Stephen’s Posterous

Taking Helm at MySpace by Jessica E. Vascellaro, WSJ.com

When Jonathan Miller, News Corp.'s chief digital officer, phoned Owen Van Natta to finalize his appointment as chief executive of MySpace last week, Mr. Miller offered the dealmaker the sort of job he had been seeking ever since he was elbowed aside at Facebook Inc. last year, people close to him say.

As the 39-year-old Mr. Van Natta sets out to turn around MySpace, Facebook's closest competitor, he can draw on more than a decade of Internet experience, including several years at Amazon.com Inc., where he hammered out partnership deals.

But MySpace, with more than a thousand employees and flat user growth is a challenge unlike any Mr. Van Natta has seen. His mission, handed down to him by his new boss, Mr. Miller, who joined News Corp. earlier this month, is to jump-start growth and recapture some of the buzz that MySpace once generated, people familiar with the matter say.

MySpace, based in Beverly Hills, Calif., remains the largest social-networking Web site in the U.S., but the gap is closing fast. In March 2009, it attracted 70.1 million unique U.S. visitors, down 3.6% from a year earlier, according to comScore Media Metrix. Meanwhile, Facebook, which has surpassed MySpace in world-wide users, grew 72% to 61.2 million unique U.S. visitors.

Mr. Van Natta, known for a blunt style that has caused friction with co-workers, is walking into an organization that analysts, advertising executives and former executives say has lost its focus and become bloated. Pali Capital analyst Rich Greenfield predicts massive cost cuts will be needed to align MySpace with its revenue. A spokeswoman for MySpace declined to comment.

People close to Mr. Van Natta say he has just begun digging into details of the Web site's operations. They say he has been reviewing organizational charts, and has some ideas to simplify the site and place more emphasis on its technology.

Mr. Van Natta is keeping his roughly 0.5% stake in Facebook, according to people familiar with the talks, a move recruiters say is fairly common in the tech industry, where executives frequently jump from company to company. A Facebook spokesman declined to comment on Mr. Van Natta's keeping his stake.

Conscious of his lack of technical experience, Mr. Van Natta has begun narrowing the field to choose a senior product person, say people familiar with his thinking. They expect him to hunt for engineering talent within Silicon Valley, where his family will be based for now.

Mr. Van Natta isn't likely to turn MySpace into another Facebook, these people say. He views Facebook more as a communications channel and MySpace as a destination, where people come to entertain themselves by discovering music and meeting new people, they say.

The executive landed at Facebook in 2005 following an introduction by Silicon Valley investor Ron Conway, among others. At the time, the site was a small group of mostly 20-somethings seeking an experienced hand to help them negotiate partnerships. Facebook Chief Executive Mark Zuckerberg brought Mr. Van Natta on as vice president of business development, promoting him to chief operating officer five weeks later, according to people familiar with the matter.

He focused first on recruiting. He also solicited bids for the role of third-party advertising provider, helping seal a crucial alliance with Microsoft Corp. But over time, his hard-driving personal style, an asset at the negotiating table, aggravated disagreements between him and Mr. Zuckerberg, who is also know for a stubborn streak, say people familiar with the matter.

The two sparred in 2006 over Facebook's refusal of a nearly $1 billion takeover offer from Yahoo in 2006, which Mr. Van Natta had helped negotiate, according to people familiar with the matter.

Mr. Zuckerberg told Mr. Van Natta that he felt he needed to build out his management team and wanted him to take on a different role, according to two people familiar with the matter. In August 2007, Mr. Zuckerberg made him chief revenue officer and elevated several other executives to a similar rank.

Mr. Van Natta played a key role in negotiating a new round of financing in 2007. At a dinner in his Palo Alto, Calif., home with Mr. Zuckerberg and Microsoft CEO Steve Ballmer, Mr. Van Natta played hardball, say two people familiar with the meeting. Soon after, Microsoft took a 1.6% stake in the company in a deal that valued Facebook at roughly $15 billion.

Mr. Van Natta left the company in April 2008, telling friends and colleagues he was leaving because he always wanted a chief executive job and was tired of the erratic schedules of 20-somethings, according to these people.

