Dow Jones' Digital Gamble


By Tom Lowry Ever since media companies began posting their content online in the mid-1990s, Dow Jones & Co. (DJ) has been in an enviable position among its peers: It successfully convinced people to pay for its information from the get-go.

It never waivered from a pay-per-view model, either. Result: the Web site of The Wall Street Journal, a Dow Jones property, has 701,000 subscribers today. So when the company announced on Nov. 15 it was paying $519 million for the free financial news Web site MarketWatch (MKTW), it left some folks wondering whether Dow Jones was abandoning its subscription model.

Absolutely not, say Dow Jones execs, explaining that cyberspace has plenty of room for both free and pay sites, even if they're both focused on business. "This gives us the best of both worlds," says L. Gordon Crovitz, president of Dow Jones' electronic publishing unit.

DRAG ON STOCK? Any way you see it, however, the MarketWatch bid is a huge bet by Dow Jones, which has had a less-than-stellar record with its acquisitions. Most notable is its disastrous, money-losing Telerate financial data business, which was finally sold off in 1998 to Bridge Information Systems.

Paying for MarketWatch will dilute Dow Jones' earnings for 2005 and load it up with as much as $400 million in bank debt. Standard & Poor's, a credit-rating agency owned by BusinessWeek Online parent McGraw-Hill (MHP), placed Dow Jones on CreditWatch following the Nov. 15 announcement. The same day, Fitch Ratings put Dow Jones on Rating Watch Negative.

Dow Jones stock closed at $45.10 per share, up 10 cents, following the announcement. However, more debt and a hit to earnings could be a drag on the stock over time -- and perhaps even make the media outfit an attractive takeover candidate. This scenario especially would be in play if Dow Jones' controlling shareholder, the Bancroft family, loses patience.

RAPID E-PUBLISHING GROWTH. Moreover, the MarketWatch deal comes as The Journal is in the midst of another ambitious plan, launching a Saturday weekend edition in September, 2005. Some analysts say this edition could cost $50 million to produce in the first year.

Bolstering the electronic-publishing arm of Dow Jones has two far-reaching strategic implications. For one, MarketWatch will make it the leading online provider of originally created business news, since Yahoo! (YHOO) and MSN Money aggregate much of their financial news from other sources.

For another, the deal could turbocharge the fastest-growing area at Dow Jones. In 2003, the electronic publishing business accounted for 22% of Dow Jones' $1.5 billion in revenues and 43% of its $125 million in operating income. Online ad revenues have grown over the past two years at about a 30% clip, say executives. From September, 2003, to the MarketWatch bid, the division had already spent more than $100 million on acquisitions.

LITTLE AD OVERLAP. Combined, the Wall Street Journal Online site, wsj.com, and MarketWatch are projected to have about 9 million unduplicated visitors a month. About 11% of MarketWatch's regular visitors are Journal Online subscribers, say Dow Jones execs. MarketWatch is expected to generate revenues of $96 million in 2005, according to Merrill Lynch (MER).

Dow Jones' strategy is to slice and dice as much information as possible to cater to particular reader segments: Premium-priced online newsletters for top-tier subscribers, the Wall Street Journal Online for business professionals, MarketWatch for a broader consumer audience, and free specialty Web sites such as CareerJournal.com, CollegeJournal.com, and OpinonJournal.com for others. It will then sell packaged advertising across all the sites.

Dow Jones' Crovitz says of the top 50 advertisers, about a third advertise on both the Journal Online and MarketWatch. "There's not much overlap, creating opportunities for both," adds Crovitz. The biggest advertisers on wsj.com are technology and financial-services companies while auto and beverage concerns are the big categories for MarketWatch.

LABOR ADJUSTMENTS? However, risks abound. What if The Journal's 701,000 online subscribers, in reading MarketWatch, decide they don't need to pay for their online news anymore? Crovitz says he's unconcerned: "I don't think the word cannibalization has crossed our minds," he said, noting that both the content and the readership are distinct from each other.

There's also the question of how well MarketWatch's 325 employees, who will be required to join the union at Dow Jones (mostly in New York and San Francisco), will adapt to working under the current labor agreement. A new pact was approved by the Independent Association of Publishers' Employees in August after more than a year of contentious negotiations with Dow Jones management. Dow Jones employees worked without a contract for more than a year. The previous pact expired in May, 2003, and a new deal was reached in August, 2004.

The boards of both outfits are expected to vote on the tentative deal over the next 90 days. Meanwhile, investors will be studying what happens with the businesses closely. At stake: Will MarketWatch help reinvent the venerable Dow Jones (it rolled out the first issue of The Wall Street Journal in July, 1889) as a model of a modern publishing company? Or will Dow be a disappointed gambler in the new round of Internet exuberance? Investors will watch the two closely in the days ahead. Lowry is media editor for Business Week in New York


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