This morning’s blockbuster news that Disney would be spending nearly $67 billion to buy the 20th Century Fox Movie and TV studio and its library of films and TV shows and the resulting characters — among them “The Simpsons,” “The X-Men,” “Avatar,” and the like — as well as the Fox Sports Regional Sports Networks, the FX and Nat Geo cable channels, Fox’s stake in the Hulu streaming service, and international media properties with 130 million existing subscribers is absolutely massive.
You can go read the full press release about this deal here, but there are so many fascinating angles to unpack that I’m going to number them all and discuss below.
So here we go.
1. THIS DOES NOT INCLUDE THE BIG FOX BROADCAST NETWORK, FS1, FS2, THE BIG TEN NETWORK, FOX NEWS OR FOX BUSINESS.
I put this in all caps because many are going to miss this aspect of the deal.
Fox News and Fox Business won’t be owned by Disney at all and live event programming will almost entirely, save the Fox Regional Sports Networks, be untouched by this deal. In fact, these live programming networks are still highly profitable and throw off tremendous cash flow. Which means Fox will be able to invest substantial sums of money in even more live rights events going forward. The future business prospects of the remaining Fox assets are still very bright here.
This Tweet from Fox VP Mike Mulvihill — a brilliant guy all of you should be following on Twitter — sums up the remaining Fox assets very well, they’re still number one in the country in live news and TV even after the other assets are sold to Disney.
Minutes of News+Sports Viewing by Parent Company, Calendar 2017 to date:
“New FOX” – 1.2 trillion
Comc/NBCU – 1.1 trillion
Disney – 828 bill
Time Warner – 602 bill
CBS – 446 bill
— Michael Mulvihill (@mulvihill79) December 14, 2017
Fox Sports, other than the regional sports networks, is untouched by this deal. (And this deal will have no impact on me because Outkick is 100% independent of Fox Sports. Yes, that includes my radio show, which is distributed by Premeire and owned by I heart radio).
The business left behind here in the existing Fox spinoff company will be the leader in live event programming in the country. Fox Sports will still have the Super Bowl, the NFC, the World Series, the World Cup, the U.S. Open in golf, the UFC, the top Big Ten games, the Pac 12, the Big 12 and countless other sports properties.
FS1 and FS2 programming will not change.
2. Existing Fox shareholders will own 25% of Disney as Disney is paying for this deal with a stock purchase.
Quoth the release from Disney: “Under the terms of the agreement, shareholders of 21st Century Fox will receive 0.2745 Disney shares for each 21st Century Fox share they hold.”
This will leave the Murdoch family as the largest single shareholders in all of Disney.
I believe this aspect of the deal is being overlooked by most commentators and writers. This is a massive detail because it effectively means these two companies are becoming brothers in arms in that the existing Fox shareholders are now tied into the success of Disney’s properties in the future.
That is, Fox remains invested in Disney’s success while Disney isn’t invested in Fox’s continued success. The big question I have here is will this remain the case? Or will Fox potentially sell off these assets and divest itself of its Disney shares and put that money into new investments? I suspect this is a major tax and regulatory issue that attorneys for both companies are poring over as we speak.
So why is this deal happening?
3. This deal is happening because of Netflix, Amazon, Facebook, Google, and Apple.
At its most basic level this deal is about power and who has it in country and the world. Right now Disney has a market cap of $160 billion. By acquiring these assets Disney’s market cap will move to roughly $220 billion. (At least in theory). But that still leaves Disney as a much smaller company than Amazon, Facebook, Google and Apple.
Presently Apple has a market cap of $887 billion. Apple is so big, in fact, that it could buy all of Disney right now with cash. Google is at $728 billion, Amazon’s market cap is $563 billion and Facebook’s is $520 billion. All of these companies still dwarf Disney and all of these companies are involved, to varying degrees, in creating original content to stream directly to consumers.
But Netflix is the immediate threat to Disney.
And ultimately all of these moves are about how consumers will receive content in the 21st century. Namely, via streaming.
Now let me explain why.
4. Netflix has won the streaming battle in entertainment so far.
Several years ago Netflix CEO Reed Hastings faced an intriguing dilemma — he had a successful DVD rental business, but he realized something, DVD’s were going to be destroyed by streaming video. That is, whereas in the early 2000’s you and I might subscribe to Netflix and wait a few days for them to ship us new DVDs in those red envelopes, by a few years down the road we were going to want to watch whatever movie we wanted to see at that exact instant.
And we now take for granted that we can pull out our TV remotes and basically rent any movie that’s ever existed in the history of the country with a couple of clicks on our remote control.
But Reed Hastings saw this transition coming and realized it would destroy his business if he didn’t adjust course in a hurry.
