News Corp: Digital Assets Can Help Improve Advertising Revenues
News Corp‘s (NASDAQ:NWSA) publishing business has suffered significant losses in the past few years, primarily due to a secular decline in the publishing industry and the rise of digital alternative sources of news and information. The company’s News And Information Services division has seen revenue declines over the past few years due to lower circulation and subscriptions. As free online information becomes more abundant, customers are becoming less likely to pay for the same information, which has resulted in a decline in the company’s subscriber base. Lower readership has in turn led advertisers to spend less on print ads. We expect this trend to continue in the coming years driven by the growth in Internet penetration. News Corp has been aggressive in acquiring digital assets, which can help it offset some of the declines in the print industry. On that note, we discuss below the trends in the company’s print unit and the growth in digital assets.
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Advertising Revenues Continue To Decline
The News and Information Services segment consists of products and services targeting consumer and enterprise customers, and includes The Wall Street Journal and Barrons. It is an important segment for News Corp, and accounts for more than 40% of the company’s value, according to our estimates. The segment derives its revenues primarily from two sources, advertising and circulation & subscription. Advertising revenues declined from $3.86 billion in 2009 to $3.71 billion in 2013. [1] Free online sources have put pressure on its paid products, while stagnation of print services remains a concern. For the time being, growth in digital publishing has not been able to offset the decline in print media. However, in the long run, digital publishing should help the company revive its advertising and circulation pricing. Accordingly, we expect the revenues to continue to decline in the near term and stabilize thereafter driven by growth in digital sales. We forecast revenues to be around $3.60 billion by the end of our forecast period. An estimated EBITDA margin of 12.40% for News and Information Services segment will translate into EBITDA of close to $450 million, representing close to 30% of the company-wide EBITDA.
Ad spending has been moving away from print industry towards Internet and mobile. While the print industry (newspapers and magazines) accounted for 22% of ad spending in 2014, the share is expected to decline to 18% by 2017, according to a research by Zenith OptiMedia. [2] There is more demand for display ads (desktop) among advertisers and spending on that segment is seeing a rapid growth of 18% annually. While print ad pricing is revised periodically, a growth in pricing won’t be enough to compensate the overall decline in advertising. As a result, News Corp will have to look at digital assets for future growth. The company has been enhancing its digital offerings and launched a new Wall Street Journal app. It also developed Sun+ in the U.K. Beyond news and information services, the company has been aggressive in digital real estate acquisitions over the past year or so.
News Corp Has Been Busy Shopping For Digital Real Estate Assets
News Corp’s digital real estate business stems from its 61.6% ownership of REA Group, which is a digital advertising business specializing in real estate services. It offers digital advertising solutions to help real estate agents sell or rent properties and win new listings. The company generates revenues from advertising and News Corp with such assets will be rightly positioned to benefit from the growth in ad spending on Internet. In 2014, the company spent $950 million to acquire Move Inc., which operates the Move Network of real estate websites and captures more than 35 million monthly visitors making it one of the most trafficked website in the U.S. This acquisition will help News Corp diversify into the U.S., a lucrative market for advertising space. Move Inc. generated revenues of $227 million in 2013 primarily from advertising. News Corp also bought a stake in iProperty, giving the company exposure to Asian countries. iProperty operates websites in Malaysia, Singapore, Hong Kong, Indonesia, Macau, India and the Philippines. REA Group currently holds 17.22% stake in iProperty Group. [3] The company has been closely watching over the startups in India and invested $30 million in another digital real estate asset – PropTiger – in 2014. Also, few weeks back, the company announced yet another acquisition in India – BigDecisions.com – a website that claims to help the consumers make better financial decisions. The steps initiated by News Corp are in the right direction, moving away from a mere print news provider to one big player in digital space with reliable assets such as The Wall Street Journal, The Barrons and REA Group websites. All these digital assets are likely to pay-off for the company in the long run and we expect the digital real estate revenues to be close to $600 million by the end of our forecast period. An estimated EBITDA margin of 49% will translate into EBITDA of around $300 million, representing close to 20% of the overall company’s EBITDA.
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- News Corp’s SEC Filings [↩]
- Global adspend forecast to increase by 4.9% in 2015 claims ZenithOptimedia Report, The Drum, Dec 8, 2014 [↩]
- News Corp’s Acquisition Of Move Inc. Will Diversify Its Digital Real Estate Assets, Trefis, Oct 8, 2014 [↩]