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June 11, 2007

Comments

Victor Cook, Jr., New Orleans, Louisiana

Joe,

I agree with you. My "Hidden Value" column was intriguing. I might even add, surprising. When I read about Mr. Murdoch's $60 a share bid, like most everyone else, my first thought was "irrational exuberance!" That's what motivated me to apply the enterprise marketing framework (EMF) to his offer.

The first thing my EMF requires is selection of the members of a strategic group. This is a tricky process and, ultimately arbitrary, as you suggest. On the first page of Chapter 3 I warn the reader:

"Sometimes even the most astute financial managers forget that performance is relative. Unfortunately, identifying competitors is not as easy as the airline example in the last chapter suggests. The answer to the question, who’s in my strategic group, depends on a lot of factors."

One of the most critical of these factors is who asks the question. For example financial managers and marketing managers often have entirely different competitors in mind. CFOs may think first of companies with which they compete for capital. Since capital markets are global, the CEO of AT&T may include France Telecom in the list of competitors even though the French monopoly has few North American customers. AT&T and France Telecom only compete for capital today. Maybe they'll compete for customers tomorrow.

Fortunately, the results are quite robust across groups with different membership as long as they have a high degree of market commonality and resource equivalence. Translation? The group members share one or more customer bases, though their products may be quite different, and their pockets are of similar depth. If you're interested in the details of how I use financial accounting data to define group membership see my audio slide show "Who's in My Strategic Group?" It runs about 11 minutes: http://breeze.tulane.edu/cookchapterthree/

Forecasting trends is equally tricky. No one knows what the sales revenues of the combined group will be in 2010. All I can do is explain how I came up with an increase in CAGR from 3.8% to 4.8% if Mr. Murdoch were to succeed in his bid for Dow Jones.

First, let me be clear. This is not a forecast of DJ's sales from 2006 through 2010. The company's revenues actually declined 31% from 1997 through 2006. It's a forecast of the group's revenues. And the other three companies experienced significant top line growth. GCI was up 70%; TRP was up 105%; even the Gray Lady's revenues grew by 15% over the decade. Add them all up and group revenues increased from $2.7 to $5.5 billion.

Second, I expect the performance of DJ under Mr. Murdoch's leadership will boost sales of the other three companies in the space, just as his acquisition of Fox did earlier.

Third, my results are not much different at 3.8%. DJ's maximum earnings market share drops from 22.4% to 20.9%. And the nominal value of its 2010 stock price falls from $118 to $110.

You put you finger on the biggest wild card in this deck: competitors certainly "would not stand still for such a dramatic shift in share." But, I must ask you in return: what can they do to stop an invigorated Dow Jones & Company driven by an increase in enterprise marketing resources from $653 million to almost $2 billion?

As to whether Mr. Murdoch has more experience in the entertainment business than in newspapers, I don't know. But if that's true, is it necessarily a disadvantage in the wild world of media in the 21st century?

Thanks for your thoughtful comments.

~V

eyeonmedia

While the "Hidden Value" column was intriguing, the "Sense" column has a number of significantly flawed assumptions. Here are some major problems: First, the assumption that the "Group Revenues" will be higher by 2010 is not substantiated by current or anticipated industry trends, including the 2007 YTD results; indeed, it is likely to be lower. Second, the change in market share makes no sense, since Dow Jones competes directly with the rest of the arbitrary "strateguc group" in only a few revenue areas and, even if this "Group" were a true market segment, the competitors would not stand still for such a dramatic shift in share. Third, Murdoch's prowess has been much stronger in the entertainment business than in newspapers, and will he be around in 2010?

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