End of the Empires: News Corp and Apple

Both News Corporation and Apple Computer are in the news, with News Corp. sliding downwards in stock price, and Apple share up, based on the phone hacking scandal in Britain, and increased Iphone sales for Apple, respectively. But both organizations face a downward slope to being “ordinary” corporations, like Time-Warner, or GE, or Sony, or Microsoft. Both Apple and News Corp. rely on a single man, exclusively, to focus their organizations towards maximum profitability. By doing things differently than their competitors, and reaping considerable rewards. Neither man, of course, has a replacement and the succession is likely to be a disaster.

News Corp. is a highly leveraged, media company. It must make payments of about $1 billion every year to service its debt, mostly bonds. As long as the company generates that cash, it does quite well. The leverage results in higher returns for equity investors, who are basically taking risks (currently satellite TV expansion in the UK and Asia) with other people’s money (the bondholders) while reaping the rewards. But the key is servicing the considerable amount of debt. Which means, basically, Fox News.

Fox News produces on its own, about $1 billion a year in operating profit. Enough to fund the payment on debts year in and out. The Film division last year produced about the same, but the Film division is highly variable. Some years it can produce even a loss, and other years perhaps more. News Corp. MUST make those debt payments, and bondholders watch the cash flow quite carefully, as do shareholders. No other division within News Corp produces anything like the money Fox News produces to service the debt every year.

And this is a problem — because the successors to Rupert Murdoch are stupid. James Murdoch, Lachlan Murdoch, and Elizabeth Murdoch have been quoted as saying they wish to fire Roger Ailes and turn Fox News into MSNBC. Wendi Deng, Murdoch’s current wife, has been quoted as saying the same thing. This will gain them the admiration of “respectable people.” The Guardian and BBC will cease to attack them. Jeannine Garofalo, Bill Maher, and Whoopi Goldberg will be happy. So too will Sting, Trudy Styler, and Bono, along with Ashton Kutcher, Demi Moore, and Jamie Foxx.

But no one will watch. Fox News is extremely profitable, a money-making machine, because its costs are low, and advertisers pay through the roof to get its huge audiences, which dwarf the other players, who fight among themselves for the small group of (to be sure wealthy) White people who are liberal. Most non-Whites lack money (little Lexus purchasing among the Black and Latino community) and don’t care about news (Latinos if they watch news watch it in Spanish, and Blacks at 12% of the population watch little news anyway). Even as the non-White population grows, their share of disposable consumer income is not growing much anyway. Making the demographic change of America outpacing that of the political/consumer change. Importing millions of dirt-poor illegal alien Mexicans, has not made them rich. Their kids, born in this country, remain poor also.

Therefore, the action is split among Whites, the rich liberal faction, which spends a lot of money on things like TD Ameritrade, or Lexus autos, and the like, and the vast working/middle class White consumer base, which buys Fords, Toyotas, and Budweiser. The market for the White Upper Class Liberals, is already saturated. NBC, CBS, ABC, MSNBC, CNN, CNN Headline News, Oprah Winfrey Network, Lifetime, the New York Times, the Washington Post, the LA Times, NPR, PBS, and more all compete for attention, time, and money. Anyone NOT an Upper Class Liberal (or who does not aspire to be one) has only … Fox News.

Fox News only makes money because no one competes with it. No other Media organization can or will “sully itself” to make money by being slightly less left-wing, slightly more middle/working class, than the upscale, liberal, upper-twenty-percent income folks who watch CNN. As of 2009, according the US Census Bureau, the top twenty percent in income numbered roughly 23 million households, and they make more than $100,000 a year. The number of people in the middle, the 60% center, make from between $20,000 and $100,000 a year, and number about 69 million households. The people at CNN and the NYT and NPR don’t care about the middle/working class, the 60% of the income around the median. That group is an alien people, living in places like suburban Dallas or St. Louis, with interests, views, and incomes totally alien to the urban coastal hiperati that makes up the alternatives to Fox News.

