SECTION: U.S. EDITION; TECH SPECIAL/RUPERT'S WEB RULES;
HEADLINE: Look Who's Online Now;
It took a while, but Rupert Murdoch has a case of Internet fever. A real-time portrait of a legendary mogul remaking his media colossus.
BYLINE: ADAM LASHINSKY
WE CAN'T SAY FOR CERTAIN WHICH of his many tribulations was on Rupert Murdoch's mind when he convened his lieutenants for a September offsite in Carmel, Calif. It may have been the son who got away--Lachlan, who had abruptly quit his post as News Corp.'s deputy chief operating officer and moved to Australia, leaving behind a distracting residue of palace intrigue. Or maybe it was the larger family feud, which saw Murdoch's second wife fiercely guarding her children's voting shares in the company while Rupert and his third wife tried to pry loose a stake for their young kids. Or it could have been the machinations of his longtime rival and old pal John Malone, whose growing stake in News Corp. forced Murdoch to adopt a poison-pill defense. Corporate battles, a nuanced family life--the world of Rupert Murdoch, 74-year-old billionaire, is nothing if not cinematic.
But this much we know for certain: In Carmel, Murdoch put aside those messy, complicated concerns and lasered in on a great big business problem--the kind of imminent threat (and glorious opportunity) that's a lot more engaging for a born empire builder like him: what to do about the Internet. As Murdoch and his deputy, News Corp. president and COO Peter Chernin, sat at one side of a meeting room, a crowd representing all corners of his empire listened intently to presentations from Internet experts and the heads of the three new-media businesses Murdoch has spent $ 1.3 billion in rapid succession to buy. Venture capitalist Vinod Khosla urged Murdoch to experiment, something big companies typically screw up. Silicon Valley marketing whiz Richard Yanowitch presented the pros and cons of creating an Internet portal. Author John Battelle suggested that Murdoch's Fox film and television units "put their video out on the Internet and then figure out how to make money on it." ("You could have heard crickets chirp," says Battelle.) There were no sacred cows. The meeting was a corporate teach-in, and Murdoch wanted his people to hear it all--the paradigm is shifting fast, and News Corp. needs to shift with it.
"When you've got a big, expanding world economy, you'd expect a boom in advertising, and it hasn't been there," he explains a couple of weeks later in his Los Angeles office, a spacious fifth-floor redoubt overlooking the sprawling lot of his 20th Century Fox movie studio. Even as traditional ad sales failed to boom, he says, small in-house websites like Foxnews.com and Britain's Times Online started generating meaningful revenue on puny investments. "You start putting two and two together, and we decided to abandon our defenses and get offensive."
MURDOCH SIGNALED his intentions in an April speech to a group of newspaper editors, acknowledging that he'd been too complacent after the dot-com bust five years ago. The upshot was that News Corp.'s Internet audience badly lagged behind not just web upstarts like Yahoo but old-media stalwarts like Viacom and Disney as well. (A lack of that magical Internet mojo has plagued Murdoch's stock, as it has other big-media stocks. News Corp. shares are trading around $ 16, or 10% lower than two years ago; Yahoo's are up 60% in the same time frame.) The battle cry was followed by fast action, as Murdoch launched a new web entity called Fox Interactive Media and then outbid Viacom to buy two of the biggest web properties he could find, the teen-focused social-networking site MySpace and a gamer destination called IGN. He also picked up Scout Media, a sports site.
Let's state the obvious: This embrace of the web by the world's richest media mogul may seem a little late. Here we are in the autumn of 2005, ten-plus years after Netscape went public, and now he says there's something to this whole Internet deal? But the fact is, Murdoch has created a $ 7 billion fortune giving the lie to that Silicon Valley chestnut about "first-mover advantage." The man is an opportunist. He doesn't care if he's first, last, or in the middle; what matters is that the business grows and makes money. The Fox television network, the Fox Sports franchise, and the Fox News cable channel--all those Murdoch success stories faced well-entrenched incumbents. "Rupert's not wrong to say he figured it out before and he'll figure it out again," says Scott Sassa, a media veteran who ran Friendster, the diminished dating website now overshadowed by MySpace. "He came late to the network television game, late to the sports game, late to the cable network game, and late to the distribution game. But News Corp. has created relevance in all those areas." (Full disclosure: The author of this article is a commentator on Fox News Channel's business programs.)