He chilled out in Santa Cruz, grew a beard and made a few small investments in start-up companies, friends say. He turned down an opportunity to head MySpace Music, say people familiar with the matter. Instead, in November 2008, Mr. Van Natta became CEO of music-streaming site Playlist Inc.

Mr. Van Natta continued to weigh other possibilities. He interviewed with News Corp. Chairman Rupert Murdoch about the chief digital officer position, according to people familiar with the matter. Several weeks later, after Mr. Miller was named to that post, he started conversations over dinner with him about the MySpace chief executive job.

Emily Steel contributed to this article.

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Founders Step Aside at MySpace by Juia Angwin and Emily Steel, WSJ.com

The founders of MySpace are leaving the helm of the pioneering Web site that made social-networking a mainstream phenomenon, as owner News Corp. seeks to reinvigorate the once-hot property it scooped up four years ago.

The stepping aside of Chris DeWolfe and Tom Anderson, whose contracts weren't due to expire until October, represents a pivotal test for the viability of social-networking sites. While social-networking sites such as MySpace and Facebook have exploded in popularity in recent years, they have struggled to generate the kind of revenue and earnings prospects that can sustain them as businesses over the long haul.

News Corp. now aims to show that a large conglomerate, with a portfolio that includes many old-media properties including newspapers, can succeed at that task.

People familiar with the situation said News Corp., was completing a deal to name former Facebook Chief Operating Officer Owen Van Natta as chief executive to succeed Mr. DeWolfe. He would report to Jon Miller, the former AOL chief executive who was recruited to join News Corp. this month in a newly created position of chief digital officer.

Charged with all News Corp.'s stand-alone digital properties, he was particularly given the mission of shoring up MySpace. Spokeswomen for News Corp. and MySpace both declined to comment beyond a news release. Messrs. DeWolfe, Anderson and Van Natta couldn't be reached for comment.

News Corp. sees MySpace as critical in its transformation from a conglomerate of traditional television, movie and newspaper businesses to a new-media titan. But while MySpace grew quickly following News Corp.'s purchase, last year its revenue fell short of executives' targets, according to people familiar with the matter. News Corp. also owns Dow Jones & Co., publisher of The Wall Street Journal.

MySpace is still the dominant social-networking site in the U.S. But its U.S. audience has fallen this year. In March, MySpace attracted 70.1 million unique visitors, down 3.6% from a year ago, according to comScore Media Metrix.

Meanwhile, Facebook is nipping at its heels. Facebook surpassed MySpace's world-wide audience a year ago, and is growing fast in the U.S., with 61.2 million unique visitors in March, up 72% from a year earlier. Facebook also has made international expansion a priority, pressuring MySpace.

More broadly, MySpace, like other social-networking sites, still must overcome doubts about the medium's viability. Advertisers, for one, remain leery. "Advertising doesn't fit so neatly into a conversation that people are having among themselves," says Tom Bedecarre, chief executive of independent digital-ad firm AKQA. "The interruptive model of advertising hasn't been successful."

MySpace was founded in 2003 by Messrs. DeWolfe and Anderson. Their email marketing division of a Los Angeles company called eUniverse, which later renamed itself Intermix, was floundering, so they imitated a popular site at the time, Friendster.

They made two key improvements on Friendster: They allowed users to customize their profile pages, and they allowed users to create any identity they liked. Friendster, like Facebook today, encouraged members to use their real names.

But just as MySpace was taking off, fueled in large part by its popularity with musicians, it was sold to News Corp. MySpace's parent company, Intermix, negotiated the $650 million deal directly with News Corp., leaving the MySpace founders out of the loop until the last minute.

News Corp. Chairman Rupert Murdoch immediately sought to mollify the founders with lucrative two-year pay packages of $30 million each, but Messrs. DeWolfe and Anderson still chafed at the fact that MySpace ad sales were taken over by executives at Fox Interactive Media, according to people familiar with the situation.

The rank and file of MySpace was also angry that their stock options were canceled after the acquisition and that they were forced to move from Santa Monica to Beverly Hills, the people said.

Relations fell apart further. Mr. DeWolfe ignored suggestions from Fox Interactive Media President Ross Levinsohn about ways to improve the site. Mr. DeWolfe also sought to amend a $900 million advertising deal that News Corp. cut with Google Inc., delaying its implementation, the people said.

