Rupert Murdoch's Motley Empire (Fortune Classics, 1984)July 31, 2011: 9:30 AM ET
Editor's note: Every Sunday, Fortune publishes a favorite story from our archive. Rupert Murdoch looked a sorry sight when he took a pie in the face on July 19 during a parliamentary hearing about the phone hacking scandal at News of the World. But even when he was at the top of his game, there were clues of trouble to come. In 1984, Murdoch told Fortune, "I don't know any better than anyone else where the electronic age is taking us, or how it will affect a large newspaper company. But I do know it's going to have an impact."
"A very able buccaneer" -- "a sinister force" -- "an old pirate" -- "schlock, just like his papers are schlock." These assorted epithets, offered by some of his competitors, suggest the fear and distaste, occasionally mixed with grudging awe, inspired by Rupert Murdoch, proprietor of one of the world's largest and oddest newspaper companies. The Australian rebel plans, in all seriousness, to build News Corp., his $1.4-billion-a-year publishing operation, into the biggest communications company in the world. Murdoch intends to grow mainly through acquisitions and expansion into new communications businesses, mostly in the U.S.
By Richard I. Kirkland Jr. and Gwen Kinkead
FORTUNE -- Can he make it? The answer will rest on what lies behind the facade of one of the era's most controversial publishers -- on the might of his financial muscle and on the strength of his imposing will. Murdoch already controls so much of the Australian press that few significant acquisition opportunities are left there. Nor could he buy more newspapers in Britain, where he earns most of his profits, without bumping up against monopoly restrictions. That leaves the U.S. as the only English-speaking market equal to Murdoch's appetite.
Murdoch's appetite has put him on competitors' minds -- and in their news columns -- a lot lately. His recent purchase of 6.7% of Warner Communications so rattled Warner Chairman Steven Ross that he rushed to sell off a much bigger piece of the company to thwart a Murdoch takeover. The Aussie's purchase last month of the Chicago Sun-Times, the ninth-largest daily in the U.S., summoned up a similar storm. The paper's editor, publisher, general manager, sales director, and leading columnist all resigned.
News Corp. already is one of the largest publishing companies in the English-speaking world. Most of its growth came in the last seven years, largely through acquisitions. Murdoch bought impulsively, guided by little more than an eye for a bargain and a willingness to take risks. Says a business associate: "I think he spends five minutes a day giggling at the fact that everyone is trying to figure out what he's doing." Murdoch's impulsive gambling has produced widely mixed results, which despite all the attention he gets are not often examined in detail. Some of his newspapers are fabulously profitable while others are perennial losers. Overall, News Corp.'s profitability is unspectacular, in the lower tier of his publishing peers.
Murdoch had greater success achieving size, reach, and power -- things that associates say matter a lot to him. He routinely uses his newspapers to promote his political causes. His papers have been strident supporters of President Reagan and New York Mayor Edward Koch, and relentless attackers of politicians who offend his sensibilities, including Senator Edward M. Kennedy and Brooklyn District Attorney Elizabeth Holtzman.
News Corp. publishes more than 80 newspapers and magazines in Britain, Australia, and the U.S. The newspapers include the Times of London, the oldest and one of the most prestigious English-language dailies, the Sun of London, the largest and one of the east prestigious English-language dailies, and the Daily Mirror, the largest afternoon paper in Australia. The company's other holdings include two Australian TV stations, four book publishers, a half interest in Australia's largest private airline, and parts in two oil and gas exploration consortiums.
Murdoch expects much of News Corp.'s future communications growth to come outside publishing. As he told FORTUNE recently: "I don't know any better than anyone else where the electronic age is taking us, or how it will affect a large newspaper company. But I do know it's going to have an impact. To prepare for that, and to have a position in that new industry, you want to be a major player in the production of entertainment programming."
Warner would fit the scope of Murdoch's ambition. It operates one of the most consistently profitable movie and TV studios in Hollywood, owns a vast film library worth more than $500 million, and has one of the largest record companies in the U.S. A battle for Warner would show off Murdoch's defiantly competitive ways. His instincts are brute and he hardly ever bolts from a row. In late January, for instance, he had reporters at the New York Post searching for dirt about Steve Ross of Warner.
