Sunday, July 22, 2007

Ownership Matters: Murdoch, Dow Jones and the Importance of Family

The Bancroft family meets Monday, July 23, to finally decide if they will sell Dow Jones & Co. to News Corp., the company that is Rupert Murdoch's global media behemoth. This may be the last of four separate deals involving seven companies with journalistic reputations that were established over decades.

Dow Jones owns the Wall Street Journal, respected for prize-winning news coverage viewed as independent of the newspaper's ardently conservative editorial page, and of the Bancroft family interests. News Corp. owns companies like the New York Post and Fox News, viewed as spiking journalism with sensation and conservative politics that reflect Mr. Murdoch's views. Much coverage of the pending sale has therefore focused on whether News Corp. will remake the journalism at Dow Jones to conform with Mr. Murdoch's desires.

As of this post, it seems likely the sale will go through. Directors at Dow Jones voted for the deal last week. The Bancrofts control almost two-thirds of the shareholder votes needed for final approval. The International Herald Tribune reports the family's stock generates about $20.6 million in dividends each year that must be divided among more than 30 people. The newspaper reports a sale could give the family enough cash to generate $52 million a year if the cash were invested conservatively.

The family is divided about the sale, but even members who regard Mr. Murdoch as a threat to good journalism have searched for alternate buyers or investors . Newspapers in markets with high-speed wireless and Internet connections are taking stiff financial blows as advertisers move online. Mr. Murdoch is offering a premium for Dow Jones stock, making a vote to reject his offer a vote against the best financial interests of other company stockholders. Journalistic principles, alas, cannot generate enough immediate revenue to overcome this financial imperative.

Family Influences

If the deal goes through, the sale of Dow Jones to News Corp. will join the sale of Knight Ridder to The McClatchy Co., the sale of The Tribune Co. to real-estate investor Sam Zell , and the sale of Reuters to The Thomson Corp. on a list of acquisitions involving companies deeply involved in the production of news. In each case, at least one of the companies is also known for its founding family, or families.

Family ownership has cachet in the newspaper business. The New York Times Co. and the Washington Post Co. are controlled by families that place a high value on journalistic excellence, sometimes at the expense of their short-term economic interests. There is also systematic evidence that control by families or executives at public companies increases the financial commitment to those companies' newspapers.1

However, the four deals show family influence varies. A significant number of Bancrofts want to sell Dow Jones. Mr. Murdoch's father was a journalist.

The Chandler family, best known for owning the Los Angeles Times, had a significant minority stake after their company merged with the Tribune Co. The Chandlers pushed hard to sell the Tribune Co. when Mr. Zell offered a deal that would maximize their financial returns and minimize the taxes they owed.

Knight Ridder was known for distinguished journalism, and its last CEO was a member of one of the founding families. However, Anthony Ridder was unable to fend off stockholder pressure to sell the company's 32 newspapers. McClatchy is also controlled by a family that values journalism, but it did not keep 12 Knight Ridder papers, including some with national reputations, because they weren't in growing markets.

Roy Thomson said money, not news, drove his ambitions, and he built Thomson into a multinational company. The company owned dozens of dailies in the United States, but their news coverage was considered mediocre. Thomson sold its U.S. newspapers around 2000 as it reinvented itself as a provider of specialized information. Reuters, which began as a news service in 1851, is heavily invested in financial services. The acquisition by Thomson will merge established news companies that refocused their operations to take full advantage of new media technologies.

These four cases show the relationship between good journalism and family ownership varies, particularly at companies facing enormous economic pressure. There are other variables that probably play an important role in determining the outcome of such deals. Those variables will be examined in my next post.

1 Lacy, S., Shaver, M.A., & St. Cyr, C. (1996). The Effects of Public Ownership and Newspaper Competition on the Financial Performance of Newspaper Corporations: A Replication and Extension. Journalism & Mass Communication Quarterly 73,(2): 332-41.

Wednesday, February 28, 2007

Of Search Engines, Ad Prices, and Blind Sales

A report that Google and Yahoo are losing ad sales to an upstart might, at first glance, raise doubts about the search giants’ understanding of the advertising business. However, a closer look suggests the famously smart people at Google and Yahoo know exactly what they are doing.
The article in Monday’s New York Times reports a new company, Quigo Technologies, convinced Fox, ESPN, and Cox Enterprises to abandon the search giants as providers of text advertising. These ads appear beside your search results in response to the words you are searching for.
Quigo, unlike Yahoo and Google, tells advertisers where ads appear on the web and allows advertisers to buy ads on specific sites, the Times reports.
It may seem odd for search giants to conceal this information because advertisers target people likely to buy their products. So most advertisers want to appear on websites with content that attracts large numbers of people potentially interested in their products – if you sell sporting goods, you want to be on the big sports sites.

How Search Advertising Works

According to Advertising Age, the search giants make most of their money from these text ads.
Advertisers buy key words, and their ad appears when those words are typed in a search engine. The advertiser only pays if someone clicks on an ad. Advertisers bid a certain amount for each click, and that determines how often and where their ads appear.
The search giants display the ads on their pages and on innumerable other web sites participating in their advertising programs. The advertiser knows how many clicks it paid for, but not where the clicks came from.
If advertisers knew ads were appearing on sites they want to target, wouldn't they buy even more ads? So why is this information concealed?

