Dow Jones & Company

123jump.com Staff
04 Jun, 2007
New York City

In the global world of financial information and news, Dow Jones remains an American institution. In the last three decades the world of financial information has rapidly evolved from print only to TV, Internet and electronic networks. Dow Jones has found it difficult to leverage its historic leadership in this multi-media world and missed opportunities to broaden its offering. The acquisitive management and hands-off owners have seen Dow Jones franchise under attack from new media barons.

Dow Jones & Company – Beyond Printed Words

It did not have to come to this.

Rupert Murdoch’s takeover of Dow Jones will have significant ripple effects throughout the entire financial information industry and may drastically change the publishing company. For the past three decades, Dow Jones management has missed opportunity-after-opportunity to utilize its considerable assets to effectively compete in a rapidly changing world of new technology, expanding markets, and declining newspaper sales. In a statement from the Bancroft family, who hold voting control of the company, they have apparently finally come to the realization, “the mission of Dow Jones may be better accomplished in combination or collaboration with another organization, which may include News Corporation.”


Were did Dow Jones go wrong?

For 125 years, Dow Jones & Company’s Wall Street Journal has been the country’s premier financial newspaper - commanding the attention and trust of millions of loyal readers. During that time, it built a near monopolistic relationship with its readers. For generations, the paper set the agenda for financial readers who relied on its printed word for all relevant business information. With coming of the new media revolution, however, that relationship began to break down.

The proliferation of financial information sources, from cable TV, terminals, and the Internet, fragmented the market in ways not possible just a decade ago. Today, a reader can set his own information gathering agenda and easily personalize the process to meet his changing needs. Information that was previously available only through print has now become available on numerous financially related Internet sites - often in near real-time and at no cost. With the possible exception of breaking news on pending deals, which Dow Jones is able to gather through its vast network of contacts, the financial information published each day in the Journal has become a commodity.

Dow Jones was slow to adjust to the new reality. Even though it had the content, resources, and expertise necessary to pursue these new outlets, its efforts were not successful. That failure, which is clearly reflected in the company’s financial performance, left it vulnerable to buyout offers from the likes of Rupert Murdoch.


Fumbles, stumbles, and lost opportunities

In just the last three decades, Dow Jones has missed major opportunities to leverage its financial content business through various developing technologies. Data terminals, cable TV, and the Internet have all grown from the idea stage to major industries, but Dow Jones, with its lack of vision and focus on newsprint has been left in the dust. The continuing expansion of capitalistic economies and opening of markets around the world has lead to need for more-and-more financial news and data. Yet Dow Jones has either ignored these opportunities or failed to build businesses around these developing markets.

In the early eighties, when financial content began to migrate to cable TV, WSJ TV was one of the pioneers along with FNN and CNBC. Despite Dow Jones’s clear content advantage, it failed to execute properly and let the opportunity slip away. The channel died a premature death, not because of financial problems that ended FNN, but rather a lack of management vision and the will to succeed. NBC exploited the weakness and built a solid product that is now a fixture of virtually every trading room around the world.

Another example was Dow Jones’s purchase of a one-third interest in Telerate in 1985. By 1990, it had spent $1.6 billion to acquire control of the company. Renamed Dow Jones Markets, the service provided real-time financial information, decision-support products, and transaction services to the financial community through 94,000 terminals. It had planned to spend an additional $600 million to improve the technology, but due to internal opposition and lack of management vision, the division was sold to Bridge Information System for $510 million in 1996, leaving the electronic business to be dominated by Bloomberg in the U.S. and Reuters in Europe and Asia.

When it became clear that the Internet revolution was real, Dow Jones launched its paid online newspaper portal WSJ.com. Despite being somewhat disorganized, the site now has about 900,000 paid subscribers. While it has been a financial success, that success has come at the expense of its print product. In order to expand its limited online presence to a much larger audience, Dow Jones paid an astonishing $538 million for Marketwatch.com. Given its name and content, it could have certainly developed its own competing site for a fraction of that cost.

In yet another example, the WSJ recently launched Mint, business news paper joint venture with Hindustan Times of India - one of India’s three, top dailies. The Hindustan Times is well entrenched in the Indian market, but offers a poor quality product that is narrowly focused and supported with virtually no journalist outside India. The new paper uses the WSJ logo along with its brand Mint on the front page, but its staff consists of local journalists who fall well below global journalistic standards. Daily market reporting rarely goes beyond stating facts and repeating management assertions. As a result, newsstand sales of Mint have been dismal compared to the well-entrenched Economic Times with more than two million paid subscribers. India is one of few markets in the world where newspapers circulation is growing, an important growth driver for many media companies.