Mr. Levinsohn also clashed with Mr. Anderson, who is president of the site. Mr. Anderson controlled the product development and was criticized for not moving fast. In April 2006, MySpace bought the online karaoke service kSolo. MySpace launched the karaoke feature on its site in April 2008, two years later.

The tension between the MySpace founders and News Corp. eventually led to Mr. Levinsohn's dismissal in November 2006. He was succeeded by his distant cousin, Peter Levinsohn, who eventually gave Mr. DeWolfe control of the advertising sales at MySpace that he had sought.

All this time, Facebook was steadily gaining on MySpace. Founded by Silicon Valley computer programmers as a social network for Harvard students in 2004, Facebook expanded to other college campuses and opened to everybody in 2006. Facebook focused on building innovative features and encouraging third-party software developers to write applications to run on Facebook.

Meanwhile, MySpace, with its marketing and music background, fought back with entertainment, such as a celebrity news site and an expensive music joint venture.

Last April, Facebook edged out MySpace in terms of world-wide unique visitors and has continued to steadily gain in the U.S. Three top MySpace executives, including Amit Kapur, former chief operating officer, left the company in March to work on a start-up. MySpace has yet to name successors for those positions.

Mr. Miller began discussing the job with potential candidates including Mr. Van Natta, but hadn't finalized anything when the news of the talks leaked, according to people familiar with the situation.

Mr. Van Natta helped expand Facebook but stepped into a less prominent role as chief revenue officer as the site grew, ultimately leaving the company in February 2008. At MySpace, he could serve as a bridge between Silicon Valley and MySpace, which has struggled to match Facebook's technology prowess.

Hearing of the talks, Mr. DeWolfe offered to resign, these people said.

Jessica E. Vascellaro contributed to this article

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Caris & Co. is upgrading shares of CBS (ticker: CBS) from Average to Above Average, not only because the stock has fallen materially away from our price target, but because at current levels, the equity is reflecting a free call option on a future advertising recovery.

Stated simply, and based on a slightly revised sum/parts analysis, Caris & Co. believes CBS' equity now reflects terminal value for Showtime only. All other assets, the syndication business, the interactive business, and the Outdoor business, plus old media assets like spot TV and Radio, investors now have the chance to own for free.

To review, Caris & Co. downgraded CBS to a Below Average rating last October when overall business conditions at the time made it completely apparent that CBS was not going to make its fiscal 2008 guidance. Upon slashing its dividend 81% in tandem with its fiscal fourth-quarter earnings just four weeks ago, Caris & Co. upgraded CBS to an Average rating for the simple reason that the stock had achieved our price target of $5 and was fairly valued.

Now, with the stock at $3.83, deep-value investors have the opportunity to pick up a liquid media name with an equity value reflecting only the Showtime asset, which continues to grow its sub-base annually in the mid-single-digit range on the afterglow of a string of hits, which include Weeds, Dexter, The Tudors and Californication. Amazingly, Californication is commanding $1 million per episode in foreign syndication.

The easy rebuttal to the argument will be that the majority of CBS' ad-supported business are under secular siege. That's true for CBS' TV station and Radio station businesses, but is certainly not true for Outdoor, which is not going away, and Interactive, the latter of which grew revenue 218% in the fiscal fourth quarter. Suffice it to say, with Showtime now worth $3.88 per share in the latest iteration of our sum-of-the-parts analysis, the market is valuing all other assets effectively at zero, which Caris & Co. believes is near-term inefficient.

In tandem with still tough overall macro conditions, Caris & Co.has been steadily ratcheting fiscal 2009 projections down throughout the bottom half of 2008, and into fiscal 2009, and are doing so yet again today, though this time due to foreign-exchange adjustments as a result of CBS' Outdoor advertising exposure to the London Tube [subway system].

Caris & Co.'s fiscal 2009 revenue estimate moves from $13.2 billion to $13.1 billion, and as a result, Caris & Co.'s fiscal 2009 earnings-per-share estimate moves from $1.00 to 90 cents. Consensus at this point is 85 cents with a range on the Thomson Reuters grid between 69 cents and $1.10.

