based businesses such a success. With his move into time-based media the pattern was repeated with the launch of Sky a particularly extreme example of a sink-or-swim approach. Skills developed in the corporation from this experience may be discerned in the development of Fox and STAR.

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Synergy manager. This is the role of the centre as claimed by Rupert Murdoch. The logic is that vertical and horizontal integration and globalisation will enhance value across all the business units. NewsCorp may achieve this in a number of ways: for example, the common sourcing of finance, distribution of corporate debt across the subordinate businesses, economies of scale (television programmes go to Fox television stations first, then global, then syndicated, then video and DVD, with merchandising spins-offs for the most successful ones), common skills and competences across the businesses (e.g. the understanding of products, brands and markets built up in BSkyB can be leveraged across all NewsCorps satellite distribution systems). However, given the size of NewsCorp and the limited personnel at the centre, to what extent can the centre manage such synergies rather than merely hope that they materialise? Visionary/Empire-builder. This may well be the role of the centre, given that to all intents and purposes the centre is Rupert Murdoch. In a changing and challenging world Rupert Murdoch concentrates on the wider picture. This fits with the small centre and fairly autonomous nature of the business units. The logic of the multinational is the logic of Rupert Murdoch, which itself is opportunistic and visionary.

Students should be asked to consider which of these roles they regard as predominant in NewsCorp. In purely economic terms the question to consider is whether these strategies are supported by any business logic in the traditional sense of adding value and providing increasing returns to shareholders. For example, finance theory suggests that diversification as a strategy is something that shareholders themselves may be more efficient at doing through their portfolio of shareholdings, than management may be through diversification. The shareholders of BSkyB are unlikely to be happy with the burden of corporate debt that the business has been compelled to shoulder. However, the attitudes and values of Rupert Murdoch appear, on occasion, to run contrary to rational business logic. Criticisms of the likes of Ted Turner, that Murdoch wants to rule the world, may be overstating things, but his periodic gambling of the company on specific business deals suggests very strongly that he is driven by something more than the clear cut focus on profits. This drive on occasion runs contrary to rational business sense. While much of NewsCorps strategic development was opportunistic, at key points Murdoch saw with greater clarity than any of his competitors the strategic imperative to create a global media corporation. His bootstrapping of BSkyB may now be regarded as a turning point shifting NewsCorp from being primarily a print-based operation to one that is heavily time-based now. Murdochs recognition of the importance of distribution and the US market during the 1990s when competitors were still focusing on content is another. These strategies were generally facilitated by a judicious conjunction of three elements of strategic management the values, objectives and strategic understanding of Rupert Murdoch identifying opportunities as they emerged, the environment in which
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NewsCorp operated offered the political and commercial opportunities for them, and the profitability of these opportunities and the support of the debt market provided the resources to secure such activities. 6.4 What are the key unresolved issues for the future for Newscorp? A number of issues can be raised here, and a brainstorming session may produce most of, if not more than, those given below. What can usefully be discussed is the extent to which these are short-, medium- or long-term issues, and the extent to which they are fundamental or not to the future existence of NewsCorp.
Content/software issues

Globalisation aspects: The case highlighted some political, cultural and commercial problems in parts of Asia. Further problems may arise. For example, all that Rupert Murdoch is good at (fast, opportunistic decision-making, ruthless exploitation of competitive half-openings, willingness to work with any culture) runs counter to Chinese and Japanese business culture, which values relationships, consultation and controlled competition. Here the choice of joint-venture partners will be important. NewsCorps ability to create a coherent global strategy in such culturally diverse areas will be severely tested. In this respect one can include Latin America as well. Market fragmentation aspects: Can NewsCorp create programming that will enable it to acquire/maintain a distinctive position in the multi-channel television market? Where NewsCorp does not control distribution, good/unique programming is essential. So is control of distribution (hardware) to be the key to increasing revenues?

Succession issue

This is a major issue given the role that Rupert Murdoch plays in the multinational. If the core logic of NewsCorp relates to realisation of Murdochs own personal media vision then it is possible that no successor will share such a vision. Instead a successor may focus on more traditional business issues such as maximising profits rather than growth, and be much more conservative in business dealings. NewsCorp under any other successor may become a very different beast to the corporation built by Rupert Murdoch. 6.5 What role does Rupert Murdoch play in the development of NewsCorps corporate strategy? As Chairman and Chief Executive and controlling shareholder, Rupert Murdoch plays the most important role in setting the multinationals corporate strategy. The business has no strategic planners and few other long-term key executives, save for Murdoch. It

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is no exaggeration to say that the companys corporate strategy and Murdochs personal strategy are the same. His personal corporate strategy for the business is growth, and this is the route that the business has taken during the period of the case. He offers the multinational vision and political acumen, commercial skills and knowledge, and an ability for taking advantage of opportunities. However, while having a personal corporate strategy for the business he also has a personal strategy for himself that of maintaining control of the multinational. This he has achieved by maintaining his managerial and ownership position and by the particular financing strategies that he has implemented.

