A cable network on a shoestring

NEW YORK (Fortune) -- As audacious as Rupert Murdoch's $5 billion offer for Dow Jones was, News Corporation's internal plans to launch Fox Business Channel to go head-to-head with CNBC are surprisingly cautious.

Or maybe it's not so surprising: After all, the company set up Fox News on a relative shoestring in 1996 and the network now trumps its much better-financed rival CNN in the ratings. (CNN is one of the partners in CNNMoney.com.)

The company plans to spend $100 million in initial capital for the business channel, which is slated to hit the airwaves in October, a News Corp. insider told Fortune. At the same time, the company is in the process of hiring about 300 people to staff the network. (The company has never released these figures - it has only said it plans to launch the channel in the fourth quarter of 2007.)

For News Corp. (Charts, Fortune 500), $100 million is merely a rounding error, and the outlay suggests the company is wary about wading too deeply into cable business news, an industry that has seen such high-profile flops as CNNfn and the Financial News Network, which CNBC purchased out of bankruptcy in 1991 for $115 million. (Roger Ailes, the Fox News boss, was said to be initially skeptical about launching a competitor to CNBC).

"$100 million is not really much to launch a typical cable network," says Derek Baine, an analyst at Kagan Research. By comparison, News Corp spent $400 million to launch Fox News, and it took about five years to break even.

Baine projects that Fox will endure about $107 million in losses from Fox Business Channel before breaking even in four years. The relatively small investment is made possible in part because the channel will utilize much of the infrastructure of Fox News - the company doesn't need to invest heavily in real estate and building fancy studios. It already has that.

This caution, however, would turn in to full blown ambition should News Corp. prevail in its bid for Dow Jones (Charts).

The day the Dow Jones offer became public, on May 1, Murdoch told Fox News' Neil Cavuto, "we just want to have a business channel that lives up to the quality and traditions of The Wall Street Journal, and we think that if we can do that, we will do very well."

While News Corp. envisions leveraging the Wall Street Journal brand and journalism to buttress the new cable network, how much they would be able to combine the two entities is something News Corp. lawyers and executives are debating. Dow Jones and CNBC currently have a deal in place through 2012 in which CNBC pays an undisclosed fee for access to Dow Jones' content and its reporters for on-air commentary. That deal is exclusive - meaning, for example, that Journal reporters cannot appear on another business network.

News Corp insiders believe they could use the Wall Street Journal name for the new channel, but acknowledge they probably wouldn't be able to have Journal reporters appear on air until the deal expires in 2012.

Beyond that, the CNBC/Wall Street Journal deal has significant wiggle room for News Corp, according to a source who was involved in negotiating the pact. "There's no real bite in terms of how much resources The Wall Street Journal has to contribute," said this person. "Murdoch couldn't take those resources and devote them to his own franchise but he could wean them from CNBC. He could create deadlocks for Dow Jones and CNBC."

Many observers have pointed out that Wall Street Journal reporters appear less on CNBC than in the earlier days of the deal - meaning that the real threat to CNBC from a Dow Jones-News Corp. marriage is not the potential impact on CNBC and the Journal's partnership but on the broader implications of a Dow Jones-News Corp. tie up and what it could mean long-term.

"It depends upon whether they reposition it with the WSJ name," says Baine. "I think if they do, ad sales would ramp up faster because this is such a powerful brand name and they can probably cross-sell ads across the different platforms."

In a report earlier this year, Baine estimated that the Fox Business Channel will cost cable operators 10 to 15 cents per subscriber each month - or less than half what CNBC charges. "We believe this puts CNBC in jeopardy of losing subscribers as contract renewals take place, particularly if FBC can gain some ratings traction," he wrote.

That traction would get a significant boost if Dow Jones winds up in Murdoch's hands.