Caris & Co.'s 12-month price target of $5 continues to be supported by a target enterprise value/earnings before interest, taxes, depreciation and amortization [Ebitda] multiple of five times, but also an updated sum-of-the-parts analysis, which supports $5 in value, with Showtime worth $3.88 out of the $5. In addition, given management's recent cost-cutting announcements, we now have CBS trading at a levered free-cash-flow yield of 9.06%, a full 650 basis points ahead of 10-year Treasuries.

The moniker of CBS being the "most-watched" network is no lie. In terms of total viewers, CBS is the most-watched English-language broadcast network of the six currently measured by Nielsen, providing viewers with some of the nation's highest-quality entertainment, news and sports programming.

Popular shows include CSI: Crime Scene Investigation, CSI: Miami, CSI: NY, NCIS, Cold Case, Two and a Half Men, Survivor, The Late Show with David Letterman, 60 Minutes and the AFC Football package.

CBS takes an efficient game-theory approach to prime-time programming, meaning a balanced mix of company-owned shows, e.g., CSI, licensed shows, e.g., Two and a Half Men, and shows that are sold to other networks, e.g., Medium. Placing too many company-owned shows on a prime-time schedule can be very risky and can amount to substantial losses if the shows are canceled.

While bears on CBS will argue that CBS' prime-time schedule is sound, its daytime schedule is suffering in the ratings. That said, 50% of revenue within the core TV business is derived from prime time, 8pm-11pm. The balance is split evenly between daytime and "early fringe," 5pm-8pm.

Unlike its peers such as Disney (DIS), News Corp. (NWSA), Time Warner (TWX) and Viacom (VIAB), CBS derives substantial revenue and cash flow from an envious asset base of Outdoor signage, domestically and internationally. Unless some sort of technology arises that makes automobiles an obsolete technology, the case for the validity of Outdoor advertising is a strong one.

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The top 10 stocks of the Yacktman Focused Fund (YAFFX) comprise nearly 70% of total assets. "We feel like we ought to focus our money on our best ideas," Yacktman says, rather than take "a Noah's Ark approach with two of every kind."

That approach has helped consistently put the fund at the top of its category. Based on annual returns, the fund ranks among the top five large value funds for the most recent one, three and 10-year periods, according to Morningstar.

Over the last 10 years, Yacktman's fund has produced an annualized total return of 2.5%, six points better than the Standard & Poor's 500.

The current climate now has Yacktman putting any leftover cash to work in names you might not consider. The fund's top holding is AmeriCredit (ACF), an auto-financing company that now trades at a 64% discount to its book value. The fund manager has also made a big bet in media stocks, such as Viacom (VIAB) and Liberty Media (LINTA).

We recently asked Yacktman about his investing strategies:

Barrons.com: As a value investor, has your investment criteria changed in the current climate?

A: No. We've done the same thing for years. There may be slight nuances hopefully improving the process, but it's the same basic process. When the market is up we tend to start having a harder time finding things to buy. We end up owning fewer stocks, and you'll find there is a component of cash in there. Going into last year, I think we had close to 30% in cash.

Now my feeling is if you are a value investor and you're not fully invested, then there is a disconnect because there are plenty of things out there to justify buying in this environment at low prices.

Q: So is this something of a dream market for value investors?

A: Sure. These are the kind of times where you may say, I wish I waited a little longer. We tend to be early on average. But you feel very comfortable on a long-term basis. And we have a 10-year horizon time. So we just don't think in terms of 10 days or 10 weeks or 10 months. An investor who thinks in those terms is going to be frustrated and whipsawed potentially. But somebody who can have that long horizon time will have a high-comfort index in this market.

Q: How do you pick stocks in this environment?

A: You stick to objectivity, and you should look at the long term. When I hear somebody talk about 15% growth rates indefinitely, I think that's just not realistic. So you come up with some realistic normalized numbers. Most of the companies we have tend not to be wildly cyclical. Their earnings aren't as gyrating as say an auto company or an airline.

In the fourth quarter and the last few months we have honed in on sectors like media, health care and insurance. So that has some cyclicality but they're low capital requirements.

Q: What are some of your favorite stocks right now?

