News Corp’s Digital Push Via Youtube Is Smart But Adds Little Value

News Corp (NASDAQ:NWS) has struck a deal with Google (NASDAQ:GOOG) under which the media company will allow viewers to buy and rent movies and TV shows via Google’s Youtube and Google Play. ^[1] This move is different from striking a streaming deal with companies such as Netflix (NASDAQ:NFLX) since the aim here is not to monetize older content, but to push the sales of newly produced content in order to make up for the DVD sales decline. Nevertheless, the incremental value is low given the low contribution of movie and TV show production business to News Corp’s value.

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Youtube’s Wide Reach Makes It A Good Distribution Platform

We estimate that Youtube had close to 560 million monthly users by the end of 2011, and we expect this count to increase to roughly 620 million by the end of this year. A significant proportion of this user base resides in the U.S. due to the high Internet penetration rates and access to high broadband speeds. This means News Corp’s digital content can be distributed instantly across millions of Youtube users in the U.S. and so easy access to viewers is the bright side of this deal.

The flip side is that the large scale distribution will not automatically translate into higher sales. Most Youtube users are accustomed to free content and so unlikely to readily pay for content. Even though the content will be distributed to well over 100 million people in the U.S., the actual number of people who would be paying customers is quite low.

Nevertheless, the move will provide great visibility to News Corp’s content and present some additional marketing opportunities for the company.

Incremental Value Add Is Likely To Be Low

We estimate that movie and TV show production and distribution business constitutes roughly 20% to News Corp’s value. This includes revenues from box office, licensing of content and DVD & electronic sales. The deal with Google pertains to enhancing the revenues from DVD & electronic sales. We expect the total revenues from this segment to amount to close to $2.5 billion in 2012, constituting 33% to the total movies & TV show production and distribution revenues. This implies that the contribution of this business is less than 7% to News Corp’s overall value. Therefore, any further enhancement in revenues will bring in only minimal direct incremental benefit.

Nevertheless, the move is critical to maintain the growth of sales of movie and TV content to viewers’ homes. DVD sales have declined over the past few years and media companies are now looking at digital sales to recoup losses. It is inevitable that News Corp and other media companies will make more of their content available online with easy access and affordable prices.

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1. Rupert Murdoch Makes Peace with “Pirate” Google, Starts Selling Movies, allthingsd.com, Sept 18 2012 [↩]