Concealing Information Increases Ad Revenues

I am indebted to Roy W. Kenney and Benjamin Klein , authors of a 1983 article in the Journal of Law and Economics (cite below), for this explanation:

Advertisers consider some web sites to be better than others. They may be attracted by the large number of sites available through Google and Yahoo, but most advertisers would probably like to select some sites and ignore the rest.
But advertisers cannot select sites, so they must instead estimate the average value of a click from all sites, desired or not. Many people who click on an ad will not buy anything. And sites with small amounts of traffic probably have smaller proportions of buyers among those who do click on ads.
So the best sites will generate large numbers of clicks and many more likely buyers. Another way to think of this is that average sales per click will be much higher on the desirable sites.
If advertisers could identify the desirable sites they would bid more for those, and advertising would be concentrated there. But Google and Yahoo would be forced to sell ads for much less on the undesirable sites, and their total advertising revenue would decline.

Two Alternatives

What if Google and Yahoo instead offered to sell advertisers web sites in groups -- or bundles -- and included some less desirable sites in each bundle? Buyers would look for bundles they considered bargains, and only bid for those. The search giants would be forced to sell ads on the remaining bundles for less than buyers would pay if they did not know what bundle they were getting.
Another alternative would allow buyers to experiment, buying ads on a variety of sites to see which sites produced the best results. Advertisers would make adjustments after their initial purchase, asking the search giants to redirect ads to sites generating the most sales. But this would be costly for the search giants. It would also have the same effects on ad prices and revenues as the other alternatives.

A Change is (Probably) Gonna Come

The existing arrangements also make it possible for Google and Yahoo to distribute ads differently than expected. For example, an ad on 1,000 blogs might generate 1,000 clicks, but few buyers. The same ad on a few big news sites might generate the same 1,000 clicks and deliver far more potential buyers. Google and Yahoo are asking buyers to trust that this is not happening.
The Times article also reports some buyers are worried about click fraud. This happens when people click on ads just to generate revenue for the sites where they appear (Google and Yahoo share some of the revenue with the site).
The article says Google is planning to give advertisers more information about where ads appear. The search giant is feeling competitive heat from companies like Quigo. It will be interesting to see what happens next.

(The cite for the Kenney and Klein article, "The Economics of Block Booking," is Journal of Law and Economics, Vol. 26, No. 3. (Oct., 1983), pp. 497-540.)

Monday, February 26, 2007

Competition and the satellite radio merger

Prof. Stephen Lacy of Michigan State University is this blog's first guest commentator. He has this response to my Feb. 21 suggestion that prices will be higher if the two satellite radio companies are allowed to merge:

"The particular blog prompted an idea about substitutes. Satellite really has two submarkets -- in the home and in the car.
In the home, Sirius and XM compete with the three-dozen or so music channels on digital cable, iPods and with specialized Web sites such as In the car, the companies compete with iPods, books on tape and CDs.
These are all pretty good substitutes for music, which suggests satellite will differentiate itself with programming other than music. In other words, the potential price increase might be acceptable because of programming that might not otherwise be available."
(Full disclosure: Prof. Lacy was my dissertation advisor.)

Wednesday, February 21, 2007

Things to consider about satellite radio

The proposed merger of the satellite radio companies, XM and Sirius, is getting a lot of attention because of the size of the deal (Bloomberg reports its worth $4.84 billion), because of uncertainty about how federal regulators will view the deal, and because consumers might be hurt by the reduction in competition.
The companies have about 14 million subscribers between them, each paying about $13 a month or more. A rough estimate suggests the merger would result in a company with subscriber revenues of at least $2.18 billion a year. However, the Chicago Tribune says the companies lost a combined $7 billion getting started, and the new company would have about $1.6 billion in debt. The companies argue the merger is critical to their survival because of intense competition from programming on the Internet, cell phones, and broadcast radio.

Some questions for regulators

Regulators at the Federal Communications Commission must approve the deal, or it won't happen. It won't be easy for the FCC to evaluate the arguments that consumers are substituting all of those alternatives for satellite radio.
First, consumers pay to receive satellite radio, but not for advertiser supported radio or Internet programming. But the best way to tell if goods are substitutes is by measuring the relationship between the price of one good (satellite radio) and the demand for other goods (everything else). How do you measure the influence of price if consumers can get the substitute goods for free?
Second, the market for earthbound broadcasters is defined by the reach of their radio signal, but the market reached by a satellite is not limited this way. And there is no good way to define the geographic extent of a market on the Internet.
I'm skeptical that all of the other media being cited by the companies are substitutes -- many people who consume free radio would not be willing to pay for the same programming. This does not mean the companies' arguments lack merit, but it's in their interest to push their definition of the market to the limit.

What about consumers?

There are two possible ways consumers could be hurt. First, the merger probably will result in higher prices. Second, the range of programming might be reduced.
The second point first. Phil Rosenthal at the Chicago Tribune points out that XM and Sirius offer different programming -- one has Howard Stern, and the other Oprah, one has football, and the other has baseball. So customers who like particular genres, such as sports, have to subscribe to both XM and Sirius to get all of the programming they want. However, it's unlikely many people are actually willing to pay for both services, not to mention impractical.
Customers who want programs on the service they don't subscribe to would be better off if the merger goes through. The new company will probably offer all the programs now offered separately because elminating programming means the new company would lose customers.
As a general rule, increasing the range of programming at a merged company would increase the number of subscribers. For instance, sports fans and opera fans would subscribe if they could both find programs they liked for a price they were willing to pay.
This goes back to the first point. Prices will probably increase, but subscribers will probably get more programming. Customers should pay more if they are getting more.
But will the new prices be so high that they cannot be justified by the increased programming?
This might be the outcome if the new company can monopolize its segment of the radio market. And that is why the market definition that the FCC adopts will be so important to this proposed deal.