A: You look at the largest holdings in our top 10 and the top three would be Coca-Cola (KO), AmeriCredit and Viacom. But if you look at the top 10 you will notice there is Viacom, eBay (EBAY), News Corp. (NWSA) and Liberty Media (LINTA), [which includes the QVC retail channel. News Corp, (parent of Dow Jones, the publisher of Barrons.com) cracks the top 10 of Yacktman's flagship fund (YACKX) but wasn't a top holding in the focused fund, as of Dec. 31, 2008.]

So there's a lot of media in there and the theme is very similar in a lot of ways in that they tend to use TV or media; they're heavily TV oriented. What has killed them is the advertising has just dried up dramatically in this environment. Yet they are very good businesses, and, long term, I think they will make very nice returns.

Q: So on the media side, are you particularly interested in the TV business?

A: I just think they are good businesses, and they are cheap. If you look at the list of properties that Viacom has, it's things like MTV, Nickelodeon and Comedy Central, but the stock has been under pressure.

Q: Do you think the advertising on television will come back?

A: To some degree. One of the problems is virtually every consumer company is trying to find where they can get eyeballs. It's tougher and tougher. The media world is more diversified, and it is much more difficult to hit [consumers] than it was 10 or 20 years ago when you had just a few networks.

Q: That said, with 20% of your fund currently invested in media do you think these companies are the ones that will or can figure it out?

A: I think they are some of the best ones. Part of the problem with Viacom was they were under tremendous pressure because National Amusements owns a lot of their stock and had some leverage, and I think people were nervous about it.

Q: Are those the kind of events that scare a lot of investors that you are willing to look past in finding value?

A: We view the market as kind of a manic depressant. We are constantly looking at news events, and when companies hit the headlines with negative news, that is usually the time to start sifting through and looking at the numbers. We do our own research. We aren't relying on somebody else for making decisions. But what happens is a lot of the other research may accelerate our learning curve, so that's why we have it available to us. But I think that's what separates the men from the boys.

Q: What else is on your mind in picking stocks right now?

A: I really don't like to spend a lot of time on macro issues, because the reality is that it is the specific investment choices that really make the money. Fortunately there are plenty of good opportunities out there. But I would be very concerned about holding a lot of cash, and that's where people are moving toward. I think that's just the wrong place because when the economy does turn and things improve, it looks like there is going to be an awful lot of inflationary pressure.

Q: So do you guys have a position in gold?

A: No gold. I would rather have Coca-Cola than gold any day of the week. The ability [for them] to raise prices is like a machine that prints money.

Q: Thanks for your time.

Source. Subscribe to Barron's. Cabot Money Management.

Three top executives from News Corp's MySpace social network will be leaving the company to start a new business. Amit Kapur, MySpace's chief operating officer, Jim Benedetto, its vice president of technology and Steve Pearman, its senior vice president of product strategy, will stay on "for the next few weeks", according to the company.

Rupert Murdoch's 2005 purchase of MySpace for $580m looked kooky at the time. But it's been a lesson in excellent timing. Even if the social network has seen its best days, as a slew of top executive defections might suggest, it’s already paid off for News Corp.

When Murdoch bought MySpace, social networking was only beginning to gain a following. MySpace had 14m monthly users. A year later its user base had grown 400% and News Corp chief operating officer Peter Chernin called it the company's single biggest growth opportunity.

Now it brings in a whopping 126m monthly visitors. But heady growth may be a thing of the past. Rival Facebook has since surpassed MySpace, and has more impressive user demographics to boot. It now has more global visitors, with 200m monthly. While MySpace's user growth has slowed, Facebook's grew 116% last year.

The company faces a tougher grind over the next few years. It has had trouble selling its advertising inventory and missed its 2008 revenue targets. Its $900m advertising deal with Google, the source of most of those revenues, ends next year. And now some top executives, including its chief operating officer, are leaving to create their own start-up. That doesn't bode well.

Of course, had News Corp flipped MySpace two years ago when social networking was red hot, it would have been an act of pure genius. At the time, Facebook was valued at $15bn. The rival now thinks it's worth $4bn at most. MySpace's theoretical price has probably followed a similar arc. A year ago MySpace might have been worth more than $5bn, that's what Sanford Bernstein thought.

