CITIZEN MURDOCH PRESSES FOR MORE The Australian turned American is the first global media master. He built his empire by himself, and he runs it solo. But what does he want to do with all that power?
(FORTUNE Magazine) – THINK OF Rupert Murdoch as the Magellan of the Information Age, splashing ashore on one continent after another. The natives laugh at him, they throw stones, and sometimes they give him gifts. The Australian turned American plunges ahead regardless, a plucky entrepreneur with a knack for buying troubled media properties cheap and turning them around. But Murdoch can no longer be viewed as just an opportunist. No one who knows him has ever doubted that he had a vision of empire. Now the vision is becoming clear. All those conquests around the globe fit into a Big Picture that is causing competitors to rethink their own international plans. At 56, Murdoch has become the first person to control single-handedly a global media empire including newspapers, magazines, TV stations, book publishers, and a movie studio. His Australian-based News Corp., which he runs out of New York, is a strong presence in all major English-speaking markets. Murdoch has rapidly become a force in U.S. magazine publishing, with such highly successful periodicals as the weekly New York and Elle, a monthly fashion magazine aimed at chic young women (Murdoch owns 50% of it in partnership with France's Hachette). He has launched a fourth TV network in the U.S. by combining his Twentieth Century Fox studios with his Metromedia TV stations and some 100 independent affiliates. He is the biggest newspaper publisher in Australia and a major media voice in Britain, and he has a beachhead in Asia. The big question is, What does he want to do with all that power? An eclectic political conservative -- and becoming more so as he grows older -- Murdoch pushes candidates ranging from New York Mayor Ed Koch to British Prime Minister Margaret Thatcher, and such pet projects as the hunt for ex- Nazis in Latin America. But mostly he uses his clout to maximize profits. He flexed his muscle to break Britain's printing unions, fortifying the profits of his papers there. He buys newsprint massively -- 800,000 tons last year -- at substantial volume discounts. He shifts profits, losses, and interest costs among holding companies in various countries to wangle the most favorable tax treatment. He borrows internationally wherever interest rates are lowest. Last year he earned $60 million just trading foreign currencies. Murdoch is poised to achieve what amounts to vertical integration in information and entertainment. He is able to pay the best writers, reporters, and producers more for their material because he can spread the cost over a wider and more diverse base than many competitors. Says Brooks Thomas, exiting chairman of U.S. publisher Harper & Row, Murdoch's most recent acquisition: ''He sees great synergy in media. He believes he will be able to find and develop authors. Their books will be serialized in his magazines and newspapers, made into his movies, and aired over his network.'' He is looking for other synergies. Last year Murdoch and BBDO, the advertising agency, hatched the first global TV buy, a three-year deal in which Gillette reserved time on Murdoch stations in Australia, Europe, and the U.S. at 20% off prevailing rates. The dollars weren't huge, coordinating branch offices in different countries was difficult, and BBDO doesn't see many more clients banging on the door to do another such deal soon. But, says Arnie Semsky, executive vice president of BBDO Worldwide, ''Murdoch proved it could be done.'' By turns charming and ruthless, unpretentious and formal, Murdoch has been intriguing, outraging, and generally confounding people since he graduated from Oxford in 1953 and took over the tiny Adelaide News from his father. In business he thinks big but can dress down an editor for something as petty as spending money to subscribe to an out-of-state newspaper. He fills his tabloids with sensational headlines and barely clothed beauties but also caters to highbrow readers with some of the most reputable newspapers in Australia and Britain. He shamelessly uses his papers to court political and business powers, only to twit Establishment noses with his sometimes yellow journalism, right-wing views, and blitzkrieg takeovers. He inspires loyalty among his top lieutenants but can cast them out at the first sign of independence or weakness. NEWS CORP. is largely a one-man show, with Murdoch sometimes startling his top advisers by making major decisions on the spur of the moment. In New York he works out of a modest suite of offices in the New York Post building near Wall Street. Every Thursday he gets a report of the vital numbers -- circulation, ad pages, revenue, profit projections, expenses -- of all of his companies around the world. This flash report is followed the next morning by what is known as the book, a binder filled with computer printouts containing supporting data. If Murdoch is on the road, Richard Sarazen, his chief financial officer, pores over the numbers and alerts him by phone or telex to anything that looks amiss. Murdoch prides himself on being able to run the company with a corporate staff of only 35. He spends much of his time on the phone or flying around the world. With his wife, Anna (see box), and three teenage children, he makes his home in a penthouse apartment overlooking Manhattan's Central Park. He also has a mountainside ski lodge in Aspen, a mansion in Beverly Hills, an elegant townhouse off St. James's Square in London, a house in Melbourne, and a sprawling ranch near Canberra.