If Netflix had kept renting DVDs, its business would have died.
But Netflix realized streaming was the future and pivoted to go all in on streaming. It bought up a great catalog of existing movies and shows and put them available for its customers to stream. Early on the entertainment companies sold these rights rather cheaply because they saw it as free money. Why not take guaranteed cash for old movies and TV shows that weren’t that lucrative otherwise?
Only, as Netflix grew, the major media companies realized they’d made a bad deal, it turns out Netflix was able to sign up millions of people and charge them a substantial monthly cost for these products. So the movie and TV studios ratcheted up their cost for these shows.
And Netflix saw the future again and said, “By God, we can’t just rent old movies and TV shows because eventually those become too expensive. Worse, we don’t actually own anything and if they take away all our content and start streaming this themselves then we’ll be left with nothing to sell. This will be just like the mail video business all over again.”
So Netflix pivoted and got into the original content creation business. Out came “House of Cards,” “Stranger Things” “Orange Is the New Black,” “Bloodline,” “Making a Murderer,” and countless other original shows you guys have all watched on Netflix. Instead of renting other people’s content, Netflix got into the business of creating its own content.
Netflix now spends billions a year on new shows and its business is thriving. Because it’s a direct to streaming business and people are subscribing for their content. Now instead of subscribing to Netflix to catch up on “Breaking Bad,” you subscribe to watch their own original shows which you can’t get anywhere else.
Well, Disney, Fox and other companies have seen the growth of Netflix and tried to create their own competitors — hence Hulu — but they haven’t been able to compete as effectively because they are fighting a two fronted war — they still have an existing cable and satellite business as well.
So let’s talk about that dilemma now.
4. The cable and satellite business is where most legacy media companies make their money.
Instead of charging a flat monthly fee like Netflix does, the existing costs for individual cable channels are all rolled into the price you pay for a bundle of channels, i.e. your cable and satellite subscription. Netflix has effectively created its own bundle on its streaming service — they have original programming for all ages — just like cable does.
Only, significantly, you choose to pay for Netflix whereas most of the time your cable bundle isn’t a la carte.
So we have two different media companies going two different directions…
5. Disney is going all in on streaming with this Fox purchase while Fox is effectively focusing on the existing live TV business.
Remember, Fox will still retain the Fox broadcast network, Fox News, Fox Business, FS1, FS2, and the Big Ten Network. (Disney may have worried that owning the SEC Network, the ACC Network, and the Longhorn Network, may have looked too much like an antitrust violation in college sports to risk on this purchase).
The ultimate problem that ESPN has, which I have written about a great deal, is that their cost for programming — i.e. sports rights — is continuing to rise while their subscriber base is continuing to decline. That’s the problem that cable sports are facing in general, but ESPN faces it more than any other network.
So what ESPN has to do is find a way to do what Netflix did, jump from a dying business — the DVD mail rental/cable and satellite business — to a thriving business — streaming.
Facing that problem Fox has effectively decided to get out of the regional sports rights business and take some of their money off the table. Rupert Murdoch surveyed the existing cable and satellite market right now and said, “Give me top dollar for these assets.” That’s the only live rights, significantly, that Fox is really selling here, the ones it owns in sports via its regional sports networks. (Rupert Murdoch taking his money off the table is, admittedly, complicated by taking a substantial stake in Disney shares, which is why I find the resolution of this issue so fascinating).
But ESPN has decided to try and fight a two-fronted sports war — win in cable and satellite while simultaneously winning in streaming. And, frankly, I just don’t see how this is possible. Because, and many are going to miss this, remember that ESPN CAN’T OFFER A STANDALONE STREAMING SERVICE under its existing contracts.
That is, unlike Netflix and HBO, ESPN isn’t contractually permitted to offer its sports programming direct to streaming subscribers. The only way you can stream the top ESPN programming is if you have a cable and satellite subscription. (Or you steal someone else’s login info which virtually everyone in their 20’s reading this article right now is doing on some level). This is why when you sign up for the ESPN streaming app you have to give them your cable and satellite login info to watch their content.
So adding all these regional cable sports networks won’t really change the existing dilemma ESPN faces. You’ll still need a cable and satellite package to watch and, significantly, you’ll still only be able to watch your local teams on these regional sports networks in your home market. (If you pay for a league pass your local games are blocked out and you have to watch them that way.)
So how does this deal help ESPN in sports?
I don’t think it does. Indeed, this is the most confusing element of this deal to me.
The future of sports is still in streaming and ESPN is still unable to offer a direct to consumer streaming option in the world of sports. Instead ESPN has to hope that its cable subscription declines — currently approaching 15,000 a day — are held at bay by sports fans who refuse to give up their cable and satellite subscriptions.