Rupert Murdoch understand this. He knows, from a brief experience on a working-class tabloid early in his career, that the middle/working class if catered to on a social level (which is the fundamental basis of Fox News) can make a lot of money. Not so much in newspapers now, but certainly in TV news. And perhaps on the internet, eventually. Fox News has been picking up money left on the table by all the other competitors, by being slightly less hard-left and more middle/working class oriented. [Even so, they’ve avoided carefully describing the race of the Flash Mobs assaulting/lynching Whites this Summer.]

Regardless of how the phone hacking scandals play out, someone not named Rupert Murdoch will take over News Corp. soon. Murdoch is a man in his eighties, he simply cannot run the organization much longer. If not James, then Lachlan. If not Lachlan, then Elizabeth. If not Elizabeth, then Wendi Deng. One of them will succeed Rupert Murdoch, and do exactly what they have promised interviewers time and again: fire Roger Ailes, and turn Fox News into MSNBC. Very soon after that, the Film division will have a bad year, losses instead of earnings, and News Corp. will struggle or miss debt payments. And so begin a long, slow, NYT-like decline. All because the remarkable attributes of Rupert Murdoch, understanding that there is money to be made catering to middle/working class conservative sensibilities, cannot be duplicated in his family.

The same is true for Apple, regardless of increased Iphone sales for now. Steve Jobs is a very sick man. His company has been terrible without his leadership. Alone among Apple CEOs, Jobs understands that what he sells is a mixture of hip-glitterati envy, and convenience in making things “just work,” be it a smartphone offering all sorts of handy and convenient apps (at the expense mind you of privacy and security), or a music player that integrates completely with your computer, or a store to buy music and video and books and applications, that integrates completely with your computer and various devices. In addition, Jobs understands the model of generally well paid engineers to produce high-end software and hardware, and the integration between them, producing mostly high-end results, for which the company charges a high-end price.

Absent Jobs, there is no one with the vision and ability to make Apple competitive down the road as Google/Android gets better and bigger and cheaper in smartphone offerings. Absent Jobs, there is no one to push personal computing into the next space, perhaps recording and classifying and moving around video from Satellite, Cable, and over-the-air broadcasting the way a TIVO or VCR does, only with Itunes capabilities and the ability to synch with a portable player to take wherever and whenever you want. Absent Jobs there is no one with both a design and engineering eye that can produce products that look beautiful and function well enough to inspire gadget lust among Apple’s well-heeled buyers.

In the meantime, Apple has become trapped like most computer makers in China. Manufacturing (contrary to what Steve Wozniak, Apple Co-founder argued) has long been sent to China, decades past, like nearly all computer manufacturers. Making tighter integration with hardware and software, last minute changes, and quality control and supply chain shock insurance much, much harder. The CEO has to be even more on top of things, because the factory is not five minutes or five hours away, able to quickly re-tool and deliver a changed antenna, on an Iphone, for example. Or a different screen on an Imac. This makes getting it right the first time vital, and only Jobs has been able to do this. No other computer exec, including Bill Gates, has been able to make as many design wins on hardware/software integration as Jobs has done. This is the fundamental basis for Apple’s success.

And its downfall. Other than Jobs, can any exec on the horizon offer more than Carly Fiorina style cost-cutting and job-shedding? A “me too” attitude towards commoditization, or pie-in-the-sky business consulting (Xerox’s Diversity CEO, Ursula Burns is a good example of the futility of this approach). Apple is not going to compete with say, Oracle, SAP, and Sybase for business integration money. The company has no expertise and no ability to execute that strategy. For better or worse, Apple remains consumer-wedded, and that means a strategy of not being the low-cost leader, but easy to use, integration already done, high-margin leader. The only person in the history of personal computing to execute this strategy continually and successfully is Steve Jobs. He simply is not replaceable.