For now, though, Murdoch is stymied. Ross handed a 19% interest in the company to Chris-Craft Industries in exchange for an interest in a ChrisCraft broadcasting subsidiary. ChrisCraft has bought additional shares, raising its total to more than 21% of Warner. So has Murdoch; by late January he held 7.1%. But unless he can persuade the courts to undo the ChrisCraft deal, Murdoch looks like a loser. Warner's bylaws make it impossible for him to force a merger or a spinoff of assets without Chris-Craft's assent. That would make two defeats in a row. He was notably unsuccessful in another, less publicized foray into satellite broadcasting last year.
In the future envisioned by Murdoch, the line between entertainment and news will increasingly blur. His critics claim he's never known the difference anyway. Murdoch, 52, started in 1955 with a tired daily inherited from his father in the Australian city of Adelaide. He has applied a rigid formula of scandal, sports, cheesecake, and crime to most of the papers acquired since. Murdoch's tabloids luridly depict a world in which fiendish criminals prey on women and children, evil immigrants menace the natives, and most government affairs are too tedious to note. By the time he moved into England in 1969 to buy the Sunday News of the World, Murdoch's Australian company owned nearly a dozen papers. Most had been bought on the cheap with borrowed money and turned around with Dickensian cost controls, strident promotion, bingolike contests, and the tabloid formula.
Being young (38 at the time) and comparatively unknown helped Murdoch get the biggest bargain of his life and the one on which today's empire rests. For $1 million, he bought the Sun, then a moribund socialist daily, from International Publications Corp. Murdoch applied his formula to the Sun, gave "page 3" a new meaning among journalists by publishing pictures of bare-breasted women there every day, and swung its editorials to the right. The Sun has become the most profitable piece of the empire, earning an estimated $50 million last year.
Murdoch stole quietly into the U.S. in 1973, buying two marginally profitable papers in San Antonio for $18 million. The next year he splashily launched the Star, a knock-off of the sensational weekly National Enquirer. Then came the acquisitions of the New York Post; New York magazine; the Village Voice, a far-left New York weekly; and the Boston Herald.
Outside the U.S., he gobbled the Times of London and took his half interest in Ansett Transport Industries, the Australian airline. The Ansett deal showed how crafty Murdoch could be: in four years his half of retained earnings and a special dividend have already exceeded his $100-million purchase price.
Murdoch's newspaper buys -- mostly marginal profitmakers or outright losers --haven't been quite as reckless as they might appear. In most cases, he picked up assets whose value was masked by dismal performance. He paid $1 million in cash and $7 million in future profits, if any, for the money -- losing Boston Herald, but the deal included real estate worth an estimated $7 million.
The Times came with real estate and fixed assets worth twice as much as Murdoch's purchase price. But the Times brought a much richer lode. With it Murdoch got 4.6% of Reuters Ltd., the news and financial information service. Reuters probably will go public once its shareholders decide how to divide the spoils, and its total market value could be $1.5 billion or more. The 4.6% could bring Murdoch more than $69 million. Murdoch owns 6.4% of Reuters through his other papers and presumably could have spotted that hidden asset. He insists otherwise, saying that the prospective bonanza from the Reuters shares is "sheer luck."
In the two years since News Corp. began consolidating results from Australia, Britain, and the U.S., revenues have increased 14% to $1.4 billion. Because these results are stated in U.S. dollars, however, they understate the true gains. Most of News Corp.'s business is conducted in Australian dollars and British pounds, both of which have fallen relative to the U.S. dollar. Measured in Australian dollars, revenues jumped 41% over the last two years. Profits before currency-related gains and losses were down 43% in 1982 and up 98% last year. The fiscal 1983 profits were $69.9 million in U.S. dollars.
The sharp turnaround in earnings sent News Corp.'s stock rocketing early last year. (The shares trade in Australia and over the counter in New York.) When rumors spread that Reuters would go public, the stock kicked in the afterburners. Nudged up again by the news of the investment in Warner, the shares recently were selling at $11.80, up nearly fivefold since early 1983.
