Australia is Murdoch’s big earnings headache


Sure, currency fluctuations played havoc with these outcomes, and a one-off gain in the previous corresponding period from the sale of a UK betting joint venture with Tabcorp, Sun Bets, detracted from comparisons, but the underlying result was still disappointing. Revenues from each of the segments mentioned above fell between 3 per cent and 9 per cent. The market’s response was to push News Corp shares down 5.5 per cent immediately after the result was out.

Aussie trouble spots

Among the multitude of businesses that make up News Corp, there were a few stronger performers, but they were not robust enough to offset the trouble spots.

And several of these trouble spots were the Australian divisions including print, digital real estate (REA) and Foxtel – which is two-thirds owned by News Corp and one-third owned by Telstra.

Indeed, News Corp chief executive Robert Thomson called out Australia in his opening remarks, noting that the company’s overall performance was “affected by pronounced currency headwinds and a particularly sluggish Australian economy and property market”.

The most troublesome Australian asset is undoubtedly Foxtel. It has been squeezed in a pincer of paying for expensive sports programming -in particular cricket – and facing a relentless churn of customers away from its flagship subscription service.

This put pressure on revenue and costs. Revenue from Foxtel fell by 9 per cent (or 3 per after adjusting for currency effects) and its earnings before interest, tax, depreciation and amortisation (EBITDA) slumped by $US32 million to $US81 million – driven by lower broadcast subscribers numbers and a hefty 14.4 per cent churn rate.

Foxtel is making up some of these losses by adding lower-paying customers to its two newer digital services, Kayo and Foxtel Now – but not fast enough, and in the quarter adjusted EBITDA fell by 28 per cent.

Structural decline

The former pay TV monopoly is in structural decline, having been disrupted by new entrants into the video streaming space like Netflix and Stan, and more recently by Amazon Prime and Apple – all of which place intense pressure on the operating model of the traditional subscription TV product.

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To make matters worse, in this quarter paying customers for Foxtel Now slumped from 446,000 to 375,000 as people tuned out after the final of the hit series Game of Thrones. Thomson said Kayo currently had 402,000 paying customers.

The pressure on Foxtel is further highlighted by News Corp’s move to advance the broadcaster an additional $200 in shareholder loans on top of the $500 million that it has already lent. Foxtel’s debt has now increased to almost $2.3 billion.

The Australian news and information segment, which is made up of newspapers such as The Australian and The Daily Telegraph, also had a difficult year and experienced an 11 per cent fall in revenue thanks to weakness in print revenue.

Price increases and digital subscriber growth across the broader publishing group were offset by lower print volumes in Australia and Britain.

Like all newspaper publishers, News Corp is attempting to bolster digital advertising and subscription revenues to replace the dollars lost in print.

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However, the group appears to be gaining some traction in attracting digital subscribers – a move that it hopes will be accelerating with its recent deals with Facebook and Apple.

In an environment where its traditional businesses are under pressure, it was unfortunate that the digital real estate business in Australia had been caught by the property price slump, which resulted in lower prices and lower volumes.  REA group’s quarterly revenues fell by 14 per cent.

But News Corp is hopeful that the recent improvement in property prices will kickstart revenue again, even though volumes have not shown much strength to date.

At this point, real estate is looking like its best hope to arrest the decline in the company’s performance as News Corp fights to arrest the decline in other divisions.

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