7. Some comments on finance and financing strategies

The financing of NewsCorp has been influenced by two particular issues that we have already discussed: (a) the need for substantial sums of money to implement Rupert Murdochs corporate strategy of integration and globalisation in the highly competitive time-based media industries, and (b) the personal strategy of Rupert Murdoch to maintain personal control over the multinational. From examination of his business dealings a number of elements in his financing strategies can be discerned. These include a preference for long-term debt funding rather than equity and maximisation of retained earnings. As is noted in the case study the debt-funding approach threatened catastrophe for Murdoch on more than one occasion, particularly when the mode of financing was insufficiently sophisticated to meet the demands of such a complex and globalising business. Recent events suggest that approaches to maximisation of retained earnings have also been superseded by the demands of the current business environment. In the past NewsCorp had traditionally adopted a very aggressive tax management strategy, for example in incorporating profitable businesses in countries with low corporate tax rates (Bermuda, British Virgin Islands, Caymans, Netherlands Antilles), while loss-making business are in high tax areas and so attract tax relief. The result has been that NewsCorps rate has averaged under 8% in the 1990s while Disneys, Time Warners and Viacoms have averaged about 30%. NewsCorp has recently revised its corporate accounting policy, paying more tax in the process, and declared its intent to change its incorporation from Australia to the USA. In part this may be in response to worries about the changing climate of business regulation brought about by recent corporate scandals that were in part the result of dubious accounting practices. This move has meant that the company has had to change its accounting practices and this in turn led to the posting of losses in 2001 and 2002, in part as a result of costs associated with the changeover. While this may mean that
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current published NewsCorp accounts are a transparent representation of the state of the business, earlier published accounts are much less transparent and hence must be treated with care. NewsCorp has also traditionally limited its dividend payments. Rupert Murdochs corporate strategy is growth rather than profitability, and as a controlling shareholder he can force acceptance of a low dividend policy on other shareholders. Again this appears to have been subject to some revision recently with the announcement of dividend payments to BSkyB shareholders in 2004. This, however, may only have been a temporary means of mollification in response to their anger at the appointment of James Murdoch to the position of CEO. As a final comment, review of many of NewsCorps business dealings emphasises that that the guiding philosophy behind the financial management of the business has been less to do with maximising profits and much more with facilitating expansion, even at the risk of the firm. This non-rational approach to corporate management is one of the most intriguing things about NewsCorp. Notes An alternative approach to considering this question (or a further question that could be posed to consolidate students understanding) would be to ask the following question: What is the logic behind the merger of Time Warner and AOL or Vivendi and Seagram? Given the analysis above the response would be: A reflection of the multiplicity of channels available and the need for content resulting in vertical integration via the acquisition of content and distribution platforms. Seagrams Universal Studios television and music interests complement Vivendis pay-TV arm, Internet assets and mobile expertise. Time Warner acquires AOLs distribution outlet and AOL acquires Time Warners content. AOL gets one of the richest streams of content in the business. Time Warner gets the chance to offer its wares on-line. This offers the possibility of a tremendous amount of crosspromotion. Acquisition of an increased subscriber base for cross-promotional purposes and maintenance of this base through good/unique content. Globalisation to obtain subscribers, again allowing cross-promotion, content acquisition and growth in subscriber base. Access to technology. For example, with Time Warner and AOL, each sees the other providing the technology that provides a crucial element it lacks in the content distribution link. AOL buys into Time Warners content and subscriber base and Time Warner gets access to broadband high-speed Internet access through cable TV or telephone lines, hopefully covering the company in the unresolved area of where will subscribers go for content the TV or the computer?
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Asset stripping to pay for acquisitions a point not previously mentioned and relevant to the Vivendi/Seagram merger. Non-media-related companies serve as a means to offset debt: e.g. Seagrams drinks business and Vivendis environmental businesses will be sold off or spun off to pay off large amounts of debt involved in the merger. Reduction in competitive costs. Consolidation, mergers and acquisitions are often the only way a company can become big enough to absorb the losses of managing the current change in the media industry. Defensive the bigger you are the more difficult it is for a rival to swallow you. A reflection of convergence. The merger of Time Warner and AOL reflects the fact that old media and new media no longer exist in mutually exclusive spheres: so too with content and distribution.

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