Murdoch maintains control of News Corp. through a private family trust that owns 35% of the shares. Some shares trade thinly on the Sydney and London stock exchanges and as ADRs on the New York Stock Exchange. He does not go out of his way to answer questions about his operations on the theory that the less competitors know, the easier it is to surprise them. He declined to be interviewed for this article or to allow his executives or editors to talk. A few did anyway, along with competitors and former employees. Murdoch did allow Sarazen to verify financial information obtained from other sources. The News Corp. empire reaches some 30 million people (see map). For the fiscal year ending this June 30, News Corp. should report operating profits of more than $600 million on $3.2 billion of revenues. This goliath generated over half its revenues and operating profits in the U.S., mainly from Twentieth Century Fox, the former Ziff-Davis trade magazines, the Star, and New York magazine. News Corp.'s breakup value is over $7 billion, according to Richard J. MacDonald, a media analyst at First Boston who issued the first major U.S. report on the company last December. By comparison, other estimates place the breakup value of Gannett, the biggest U.S. newspaper group, at more than $10 billion; Time Inc. (publisher of FORTUNE) at $7.8 billion; and CBS at $5.7 billion. MURDOCH has been operating outside of Australia since 1968, when he bought Britain's News of the World Sunday tabloid. But it was only three years ago that he stepped up his global activities. He went on a buying binge that stunned media industry executives, some of whom worried that their companies might be next on his shopping list. In 1985 he bought 13 magazines from Ziff- Davis for $350 million and took over Fox from Denver oilman Marvin Davis for $575 million. Last year he bought Metromedia's six U.S. TV stations for $1.5 billion. He also paid $300 million for the Hong Kong company that owns the South China Morning Post (circulation: 85,000), an English-language newspaper, and a 51% interest in the Far Eastern Economic Review, a weekly magazine. Then he swooped back to Australia to pay $1.6 billion for the Herald & Weekly Times Group, the country's biggest media company. This spring he returned to New York to buy Harper & Row, the fifth-biggest U.S. book publisher, for $300 million. He did some unloading too. He sold New York's Village Voice for just over $55 million; he had picked up the newspaper along with New York and New West magazines for $17 million eight years before. To avoid conflict with the Federal Communications Commission over the Metromedia purchase, he sold the Chicago Sun-Times for $145 million, up from the $100 million he paid for it in 1983. To help finance the big Australian takeover he cashed in most of his TV holdings there for $1.4 billion, a heady 70 times earnings. In most of his new acquisitions, Murdoch outbid competitors by wide margins, paying big premiums to consolidate operations, dominate markets, and enter new ones. Each acquisition had strategic value that made it seem worth more to him than to others. At a time when program costs are rocketing, Fox's film library and production capability offer a guaranteed supply. Metromedia's big-city TV stations became the basis of his new U.S. network and worldwide program distribution service. Harper & Row fit Murdoch's strategy like the dust jacket of a book. His preemptive bid of $65 a share eclipsed competing publisher Harcourt Brace Jovanovich's $50 offer and astonished other potential bidders. Says one: ''There's no way in hell that company is worth $300 million. We couldn't stretch it beyond $200 million.'' Murdoch could because he saw the deal as a way to get William Collins & Sons, a major British publisher in which he has a controlling stake, into the U.S. market. He is considering merging Harper's general book business with Collins, then selling the company's lucrative educational and medical textbook divisions, including its crown jewel, Lippincott. Most bidders saw it the other way around; they wanted the textbook business. Murdoch may well get more than $200 million for the textbook divisions, ending up with a major position in U.S. book publishing for only $100 million. SOME AUSTRALIAN observers thought Murdoch was overly moved by sentiment when he outbid Robert Holmes a Court and Fairfax Publications for the Herald & Weekly Times (HWT), a media group his father managed but never owned. But the move made hard business sense, even at what seemed an inflated price. Many