Indeed, the much ballyhooed ESPN streaming option that will be offered direct to consumers will only consist of games and properties that the network deemed not good enough to put on television.
At best all this deal allows ESPN to do is pay enough money to try and keep the leagues from going direct to a streaming provider. (The Fox RSNs are presently profitable.) But this also means ESPN is even more in thrall to the teams and leagues than it was before. Rather than decrease Disney’s exposure to sports, this deal increases Disney’s exposure.
Which seems nonsensical.
Because if Amazon, Netflix, Facebook, Google or Apple ever decide to pay to stream sports now either nationally or locally then ESPN is dead because they can’t afford to pay what the much bigger companies can. And right now all ESPN has to offer is its exclusive rights to the games. Once ESPN loses the games, why does it have any reason to exist?
Put simply, it doesn’t.
ESPN is effectively a distribution play in a time when distribution has moved from cable and satellite wires to streaming.
What’s more, and I keep beating this drum because it’s so true, while Disney has smartly been investing in buying new content it can own with Marvel, Pixar, and Star Wars or the Fox movie and TV studios which fit that same growth pattern, Disney/ESPN doesn’t own anything in sports. It just rents it from the leagues.
Honestly, if Disney/ESPN wanted to swing for the fences and follow the same game plan as it did with Marvel, Pixar, Star Wars, and the Fox movie and TV studios what it should be trying to do is buy the NFL, the NBA, MLB, or the NHL. Seriously, I’d try and buy every team and own an entire league if I wanted to own the future in sports.
ESPN’s future doesn’t really square with the future of the rest of Disney.
So maybe the decision here is something that hasn’t been much talked about — maybe Disney is buying these regional sports networks to allow it to spin ESPN off as a standalone company. That’s the only way this acquisition of the Fox Sports regional networks makes any sense to me. And even then it doesn’t make that much sense. Is someone more likely to think a dead business is a live business if you surround it with other dead businesses? Maybe so.
6. But fortunately for Disney sports is an anomaly, its other streaming properties desperately need great content.
And Fox has great content.
So adding the movie and TV library of 20th Century Fox — “The Simpsons” and Mickey Mouse under the same roof — and the international reach of Fox’s properties overseas strengthens Disney’s future as a streaming entertainment company. The more, better content you have the better off you’ll be in the future.
So does grabbing a bigger stake in Hulu.
And maybe, frankly, that’s enough to withstand the collapse of ESPN’s business.
Because if you own your own content you don’t have to worry as much about cannibalizing your own cable and satellite business in a streaming era. ESPN’s streaming app can’t offer the NBA Finals without someone having an existing cable and satellite subscription, but Disney can offer a kid’s streaming option to all of its programming anywhere, any time without killing cable.
ESPN is dead as a profitable business, but I’m taking my kids to see the newest Star Wars tonight and in February we’re going on a Disney cruise. Bob Iger has smartly diversified Disney so that the collapse of ESPN may not take down all of Disney too.
Disney is buying great content from ESPN that makes a lot of sense in this respect, just like Disney previously did with Marvel, Pixar and the Star Wars films.
7. So what are the complexities here?
First, will this pass regulatory muster? So far the AT&T and Time Warner merger has not. It’s likely this proposed merger will take a year or more to complete and it’s easy to see why many may oppose a company of this size and scale taking shape.
Second, I should mention here that Bob Iger is required to stay on as CEO to sync these two companies. So my theory about Iger running for president disappears thanks to this deal. You can also even surmise, if you want to have some fun with political intrigue, that this is Rupert Murdoch removing a potential rival for the presidency from Donald Trump in 2020. Which would, in theory, make this deal more likely to pass antitrust muster.
Third, and maybe most importantly, will Fox retain its 25% stake in Disney? This is massive to me because it creates so many potential conflicts, particularly in sports.
Let’s say the Big Ten is selling a new rights package. Even if Fox lost in bidding to ESPN it would still own 25% of Disney’s Big Ten package through its shares of stock.
Rupert Murdoch has managed to mostly eliminate all downside while retaining a great deal of upside here. He’s focusing on live TV while Disney is focusing on streaming.
And right now Disney and Fox are connected at the hip, will that always be so or is this part of a intriguing future chess move that we don’t see yet? Could Murdoch and his sons even be plotting a potential takeover of Disney down the road. Remember, they now have a 25% stake through the Fox company they control.
I can’t wait to find out.
In the meantime, Mickey Mouse and Bart Simpson are owned by the same company.
Just like the Simpsons predicted.
Disney officially buys Fox….and another Simpsons joke comes to life: pic.twitter.com/FshXPmXnrT
— Rob Hart (@RobHartWBBM) December 14, 2017
I’ll be damned.