Despite its impressive growth, News Corp.'s profit margins and return on assets have been below par for a publishing company. Its return on assets was 6.4% in fiscal 1983, vs. an average of 9.1% for the seven largest U.S. publishers in the same period. News Corp.'s return on equity, on the other hand, was a stunning 22.4% in fiscal 1983, higher than any of the seven. That's because Murdoch operates with a phenomenal amount of debt, or gearing, as Australians call it. The debt-to-equity ratio is 0.8, vs. an average 0.3 for the other large publishing companies.
News Corp. borrows so heavily because Murdoch refuses to dilute his 46% stake -- worth $340 million –- which he controls through a family trust. Says Richard Sarazen, News Corp.'s finance director: "His father, a famous newspaper editor in Australia, was a manager who made a fortune for others. Rupert decided he'd never do it that way."
A proprietor's grip is plainly evident in the drum-tight lid Murdoch keeps on expenses. The first change he makes after almost every acquisition is to slash costs, discharging whole regiments of nonessential employees and installing any new equipment that will reduce operating expenses. Though its holdings are thousands of miles apart, News Corp. does without a corporate jet. Corporate overhead ate up only $10 million of the company's revenues last year.
A surprisingly large share of News Corp.'s profits flow from a handful of properties. The big contributors are the tabloids whose reporters, as the old joke goes at one of them, write the headline before they report the stories. Biggest of all is the Sun of London, whose circulation of nearly 4.3 million gives Murdoch 28% of the morning readers in Britain. Says the editor of a rival paper, goggle-eyed at the Sun's success: "It gets worse editorially and better commercially. Fleet Street knows they pinch stories and put words in people's mouths, and their intrusion into privacy, particularly of the Royal Family, is second to none."
The $50 million the Sun contributed last year represented an astounding 41% of News Corp.'s operating profits. The Sun, the weekly Star in the U.S., and a Sydney tabloid, the Daily Telegraph, accounted for nearly 60% of the company's operating earnings last year.
Murdoch needs those winners to carry the papers that lose money. And does he have losers. The freedom of action that controlling ownership brings allows Murdoch to wait years, even decades, for losing properties to turn around. The Australian, a national newspaper, has been consistently in the red ever since Murdoch started it in 1964.
Last year was the first time Murdoch ever turned a profit in the U.S. His American properties had a combined operating profit of $19 million and a net profit of $12 million. In the seven years Murdoch has owned the New York Post it has never broken even. The Post lost an estimated $14 million last year, and its cumulative operating losses come to more than $80 million. The daily Times of London lost $10 million in fiscal 1983.
Apart from the weekly Star and the San Antonio News, Murdoch's lowdown journalism isn't working its magic in the U.S. Sensational news coverage, more sports, and expensive promotion gimmicks have won readers: circulation at the Post is up to 960,000, nearly double the readership when Murdoch took over. Murdoch's brightening, as he calls it, has boosted the Boston Herald's circulation from 247,000 to 318,000 -- a 28% gain – in just one year.
But advertisers haven't been eager to push their products in papers with headlines that scream HEADLESS BODY IN TOPLESS BAR or GRISLY FIND IN VETERANS HOSPITAL (two classics from the Post). The Herald has made only a small dent in the Boston Globe's 85% share of advertising revenues. "We've got a long, long way to go," Murdoch admits. "The Globe is our most formidable competitor in any U.S. city. They don't like me and I don't get on with them. They're very high class."
Editor Thomas Winship of the Globe is equally admiring -- and disdainful -- of Murdoch: "He does put energy into a paper and make it more entertaining to read. But competing· with him is more depressing than threatening. What he does just isn't journalism – it's a different art form."
In New York, Murdoch is hoping the Tribune Co. will weary of circulation wars and simply close its tabloid, the Daily News. But the News, which lost some $15 million in 1982, is about to report a surprising profit of more than $15 million for last year. The turnaround is the reward of some painful cost-cutting. Blusters Murdoch, who still considers himself the sharpest cost-cutter: "They bought some time on their decline. When you get in a war of attrition like this one, the low-cost operator wins in the end." Others aren't so sure. J. Kendrick Noble, a publishing analyst at the brokerage firm of Paine Webber Mitchell Hutchins, has switched his bet to the News.