While poor management leadership is ultimately to blame, part of the company’s failure can be laid at the feet of the Bancroft family. Even though they are often heralded for their lack of interference in journalist and management affairs, perhaps greater attention to the long-term development of the company and a willingness to forgo dividends might have made a difference.

Over the last ten years, Dow Jones has earned less than $500 million from operations and has paid dividends of more than $400 million. Had the company used its excess resources to invest in the business with a focus on the emerging digital media, the story might have been very different. The Bancroft family should have been asking hard questions and focusing management attention on the creation of long-term wealth, rather than simply using the company as a cash cow.

The financial statements tell the tale

In reviewing the company’s annual reports for the last ten years, one thing is very clear: the company has an aversion to risk. Even when management did step up to the plate, they did not properly follow through, and usually struck out.

The Marktetwatch.com purchase, which was announced in the last quarter of 2005 and completed in January of 2006, is a case in point. Marketwatch.com was purchased for $538 million borrowed money. It is difficult to see the site generating a reasonable return on investment based on its advertising driven model even with six million monthly users. When Dow Jones purchased the site from CBS and Peasron – publisher of Financial Times, they had hoped to attract more than ten million users between, WSJ.com and Marketwatch.com. Instead, monthly traffic at Marketwatch.com had steadily declined to five million users from seven million with page views of 189 million, down from 230 million two years ago.

For the last ten years WSJ.com has kept the site access limited to paid subscribers. The steady growth in subscribers is now approaching 900,000 and with an annual charge of $49, it generates close to $45 million dollars in subscription revenue. Had the Journal kept its site access free for the last decade and built a loyal user base, they could have successfully competed with Marketwatch.com and captured many of the users that are attracted to free sites. The site would have generated substantially higher advertising revenue than currently generated by Yahoo! Finance and would not have required purchase of Marketwatch.com.

The company paid nearly 46 times projected 2005 earnings for the Marketwatch and other affiliated properties. According to industry sources, organic earnings at the acquired portfolio of sites have declined since the purchase. For the nine months ended in September 2004, the last 10-Q filing as an independent company, Marketwatch.com had reported net earnings of $1.75 million. Even when duplicate cost of administrative and sales are eliminated, it is unlikely that Marketwatch.com and affiliated internet financial data services can generate more than $15 million net profit a year. Given current trends in site traffic, advertising rates, and operating margins, it will take at least fifteen years to recover the purchase price.

In the last three years the company has made several other acquisitions in an attempted to position itself to generate revenue from the electronic media with mixed success. A number of organizational changes and reorganizations make it impossible to judge the effectiveness of these acquisitions. The haphazard and opportunistic acquisitions have not improved revenues at the company and in fact several of them appear to have been made at top dollars.

For example, the company purchased eFinancial News in the UK for nearly $53 million in the early 2007 at what the company claims was ten times EBITDA earnings for 2007. A costly acquisition of a merger and acquisition focused site. The site has only 10,000 daily users according to its media kit. The site was purchased, what most analysts would consider, at the peak of the acquisition industry cycle. If the objective was to expand the Dow Jones presence in the UK market, there are many other strategies that would have yielded a larger audience at a lower cost.

In December 2005 Dow Jones recorded a loss of $37 million related to the disposal of a 50% interest in both CNBC Asia and CNBC Europe, as well as a 25% interest in CNBC World.

Late last year Dow Jones paid $175 million to acquire the remaining 50% of Factiva, a joint venture between Dow Jones and Reuters, which included $146 million for goodwill. Factiva stands out in Dow Jones’s portfolio because of its profitability. The paid service, available on corporate intranets, is used by 1.6 million subscribers to access collections of financial content and research from various publications. Most of its users are in professional services organizations, government agencies, and corporations.

Factiva, Dow Jones Indexes and Licenses, and Dow Jones Newswire, which form the Enterprise Media Group, generated 23% of revenue and 69% of Dow Jones’s operating profit in the year 2006. The newswire service has nearly 300,000 paid subscribers and is supported by 850 journalists.

A letter addressed to shareholders in the year 2001 by the then company Chairman and CEO, Peter Kann stated that company has reduced its cost to the bone: and, as advertising revenue improves, every additional dollar will generate 80 cent of pre-tax income. This assertion was reported again in the letter to the shareholder printed in the annual report of 2002. The revenue of the company declined in the 2003 and marginally improved in the years 2004, 2005, and 2006. But the increased revenue did not generate the leverage that the former chairman had predicted.

