Newscorp brand risk

Posted by in Australian Shares on Jul 18th, 2011 | 16 comments

Quis custodiet ipsos custodes? Who’s watching the watchmen? That’s the question now dogging the future not only of Rupert Murdoch’s UK media interests but Newscorp globally.

How bad is this going to get for the Sun King? I have no idea. But I thought I’d offer a framework for thinking about it.

When society authorises private businesses to perform the role of a watchdog, that role comes with a very serious brand risk. Because nobody is watching these watchmen, the integrity of the brand is absolutely paramount. Whatever makes up that integrity, the values that are expected by the society of the the profit making entity, are the value of that company.

In the past decade, we have seen two very high profile examples of failure of brand integrity in watchdog businesses that offer two very different paths ahead for News Corporation. The first was the case of Arthur Anderson and Enron. You may recall that Arthur Anderson was one of the “big five” global accounting firms and a seemingly indomitable colossus that had traded for a century. However, in 2002, when Arthur Anderson employees were convicted of shredding documents that related to the collapse of Enron, the firm lost its US CPA license and went out of business. The brand damage was such that the global operations of Arthur Anderson failed and were sold off to competitors. Ultimately, the US conviction was overturned but too little, too late.

So, we have seen a recent example of a watchdog brand sustaining such damage in one major country that it caused the collapse of an entire global business. However, the key factor was that the government of the United States had licensing control and revoked it.

A second example of a badly damaged watchdog brand is the role of credit ratings agencies in the GFC. The outcome here could not be more different, though is still unfolding.

The ratings agencies were the sine qua non of the crisis, abandoning their century old integrity in favour of the easy money to be gained from AAA rubber stamps for mortgage securities in the US, famously captured in the email of one employee to another that a security could be “structured by cows” and the firm would rate it.

However, the outcome for the agencies could not be more different to that of Arthur Anderson. They continue to operate within largely the same context, in which those who create the securities pay for the ratings, and no major ratings firm have disappeared. Yes, there has been some reform of their operating environment but it is not extensive.

The fact is, the agencies are as powerful as ever. In my view, this is simply because reforming the rating agency system is simply too hard. The reform is not so simple as making an example of a single company. It is, rather, a complex act of legislation in which an entire system must be restructured.

No doubt aware of this chasm that they straddle, the agencies have embarked on a global campaign to restore brand integrity. Their models (whatever they are) now downgrade firms and countries well in advance of their former easy schedules and at times, such as recently in Italy where sovereign and bank downgrades were split, seem even to draw out that pain by drip feeding.

The travails of Newscorp seems to fall between these two examples. As a single entity fighting off a brand destroying collapse of integrity in one of its major country operations, the entire company appears vulnerable. Key players have been arrested. However, because, rightly, there is no licensing regime for media (such is the favourite trick of autocratic states), legal proceedings have no immediate operational fallout.

Nonetheless, when the Leader of the Opposition, as well as other media interests start calling for media ownership laws to be changed to break up companies such as News International (Newscorp’s UK business), it is obvious that this scandal has some way to run. And that’s before we add in the risk that a new FBI investigation will turn something up in the US.

Having said that, there is one other way in which Newscorp has a tactical advantage over both of the other watchdog business examples used in this post.  Both Arthur Anderson and the ratings agencies are global business to business models with a single brand. Newscorp is largely a business to consumer model with multiple brands in different countries. That brand diversification is a huge asset in this struggle.

Perhaps that is why under such uncertain conditions, Newscorp’s share price has held up quite well.

I’d be steering clear for the time being.




16 Responses to “ “Newscorp brand risk”

  1. Dingo says:
    July 18, 2011 at 10:23 am

    And your view on nitwits, like Ed Milliband and Bob Brown, calling for breaking up or regulating media companies is?

  2. Houses and Holes says:
    July 18, 2011 at 10:29 am

    I’n in favour of media diversity and regulation that promotes it. I totally reject any notion licensing or the like.

    • Dingo says:
      July 18, 2011 at 11:44 am

      And what precise regulation would you be in favour of to ensure the ‘media diversity’ which your statement, by implication, seems to suggest is lacking or may be lacking? How precisely do you assess whether such ‘diversity’ is lacking? Do you support what Ed Miliband is proposing? Or would privatizing the BBC be a better idea? Should there be laws which force News Corp to divest titles in the UK? News Corp owns 70% of newspapers in Australia – should there be laws to force them to divest title here? Or would the break-up of the ABC be a better idea?

      Don’t be satisfied by government spin about “ensuring media diversity”. Ask specific questions. Get specific answers. The public want to know :-)

      • Houses and Holes says:
        July 18, 2011 at 11:47 am

        I didn’t write this post about media laws. It’s about risks surrounding Newscorp. If you want to write about media laws, by all means do so in comments.

        • Dingo says:
          July 18, 2011 at 1:27 pm

          H&H, you know I love your work, but would humbly submit that media regulation is the biggest risk to News Corp at the moment, not loss of readers.

