Personalities, egos and dollar signs never can be discounted when sizing up major media business maneuvers, but one motivation above all others led 21st Century Fox and Disney to the negotiating table: the rapidly shifting media landscape.
With streaming services like Netflix luring away cable TV subscribers with increasing speed and threatening traditional business models, distributors such as AT&T and Comcast have gained leverage through consolidation. This new reality seems to have prompted two longtime media rivals, with their distinctly different corporate cultures, to consider combining — though it should be noted that talks apparently have reached an impasse.
In the short term, most Wall Streeters and media observers sees plenty of upside for Disney but murkier prospects for Fox, which reportedly had determined that it lacked sufficient scale to compete vigorously. On the cable TV side, the addition of a prestige content outfit like FX Networks would bolster Disney’s struggling cable business, particularly its traditional cash cow, ESPN, which has shed 13 million subscribers in the past six years. It also positions Disney and Fox for a future in which content is delivered via the Internet.
“Content is the weapon of choice in this over-the-top game,” said Peter Csathy, chairman of CREATV Media. “Crafty Disney can use content offensively and defensively. It can withhold its treasure trove of content and characters … from Netflix, or use some of the biggest brands in the world, the biggest franchises — Star Wars, Pixar, Marvel, now maybe X-men is another one — to its advantage.”
Disney announced this summer that it plans to remove its movies from Netflix to launch a direct-to-consumer streaming service in 2019. Adding Fox’s film library to the mix, with such blockbusters as Avatar, Deadpool, X-Men: The Last Stand and even the Alvin and the Chipmunks and Ice Age animated franchises, would strengthen such a direct-to-consumer offering. Given Disney’s reliance on theme parks, wringing cash out of IP in that arena represents another opportunity that other media conglomerates can’t match.
Fox “offers significantly more IP — especially in older demos — versus the Disney franchises,” wrote RBC Capital Markets analyst Steven Cahall wrote in a note reacting to reports of the talks, which first surfaced on CNBC. “In addition to bringing Marvel’s X-Men back to the rest of the studio, Fox has major franchises including Planet of the Apes, Kingsman and Alien, not to mention plenty of Oscar-worthy films like The Revenant, The Martian and Birdman. This could help fill in the adult interest in DTC beyond Marvel and Star Wars films.”
Speaking of adult audiences, no one has managed to compete better in the prestige, premium-TV trenches than FX. Under the leadership of John Landgraf, the 20-year-old outfit has created a collection of franchises and award-winners. Still, Landgraf has railed against the “shock-and-awe” levels of spending that Netflix and other hugely capitalized rivals bring to the TV game. At his TCA executive session last August, he compared the task of competing with Silicon Valley-funded entities, which now include Apple, Facebook and YouTube along with early movers Netflix and Amazon, to being “shot in the face with money” every day. In this “titanic struggle,” he added, “I want humans to win against the machines.” Teaming up with a fellow major player like Disney could give humans a better shot, in theory.
Other elements of the deal include Fox’s 39% interest in pay-TV giant Sky, though the Murdoch family, whose long, costly pursuit of the remaining portion — still held up by regulators wary of the Fox News owner’s stewardship — might have reached its end. Elsewhere under the corporate tent, it’s unclear what, if anything, a merger of Disney and Fox would mean to their disruptive love-child, Hulu. The media companies share one-third ownership with Comcast. Time Warner owns a 10% stake.
Launched to compete with YouTube, the streaming service has evolved from its origins a decade ago as a TV catch-up service consumed largely via desktop computers. It now is a multi-faceted entity with a live, over-the-top bundled service competing directly with pay-TV and skinny-bundle purveyors and a content giant that showcases high-value library titles and produces its own originals, including Emmy-winning drama The Handmaid’s Tale.
Cahall ballparks the deal’s valuation at $20 billion. He also notes that the remaining assets of Fox themselves could then command an M&A premium, “especially from distributors with regional footprints that can be tied into RSNs and local station activities.”
The portfolio that doesn’t wind up with Disney — assets such as Fox Broadcasting Co., local TV stations, Fox Sports and Fox News — represent a significant amount of remaining value. Lest anyone forget, these are the Murdochs, who, aside from the odd MySpace fail, have a habit of pulling rabbits out of hats.
“Split-to-sell is a time-honored equity market tradition,” Cahall notes.
Plenty more assessments of the deal’s implications and details are likely forthcoming this week. Fox is set to report third-quarter earnings on Wednesday, with Disney following suit on Thursday.