It's also true that his company has dipped a toe in the Internet pond before. Murdoch's other son, James, now CEO of BSkyB in Britain, ran a money-losing venture called News America Digital Publishing in the 1990s; Murdoch also once established a billion-dollar fund, E-partners, that went nowhere. "We were pretty cautious and made a lot of little investments," says Chernin. "On the one hand that saved us a lot money. On the other hand we didn't have a clear strategy other than to be careful." Murdoch isn't all that different from all the other old-media bosses (including the ones that run Time Warner, FORTUNE's parent) who got burned by the web crash of five years ago but now can't afford to be left behind as the thing takes off again. After the bubble burst, Murdoch all but forgot about the Internet; from 2000 onward the focus of his attention was taking control of DirecTV, for which he paid General Motors $ 6.6 billion in 2003. Now he wants a piece of the Internet once again. The only question is how to go after it.
What you're watching is Murdoch's strategy evolving in real time--and his goal is not just to embellish what he's got but to add a whole new growth engine to a giant business. "The more we think about it, the more it fits into our whole modus vivendi, our philosophy, for the last 40 years, which is more choice," he says. "The Internet is almost the ultimate way of giving people choice. Young people use it more. Before, we were pushing media at them. Now the new generation and the generations to follow are going to be pulling out of the universe what media they want to feel relevant."
MURDOCH IS BETTING that the person who will lead his company to Internet bliss is a stocky, athletic 42-year-old named Ross Levinsohn, president of Fox Interactive Media. Levinsohn's previous gig was running Foxsports.com, which he transformed from a nonentity into a contender with the likes of Espn.com. "It was a very telling message about how important traffic could be," says Chernin of Foxsports.com's rise. "If you could marry content, which we have, with traffic, you could reach leadership positions pretty quickly."
Once Levinsohn got his new gig in March, it didn't take him long to realize that his bosses weren't merely dabbling. He says that when he gave a presentation to Murdoch, Chernin, and other top executives last May, "there was a funny moment that sticks in my mind. We were having a dialogue about something, I don't even remember what it was, but somebody in the room said, 'Well, we can't do that,' and Rupert kind of swung around and pounded his fist on the table and said, 'What do you mean we can't? Of course we can.'" The plan, in Levinsohn's words, was to "get younger fast and to get audience fast." (Murdoch himself seems to have embraced a personal get-younger strategy: He's recently taken to dying his hair a sandy shade of brown.)
Levinsohn talks to Murdoch at least every other day, including weekends, and says he's now integrating the newly acquired sites with the rest of the company's online properties. Fox's TV arm, for example, is producing one-minute clips of the popular animated program Family Guy, which will be offered free on MySpace and later, for money, on DVD. Feeding bite-sized freebies to MySpace is a natural because the show was already popular with users before the acquisition. "There are 50 ideas like that," Levinsohn says. "I don't know if they're unique or stupid. We'll do all 50. And that's the great thing--the cost of doing them is so small. It's not like I want to green-light a movie and then we lose $ 50 million on it. I'll lose an engineer's time or a couple of days of time."
The greatest ambitions in Murdoch's tiny (for now) online empire appear to be centered on MySpace, located in the trendily spare offices of a former ad agency in Santa Monica, seven miles west of the Fox lot. In contrast to the historical grandeur of the Fox studios, MySpace doesn't even have a sign on the door. "With 32 million users," says Chris DeWolfe, 39, the company's stylish CEO and co-founder, "we're afraid they'll try to come visit."
MySpace started in mid-2003, by which time a slew of social-networking" sites like Tribe, Friendster, and LinkedIn were already buzzing. But MySpace is the one that really took off. Its secret sauce seems to be that once it gained popularity, it slavishly listened to what its users wanted, which generated a virtuous cycle of good buzz and more users. Initially the site had no separate category for music, for example. But once the founders noticed that music was the hot conversation topic, they added a tab on the home page, much the way eBay creates product categories and subcategories after it sees significant trading activity.
