Now let’s return to the example of Rupert Murdoch, who seems to have overpaid for a newspaper and two sports teams.
Murdoch is doing the equivalent of the consulting firm leveraging Corinne, only using companies rather than people. Plus, his end game is different. To understand why he would pay an additional $2 billion for the Wall Street Journal, we need to analyze past deals.
Murdoch once paid $1.6 billion for the four-year rights to broadcast National Football League games on News Corps’ fledgling group of TV stations. According to Barron’s, he lost $350 million on the deal when compared to ad revenue generated by the deal. However, Murdoch recognized that broadcasting rights to the NFL was worth more to him than just ad revenue, and so the $350 million loss on the $1.6 billion was viewed as part of the bigger picture. With the NFL contract in hand, Murdoch’s group of stations formed what would become the backbone to launching Fox, the nation’s fourth major network. The market value of his TV network rose from $3 billion to $7 billion. In essence, the NFL deal was a “loss leader” for the TV station business. When you recognize someone or something is worth more to you than the asking price, purchasing it is a fantastic way to exert leverage (finance people refer to this as an “arbitrage” opportunity). Murdoch would probably see the NFL contract as a $350 million investment to make $4 billion (i.e., the increase from $3 billion to $7 billion for his network).
Murdoch’s deals to buy the LA Dodgers baseball team and Manchester United soccer team followed a similar pattern. The sports teams’ games were “content” to be transmitted over his media infrastructure. He even envisioned cross-promotion of games by Fox’s highly successful Simpsons franchise. Similar to his NFL deal described above, what he might lose on any broadcast deal, he would make up for in cable subscriptions and stock market appreciation of his media empire.
The Wall Street Journal purchase took this approach to a new level. Murdoch started with a marquee newspaper property. He likes these, not for their bragging rights, but because of the other intangibles that can be gained from them. For sure, he wrung costs out of the Journal by sharing operations with News Corps’ many newspapers around the world. Likewise, it filled in a gap in his newspaper portfolio which stretches from tabloids like the New York Post to the highbrow London Times and the Sunday Times. And the Wall Street Journal added another well-regarded international pulpit for him to move his own political, social, and business agenda forward.
But, the purchase’s real value appeared to be the increased value of his business with China. For years, he had wanted to expand his media empire into China, especially his Star TV and Phoenix Satellite TV operations. If 200 million Chinese subscribed to his satellite TV at, say, $10 per month, it would generate $24 billion per year in revenues. However, China was reluctant to allow in media that it did not control and censor. Plus, due to some political missteps in his dealings with the Chinese government, it had made Murdoch kowtow to gain entry, once making him wait for hours to see a lowly bureaucrat. So, Murdoch was looking for keys to unlock China’s doors.
One particular key could be the Wall Street Journal. China bristles when criticized by outside media. Well, the Wall Street Journal, while openly enthusiastic about the China market and culture, has openly blasted the Chines government on everything from its totalitarian regime to human rights abuses. As he had done previously by quashing a book from one of his publishing houses that put China in a negative light, if Murdoch could remove this thorn in China’s side by reducing the Journal’s negative coverage of its government, it could go a long way to building the bridges required for greater inroads into China’s growing market. The $2 billion premium for the Wall Street Journal would simply be another loss leader for larger returns in another piece of the media empire.
Both Corinne and Murdoch offer examples of leverage; that is, people using other people’s assets to make money. The purpose of this section of the book is to teach you the concept of leverage and how to apply it to yourself. We want you to start seeing yourself as an asset that produces value and to learn where you fall in the leveraging food chain.
Who would you rather be:
Corinne or the consulting firm partners who are leveraging her?
The Wall Street Journal and Los Angeles Dodgers or Rupert Murdoch?
Your answer will tell you whether you prefer to be leveraged or to do the leveraging.
Critical Path Action Items
Do you prefer to be Corinne or the consulting partners who leverage you?
Would you rather be the Wall Street Journal and Los Angeles Dodgers or Rupert Murdoch?
Do you prefer to be leveraged or do you prefer to do the leveraging?