Murdoch's newspaper bets irk Wall St.

LOS ANGELES (Fortune) -- I saw Rupert Murdoch a couple of weeks ago in Los Angeles and asked him if he was having fun with the Wall Street Journal, his hard-won prize and current fixation. "Not yet," he quickly replied in his Aussie brogue. This week, Murdoch rattled the media world with the news the Journal's top editor, Marcus Brauchli, stepped down after just 11 months in the position and an accomplished career at the esteemed business daily. That came in tandem with word that Murdoch is close to a deal to buy Newsday, the Long Island-based daily, from Sam Zell's Tribune Co. for $580 million.

Does the fun begin when he installs his own person atop the Journal and sews up the New York newspaper market, putting a chokehold on the nemeses of both the Journal and his beloved tabloid, the New York Post? Well, that might be a start. But Murdoch's true enemy is not the New York Times or the Daily News, but rather time itself. He needs to prove that his big bet on newspapers - his original business - is justified in the midst of both sectoral and cyclical worries.

Richard Greenfield, media analyst at Pali Capital, charged this week that Murdoch "has not communicated a clear long-term strategy for the newspaper business." Lauren Rich Fine, who followed the newspaper business for years before retiring as an analyst from Merrill Lynch, wrote in an online article: "If I were a NWS shareholder" - NWS is its ticker - "I would be angry. The average NWS shareholder doesn't own it for its newspapers; in fact, they likely own it despite the newspapers. "

So far this year, News Corp (NWS, Fortune 500). shares are down 25% against a 6% decline in the S&P 500, although it's probably unfair to hang that entirely on newspapers, which accounted for just 17% of the company's US$15.7 billion in revenues in the six months ended December 31, and 12% of its operating profits of US$2.5 billion. Operating margins for what the company calls its newspaper and information division were 11% during the six months, better than many rivals but down from 14% in the year-earlier period.

One supposes that the argument could be made that by focusing on the Journal, Murdoch is putting less personal attention into ventures like MySpace or his Fox Business channel, but that strikes me as sort of besides the point. We are, after all, talking about a singular figure in media whose playbook relies heavily on challenging conventional wisdom, pushing the envelope and changing tactics until his objectives are met; sometimes changing his mind entirely but always finding new wars to fight.

In that context, the news from News this week is hardly unexpected, because you never know what to expect from Murdoch. Where the Journal is concerned, the game plan (for now) is to make the paper livelier and expand its political and general news coverage to compete more squarely with the New York Times, which Murdoch feels has held too much sway over setting America's news agenda.

But Murdoch's mission is very different from the other legendary newspaper battles he has waged in his five-decades-plus career. At both the New York Post and the Times in London, Murdoch took over papers that significantly lagged their chief rivals, the Daily News and Daily Telegraph, in circulation. He's now overtaken the Daily News on weekdays in New York, and bridged the gap significantly at the Times.

But the Journal already outsells the New York Times on weekdays, so Murdoch is attempting both to keep the Journal's core business readers and lure the Times' high-end readership who might otherwise not give a pure business paper a look. If a jazzed-up Journal can get just 5 or 10% of Times readers to switch over, the idea is that more high-end advertisers will follow. There is, of course, a huge online component to this too, not to mention the longer-term promise of melding Journal content with other TV and print assets around the world.

The Newsday part is interesting because part of the sell to regulators is that unless it can consolidate business operations from the suburban paper with the Post, the Post will never be profitable. That is a notable change in message from Murdoch's camp, which has portrayed profitability at the Post as just around the corner. (Similarly, this is supposed to be the first year that the London Times will make money since News Corp. acquired it way back in 1981, though its sister Sunday Times makes plenty as do Murdoch's UK tabs.)

As for whether there will be any changes in the Murdoch Method, don't count on it. At a Goldman Sachs conference right after sealing the Dow Jones deal last fall, Murdoch acknowledged that his unpredictability probably weighed on News Corp. stock. That said, he added, "I'm very happy to put my record of investment against any one of my peers in the last 10 or 15 years."

When newsrooms shudder, investors worry, and pundits kvetch, this surely is a sign to him that the fun is soon to begin.