          Currently listening to Sydney talk-back radio from China. If there’s one thing this country needs more of its radio shock jocks and more Murdoch-style ‘stick a microphone in the noses of the powerful’ journalism. I reckon a daily page 3 picture of various Chinese babes wouldn’t go astray either.

          China, of course, unlike Hong Kong and Taiwan, bans such tabloid journalist.

          There’s a lesson in that for all those holier than thou types decrying media sensationalism and journalists that “write crap” as our potty-mouthed PM puts it.

      • Stavros says:
        July 18, 2011 at 11:58 am

        The Competition and Consumer Act and its basic misleading and deceptive conduct provisions should be enough ‘regulation’ to ensure truthful and honest media reporting.

        News providers are in trade and commerce, so if they engage in conduct that is likely to mislead readers and buyers of their paper, then they should be prosecuted by the ACCC or even by a citizen affected by their illegal conduct.

        I agree with Dingo that regulation aimed at creating media diversity is a vague and silly notion. The internet is taking care of diversity all by itself.

        What we dont want is some Bob Brown engineered media landscape…the fact that they even are discussing the notion should be shot down in flames by anyone that thinks a free press is vital

        News is less powerful in Oz now than it was 5 years ago. This trend will continue

        • Dingo says:
          July 18, 2011 at 1:09 pm

          I think you are bit off base here Stavros.

          The “misleading and deceptive conduct” rules of the Australian competition authorities (problematic in themselves – but that’s another story) don’t currently apply to regulate what is actually published or broadcast. Nor should they. Imagine a regulator trying to determine whether a particular opinion is misleading or deceptive.

          Beware of people who say all they are interested in is “media diversity”. Always ask them what specifically they have in mind to achieve this.

          • Stavros says:
            July 18, 2011 at 1:17 pm

            Dingo…where in the Act is that restriction (not applying to broadcast and publishing?…its a catch all provision and has been used in the past to prpsecute TV shows like Today/Tonight etc…

            And it wouldnt be the role of the ACCC to crack down on single misleading articles, but we a4re talking about a systematic and reoccuring pattern of behaivour (which is what the ACCC look for – repeated and persistent conduct).

            I assure you that if a directive has come from the Fairfax chief to be bullish on property regardless of the facts, then this would be enough for Fairfax to be guilty of breaching s52.

            You cannot mislead in trade and commerce…its that simple really.

          • Dingo says:
            July 18, 2011 at 1:33 pm

            Stavros, I’ll think you’ll find that in the cases you mention it was connected to actually selling a particular product or service e.g. constituted advertising for a particular product. The difference is this – if SMH says that you can get a subscription for such and such a price but lies about this then it would be governed by the “misleading and deceptive” conduct provision. But ACCC (as it was formerly known) does not have jurisdiction to determine whether a particular SMH journalist’s report or opinion is misleading or deceptive.

          • Stavros says:
            July 18, 2011 at 3:35 pm

            I disagree Dingo…the publishers defence does not apply any more so that you can print whatever you want no matter how misleading it is.

            In the case of Channel 7 and its promotion of the women that apparently made millions through some silly scheme, Channel 7 was found to have aided and abbetted the misleading conduct and reciecing payment.

            Fairfax would recieve millions from the property industry in advertising and I am sure they are even supplied with directly written articles from the likes of the HIA etc…

            By not disclosing this and not disclosing their vested interests, then it is clear they have misled people who are unaware of this connection.

            This is misleading and deceptive conduct and it is trade and commerce. They are the simple elements of the offence…just because no one has had the balls to take on a legal matter of this nature doesnt mean it cant happen in the future.

            Put it this way – it is getting looked into in. The ACCC will only become interested once the boat has sailed and there is political pressure to ‘do something’

  3. Stavros says:
    July 18, 2011 at 10:53 am

    I think the damage done to News Corp will not be as serious as feared. Although they have revealed to be a media organisation that breaks the law in order to break a story, there is at least no claims that they falsified the news…

    I personally think Fairfax, once it is revealed that they have actively promoted the housing bubble with a total refusal to correct their false claims about a shorage of houses and rental price pressures. They have done this purely for their own commercial gain.

    I would rather buy a paper from a ruthless organisation that breaks the law in order to reveal a story that promotes their ideological position than buy a paper from an organisation that intrentionally distorts the news about Oz property in order to keep people in the dark and promote their own commercial interests.

    I am not justifying Newscorp’s actions…they should be hammered for this with jail time for those that authorised and carried it out…but it does frustrate me that people are not looking at other examples of the media not doing their job properly

  4. The Prince says:
    July 18, 2011 at 3:24 pm

    Got sent this today:

    http://www.ritholtz.com/blog/wp-content/uploads/2011/07/ltt070718gif.gif

  5. Monday links: out of sync | Abnormal Returns says:
    July 19, 2011 at 2:58 am

    [...] What is the Rupert Murdoch-discount on News ($NWS) shares?  (Felix Salmon, MacroBusiness) [...]

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