U.S. competitors had assumed that Murdoch's Australian base was solid. It wasn't. ''Up until the takeover, our judgment was that he was not making much money in Australia,'' says a senior executive of the Fairfax publishing group, News Corp.'s last major rival in Australian publishing. The deal makes Murdoch the dominant newspaper owner in Australia, giving him profitable monopolies in a handful of cities where his newspapers used to fight it out with the HWT papers. Murdoch's boldest move yet -- and biggest gamble -- has been his new TV network. The consensus among broadcasting executives is that it can't work. No one has created a TV network in the U.S. since ABC was launched in 1948 -- and that one did not make money until the 1970s. Industry trends are terrible. Networks' audience share has fallen from 92% to 75% in the past 15 years, nibbled by cable TV, VCRs, and a proliferation of independent stations. Program costs are soaring. Network advertising sales are the softest they've been in years. So far the doubters look prescient. The Fox network, which up to now broadcasts only a late night talk show and prime time programs on Sundays, is off to a rocky start. It recently axed Joan Rivers, the loudmouth host of the talk show that began last October. (Even Murdoch couldn't abide her: ''Overall the show's numbers were not good, which doesn't surprise me looking at it,'' he told financial analysts a couple of months before Rivers was pushed out.) Her ratings, especially among young viewers, were solid on Fox's own big-city stations but slumped elsewhere in the country. Ratings for Fox's first prime time shows on Sunday night, rolled out in April and May, have been about half the 7% of the total U.S. audience the network promised. A Saturday night lineup has been postponed until July. Fox's low-powered affiliates are deflating its ratings. In theory Fox can reach 80% of TV households. But because of the weak signals of many of its stations, it actually reaches only 60%, according to a CBS estimate. Murdoch and Barry Diller, the innovative Fox chairman who reportedly planted the idea with Murdoch, say the fourth network will take three to five years to establish at a start-up cost of $150 million. That seems low to old Hollywood hands. Says one: ''Several people out here think Murdoch will go through that $150 million in one year instead of three.'' A conservative estimate by an informed industry source puts Fox's losses at $1 million to $1.5 million every Sunday night. That works out to $52 million to $78 million in the first year just for Sunday night. Even if Fox's two hours of Saturday night programming come in with the same ratings -- a large assumption since Saturday is the most competitive viewing night of the week while Sunday is the easiest -- Fox can add another $40 million to $60 million in losses its first year. Even if the network loses big money, Murdoch thinks he can come out a winner. The reason: his seven stations. Fox shows have been getting ratings twice as high on these stations as his network's average. Against summer reruns on the major networks, Fox stations in New York and Washington recently scored some head-turning double-digit ratings and placed second in overall audience share. By transferring programming costs from his stations to the network while boosting their ratings, Murdoch is improving the station's profit margins substantially. ''Even if the network itself is a fairly long- term loss maker,'' he told Broadcasting magazine recently, ''it's quite possible to conceive losing $50 million on the network, ((while)) increasing the earnings of those Fox stations by $100 million.'' If Murdoch does succeed in pushing up cash flow at the stations, says First Boston analyst Richard MacDonald, he can double their value. Still, Murdoch didn't launch the network as a simple asset play, and he has surprised detractors before. He has a few things going for him. For example, he is counting on the very problems that are roiling the networks to help him enter the business. With the traditional networks' hammerlock on TV viewing weakened, he hopes to be able to find a niche for Fox. Says one top TV executive: ''There may be no better time to come in than when three fat and happy guys find themselves in trouble -- ask the Japanese automakers.'' INDEPENDENT stations, pinched by high programming costs, are delighted to be affiliates. Fox sends them network-quality shows free, and they get to keep 40% to 50% of the commercial time. ''It was not a tough decision,'' says Randall Smith, general manager of WTAF-TV