Shift to Digital Content: A Right Move by News Corp

News Corp. (NASDAQ:NWS) competes with other media conglomerates like Disney (NYSE:DIS), CBS (NYSE:CBS), Time Warner (NYSE:TWX), Viacom (NYSE:VIA) and New York Times (NYSE:NYT) in the media and entertainment business.

Newspapers (Wall Street Journal, New York Post, The Times, and others) account for close to 15% of News Corp’s stock value by our analysis. The Wall Street Journal (WSJ) in particular has a strong, loyal, educated and affluent user base in the U.S. and globally. The premier business & financial newspaper is taking steps toward the digital platform, given the declining U.S. newspaper national print advertising market and increasing consumption of news & analysis from the Internet spurring growth in both online & mobile ads.

News Corp. is making the right moves of late. It recently launched a digital magazine, Daily, designed specifically for the iPad, and is also recording higher paid subscription through mobile devices and tablets. While we anticipate WSJ’s advertising revenues will increase to $2.8 billion by the end of our forecast period, Trefis members predict the ad revenues will reach $3.15 billion.

We currently have a Trefis price estimate of $23.21 for News Corp’s stock, about 35% above the current market price of $17.25.

WSJ Stands Still Despite Economic Downturn, Declining Print Ad Market

News Corp’s ad revenue growth was significantly subdued in 2007-2008 due to the economic downturn. Coupled with this, the U.S. newspaper national print advertising market has also declined steadily – from $7.5 billion in 2006 to $6 billion in 2008. However, WSJ has been able to hold its ground despite these headwinds. According to the Audit Bureau of Circulations, while overall circulation of newspapers in the U.S. has declined, the Wall Street Journal was actually able to increase its distribution by almost 2% during the six months ended Sept 30, 2010. ^[1]

WSJ enjoys strong market position and high credibility among serious, educated financial news subscribers. In addition, WSJ’s subscriber base is affluent. According to a report, the average annual income of an employed WSJ subscriber is more than $200,000, and about 56% of these subscribers represented top management in their respective firms. ^[2]

News Corp to Benefit Significantly from its Move to Digital

News Corp is trying to keep pace with competitors such as Time Warner, which has moved to offering subscriptions to its magazines like Sport Illustrated and People on connected devices. News Corp recently launched a digital magazine “The Daily,” specifically designed for Apple’s (NASDAQ:AAPL)  iPad and is optimized for tablet viewing. This offering includes two subscription plans (weekly and yearly), interactive pictures with 360 degree images, sharing of information on social networking sites and recording of audio comments. (See: News Corp Launches Digital Magazine, but Stock Still Depends on “Old Media”)

We believe that the shift to online platform will benefit News Corp immensely in the future. According to PricewaterhouseCoopers’ Global Entertainment and Media Outlook for 2010 to 2014, the Internet is set to overtake newspapers as the second-largest U.S. advertising medium by revenue behind television. The report also forecasts that the online ad business is expected to reach $34.4 billion in 2014 from $24.2 billion in 2009, and that mobile advertising market in North America will increase 4 times from $414 million in 2009 to $1.6 billion in 2014. ^[3]

News Corp is definitely doing the right thing by digitizing its content, given the increasing broadband penetration and rising consumption of online news. Making news available through several media like mobile devices and tablets means more advertising revenues for the news media conglomerate. WSJ recently announced that it added 200,000 paid subscribers through mobile devices like the iPad and the Kindle. ^[4] Subscribers have to pay $4 a week to read WSJ on their iPad. Assuming that half of these subscribers are iPad users, News Corp should be making more than $1.5 million a month only from WSJ subscription on the iPad. A larger number of mobile-device subscribers also means a vast potential of online advertising revenues for WSJ.

Our complete analysis for News Corp’s stock is here.

1. Newspapers in 2010: Another Bad Year, But the Bleeding Slows, thewrap.com, Dec 19, 2010 [↩]
2. The Wall Street Journal Audience, wsjmediakit.com, revised on Dec 29, 2010 [↩]
3. Internet Is Set to Overtake Newspapers in Ad Revenue, WSJ.com, July 15, 2010 [↩]
4. The Journal Adds 200,000 Mobile-Device Subscribers, WSJ.com, March 11, 2011 [↩]