Stagnating revenue growth may mean it will never attract such a valuation again. Yet MySpace brought in $1.6bn in revenues over the past three years. More importantly, it probably made close to $200m in profits last year alone, given Murdoch's expectation for the unit to garner over 20% margins on its $900m of revenues. For the price he paid, and the cash he should be able to extract, Murdoch still looks in the money.

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Rupert Murdoch has achieved a long-held ambition. It has become plausible, even tempting to investors, for him to cede the running of News Corporation to his children. This week, it feels as though he needs his offspring more than they need him. After Peter Chernin, Mr Murdoch’s long-time number two, decided to step down, both James and Elisabeth Murdoch made clear that they have no need – or desire – to leap quickly into the breach.

James Murdoch runs News Corp’s European and Asian businesses and is chairman of British Sky Broadcasting, the UK satellite broadcasting group of which he used to be chief executive. He is his father’s most likely successor but wants to avoid the same trap as Lachlan, his older brother, who was squeezed out as Mr Chernin’s deputy in 2005.

Meanwhile, Lis Murdoch turned down a board seat at News Corp in order to keep running Shine, her independent television production company. She too was treated roughly by a former Murdoch lieutenant – Sam Chisholm, her boss when he ran BSkyB in the early 1990s. The shift in the familial balance of power, however, is more than a matter of the children having got older and gained independence and authority. It also reflects their father’s own vulnerability.

News Corp has suddenly been thrust into its most testing period since its debt crisis in the recession of 1990, which almost led to banks wresting control from the Murdoch family. This time, the balance sheet is in good order but Mr Murdoch faces a crisis of credibility.

Mr Chernin’s departure has not really altered who runs News Corp. “This company is one man’s creation and it has a very simple power structure,” says one executive. But it has crystallised the doubts in investors’ minds – is a 77-year-old who loves newspapers still the right leader for a 21st-century media group?

For now, the answer is yes. But the time is coming, sooner than Mr Murdoch is willing to acknowledge, when James Murdoch would be able to run News Corp better than his father. After insisting on his children’s right to succeed for so long, Mr Murdoch must accept it.

News Corp might be better off led by a non-Murdoch. Media groups run by low-key, dispassionate managers – Jeff Bewkes at Time Warner and Bob Iger at Walt Disney – have performed better in this downturn than those in the hands of media moguls such as Mr Murdoch and his (very) old rival, Sumner Redstone.

News Corp is worth only $15bn (€11.76bn, £10.34bn), compared with a market capitalisation of $59bn at its peak two years ago, and its shares have fallen 69 per cent in the past year. Disney’s market capitalisation is $33bn and Time Warner’s $28bn, both being less exposed to print and television advertising.

But this is moot, since the Murdoch family controls News Corp through its voting shares, having seen off a raid by John Malone. The only choice investors have is Rupert, James or a triumvirate of Murdochs.

Until now, Rupert has been the best Murdoch to have in charge. He has moulded the business over decades since he took over a small Australian newspaper group from his father in 1953. He has disrupted the media industry around the world with a string of successes, such as the creation of the Fox Network in the US and BSkyB in the UK.

Two years ago, he even looked as if he had “got” the internet better than others, having bought MySpace for $580m in 2005. It was growing rapidly but its growth has peaked, and it has been overtaken by Facebook in the US (according to some data).

His big problem is Dow Jones, the company that owns The Wall Street Journal, which he acquired for $5bn in 2007. It has since become clear that he overpaid: News Corp this month took a $3bn writedown on its newspaper unit and $5.5bn of other writedowns, mostly on its local television stations, which have lost consumer advertising.

Dow Jones has stripped off the gloss he enjoyed from MySpace and made him look like an old guy with print in his veins. Like many caricatures, this is a bit unfair, since Mr Murdoch founded the satellite television businesses that James now runs, but it has enough truth to it.

Meanwhile, News Corp has started to look uncomfortably like a legacy media company. Michael Nathanson, an analyst for Bernstein Research, describes most of its assets – papers, broadcast television, book publishing and the film studio – as “bad News” and just a few parts – its satellite and cable television operations and MySpace as “good News”.

“Even when there is economic recovery, the bad parts are not going to be growing. It is very sobering and my frustration with News Corp is that Mr Murdoch is not going to change the structure of the company because he has not changed it in decades,” says Mr Nathanson.

