Big stakes in paper war: The Sun's 5p cut in cover price represents an 8m pounds gamble for Rupert Murdoch at a difficult time. Jason Nisse reports

THE large, bulldog-like frame of Kelvin MacKenzie is rarely seen out in public. The Sun's editor prefers to hide his light under a bushel, leaving it to his subordinates (and sometimes his superiors) to appear on television and at public meetings when the Sun's actions need defending. But when Britain's largest-selling daily cut its cover price from 25p to 20p for two months, the Wapping Rottweiler led from the front, appearing in his own advertisement.

The script is pure Kelvin. He said that the price cut was to help Sun readers through the current recession. He then turned from the camera to a chair behind him and said: 'Is that OK, boss?'

The chair spun around to reveal a man bound and gagged, emitting a muffled scream, to which Mr MacKenzie said: 'I'll take that as a 'yes' then.'

Significantly, the man in the chair was not the boss, but the vice-chairman of the Sun's advertising agency, Arc. It is hard to believe that Mr MacKenzie could have ordered a price cut without the prior approval of either Andrew Knight, chief executive of News International, or Rupert Murdoch, head of the News Corporation empire.

For while News International claims the cost of the cut - which it says is less than the pounds 1m a week estimated by the City - is being paid for out of cuts to the group's lavish promotions budget, the decision to bet pounds 8m on a price cut in the Sun is an expensive gamble for an organisation which came close to financial collapse only two-and-a- half years ago. But it is a decision that shows the optimism being promoted by News Corporation and its UK subsidiary, News International. In recent weeks, the group has bid for a large stake in a Hong Kong TV company, announced plans to buy a half-share in China's largest lifestyle magazine, and returned to the fray in the bewildering merry-go-round of the Australian broadcasting industry.

On the face of it, News Corporation is in rude health. Its third-quarter profits, released in May, were twice what they were in the previous year, and analysts are expecting that the pre-tax profits for the year which ended on 30 June will exceed Adollars 1bn ( pounds 480m). Despite equity issues and disposals, News Corporation still has more than Adollars 9bn worth of debts, but Mr Murdoch has recently refinanced almost all of this in two massive revolving credit facilities, which have reduced the group's interest and debt repayment burdens substantially.

Things that had been going wrong for Mr Murdoch are now coming right. British Sky Broadcasting, the albatross which weighed so heavily around News Corporation's neck that it would have been forced to close down Sky if it had not succeeded in merging it with BSB, is now making operating profits and is close to making 'real' profits - a contribution after interest. Fox Television, the US fourth channel, is finally getting the sort of advertising revenue which its innovative programming deserves; and although it still seems shaky, the airline Ansett (which News Corporation jointly owns with TNT) is no longer losing money the way it was a couple of years ago.

But there are dark clouds. Nothing seems able to stop the drift in profitability at HarperCollins, the book publisher. Twentieth Century Fox, where Mr Murdoch installed himself as chairman after one top executive defected to Disney and another was fired, is finding it difficult coming up with a hit to match the studio's most recent blockbuster, Home Alone. And Mr Murdoch's attempts to save the New York Post have still not achieved final success.

And then there are British newspapers - the backbone of the empire. The recession has hit advertising revenue across the board. The Times and Today continue to lose large amounts of money, while the Sun and the Sunday Times are feeling the cold wind of competition with the threat of more to come.

The Sunday Times is still, in the inimitable words of Charles Wilson, managing director of Mirror Group Newspapers, the 'gorilla on the block' - a newspaper whose circulation is so far ahead of its rivals that it can dictate the market. But the Sun is not in such a happy position. Audit Bureau of Circulation figures for the first half of this year show that it sold 70,000 fewer copies a day than in the same period last year, despite having a 2p price advantage over its main rivals, the Daily Mirror and Daily Record, and the editorial upheavals at the Mirror.

This represents a loss to News International of nearly pounds 2m in the half year. Looking at the global picture, this is a drop in the ocean to News Corporation - five minutes' cash flow is how Derek Terrington, media analyst at Kleinwort Benson describes it. But it shows a declining trend which Mr Murdoch knows he must halt.

The media industry and the City like to ascribe various Machiavellian motives to the decision to cut the Sun's cover price by 5p, which has raised the paper's circulation by 200,000 in the last five days. One reason, which appears not to hold water, is that it was designed to put off the placing of the 54.8 per cent stake in Mirror Group Newspapers held by the administrator of the Maxwell private companies. If that was the plan, it has backfired as sales of the Daily Mirror actually rose last week.

Another aim may be to kill off the Daily Star, the sick man of the tabloid market. Its sales fell nearly 4 per cent in the first half to just 774,000, and it is reckoned to have lost another 30,000 this week. Two years ago, it was losing pounds 9m a year, but is now estimated to be losing pounds 13m. And with its parent, United Newspapers, in the middle of a pounds 190m rights issue, there is a feeling that Mr Murdoch is forcing Lord Stevens, United's chairman, to grasp a growing and troublesome nettle.

Mr Murdoch's camp denies such plotting, saying it merely intended to convert occasional Sun buyers into regular ones. 'It was not our intention to start a price war to get rid of a rival title,' said Jane Reed, News International's head of public affairs. 'The intention was to increase the frequency with which people bought the Sun.'

But to add to Mr Murdoch's problems, the price war appears to be hitting Today, which has never made money since News International bought it six years ago and is estimated to be losing pounds 9m a year. Industry estimates suggest sales are down by at least 30,000 since the Sun launched its campaign.

There is also the prospect of VAT being levied on newspapers and books. The industry avoided it in the last Budget, but the odds are now that the political clout of the Tory press has been dented by its attacks on John Major and the Prime Minister is ready to get his own back.

As predictions of the demise of Rupert Murdoch's media empire proved premature in late 1990s, predictions of his return to his previous pre-eminence appear to be over-optimistic. The man who was recently described as the 'bankers' pin-up boy' may look as attractive as Dame Edna Everae appearing on Page Three if the Sun does not win this war.

(Photograph omitted)