The Son Also Rises

Fox stations prosper under the helm of a new generation

When Rupert Murdoch put his son in charge of News Corp.'s most crucial corporate division, Wall Street could have gotten nervous. But compiling record profits has a way of reassuring investors, and Lachlan, Rupert's eldest son, who has headed the Fox Television Stations group since 2002, is doing that.

It must be something in the genes.

News Corp. stations are the "single biggest profit generator for News Corp.," says 33-year-old Lachlan Murdoch, who also has a brother and two sisters from his father's second marriage, to Anna Murdoch. "In the past year, we have provided over a billion dollars worth of EBITDA [earnings before interest, income taxes, depreciation and amortization] to News Corp.," the parent corporation.

Wall Street isn't complaining. "I don't think anybody can argue with the numbers," says analyst Jessica Reif Cohen, vice president at Merrill Lynch. "If you judge on performance, he is doing great."

The Fox group reaches nearly 45% of U.S. TV homes (37.92% by FCC calculations, which discounts for UHF channels). That gives it the biggest reach of any single station group. Fox's 35 stations are in 26 markets, and that includes duopolies in New York, Los Angeles, Chicago, Dallas and Washington—all top-10 markets—as well as in Houston, Minneapolis, Phoenix and Orlando, Fla.

Total net revenue for the group in the most recent fiscal year is around $2 billion. The station group has been generating margins "in the mid 40s," Murdoch says. For UPN-affiliated second stations in the group's nine duopoly markets, where total integration savings now are in excess of $100 million, those margins soar into the mid- and high-50% range.

Those duopoly savings have been achieved by integrating sales forces and, in many cases, combining news operations and physical plants. Perhaps the biggest single component of the savings has been in people costs: The combined stations are run by fewer employees.

But the cost savings from buying the duopoly stations are "pretty much done," Murdoch says. Now it's time for a new phase.

Still to come is the "programming piece, when you start to program these duopolies so that they keep very distinct voices in the market," Murdoch explains.

The addition of Fear Factor
and Malcolm in the Middle
to the UPN stations' lineups is part of that new focus on "building our duopolies with second-station programming throughout the day," he says. "We've invested very heavily in [programming for] our UPN stations."

The group also has renewed Seinfeld, which airs on the Fox stations, and bought Everybody Loves Raymond, which will join the lineup in 2008.

The Fox group is "very smart in the way they buy programming," says analyst Reif Cohen. "They cross-promote, and [their Fox and UPN stations] have complementary schedules." News Corp./Fox is almost unique in the way it runs its companies. "You don't have the problems between divisions that some of the other companies have."

While the other major station groups can be "reasonably positive" about their TV stations, "Fox has definitely had the best run with their syndicated programming to generate growth," says Fahnestock & Co. media analyst Peter Mirsky, singling out the Seinfeld
deal as particularly valuable to the group.

Those record station-group profits provide an important part of the war chest that finances News Corp.'s aggressive worldwide expansion plans, whether it's DirecTV in North America or SkyItalia in Europe.

But even if the TV-station business seems old in a world of exploding media choices, well run stations still print money. The station group is News Corp.'s single "most important television asset," Peter Chernin, the parent conglomerate's president and chief operating officer, told Wall Street analysts earlier this year. "The stations are going to continue to be the explosive growth driver that fuels our television business."

The reason is as obvious as the dollar signs on the News Corp. bottom line. Consider New York City, the country's No. 1 TV market:

No, Fox isn't on top, exactly. The Big Apple's single-station revenue leader by far in 2003 was WNBC, the NBC flagship, which took in an estimated $335.8 million, followed by ABC's WABC ($286.3 million), with Fox's flagship, WNYW, in third with $223.2 million, according to the most recent data available from BIA Financial Network.

WCBS was in fourth place in the No. 1 market, where Viacom's CBS does not own a second broadcast station. But Fox does, and in this new age of the duopoly, single-station numbers may no longer tell an entire market's story.

WWOR, Fox's UPN affiliate in the Apple, took in an additional $130 million, according to BIA. Since both WWOR and WNYW are Fox owned, Murdoch's division was in fact the overall English-language broadcast-station revenue leader in New York in 2003.

(The computation changes back to NBC's favor when NBC's Spanish-language Telemundo station, which had $40 million in 2003 revenues, is added to WNBC's $335.8 million.)

The Fox money is even more complex in Los Angeles, the sprawling No. 2 market (see page 38).

Only News Corp. and Viacom, among the media giants, have built their station-group strategies around English-language duopolies.

In fact, combining station groups and creating duopolies was one of the "key strategies" behind merging Viacom and CBS, says Viacom Television Stations Group CEO Fred Reynolds. Currently, Viacom has eight duopolies.

Although Fox has no intention of buying more stations, Murdoch says he would "swap" with another owner if that could create another duopoly. Many observers think a station swap with Viacom is the likeliest scenario, but Murdoch says, at the moment, "we're not talking to anyone." But neither Viacom nor Fox has much room to maneuver under the new 39% ownership cap.

In Viacom's case, combining the CBS owned-and-operated stations with UPN stations in 2000 made immediate and apparent sense because it gave the conglomerate two distinct brands in the biggest U.S. TV markets, adding the younger-demo, urban-appeal UPN stations to older-skewing CBS.

"We believe each brand is separate," Viacom's Reynolds says. In Philadelphia, for example, he adds, the CBS and UPN stations have "separate and competing sales forces. They have a separate creative-services resource." Because his own background is in packaged goods, "I believe in brands," he says. The Viacom stations in the market do share facilities, engineering staff and other "back-room resources."

By contrast, Reynolds notes, in Fox's largest markets, one sales force sells both duopoly brands, and that's a significant difference in both mega-giants' duopoly strategies.

News Corp.'s acquisition of Chris-Craft in 2002 made the Murdoch empire's nine new UPN-affiliated stations the single largest component of UPN's station roster. Those youthful-skewing stations seemed, at least partially, to overlap the core Fox brand audience, adults 18-49, rather than adding an entirely new demo to the group. Murdoch concedes that point, rather readily. "There is an overlap," he allows, but reaching the younger demos is "what we're good at and what our advertisers want."

Says Patrick McNew, executive vice president and director of operations, PHD Media, "Fox has done a good job of branding themselves as the 18-49 network."

The UPN/News Corp. connection is strange. News Corp. owns the UPN-affiliated stations in New York, Los Angeles and Chicago, among other major markets crucial for advertisers. That gives News Corp. clout with Viacom, but Murdoch dismisses the argument that Fox could kill off UPN when the present affiliation contract expires. (Fox signed a three-year renewal last year.) In any event, he doesn't want to.

That doesn't make sense, he says, because when UPN has "success invigorating their prime," Fox makes "more money on the non-prime dayparts." Maintaining the Fox-owned stations' UPN affiliation also is another element in giving them their own identity in the market—just as maintaining their own newscasts is—and that's part of the company's duopoly strategy, too.

In Los Angeles, for example, "we would have made more money had we closed the UPN news," Murdoch says. Instead, the newscast was retooled from one hour to a half-hour and moved back from 10 p.m. to 11, out of direct competition with KTTV, the Fox station in the market.

"There's no playbook," Murdoch says. But based on the results, he adds, "we think we're doing a very good job."