MySpace is a speck of a business. It has 140 employees; revenues in the second quarter came to $ 7 million. But its importance lies in its growth rate--it's been adding 125,000 users a month--and in the amount of money it spends to generate content, which is very close to zero. Content generation is the job of the teenagers, who spend an average of one hour and 40 minutes a month on the site, writing blogs, listening to music, and viewing one another's photos. MySpace users are uploading photos at the rate of 1.7 million per day. (MySpace "flaggers," meanwhile, manually view uploaded photos and delete any that violate the company's no-nudity rule.) Another source of free content: Bigtime bands like REM and Nine Inch Nails--as well as about 500,000 not-so-big acts--use the site to premiere new music, allowing free listening ahead of an album release. "I told the brass at News Corp., 'You guys spend billions creating content,'" says Richard Rosenblatt, CEO of Intermix, which incubated MySpace as a separate company. "We spend nothing. What is better than selling ads against content that other people are creating?"
Free content will only get you so far, however: DeWolfe is in discussions with a major music company to start a MySpace record label, which will leverage the site's ability to ferret out rising bands. MySpace knows, simply by watching traffic on the site, which unsigned bands are already marketable. A film studio and radio channel also are on the drawing boards. "Before, we were thinking about creating a next-generation portal," says DeWolfe. "Now we're thinking about ourselves as a lifestyles brand. We're more analogous to MTV within Viacom, a diversified media company within a diversified media company." (The MTV comparison is apt: Media aficionados will recall that it, too, began life as a distribution mechanism for promotional videos.)
The big fear is that MySpace is a fad and will decline when young people tire of it, as they did of its rival Friendster. And Murdoch wants to make sure he didn't spend $ 580 million on a trendy website that won't be important a year from now. "To prevent it from becoming yesterday's fad, we have to give people more and more and make them feel a part of it," he says. Speaking about MySpace and IGN--whose raucous videogame sites hit a slightly older, more male demographic--at an investing conference in mid-September, Murdoch said, "Both are either $ 500 million mistakes, or they're going to look very, very smart."
IF THEY DO END UP looking smart, it will be because Murdoch figured out how to transmogrify a big old-media company into a lean, mean web machine--something none of his peers has achieved. "Rupert is doing what he's done in the past," says Larry Kramer, president of Viacom's CBS Digital Media. "He appears to be trying to get to size and scale quickly. In certain areas on the Internet, size matters. But it's got to work together."
And how will it all work together? Murdoch has a two-pronged strategy. First, bulk up quickly on Internet distribution, even as arriviste media giants like Yahoo and Google bulk up on content. "Yahoo's a great company," says Chernin. "But we just said, If they're trying to get into the content business, wait a second, we've got billions of dollars of resources and 30 years of experience in those areas."
The second prong is to add web features, like video search, instant messaging, and Internet calling--or VOIP--that will theoretically differentiate his sites (though the competition is developing the same stuff). Murdoch has told Wall Street that he'll spend up to $ 2 billion on Internet acquisitions, so he's got about $ 700 million to go. He offered hundreds of millions for the VOIP company Skype, but eBay outbid him by billions. (That's right, Rupert got out-Ruperted.) Noting the web's impact on newspaper advertising, he frequently, and admiringly, mentions Craigslist, of which eBay owns 25%. And although he says he'll license rather than buy textual search, which is what Google offers, he's clearly been doing his homework. In our interview he mentions a search he'd done on a little-known search engine out of Pittsburgh called Clusty. As he talks about these technologies, about the only thing that's clear is that he's determined not to be a follower. "I'm not saying we'll have better IM than anyone else," he says. "I just think if we're going to be a big presence that we're going to find several ways we can distinguish ourselves." As we said, the grand plan is a work in progress.
If nothing else, Murdoch's embrace of the Internet proves he is fully engaged in the future, despite his storied past. "He thinks like an Asian," says Leo Hindery, a former cable executive who knows him well. "He thinks into the next generation." That optimism shows as he lounges, tieless, in his L.A. office. "I was given a million dollars a few years back to write my own biography," he says. "I just couldn't do it. I sent the check back. It was just too depressing. It was like sitting down and saying, 'Okay, I've come to the end of my life. This is what I've done,' when I was wanting to get on with things. I said, 'Thank you very much. I just can't bring myself to do it.' " Rupert Murdoch would rather be writing the next story, not the last one. And he wants this one to be published online.