Mr Murdoch’s best response to this simmering discontent would be to set some timetable for when 36-year-old James, who is a chip off the old block but also a talented executive who could bring fresh perspective to News Corp, will become chief executive.

There is no sign of it. Mr Murdoch becomes uncomfortable when News Corp executives mull the possibility of him stepping down even in 15 years time, which would take him past 90. He has responded to Mr Chernin’s decision by assuming oversight of the Hollywood wing of News Corp and telling staff to expect changes.

But age affects us all, even Rupert Murdoch. He will be 80 in two years (his 78th birthday is next month) and that is a good deadline for him to give News Corp’s investors a succession plan. He should know about deadlines, for he is a newspaper man.

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Peter Chernin’s departure from News Corp is a reminder that outsize pay packets spread well beyond Wall Street. The media company’s president and chief operating officer was awarded a total package of $28.8m in 2008, more than his boss Rupert Murdoch. But then Mr Chernin, who ran the Los Angeles-based Fox businesses, is acknowledged as being among the best in the industry.

The terms of Mr Chernin’s departure, agreed in 2004, are also lavish. When his contract ends in June 2008, he will enjoy a six-year production agreement with News Corp under which the company must buy two films each year from his independent outfit, on most generous terms. Other perks include use of a corporate jet and car.

News Corp’s 2004 negotiations, of course, secured Mr Chernin’s expertise for another five years. They will now get “first look” at his output and must hope that Mr Chernin proves as good a producer as he has manager. With News Corp shares down 67 per cent over the past year, economic malaise and a desperate advertising outlook are investors’ immediate concerns.

But two issues deserve consideration.

First, Mr Chernin, with his broadcast bent, was seen as a counterpoint to his boss’s newspaper fetish. As Mr Murdoch assumes the reins at Fox, he will need to lavish the same care on this more highly rated business as he does his print assets. Further streamlining of operations increases the danger of overflow in Murdoch’s in-tray.

Second, as News Corp’s leading non-Murdoch leaves, the thorny question of succession arises in earnest. Mr Chernin’s contract included a $40m pay-out should he leave mid-contract after a change at the top. It is unrealistic to expect anyone other than a Murdoch, most likely James, to take the helm eventually. Murdoch Senoir’s challenge is to placate investors by attracting more outsiders of Mr Chernin’s calibre. The top job is unavailable. But rich rewards await the right Murdoch lieutenant.

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Cable networks do not have to fear the internet. It may have killed the business models of many record labels and newspapers, but there good reasons to think that companies distributing programming can dodge the online bullet.

For a start, making video of even moderate quality is a very different, and more expensive proposition than writing a blog or starting a band in the garage. User generated content fills a variety of niches but is unlikely to derail television. It is striking that the 10 most popular videos on YouTube in 2008 were all professional efforts.

Also, for all the shows available on sites such as Hulu.com, a video streaming site owned by News Corp and NBC, the economics for content owners do not make sense. Even assuming that it is possible to charge the equivalent TV rate for an online advertisement, consumers do not tolerate as many ads online.

Bernstein Research calculates that once lost affiliate fees, the carriage costs paid by other cable networks, are taken into account, the advertising yield on one 26-minute show is an eighth of that per traditional viewer. Furthermore, hit TV shows are bundled with another 23 hours a day of programming that generates further income. Internet viewers simply cherry pick the good stuff. Putting free content online only makes sense as a means to attract new viewers to a program on the traditional distribution channels.

Convenience and availability are still necessary to avoid pushing viewers toward illegitimate downloads. Ultimately, though, consumers will have to pay for what they watch. And the easiest way to do that is to have one company deal with all the charges and technology, piping it direct to the living room.

Competition between those who lay cable or put satellites in space will erode revenues over time. But with the cable operators Time Warner, Comcast and Cablevision all trading at less than five times earnings before interest, tax depreciation and amortisation, a record low, investors should not hide behind the sofa.

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As a business proposition, Netflix seems almost too good to be true. Despite a shrinking economy, the DVD-by-mail service continues to add subscribers at a healthy clip. Netflix's product offering -- unlimited DVD swaps at prices ranging from $9 to $17 a month -- is attractive to many consumers looking for affordable in-home entertainment.