Now, Apple and News Corp won’t fall right away. They won’t go bankrupt and liquidate like Borders. Or Circuit City. Or Compusa. They can muddle along for a good long while, like Xerox, or Kodak, or GM, or Palm (before it was bought by HP). Zombie companies, subject perhaps to periodic bailouts, eking out a not-dead, not alive existence. But absent their visionary CEOs, neither company has the ability to make the money they used to, by consistently beating the competition through a strategy that is obvious but near-impossible to duplicate. In many ways this speaks to decadence and debauchment of the elites. That both Murdoch and Jobs beat them for so long by doing the clear and obvious. With never a thought to beat them at their own game.

About whiskeysplace

Conservative blogger focusing on culture, business, technology, and how they intersect.
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8 Responses to End of the Empires: News Corp and Apple

  1. I wouldn't be so sure about Fox' staying power absent the elder Murdoch and Ailes. I am already uncomfortable with the barely-perceptible-to-most leftward drift of Fox News, and although they might not be able to articulate it, I think many of its viewers also sense that something isn't quite the same.Wendi Deng and Murdoch's kids are in for a big shock if they take Fox into MSNBC territory. Once FNC is no longer a credible alternative to MSNBC, why bother watching? The advertisers will say "why bother spending the money for 30 seconds when MSNBC's rates are less?" I think people will be surprised by the speed of its collapse.

  2. No doubt, Wile E. Also, don't forget that News Corp itself is highly leveraged… if revenue falls sharply enough quickly enough… liquidation OR reorganization and THEN liquidation (because, as Whiskey notes, few others can make this work like Rupert Murdoch, and he's apparently blind to his family's supplication to liberals), because they just can't make the debt payments.You make a strong case to short-sell News Corp, Whiskey. I'd be doing it, but I think that if this scandal blows over, there will be more money and less panic shorting from a higher price.(NOTE: The above was not to indicate investment advice or imply that the article was investment advice)

  3. The economy has never been alive. It has always been dead. It's the zombie, undead economy.Fox News is becoming in recent years a libertarian, classical liberal and right-liberal phenomenon. Kudos to losing your working middle class and far-right base. Good riddance.

  4. Anonymous says:

    The Fox problem starts at J school — they're all bent Left, Left, Left.I can't describe Fox as even centrist.During this latest budget fiasco the air heads expressed more concern with reinforcing the Wan's executive power rather than the solvency of the taxpayers.BTW, in a fiat regime Spending = Taxation.So our taxes have, in fact, exploded. They show up as massive price moves in gasoline and heating oil.

  5. Whiskey says:

    Oh yes Fox News has drifted left, I've seen it and so have many others. And yes Anon the price of oil and food has exploded due to spending fiat currency.However News Corp is so big it can probably zombie along for a while, off its film division, selling off bits and pieces to make payments. The NYT did so, selling its HQ to make payments.

  6. Fox News is drivel and Roger Ailes is an evil man. The end of that GOP mouthpiece can't come soon enough. Good riddance. Hopefully a real conservative media outlet can rise in it's place. One that actually challenges the corporate police state and the oligarchs who rule it rather than sucks them off.Your points about Murdoch, Jobs, and the end of their empires are correct though. Companies with big man cultures rarely survive succession struggles.

  7. Whiskey says:

    It wasn't big man, merely that these guys were the only ones with the skill to see what's in front of their nose. In Jobs case it was attention to design integration detail to make the "best" consumer PC, for Murdoch it is that slightly less leftwing stuff will sell.Both of that is pretty obvious, but they were the only ones who could execute it. Notably no one else ever copied them.

  8. Anonymous says:

    Maybe [a href=http://www.valvesoftware.com/]Valve[/a] could. They alone among many have not yet succumbed to the PC corruption, and have already made nearly the best software-distribution model around.Plus, the company does not actually [i]depend[/i] on Gabe Newell.

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