Murdoch takes $909m hit as sports broadcasts fail to score

When Rupert Murdoch paid $1.58bn (£1.10bn) for the rights to broadcast Monday night football on his then struggling Fox television network back in 1994, the other three established networks howled in disbelief. The man had to be out of his mind, they insisted. In fact, that deal, signed with the National Football League, was just the boon it was meant to be: it established the Fox network as a serious force.

You can be sure, therefore, that executives at CBS – which had traditionally ruled Monday nights with the NFL games – as well as at ABC and NBC, were taking private pleasure yesterday in the latest results released by Mr Murdoch's News Corporation. Amid a sea of discouraging numbers, one item stands out: the Fox unit is taking a painful one-time charge of $909m because all its main sports contracts, including its current NFL deal, are no longer bringing in the revenues expected of them.

Of course, nobody can afford to chuckle for very long. It is not that the ratings for sports programming on Fox television are slipping. In fact, they remain very healthy. The American public – currently tuned in every night and afternoon to the Winter Olympics on NBC – are as sports crazy as they ever were. And Fox carries everything from car racing to baseball. "We've had a wonderful year, from the Daytona 500, to the World Series and the Super Bowl," Mr Murdoch noted to analysts yesterday.

The problem, rather, is one of slumping advertising, now being described by some in the industry as the worst since the Second World War. It started long before 11 September last year and continues to hurt just about every media business. Nor, in News Corp's view, is there much sign of it recovering soon.

"We're in a rotten advertising environment," Mr Murdoch, the chief executive of News Corp, went on to say. "When all of the prices were set for these events and contracts, they were based on assumptions that business conditions would not only remain where they were a couple of years ago, but would continue to improve."

News Corp, whose empire includes the Fox television network, Twentieth Century Fox film studio, as well as newspapers and cable channels, said its loss for the quarter ending 31 December, including all one-time items, stood at $606m. That compared with a net loss of $23m a year ago. Excluding one-time items, News Corp's second-quarter earnings came in at $203m, down from $270m.

Additionally, News Corp lowered its earnings estimates for 2002, citing the poor advertising climate. It now expects mid-single digit growth in its operating income, down from a previous estimate of high single-digit to low double-digit percentage growth.

Scott Maddocks, an analyst at fund manager Rothschild Australia in Sydney, said: "The result was not impressive and it did not really suggest there is a big turnaround in the US advertising business." Mr Murdoch faces other problems. Operating income for his newspapers in Australia and in Britain – including The Times and The Sun – was down 16 per cent.

But the Fox broadcast unit stands out for its poor performance. Setting aside the sports contract write-down, operating income at Fox television was down 87 per cent. Advertising was the core culprit. However, analysts also pointed to a flagging roster of programmes. Viewers have been defecting, in particular, to NBC and CBS. Fox executives hope to reinvigorate audience numbers with new shows including That 80s Show and Andy Richter Controls the Universe.

Mr Murdoch's Hollywood interests are not helping much. The company said that its film entertainment group saw operating income slip 9 per cent compared with the same quarter a year before to $115m. It saw strong DVD sales of Planet of the Apes and Dr Dolittle 2. But huge costs were incurred with two box office disappointments, Shallow Hal, starring Gwyneth Paltrow, and Black Knight.

Among a few bright spots has been the performance of the Fox News Channel, the all-news cable operation based in New York that has been giving migraines to executives at CNN. FNC has added 20 million subscribers in a year and has seen a 31 per cent revenue increase. HarperCollins, the book publishing division, saw its operating income rise slightly to $42m from $40m.

No one, in this environment, is looking for Mr Murdoch to make any surprise acquisitions. Last year, he lost a year-long battle for Hughes Electronics Corp and its DirecTV unit to rival EchoStar Communications Corp. "We are not looking at any major purchases or deals at the moment at all," Mr Murdoch said yesterday. Nor are big investments planned in China by its Star TV Asian satellite unit. News Corp, last night, agreed to sell its Italian pay-TV venture Stream to rival Vivendi.

Even more candid about the damage now being wrought by the sports contracts was Peter Chernin, the chief operating officer. "You would have to say, we've overpaid," he said. The current Fox deal with the NFL cost no less than $4.5bn for eight years. It paid $2.4bn to Major League Baseball for a six-year contract.

Will the networks be more cautious about paying such exorbitant figures to the sporting industry in future? The allure of winning huge audiences is as powerful as ever, but no executive can ignore the reality that there is a point beyond which any economic return will never be reached. "The prices being paid to sporting bodies have gotten beyond an economic level, not just in this country, but everywhere," a rueful Murdoch noted.

He is not alone in thinking that a rethink is overdue. Last month, after the ABC and ESPN networks won the broadcast rights for National Basketball Association games away from NBC in a six-year deal worth $2.4bn, NBC Sports chairman Dick Ebersol groused: "If winning the rights to a property brings with it hundreds of millions of dollars in losses, what have you won?"