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Can paywalls save News Corp?

News Corporation (ASX: NWS) on Tuesday reported its results for its first three months of trading as a separate company to 21st Century Fox (ASX: FOX).

News Corp generated revenues $2.07 billion, earnings before interest, taxes, depreciation and amortisation (EBITDA) of $141 million, and net profit of $38 million for the three months to September. The result represented a 3% drop in revenue, but a 58% rise in EBITDA and a $121 million turnaround in net profit.

Prior to the release, a survey of analysts by Bloomberg predicted consensus revenue of $2.18 billion and EBITDA of $128.4 million. The failure to hit the revenue target caused a sell-off. News Corp shares dropped over 5% during intra-day trading and closed down 3.26% for the day.

The company attributed the turnaround in profit primarily to the impact of its recent acquisition of Fox Sports Australia TV and reduced costs in its newspaper division. Meanwhile, the reduction in revenue was primarily due to a broad-based decline in sales and advertising in the news and information services division.

A 22% drop in revenue from the Australian newspaper division was the prime culprit, accounting for the majority of the $171 million decline in the broader newspaper segment. Segment advertising suffered a 12% fall due to ongoing weakness in the Australian and UK markets, as well as unfavorable exchange rate movements.

News Corp is attempting to shift newspaper revenue from physical sales and advertising to paid subscriptions.  The company has recently launched digital subscription packages on a number of popular Australian websites include the news.com.au network, Foxsports and The Australian.

News Corp CEO Robert Thompson did not answer specific questions about the success of the paywalls, opting instead to note that it was still ‘very early days’. In a discouraging sign for News Corp, circulation and subscription revenue fell by 6% in the period, though the fall was attributed mainly to lower print volumes and a decline in institutional revenue in the US.

Foolish takeaway

News Corporation’s future earnings will largely depend on how well it can execute its strategy of reducing the newspaper division’s reliance on advertising and physical sales. In a similar vein to the issues faced at Fairfax Media (ASX: FXJ), News Corp faces the challenge of adapting to structural changes in the way news is consumed.

The current paywall system is not yet a compelling buy. While the state-based news websites such as adelaidenow.com.au and heraldsun.com.au have paywalls in place, the Australia-wide News.com.au website has no paywall and carries roughly (anecdotal evidence) 70% of the same stories as on the state-based websites. The paywall for The Australian is a more compelling buy but does not have as wide an appeal due to the more ‘serious’ nature of the paper.

News Corp currently has the viewership to command a significant revenue stream from subscriptions if it can find a way of successfully monetizing a paywall in Australia.

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