The picture that emerges from the financial statements is of a company with an inability to develop products in-house. Instead, the company has a propensity to pay up for outside properties at the top of the market, but not back up the acquisitions with sufficient management talent and resources to insure their success. These repetitive cycles of value destruction is clearly reflected in the price of the company’s stock over the last two decades.


What is the future for Dow Jones under Murdoch?

In contrast to Dow Jones, Murdoch has successfully faced the challenge and has developed media outlets far beyond his traditional Australian newspaper base. In addition to aggressively expanding his print media empire around the world, his operations now include Twentieth Century Fox, Fox News Channel, satellite TV broadcasting, and MySpace. Dow Jones would be a plumb acquisition providing instant credibility for his planned Fox Business Channel, which is scheduled for later this year. In addition, it would provide many other opportunities for News Corporation to expand into a multitude of other areas of the financial information business currently dominated by other large players like Reuters, Bloomberg, and Thompson. It would also give Murdoch a large foothold in the online financial news and information space through Dow Jones’s Marketwatch.com and WSJ.com.

From its position as the premier financial publisher that it once enjoyed, Dow Jones has fallen far short of its potential. The company has consistently failed to leverage its leadership in print to other areas of the media. If Murdoch successfully acquires the company, can he turn it into one of the primary drivers of his empire? Or, will the crown jewel of Dow Jones – the Wall Street Journal – become just another publication in News Corporation’s portfolio? Will the high purchase cost make merger synergies difficult to realize?

The immediate value of Dow Jones to News Corporation will be to provide support and branding for Murdoch’s new Fox Business Channel. To compete effectively with CNBC, which currently has the attention of market watchers around the world, the FOX channel will have to provide an equally fast moving flow of breaking news, information, and interviews. By using the resources of the Dow Jones News Wire and mining the contacts and journalist from the Journal staff, News Corporation should have little problem developing a competitive product. At the same time, Murdoch can capitalize on the Journal brand strength to expand the Fox Business cable channel into the European and Asian markets. Another advantage of the purchase is that it will break the current relationship between Dow Jones and CNBC; and, that will only enhance the competitiveness of the new Business Channel. Beyond the launch of TV channel, usefulness of Dow Jones to News Corp is unknown. Shareholders of News Corp should be looking for answers and demanding clear understanding on return on high investment in purchasing Dow Jones.

In today’s world, market globalization requires news coverage from around the world. For a company that once billed itself as ‘universally relevant,’ Dow Jones was always very weak outside the U.S., and not even relevant in Japan, China, India, or Europe. To compete successfully in these markets, the company will have to build additional staff and resources globally.

Reducing cost will be on the top of Murdoch’s agenda. He has previously demonstrated zeal in bringing cost under control by reorganizing businesses and shifting work to optimal locations around the world – something that is long overdue at Dow Jones. Any staff additions will almost certainly not located in the U.S. In fact, there is no reason why Dow Jones publications should be based in the New York City. By moving to less expensive locations in the U.S. and around the world, the company could eliminate a significant part of its large overhead.

The financial information industry encompasses a variety of segments beyond newspapers and cable. These would include: trading platforms, online portals, financial databases, research services, newswires, and index licensing. Each has an array of strong, entrenched competitors. Although Dow Jones participates in most areas, its traditional strength has been in the breaking news segment, which has a high value but a short shelf life. For News Corporation to compete successfully in the other segments, the company will have to strengthen Dow Jones’s management culture by developing more vision, risk taking, and nimbleness. But above all, it will need the resources and commitment to pursue a winning strategy.

However, there is no reason to assume that Murdoch will hold on to anything beyond the print publications including the Wall Street Journal, Barron’s, and other Internet properties. He may sell or divest the most profitable arm of the Dow Jones for a quick profit. The sale of Dow Jones Enterprise Media and Local Media groups to private equity could potentially yield between $900 million and $1.9 billion. This will substantially lower the total purchase price of $5 billion.


Editorial Independence

The Bancroft family has indicated that they are committed in preserving the Journal’s independence and integrity. Through the years, the publication has maintained its leadership reputation in the financial world for breadth of news coverage and in explaining complex business issues, chronicling mergers, or reviewing the impact of economic policies. Despite the excellence of its news coverage, the Journal’s editorial page mission may appear narrowly focused to general public.

The Journal editorials have long been dominated by the concerns of the wealthy, right wing conservatives, and multi-national corporate interests. While the editorial pages have been an excellent source of insights into economic trends, policies and international trade, it has been rare to see coverage on topics such as poverty, universal health care, or the ever-growing concentration of wealth. When such topics are addressed, it is usually out of concern for higher taxes.