Murdoch began applying his same brighteners to the Chicago Sun-Times as soon as he took possession of it from Field Enterprises last month. He paid $96.5 million for the paper, beating out local businessmen who wanted to keep it from his grasp. The Sun Times has been profitable (it earned about $6 million in 1983), but Murdoch thinks he can push returns higher.
A team of editors from New York and London has spiced the headlines, redirected the news coverage, and is turning the editorial voice from moderately liberal to reflect Murdoch's politics, which he calls radical conservatism. "We'll bring it back more to center," says Murdoch. "It won't be totally illiberal -- we'll be very much for small business and the small man."
The furor over Murdoch's changes has already provided a year's worth of entertainment for Chicago readers. Mike Royko, a popular, acerbic columnist at the Sun-Times, announced that "no self-respecting fish would be wrapped" in a Murdoch newspaper. Royko resigned and went over to the competing Tribune. The Sun-Times retaliated by reprinting a critical column about Royko from an Arizona paper under the headline: SLATS' VERDICT: TURNCOAT ROYKO DISGUSTING CREEP. ("Slats" refers to Slats Grobnik, a mythical Royko character.) The Sun-Times also reprinted a fawning profile of Murdoch that appeared in Forbes magazine.
Murdoch's bare-fisted handling of the furor over his ascension at the Sun-Times reflects a coldness in his approach to business that some competitors say borders on ruthlessness. Murdoch commands his company from a large, comfortable office on the sixth floor of the New York Post building in lower Manhattan. His principal management tool is a detailed, weekly profit report on every operation. Any decision of consequence requires his imprimatur.
Though he can be charming at will, Murdoch has few friends and no cronies. He is entirely unsentimental, even cold, except about his family. He and his wife, Anna, a former reporter on one of his Sydney tabloids, have four children, one from his previous marriage, which ended in divorce. They live in an East Side Manhattan duplex and weekend at a spacious house in the Berkshire Mountains. Murdoch can turn irritable when he is stuck late at the office, but there is no doubt that he revels in work and seeks his goals with ferocious zeal.
While still hungry for big-city papers, he has become convinced that more and more of News Corp.'s growth must come from broadcasting, movie production, and satellite communications. He has only trifled in these areas so far. He co-produced Gallipoli, a highly regarded film about Australian soldiers in World War I, with fellow Aussie Robert Stigwood three years ago. His two Australian TV stations turn out four hours a week of undistinguished dramas. Since acquiring a 69% interest in Satellite Television, a London advertiser-supported cable network, last June, he's bought enough programming to beam five hours a night of American reruns and other fare to cable systems in Britain and on the continent. (For more on that undertaking, see following story.)
Murdoch's most serious venture into the world of electronic communications was a slapdash plan for a nationwide pay TV network beamed directly from satellites to U.S. households that aren't served by cable. Subscribers were to pick up the signal with four-foot dish antennas on their roofs or in their yards.
Murdoch's version of the idea evolved last year from a scheme of a California entrepreneur to sell standard cable fare, along with a smattering of business-related data, such as grain price futures to farmers. (Including farm information would allow farmers to write off the price of the service as a business expense.) Murdoch and his men quickly concluded the idea had bigger potential. By offering five channels of programming and going after urban as well as rural viewers, they hoped to build the first national satellite-to-home network. He called it Skyband.
Last spring Murdoch signed a five-year $75-million lease with Satellite Business Systems (a joint venture of IBM, Aetna Life, and Comsat) for five transponders, the satellite devices that amplify signals from earth and send them back down. He promised to have his new network operating before United Satellite Communications Inc., owned by General Instrument Corp. and others, launched a similar service in the fall.
But Murdoch quickly found that he had overreached. Equipment manufacturers couldn't make enough satellite dishes to receive Skyband's signals before his deadline. In addition, studios hung back from selling Murdoch rights to broadcast their movies and TV series. Those willing to bargain demanded higher prices than they charged Murdoch's cable competition, and the prices went up as the year dragged on. These negotiations took months that Murdoch had not figured on.