in Philadelphia, a major Fox affiliate. ''If it doesn't work, we've got nothing to lose. If it does work, we've got a steady supply of first-class programming that we wouldn't want our competition to have.'' Advertising agencies are big boosters too. Fox is offering up to 20% discounts from network rates, helping agencies to bargain down rates at the three major networks. Fox has also targeted an appealing audience: high- consumption but hard-to-reach 18- to 34-year-olds. Jon Mandel, media director at Grey Advertising, says the demographics of the audience, for which his clients are willing to pay premium prices, are more important than the overall ratings: ''As long as Fox gets some growth on its target audience ratings, even if total households stay flat, our clients will be happy.'' Also, since the FCC does not consider Fox a network until it broadcasts 15 hours of programming a week (it has just eight hours now), the company is not bound by the web of regulations that apply to networks. Fox can participate in the potentially lucrative syndication rights to reruns of its shows, while the major networks cannot. Murdoch is producing a low-budget news show on his New York station, called A Current Affair, which he plans to put on the network. A video tabloid of sorts, it runs stories that range from the tale of a husband who allegedly murdered his wife and ran her body through a rented wood-chipping machine to that of an absentminded sheriff who returned a rented VCR to a store with a homemade porno tape of himself and his wife. Barry Diller would seem to be another asset. He helped to turn around ABC TV and Paramount before joining Fox. He has hired some of Hollywood's best producers to develop shows. He is paying them top dollar and giving them more freedom than the major networks do. Diller also has a financial interest in Fox's success: His salary is over $3 million a year -- more than double the $1.2 million Murdoch made last year. But strains have already started to appear in the relationship between Murdoch and Diller, say studio executives. While the cost-conscious Diller has returned Fox to profitability, Fox had no major films last Christmas, has none coming up this summer, and hasn't produced a big box-office hit since Aliens -- a film in the works before Diller arrived. Murdoch duly noted this fact in a talk to financial analysts. The Hollywood rumor mill is beginning to grind out the word that Michael Eisner and Frank Mancuso, Diller's subordinates at Paramount, were spark plugs there and that Diller is less without them. Eisner has turned around Disney, and Paramount continues to soar under Mancuso. MURDOCH HAS RISKED plenty by pouring so many resources into building a synergistic worldwide media empire. But he has shown awesome staying power before. After founding Australia's first national daily, the Australian, he backed it for over 20 years before it broke even. The New York Post is still losing money -- $10 million last year -- eight years after he bought it. Banks seem ready to throw open their vaults to him, even on an unsecured basis. ''Murdoch is financing his company through short- and medium-term revolving credit lines at 30 major banks around the world, cross-guaranteed by all his various companies,'' says one former bank executive who did business with News Corp. This particular banker calls that strategy ''next to lunacy'' because of the risk of a domino-effect collapse if one of Murdoch's companies should founder. But he apparently is in the minority. Murdoch borrowed $710 million in Australia on short notice to finance his surprise HWT bid, which he then paid off by selling most of his Australian TV assets. By July he will have refinanced the $1.2 billion of Fox television preferred shares he used to buy the Metromedia stations. Rates on the new short-term credit average about 8%, cutting financing costs this year by $70 million. According to one banking source, Murdoch has become friends with Citicorp Chairman John Reed, a fellow global thinker and director on the board of United Technologies. The source says Citibank has lent News Corp. over $200 million -- more than any other U.S. bank. How financially sound is Rupert Murdoch's empire? Different accounting standards in the U.S. and Australia make it hard to say, and Sarazen, Murdoch's financial wizard, is expert at exploiting the differences. News Corp.'s debt has soared from $1.4 billion in 1985 to $4.1 billion this year, while his interest costs jumped from $41 million all the way to an estimated $236 million. In Australia and