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Daily grind

7 February 2011 By Jeffrey Goldfarb

The future of the media is supposedly here – again. Rupert Murdoch ushered in the next generation of publishing with his iPad-based The Daily at a glitzy Guggenheim Museum fete last week. As he did, old-fashioned television and print stormed back to life with some impressive numbers. The contrast served as a timely reminder that the industry’s past remains its present, and may even still represent much of its future.
The Daily proved flashy, with embedded video and a carousel-style display, but hardly revolutionary. At a conference hall in New York packed with media executives, a healthy number of them shot their hands in the air when asked if they had downloaded the first issue. Only one claimed to have ordered the second edition. The publication comes with an initial investment of $30 million and an estimated annual operating budget of $26 million. Even if it could somehow cover three-quarters of that expense from advertising, it would still require a generous 350,000 subscribers to recoup the rest.
The resurgence of pixels and paper looked all the more appealing for investors, who have suffered through the downturn’s ripple effect on advertising. Murdoch’s News Corp showed the way. In the last three months of 2010, its Fox TV network and affiliates reported a five-fold increase in operating profit, to $151 million. Cable networks at rival Time Warner, including HBO and TBS, posted an 18 percent improvement in adjusted operating income last year over 2009. More significantly, the top line grew twice as fast.
The printed word showed some staying power, too. A restructuring at Time Warner’s rack, which includes People and InStyle magazines, helped generate operating income of $515 million last year, an 88 percent improvement on 2009. Rival Hearst also snapped up 100 titles, including the American edition of Elle, from the French Lagardere last week. Though there will be considerable cost savings, the $890 million deal nevertheless valued the collection at a robust multiple of 13 times operating profit.
That provides a glimpse of what Murdoch’s The Daily is up against. The iPad’s adoption rate and growth trajectory are nothing short of phenomenal. And yet the 15 million tablet devices sold by Apple so far equates only to about the combined circulations of Better Homes and Gardens, National Geographic and Sports Illustrated, or a mere fraction of the roughly 350 million magazines purchased annually.
The staying power of TV stands to be stronger. According to projections by ZenithOptimedia, television advertising globally will increase by nearly 20 percent over the next three years. Only Internet paid-search advertising is expected to grow faster, at about 50 percent. Yet even with this supercharged expansion, by 2013, this category will still represent only one-fifth of the total dollars spent to advertise on TV.
The market may have begun to take notice. Consider the octogenarian broadcasting company CBS next to the adolescent Google. CBS’ shares have increased by some 61 percent over the past year versus a 16 percent gain for those of the Internet search powerhouse. And at least for now, investors don’t see much difference in the value of their expected near-term future earnings. Although there are some slight accounting differences, CBS is trading at 18 times next year’s earnings – astonishingly the same as Google’s.
Look no further than Murdoch, the emperor of media himself, to understand just how long the transition in media could take. As he was touting The Daily last week, he was simultaneously lining up a bank to help him unload MySpace. The musically inclined social network that Murdoch bought in 2005 was the last next big thing.


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