Through the summer and early fall, Murdoch twisted and turned to form an alliance that would let him deliver Skyband, by then postponed until mid-1984. In August he tried to buy Showtime, the second-largest pay TV subscription service, for $160 million. Showtime, in the midst of merging with the Movie Channel, a pay TV service owned by Warner Amex, rebuffed him. He tried to increase his clout with the studios by exploring a merger with United Satellite, but its owners rejected his tentative offer of $70 million for control of the company.
In October Murdoch still bravely trumpeted Skyband, asserting it would gross $325 million by the end of 1986 and add 50% to News Corp.'s earnings by 1987. But weeks later Murdoch called it quits, grounding Skyband as abruptly as he had launched it. Murdoch figures the venture cost him some $20 million. He claims Skyband still might go up in late 1986 when a new generation of high-powered satellites capable of beaming signals to smaller, less expensive dish antennas, may be in orbit. Donald Kummerfeld, head of Murdoch's U.S. operation, rejects any notion that the Skyband setback reveals poor planning. He terms it "a prudent and calculated business judgment." Murdoch puts it more plainly: "I guess I just chickened out."
Murdoch began buying up shares in Warner last summer, about the time he was first having trouble getting programs for Skyband. His objective was Warner's film library and studios. "We basically saw Warner as beyond our capacity, but vulnerable," says Murdoch. "We figured we couldn't get hurt and would learn a lot about the film industry. Anything else was a long, long way off." In his wildest dreams, says an associate, Murdoch thought that if someone else moved on the company, Steve Ross might turn to him as a white knight. But Ross saw Murdoch's purchases as the nightmare he had feared ever since earnings collapsed at his Atari video game subsidiary -- it lost more than $500 million in the first nine months of 1983 -- and pushed Warner's stock price from the mid-50s to the low 20s.
On December 29 Ross struck his deal with Chris-Craft Chairman Herbert Siegel. Caught off guard, Murdoch petitioned the Federal Communications Commission and a Delaware court to block the stock swap. But the deal went through on January 18. Though he vows to fight on, Murdoch seems uncharacteristically indecisive about how to proceed. At recent prices, raising his holdings to 50% of Warner would cost him nearly $1 billion, a large sum for a man whose present $130-million investment in Warner is the largest he's ever made. Murdoch's principal adviser, Stanley S. Shuman, an executive vice president of Allen & Co. Inc., an investment banking firm, has been talking to prospective partners for Murdoch in the event he does decide to make a tender offer. But Murdoch appears queasy about getting in a high-stakes bidding contest. In assessing how high he might go, he says, "Atari is the great unknown."
Murodch seems more inclined to mount a proxy fight if he does anything. He is openly contemptuous of Warner's management -- "those people just love to be loved all the time" – and seems to think widespread investor disaffection with Ross might carry the day for him. Counters Ross, "There's no way Mr. Murdoch can win." Even if Murdoch were to win a majority vote he still could not be certain of victory. Warner's bylaws require an 80% majority to approve any transfer of assets not backed by its board. So Murdoch would still have to buyout Herb Siegel. Meanwhile, Murdoch is still trying to void the ChrisCraft deal in federal court and trying to find a quick way into the entertainment business.
Given Murdoch's remarkable record, no one can say he hasn't a chance of becoming an electronic media mogul. But as he learned in the Skyband debacle, he can't do it by making the kind of bargain-basement buys that he did as a publisher. Nor can he borrow great sums, considering his already heavy debt load. Unless Murdoch takes in partners or dilutes his ownership of News Corp. by issuing new equity, his dream of creating the world's greatest communications colossus will doubtless remain just that.
For investors, Murdoch's management of News Corp. demonstrates the bright and dark sides of betting on an impetuous entrepreneur. His controlling interest has allowed him to take big risks and run his properties his way -- for the most part, successfully. But control has also let him indulge his proprietor's penchant for hanging on to losers too long, to the detriment of the public shareholders.