The publication’s editorial pages have been quick to endorse every war since World War II, but have been reluctant to criticize the rise of military industrial complex. American foreign policies supporting allied dictators such as Musharraf, Marcos, Bhutto, Pinochet and others in the Middle East in the eighties, have been readily indorsed regardless of their stripe.

The Journal has never called to task for masquerading as the ''pillar of journalism'' providing balance views on every issues of national importance. Yet, the columns of Daniel Henninger would have you believe that most people of Moslem faith are either terrorist or have indirectly supported extremism. Similarly, the columns of Mary O’Grady would have you believe that most elected leaders in South America are either incompetent or corrupt.

The so-called separation of editorial and news coverage at the Journal appears to have grown increasingly porous in recent years. It is not unusual to see news stories covering an event with a bias tone, followed several days later by editorial coverage reinforcing the bias views of the newspapers editorial board.

The Journal editorial pages have found receptive coverage justifying the war in Iraq and pushing free market policies as the only cure for Latin American’s economic ills. They frequently bash Russia and China for their trade policies. Two decades ago, the targets were Japan, South Korea and other nations with rising trade surplus with the U.S. The Journal has never found a reason to promote energy conservation, and has yet to do any soul searching about what went wrong in Iraq.

When covering business scandals, the SEC’s lack of enforcement resources, or the favoritism in IPO allocations, the Journal was slow off the mark. Tyco, Enron, WorldCom, and HealthSouth and other examples of corporate malfeasance were discovered only after investors lost billions of dollars. While publication deserves credit for bringing these issues in to the public’s attention, many of the underlying problems continue today with little or no scrutiny.

The business newspaper that bills itself as ‘universally relevant’ can do more in covering international trade relations and nation’s persistent trade and current deficit. Energy markets and impact of higher oil prices, issues related to small businesses, and healthcare and social security crisis are just few of topics that could be probed. While Washington corruption is covered, corruption in China, Latin America and Russia seems to be of more concern. Editorials constantly bash extremists in the Middle East as Islamic fanatics, but rarely does the Journal focus on Israel’s treatment of refugees in Palestine, the real source of friction in the region.

Given the editorial tone of Fox TV, the Bancroft family has little to fear from Murdoch with respect to editorial policy. With the possible exception of illegal immigration, the editorial tone at the Journal and Fox TV seem pretty much in line. Iraq, international trade, and Middle East are all areas of common accord.


What can the new owners do?

Increasingly, financial news and information is provided through Television, the Internet, or other electronic networks. The printed word, which once was the sole method of communication, is becoming less-and-less relevant. The new owner of Dow Jones will face this reality just as has the current owners.

News Corp may be successful leveraging the Journal franchise for its TV venture, but to compete on the Internet and electronic terminal business will be a tall order. Across the globe, there are many serious competitors fighting for a piece of the business. Murdoch will have to make sustained investments for many years to build a viable franchise beyond the TV medium.

Current operating costs will have to be reduced and new revenues will have to be generated, regardless of who acquires the company. There is a little rationale for a company that generates consistently less than 8% operating margin to have 330,000 square feet of office space for staff and executives in New York City and another 65,000 square feet office in London. The company will have to build a presence and leverage outsourcing in cheaper locations as Reuters and Thomson and other media companies have done. Dow Jones also owns and operates 17 printing plants in various locations in the U.S. New owners may have to look for ways to print publications without owning printing facilities and Murdoch may combine his printing operations.

Cost cutting can help Dow Jones only in the near term, but in the long term its future in the crowded world of financial information is uncertain. New digital products will have to be created and managed profitably in a world of rapidly changing technology and market structures.
















Redirecting cash flow

The history of acquisitions suggests that happy endings can not always be assured. Particularly in industries like airlines and autos where the dominance of union power prevented companies from exercising needed flexibility during periods of economic downturn. As a result, resources needed for reserves or for reinvestment in new products were drained away.

Dow Jones, along with the rest of the newspaper industry had a similar experience. In addition with the power of the unions, the Bancroft family’s demand for steady dividends drained Dow Jones of critical cash that should have been reinvested in the company. Despite the talk of editorial independence enjoyed by Dow Jones management, it came at a high cost.

New owner of the company, whether Murdoch or someone else, will have to redirect available cash in a way to better compete in the networked world. The company will have to be restructured in a way that it can effectively compete in global markets where information flows at the speed of light at zero cost.