Industry veterans are struggling to wrap their heads around a notion that would have seemed laughable a year ago: Rupert Murdoch, a seller?
The heightened level of activity around the possible sale of some big 21st Century Fox assets is forcing Hollywood to confront the harsh reality of what some are calling the “FAANG” effect: Facebook, Apple, Amazon, Netflix and Google have plowed into the content and distribution business and are reinventing it on their own terms.
The tech giants are fearsome competitors not only because they have far more ready cash than traditional media players to invest in the hunt for audiences. Facebook, Apple and Amazon in particular operate in fundamentally different businesses from NBC, HBO, Paramount Pictures, Comcast and the like. They have balance sheets enormous enough to make spending a few billion dollars a year on content a loss leader to fuel other strategic and financial goals — such as selling iPhones or Amazon Prime memberships, or keeping pop culture-loving consumers tethered to a social-media platform.
Netflix can spend $7 billion a year on content because its platform allows it to amortize those costs among 104 million-plus subscribers worldwide the moment a program goes live on its global platform. Amazon can write a $250 million check for rights to develop a series based on the “Lord of the Rings” books — without seeing so much as a pitch for a fresh take on the property — because it doesn’t need to turn a profit on the productions. It only needs to make sure that those who come for Gandalf and Gollum stick around to buy books and baby clothes after the credits roll.
Through his storied career, Murdoch has proved his ability to see around corners. If he’s considering overtures from Disney, Comcast, Sony and others to scoop up the 20th Century Fox film and TV studios, prime cable networks and valuable international TV platforms, the assumption is he must be seeing the five horsemen of the digital apocalypse gaining on him.
Another surprise that surfaced over the past month is adding to the growing sense of panic among CEOs of traditional entertainment and media firms: The Justice Dept.’s plan to fight the AT&T-Time Warner merger means that bulking up through acquisitions in the face of the FAANG threat may not be an option, at least while Donald Trump is in office.
AT&T CEO Randall Stephenson and Time Warner CEO Jeff Bewkes hope their companies can tie the knot. Top right: Rupert Murdoch has floated Fox assets; Sony is among those showing interest.
Stephenson, Bewkes: Mike Blake/REUTERS/Newscom; Murdoch: Tolga Akmen/LNP/REX/Shutterstock/AP; Sony Pictures lot: Damian Dovarganes/AP
“The traditional content business is really challenged,” said Greg Maffei, CEO of John Malone’s Liberty Media. “The idea that they’re going to block consolidation is crazy.”
The subject of how old media is weathering the disruption wrought by the digital giants was a prime topic of discussion last week at Liberty’s annual investor day presentation in New York. Malone, an architect of the cable service industry, said it was essentially game over for the old guard to catch up with Netflix. Only Amazon, a company with such reach and ad muscle that he likened it to a “Death Star,” has a shot, he said.
Maffei noted the perfect storm of the arms race in content costs, the boom in supply and the limitations on business models that were etched in the era of silent movies and “I Love Lucy” as the reasons the disruptors are at the gates.
Netflix has quickly trained a generation of coveted young consumers to favor on-demand access to programs rather than showing up at the appointed time to watch live linear telecasts. Meanwhile, established networks are still grappling with how to join the streaming scene without cutting into profits derived from their biggest customers, MVPDs and advertisers.
“I think the linear video channels are in a tough spot,” Maffei said. “I think the overall content business has got a challenge ahead. … You’ve seen something like a five [times] increase in the content, and I don’t see how you monetize that. Combine that with the fact that you have new entrants — people like Amazon, Apple, Google, Facebook — who have different video monetization methods. That puts a lot of pressure on traditional content companies.”
Hollywood’s big advantage during the decade or so since the tech world has been steadily advancing into content has been its hold on the means of production — the creative talent and the development infrastructure that bring movies and TV shows to life. After all, quality content is not the same as a toaster or a motherboard that can be mass-produced on an assembly line.
But five years ago, Netflix barreled into the talent marketplace with “House of Cards” and hasn’t looked back. Of late, the streaming giant is positioning itself to function as a studio and distributor as it sets lucrative overall production pacts with über-showrunners such as Shonda Rhimes and Jenji Kohan.
The only counterattack, in the view of many biz watchers, is for the largest content providers and distributors to grab market share through acquisitions and to become more global as fast as their feet can take them overseas. “Scale” is the buzzword of choice for Big Media at present. 21st Century Fox’s assets are prized by suitors including Disney and Comcast precisely because the Murdochs planted the Fox flag in Europe, Latin America, Asia and Australia long before most of their competitors.
Laura Martin, media analyst with Needham & Co., sees consolidation among the traditional content giants as long overdue. She predicts movement toward some combination of Disney and Fox, or Disney and Time Warner, or CBS and Viacom (again) in the near future, assuming the feds don’t stand in the way.
“It’s not about AT&T competing with Comcast. It’s AT&T competing with Apple, Facebook, Google.”
Laura Martin, Needham & Co. analyst
“What the government is missing is that the content players must be larger,” Martin told CNBC on Nov. 17. “It’s not about AT&T competing with Comcast. It’s AT&T competing with Apple, Facebook, Google, all of whom are spending billions of dollars. Those are the [rivals] that these content companies must compete against going forward. They need to get larger,” she said. “We are finally going to get the consolidation in content that is long overdue.”
Considered in this context, 21st Century Fox as a takeover target doesn’t seem so far-fetched. But it’s still a tough adjustment for long-timers at the Century City studio.
Fox insiders are described to have been shell-shocked by the swirl of headlines about suitors reaching out to 21st Century Fox CEO James Murdoch for very preliminary “What if?” discussions. The news of the budding courtships came as a surprise even to senior leaders. As of late last week, there had been no formal communication from the corporate level to staffers on the possibility of sale, nor has Fox commented publicly on the overtures.
“If there was ever a company you thought would be stable in its ownership, it’s this one,” said a 20th Century Fox veteran. The Murdochs have a tight grip on the company through their control of nearly 40% of voting shares.
There is speculation that the family would move to recombine the Fox broadcast network and TV stations, Fox News and Fox Sports operations — which are not believed to be part of any sale scenario — with the publishing assets held by News Corp.
21st Century Fox was carved out as a separate entity from News Corp. in 2013. There is also speculation that the Murdochs might use the proceeds from selling off big pieces of 21st Century Fox to take an enlarged News Corp. private.
But the discussions have been so preliminary that there’s no clarity on how any deal might be structured. For Disney and Comcast, the chance to buy out Fox’s share of Hulu (in which Disney, Comcast and Time Warner are also investors) would surely be a strategic play as both companies look to move deeper into the OTT subscription arena. Suitors such as Sony Pictures
and telco giant Verizon might be interested in different assets.
The sale chatter around Fox is expected to spread to other studio conglomerates seen as ripe for the picking, a list that includes Lionsgate, MGM and Viacom. The even more intriguing question is whether a cash-rich company like Apple or Google will turn the tables and go after a Disney or a Comcast.
At a moment when a gambler like Rupert Murdoch is preparing to fold some of his cards after a lifetime of empire-building, it’s anyone’s guess who will be left with the winning hand.