News Corp: The Murdoch Discount and the Murdoch Premium

Daniel Gross

The burgeoning hacking scandal at the News of the World has brought harsh scrutiny on Britain's tabloid newspaper industry, its police force and the country's British establishment. It has also focused a harsh glare on media mogul Rupert Murdoch and on the stock and future of the company he built and runs: News Corp (NWS).

As the proxy Murdoch has: "been the driving force behind the evolution of the Company from the single, family-owned Australian newspaper he took over in 1953 to the global public media company it is today. Mr. K.R. Murdoch brings to the Board invaluable knowledge and expertise regarding the Company's history and provides strong operational leadership and broad strategic vision for the Company's future."

Because Murdoch owns 40 percent of the Class B voting stock, when shareholders buy News Corp., they're buying Rupert Murdoch. For much of the past two and a half decades, shareholders were willing to pay a premium for that — and were rewarded for it. He made a series of genius moves over the years: starting the Fox television network and Fox News Channel, building up a global satellite television empire, running impressive movie and TV studios. The long-term chart of News Corp. is remarkably impressive.

But more recently, the stock has fared poorly. It's basically trading where it did in June 1998. And long before the hacking scandal metastasized there were signs that Murdoch was harming the brand. Shareholders have suffered from his continuing interest and obsession with newspapers. The New York Post, by most accounts, continues to lose money. The News of the World is now exacting a large financial and legal cost on the company. Murdoch wanted the Wall Street Journal at any cost, and shelled out big for it. In 2009, News Corp. took a $3 billion write-down on its newspaper unit, whose value included the massive price he put on Dow Jones and the Wall Street Journal. The company's $580 million purchase of MySpace in 2005, hailed as a masterstroke at a time, turned into a debacle. It was just sold for $35 million.

As David Carr notes in the New York Times today, Murdoch's willingness to skirt rules and play rough has also caused shareholders harm. Last year, it paid $500 million to settle a lawsuit from a rival in the ad supplement business that it accused it of antitrust violation. The missteps in handling the hacking scandal will exact a financial cost — the company shut down what had been a profitable newspaper. But the missteps can also inhibit the ability of other parts of the Murdoch empire to expand in regulated industries. Last week, for example, News Corp. withdrew from a bid to increase its stake in BSkyB, the lucrative satellite television business in the U.K.

As a result, as Tara Lachapelle, Danielle Kucera and Alex Sherman of Bloomberg report, investors now value the company as significantly less than the sum of its parts:

By valuing each of News Corp.'s businesses separately, the New York-based media conglomerate would be worth $62 billion to $79 billion, estimates from Barclays Plc and Gabelli & Co. show, indicating News Corp. trades at an almost 50 percent discount to its units. 'There's just sort of this generic Murdoch discount, which encompasses the concern that he will make decisions that are not consistent with other shareholder interests,' said Michael Morris, an analyst at Davenport & Co. in Richmond, Virginia.

That's the Murdoch Discount.

By and large, the Murdoch Discount applies only to the stock. There is no sense that the hacking scandal is harming the attractiveness of Fox Television or Fox Searchlight Pictures as a business partner, or damaging its output in the eyes of colleagues. The Fox television network just received 51 Emmy nominations. The closure of News of the World won't affect the willingness of rock stars to appear on American Idol. Agents won't stop sending manuscripts to News Corp. publishing unit HarperCollins. (Disclosure: a HarperCollins unit published one of my books in 2007). And media consumers generally don't lump together different units of conglomerates when they make choices. Conservatives who don't like Rachel Maddow aren't going to boycott CNBC, and liberals who find Sean Hannity as annoying as fingernails grating on a chalkboard don't boycott Fox Soccer Channel or Glee.

But the spreading hacking scandal does pose some danger to certain News Corp. units. And one of them is that some of his companies may have to pay a Murdoch Premium — in other words, they may have to compensate for diminished stature and reputation with money. That's essentially what happened when Murdoch bought Dow Jones from the Bancroft family. (Check out Sarah Ellison's War at the Wall Street Journal for the behind-the-scenes saga.) Murdoch paid a very high premium to convince the Bancrofts to sell out to him. It's likely that another media company, say Gannett, or the Washington Post, would have been able to acquire it for less. And while I disagree with Joe Nocera's column on the decline of the Journal under Murdoch (it has started an excellent Metro section, magazine and weekend sections), the Journal is suffering collateral damage.

Les Hinton, the CEO of Dow Jones and associate of Murdoch for more than half a century, was CEO of the unit that ran News of the World. He just resigned. Meanwhile, the Journal's not-so-aggressive coverage of the case (plus the unctuous defense of News Corp. published on the editorial page) has prompted critiques of the coverage of the Murdoch empire by the Murdoch empire.

But the larger issue is this: The Wall Street Journal, long (and still) the elite business publication in the U.S., never paid top-of-the-market salaries in New York media circles. Newspapers generally had pay scales less than magazines. And like the New York Times, the Journal offered good benefits, long tenure, pleasant working conditions and, above all, prestige. (It's a lot easier getting your phone call returned when you work for the Journal than when you work for Plastics News.)

But other media organizations are stepping up by investing in content (Yahoo!, Huffington Post, CNBC, Bloomberg and Reuters). And in New York in 2011, prestige can't pay rent or private school tuition. Add to it the fact that the Journal is becoming a little less prestigious, in part due to shenanigans elsewhere in the Murdoch empire, and suddenly that outside offer can be quite compelling. In the years since Murdoch took over, the Journal has lost many of its stars to Bloomberg, Reuters, the New York Times, ProPublica and Fortune. The Journal used to get a discount on labor. Now, increasingly, it has to meet the market. And it may have to exceed it.

That's already the case at Fox News Channel and Fox Business Network. Whether you think it's fair or not, much of the rest of the industry sees Fox News Channel as operating in a different sphere: more ideological, less serious, lower standards, more prone to clownish gaffes, and less respect among the people that matter to them. Nowhere has this been more apparent than in Fox's coverage of the hacking affair. (Fox & Friends team recently suggested we move on because lots of companies are victims of hacking. The hosts seemed not to grasp that the News Corp. unit was the one doing the hacking). A gig on Fox is less prestigious than one at CNN or ABC. It's common for people to go from CNN to Fox, but not the other way, Kieran Chetry notwithstanding. Fox News has to pay above-the-market salaries to attract and retain talent. The same holds for Fox Business Channel, though in its case it has to pay a premium largely because its audience is so much smaller than CNBC and other cable news outfits.

And that's where the real risk lies. It's possible that other elements of the News Corp. empire might become less attractive to talent, content producers and business partners because of the hacking scandal. (I doubt Hugh Grant, a victim of the hacking, would be eager to sign on to a Fox deal). The Murdoch Discount now applied to the stock could become a Murdoch Premium when applied to personnel, content and partners.

Daniel Gross is economic editor and columnist at Yahoo! Finance.

Email him at grossdaniel11@yahoo.com; follow him on Twitter @grossdm.