Britain, Sarazen can write up the company's media assets to < current market value every three years, enabling the company to borrow more. Conveniently, News Corp. will do this again for the fiscal year ending in June, which will also include the new acquisitions. Sarazen told financial analysts that, under Australian accounting rules, he expected that News Corp.' s debt-to-equity ratio would drop as a result from about 1 to 1 today down to 0.9 to 1. Under accounting rules in the U.S., where assets are carried at book value, his debt ratio would be considerably higher: 1.5 to 1. U.S. bankers look at leverage as a ratio of debt to cash flow and generally will tolerate $5 of debt for every $1 of cash flow. Not too long ago, says one banker who saw Murdoch's books, his ratio was well above that range. ''Murdoch has a lot of major turnaround situations,'' this man says. ''His whole strategy is based on the assumption that he can turn the negative cash flow into positive cash flow. If he succeeds, he can meet his commitments. If he can't, he's got a problem.'' Even this banker agrees, however, that the problems could not get big enough to force Murdoch into real trouble. If things got bad, he could always sell assets. Murdoch will get a big cash flow boost from his victory last year over British printing unions. When the printers refused to amend their rules to accommodate new technology, he built a high-tech printing plant surrounded by barbed wire miles away from Fleet Street in a desolate dock area called Wapping and signed a contract with a different union, the electricians. He flew in foremen from his papers in the U.S. and Australia to train the new workers. By breaking the printing unions' hold, he cut the work force by more than half and eliminated work rules that had kept the size of the Sunday Times to 80 pages, even when more advertising was available. Now the paper regularly prints as many as 102 pages. According to Bruce Matthews, Murdoch's former managing director in Britain and still a member of News Corp.'s board, cash flow should increase in Britain this year by as much as 45%, or about $120 million -- enough, if it keeps rolling in, to let Murdoch tinker with Fox television for several years. As insurance the takeover of the HWT in Australia ought to add another $60 million in operating income starting in fiscal 1988, says First Boston's MacDonald. A major problem for Murdoch is managing such a widespread and fast-growing empire. In the past he has rolled up his shirtsleeves and personally taken / charge of whatever new project he has launched. But there is only so much one man can do. Sarazen may be a whiz at numbers, but he is not a manager or dealmaker. Murdoch's other top executives, except for Diller, rose largely on their ability to show loyalty to their boss, according to former associates. The probable successors are all in the family: Murdoch's teen-age children or, if the situation arose soon, Murdoch's wife, Anna. In any case, Murdoch will have to turn his considerable energies to the prosaic task of institutionalizing what he has accomplished. As he has ranged around the world, Murdoch has competed almost exclusively with the locals. That situation is beginning to change. The role of worldwide press lord appeals to other strong personalities. Robert Maxwell, owner of London's Daily Mirror, has expanded onto Murdoch's turf in European broadcasting and wants to get into U.S. publishing. His most recent move was a $1.7-billion offer to buy Harcourt Brace Jovanovich. Conrad Black, the wealthy Canadian entrepreneur, owns several newspapers in Canada plus an interest in London's Daily Telegraph and says bluntly he is modeling his actions on Murdoch's. Building a global media empire was Murdoch's first giant challenge. Staying ahead of the imitators will be his next.
CHART: TEXT NOT AVAILABLE CREDIT: RENEE KLEIN CAPTION: In addition to these properties, Murdoch's News Corp. owns interests in a computer software firm, a British shipping company, and an Australian lottery franchise. DESCRIPTION: Rupert Murdoch's properties throughout the world, illustrated by maps and locations.
CHART: INVESTOR'S SNAPSHOT NEWS CORP. SALES (year ended 6/30/86) $2.7 BILLION CHANGE FROM YEAR EARLIER UP 42%
NET PROFIT $172.1 MILLION CHANGE UP 51%
RETURN ON COMMON STOCKHOLDERS' EQUITY 17% FIVE-YEAR AVERAGE 12%
STOCK PRICE RANGE (last 12 months) $35.75-$11.25
RECENT SHARE PRICE $25.75*
PRICE/EARNINGS MULTIPLE 20
TOTAL RETURN TO INVESTORS (12 months to 6/5) 65%
*Price is for American Depositary Receipt representing two shares.