If only Netflix's stock was as cheap. The shares currently trade at a rich 24 times projected 2009 earnings, despite the company's slowing earnings growth. Shares of Netflix (ticker: NFLX), which closed at $36.95 Monday, have doubled off a 52-week low reached in October. The shares gained 19% last week alone thanks to a surprisingly strong fourth-quarter earnings report.

The stock's "valuation now leaves no margin for error," wrote Stifel Nicolaus analyst Scott Devitt in a research report last week. Subscribers, investors and analysts all cheer the company's service and dominant brand in the movie-rental industry. Though known best for its core business of sending DVDs in the mail, Netflix has found new growth via Internet streaming. The offering allows subscribers to stream movies and TV shows instantly to computers and television sets, sans DVD. Netflix's streaming inventory contains about 12,000 titles, limited in comparison to its 100,000 DVD choices.

The company added 700,000 subscribers in the fourth quarter for a total of 9.4 million, 26% above its 2007 base. Netflix now counts about 8% of American households as subscribers. But, given a yearly turnover rate of roughly 50%, many more have used the service. In fact, on a statistical basis, as much as one quarter of American households have tried Netflix, according to Tony Wible, an analyst with Janney Montgomery Scott.

Wible notes that figure doesn't account for repeat customers turning the service on and off. Still, it's fair to question how much larger Netflix can get, if it's already touched so many homes during its 11-year existence. The company generated earnings per share of $1.32 in 2008, up 36% from a year earlier. Looking at 2009, consensus estimates call for 19% growth to $1.57 a share.

At those earnings levels, Maxim Group analyst Mark Harding thinks the stock is more than fairly valued. "It's probably priced in at least all of the growth that I'm modeling," he says. Maxim, a New York-based brokerage firm, initiated coverage of Netflix at Sell last week. Harding has a 12-month price target of $29, a 22% discount from Monday's close.

The target, a multiple of 18.5 times 2009 estimates, still represents a P/E premium compared to certain peers and the broader market. Thomson Reuters' index of Internet software and service companies is trading at 15.1 times 2009 earnings estimates, with the S&P 500 at about 13 times. Netflix management expressed its own surprise about the company's fourth-quarter growth, attributing success to the nascent online streaming business.

"The precise impact of the recession is unclear, but it's very clear that streaming is energizing our growth," Chairman and Chief Executive Officer Reed Hastings told investors last week.

The move into streaming video pits Netflix against a crowded field of competitors, including Apple (AAPL) and Hulu.com, the joint venture between NBC Universal and Barrons.com's parent company News Corp. (NWS), as well as video-on-demand offerings from cable providers. Netflix provides instant streaming to all of its unlimited plan customers, whether they're paying $8.99 or $16.99 per month. (The pricier plan allows customers to hold three discs at a time, versus just one at the $8.99 price point.)

The evenhanded approach could cause customers to trade down to the lower price point, as the roster of streaming videos grows and physical DVDs become less relevant. Such a move would have significant impact on per-user revenue, says Maxim Group's Harding. Over the last three years, average revenue per user, or ARPU, has fallen 9% on an annualized basis, he notes.

Of course, increased streaming could help Netflix's profit margins, with the company saving money on DVD processing and shipping. The company has been rather vague about the cost of licensing streaming content. That could hurt earnings visibility as streaming becomes a larger chunk of business. Doubting Netflix stock is not new. The company is a long-time favorite of short sellers predicting the company's demise.

Netflix bulls still have a solid thesis. Thus far, Netflix looks immune from the brutal economic climate. The company dominates the DVD space, having dispatched Blockbuster (BBI), the once-mighty video chain whose own DVD-by-mail service has floundered. And a growing group of consumer electronics companies are adopting Netflix standards for its televisions and Blu-ray players. Those devices will seamlessly connect Netflix streams to subscriber's televisions.

Eric Mintz, a portfolio manager at Eagle Asset Management is not put off by the recent run-up in Netflix shares. "This is a name you don't sell on valuation," he says. "The opportunity and momentum they're seeing is phenomenal here."  But momentum has a funny way of ending. Netflix investors have been treated to rare gains in the last three months. The fortunate group should count their blessings and consider moving on.

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