News Corp. swings to loss

After spending a little more than $1.5 billion on Internet assets over the last four years, News Corp. acknowledged Wednesday that they had lost nearly one-third of their value.

The conglomerate's $452-million impairment charge for its Fox Interactive Media unit, which includes the MySpace social networking site, was the biggest piece of bad news for the fiscal fourth quarter ended June 30, during which revenue fell 11% to $7.7 billion and the company swung to a $203-million loss from $1.1 billion in net income a year earlier.

Also Wednesday, News Corp.'s 20th Century Fox movie studio picked a fight with Redbox, instructing its DVD wholesalers not to sell discs to the fast-growing $1-per-night DVD rental kiosk company until 30 days after they're released.

In addition to the big write-down on its digital assets, News Corp. reported a $228-million charge for restructuring costs, most of which were related to the recent layoff of 700 employees at MySpace.

The site, which News Corp. bought for $580 million in 2005, recently has seen its growth slow significantly in the face of competition from sites such as Facebook. In a conference call with analysts, News Corp. Chief Executive Rupert Murdoch said the company was looking to change MySpace's focus from social networking to music, games and online video.

The lone bright spot for News Corp. was once again its cable channels, led by Fox News Channel, which has seen ratings grow and is benefiting from an increase in fees paid by cable and satellite operators. Operating income for News Corp.'s cable unit, which also includes FX and international channels, rose 39% to $434 million. During the conference call, Chief Financial Officer David Devoe said the increase was driven entirely by affiliate fees, as advertising revenue was down 10%.

Ad revenue was down even more significantly for the company's Fox broadcast network and local stations, which saw their combined operating income plummet 66% to $95 million in the quarter.

The 20th Century Fox film and television studio saw operating income decline 8% to $203 million, primarily because of lower DVD sales for older television shows. Although it didn't generate much money from the movies, the studio has had three box-office successes this summer in "X-Men Origins: Wolverine," "Night at the Museum: Battle of the Smithsonian" and "Ice Age: Dawn of the Dinosaurs." Gains from those should be realized in the current and next quarter.

That's in large part because they'll be released in the declining but still lucrative home entertainment market. In a move to protect more-profitable segments of home entertainment, Fox on Wednesday issued its 30-day restriction on Redbox. Fox's decision follows a similar one by Universal Pictures late last year. Redbox sued Universal as a result, and the case has yet to be resolved.

Sony Pictures Entertainment is the only studio to have reached an agreement with Redbox. Its deal guarantees revenue of $460 million over five years. Fox, which is understood to have recently been in talks with Redbox, apparently decided that such an agreement wouldn't be acceptable.

During the call with analysts and media, President and Chief Operating Officer Chase Carey spoke bluntly about the issue.

"Having our [movies] rented at $1 in the rental window is grossly undervaluing our products," he said.

In response, Mitch Lowe, president of Redbox, showed no sign of backing down. "Redbox stands behind our convenience and value that we offer consumers, and we're pleased to make DVDs available the day they are released," he said.

Also during the call, Murdoch announced that News Corp. planned to charge for Web access to all of its newspapers, along with FoxNews .com, as it already does for the Wall Street Journal's website.

Charging for news content has been a hot topic in the industry of late, but no other major papers have followed the Journal's lead. "Quality journalism is not cheap, and an industry that gives away its content is simply cannibalizing its ability to create good reporting," Murdoch said.

News Corp.'s newspaper business could certainly use a boost, as it reported a 63% drop in adjusted operating income last quarter to $96 million.

For News Corp.'s full fiscal year, revenue fell 8% to $30.4 billion and the company swung to a $3.38-billion loss from a $5.39-billion profit.


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