News Corp to split into two groups – we examine the top three reasons why

News Corp has finally bowed to shareholders’ will, announcing a split of the company that will isolate its struggling publishing arm from the more profitable and successful entertainment groups, including 20th Century Fox and Fox News.

The move has been rumoured for months, but chief executive Rupert Murdoch has resisted until now. It comes after a year-long scandal has plagued the company, with accusations of impropriety aimed at newspapers on both sides of the Atlantic.

The investigation into phone-hacking claims has cost the company millions.

Overnight, News Corp announced the new divisions will consist of an entertainment side, with 20^th Century Fox, the Fox broadcast network and the cable channel FX. The division will be led by current chief operating officer Chase Carey.

The other division will handle the publishing concerns, which include major mastheads such as The Wall Street Journal, The Australian, and publishing group HarperCollins.

“We recognise that over the years, News Corporation’s broad collection of assets have become increasingly complex,” Murdoch said in a statement.

“We determined that creating this new structure would simplify operations and greater align strategic priorities, enabling each company to better deliver on our commitments to consumers across the globe.”

The announcement comes as the company has made substantial changes to its publishing arm in Australia, with the group announcing a major restructure along with job cuts – expected to number more than 1,000.

But the decision also comes after News Corp resisted it for more than a year, despite shareholders’ protests. So why make the move now? We’ve examined the top three reasons.

1. Simplification of the business

News Corp is a huge entity. It encompasses not only several newspaper businesses across the world, but the Fox broadcast network, the Fox News channel, and various film studios including 20^th Century Fox – one of the big six film studios – Fox Searchlight, Fox Studios Australia and the Shine Group.

It also owns and operates a large number of websites, including Foxsports, AskMen and entertainment hub IGN.

These assets don’t necessarily line up. The television and film production studios are just as large and complicated as the newspaper publications. The company clearly deals in two distinct categories – entertainment and news – so splitting the two seems like a logical move.

This is also a big lesson for smaller businesses as well. Sometimes logical splits present themselves but chief executives are too hesitant to divide the company – despite any potential benefit from simplifying their company.

Splitting both will allow each side of the business to operate more effectively, and should, in theory, allow executives to spend more of their time focusing on one distinct aspect of the company. More attention on one area should provide better results.

Which brings us to our next point.

2. Succession made easy

With the company’s current structure, succession is much more of a dire issue. Anyone who makes it to the top will be in charge of both the newspaper and publication side of the business, along with the entertainment side.

Splitting the company removes some of the pressure around succession. After all, current chief operating officer Chase Carey and Rupert’s son, James Murdoch, are the two most likely candidates to take over the chief executive role.

Splitting into two grants each their own authority and, more importantly, allows Carey to focus on the entertainment side without becoming distracted by the scandals in the publishing division. After all, it’s become clear more responsibility is being shifted to Carey anyway.

Now, he’ll have that responsibility in a completely new role at the top of the company’s most profitable and successful divisions, while at the same time, pushing Murdoch into the background.

3. Splitting can provide greater value

Perhaps the biggest reason for splitting is this – the newspaper and publishing divisions simply aren’t providing as much value. They are in a declining industry, and they need to be isolated.

Murdoch claims last year’s phone-tapping scandal has nothing to do with this decision. That’s probably true, but it certainly hasn’t helped the overall notion the newspaper business is on the decline.

The numbers don’t lie. News Corp gets most of its profit from television, but the publishing group, which contains The Wall Street Journal, the New York Post, along with international newspapers including The Australian, contributed just 18% of operating income. Analysts suggest News Corp’s value could increase by as much as $US15 billion after a split.

In the nine months to March, the publishing unit generated profit of $US458 million, but the entertainment units combined provided $US4 billion in profit.

The publishing industry is dying, and while entertainment isn’t without its challenges, such as piracy and fragmented consumption methods, splitting the two allows the more successful parts of the business to remain unsullied by the struggling publishing groups.

And if the decline in publishing continues, the benefit for the split is obvious – News Corp can slowly wind it back without affecting the more successful side. It simply allows the company to reduce its risk and increase the likelihood of success.