NEWS CORP., MCI: PRODUCT + PIPELINE; ALLIANCE POSITIONS THEM FOR NEW MEDIA

By Published on .

Rupert Murdoch's News Corp. and MCI Communications Corp. are betting that product plus pipeline will add up to power and prosperity in the digital age.

The global media Goliath and telecommunications titan linked last week in an alliance likely to sketch the blueprint for worldwide communications companies in the 21st century.

News Corp. is clearly the bigger beneficiary. MCI agreed to invest up to $2 billion in the media giant, an investment that will sharply reduce News Corp.'s debt-to-equity ratio and give Mr. Murdoch-who's already on a global shopping spree-more of a war chest for acquisitions. The investment would make MCI News Corp.'s second biggest shareholder, with a 13.5% stake; Mr. Murdoch and his family control 30% to 40%.

News Corp. and MCI-20% owned by British Telecommunications-will each invest another $200 million in the worldwide joint venture, to be managed by the iconoclastic visionaries Mr. Murdoch and MCI Chairman-CEO Bert Roberts, who will take a seat on News Corp.'s board. MCI's investment will be in cash, while News Corp.'s may take the form of programming and other assets.

The vague but ambitious goal of the venture: to create and distribute a broad array of new-media entertainment and information services that leverage News Corp.'s global programming and publishing assets and MCI's vast distribution network.

"Everyone has been circling around, looking at forming alliances and what's the best way to do it," Mr. Murdoch said. "The two of us together will [have] enormous strength.... Whenever we see we can work together we will do it."

The MCI alliance caps a victorious month for Mr. Murdoch. One week earlier, the Federal Communications Commission rejected allegations that Mr. Murdoch tried to deceive the commission about Fox's ownership, removing a potentially serious regulatory hurdle from his expansion path.

The joint venture is likely to spur yet another round of alliances between media and telecommunications powerhouses and could mark the comeback of convergence, a concept given a black eye by the collapse last year of Bell Atlantic's plan to merge with Tele-Communications Inc.

"I think it is as important and as much of a stunner as the aborted TCI-Bell Atlantic deal," said Porter Bibb, managing director of Ladenburg, Thalmann & Co., New York. "It marries content with distribution. MCI gets a serious partner who puts products down their pipeline and it suddenly gives Murdoch an enormous amount of leverage with people like [TCI CEO] John Malone.

"You're going to see a whole flood of strategic alliances because of what Mr. Roberts and Mr. Murdoch have done," he added.

MCI clearly views the News Corp. stake as crucial to its diversification beyond long-distance telephony, where it is a strong but distant No. 2 to AT&T.

"They obviously feel the $2 billion can grow faster with News Corp. assets," said Drew Marcus, media analyst with Alex. Brown & Sons, New York. "It's a classic content-distribution marriage with infinite synergies."

MCI last year backed out of an agreement to invest $1.4 billion in wireless communications company Nextel Communications. But MCI has already started delivering a wide range of new-media services via the Internet.

"MCI has been moving away from basic voice transmission over the last year or two in terms of their strategic thrust," said Robert Wilkes, communications analyst at Brown Bros. Harriman & Co, New York. "They're trying to be a provider of much more broad-based information and multimedia services."

MCI's online ventures, including internetMCI and database service FYI, are expected to be linked closely with News Corp.'s floundering commercial online service Delphi. How they will work together is another question.

"As far as how we're going to mesh similar services like Delphi and internetMCI, it's too early to tell. The world of new media will demand a whole new kind of corporate thinking and decision making," said Scott Kurnit, president of MCI's Business Information Services Co.

"Delphi has had a lot of fits and starts over the last two years," said Mike Rinzel, senior online analyst at Jupiter Communications Corp. "It seems that this is the alliance they needed-a company with savvy in developing software and network solutions to their problems."

Delphi executives are said to have discussed merging or folding that service into internetMCI. Such a move would make sense since Delphi's subscribership is under 100,000. But Delphi, which recently relocated its headquarters to New York from Cambridge, Mass., and announced plans to hire 750 people, insists it will remain a separate branded service.

MCI archrival AT&T has not hooked up with a content company but has formed alliances on the technology front with such partners as Novell, Silicon Graphics and Lotus Development Corp.

"Companies announcing big alliances like MCI and News Corp. often times end up in skeleton frames without any real flesh," said an AT&T spokesman. "We don't see any clear advantage to a distributor owning a content provider."

Despite the collapse of its deal with TCI, Bell Atlantic formed a joint venture with similar objectives with fellow Baby Bells Nynex and Pacific Telesis Group (see story on Page 18). SBC Communications, Ameritech, BellSouth Corp. and Walt Disney Co. also formed a similar venture. And U S West has partnered with, and invested in, Time Warner.

Armed with MCI's cash infusion and better positioned to spend money than his global media rivals, Mr. Murdoch is expected to ratchet up his expansion plans. He is already said to be negotiating partial or total acquisition of a number of media properties.

Foremost among them are the three Fininvest commercial Italian TV networks owned by former Italian Prime Minister Silvio Berlusconi, valued at $3 billion to $4 billion.

Mr. Murdoch could bring the German media powerhouses, the Kirch Group or Bertelsmann, into such a deal.

Mr. Murdoch also said he is considering launching a BSkyB-styled service for Latin America, and may seek to expand News Corp.'s 63% ownership of Star TV in Asia.

In the U.S., there's speculation Mr. Murdoch may seek to acquire Time Warner's 20% stake in Turner Broadcasting System, valued at $1 billion to $1.5 billion, or Seagram Co.'s 14.9% stake in Time Warner.

"Ted Turner may want to retire," Mr. Murdoch joked last week.

But analysts said he is not likely to settle for minority ownership of anything. Not when he's at the top of his game.

Written by Scott Donaton with contributions from Keith J. Kelly, Kim Cleland, Debra Aho Williamson, Laurel Wentz, Elena Bowes and Electronic Media's Diane Mermigas.

In this article:
Most Popular