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PERSPECTIVE

Fox forges future

By Mary Ann Halford 17-11-2017

The much-discussed potential sale of Rupert Murdoch’s Fox assets – even if it never happens – shows the media industry is changing fast, says FTI Consulting’s senior advisor.

For more than four decades, media and financial professionals have witnessed Rupert Murdoch build his empire largely by challenging incumbent leaders.

The 21st Century Fox executive chairman was always David pitted against a Goliath – Fox Network versus ABC, CBS and NBC; Fox News versus CNN and MSNBC; Fox Sports versus ESPN; Fox International Networks versus Discovery and Turner International Networks; Sky versus the incumbent platforms in the UK, Germany and Italy; National Geographic versus Discovery and A&E…

In light of this history, it was perplexing for many to digest the news on November 6 that the Murdoch family had been exploring selling a large proportion of the 21st Century Corporation assets to The Walt Disney Company.

The assets in play include the film and television studios, the non-sports and news US cable networks, the international channel operations, the 39% investment in Sky, and Star in India. Fox would hold on to Fox News, Fox Sports, Fox Network and the broadcast station group.

Rupert Murdoch

Over the next week-and-a-half, the potential reality of a Fox transaction had begun to sink in, despite news to the effect that the talks with Disney had stalled. Then on November 16, a potential deal in the near future seemed inevitable as it was revealed that both Comcast and Verizon were engaging in conversations with Fox about purchasing many of the same assets discussed with Disney.

Why now? After five years of secular decline in the media industry, media companies continue to cling to traditional business models, while dabbling in newer endeavours without meaningful impact.

Accelerating cord-cutting, changing consumer consumption patterns and sustained growth in digital revenues are headwinds that cannot be reversed. The Murdochs foresaw a tipping point three years ago when they sought to acquire Time Warner, which would have provided leverage on the content distribution side and given them an OTT platform through HBO.

When that deal didn’t transpire, they refocused their energies on acquiring the outstanding shares of Sky. Yet that deal, which they had hoped to consummate earlier this year, remains held up in review by the UK government.

In exploring selling a sizable portion of their assets at this time, while holding on to their assets that deliver differentiated content (news, sports and network TV) on a live basis, Fox is forcing the industry to accept the bifurcation of optimal go-forward business models in the media and entertainment industry. Either 1) a direct-to-consumer model requiring a significant aggregation of high-quality content that appeals to a wide range of audiences; or 2) a live content model leveraging differentiated content, such as sports and news.

Direct-to-consumer model
All three contenders either have an existing direct-to-consumer model (Comcast, Verizon) or one that is to be imminently launched (Disney in 2019). Each of them would greatly benefit from Fox’s international presence, particularly Comcast, which is underinvested internationally vis-à-vis Fox and Disney, and Verizon, whose global consumer presence exists through the acquisitions of AOL and Yahoo.

Fox holds the screen rights to the X-Men franchise

The Fox international footprint plus the asset mix would enable each of these players to develop services competitive to Netflix on a global scale. However, a combination with Disney or Comcast would ensure a much deeper catalogue of content.

Assessing the various possibilities, a Disney acquisition would provide the optimal content combination, feeding both traditional and digital distribution channels. First, Disney would get the rights back to the Marvel franchises, including X-Men, Fantastic Four and Deadpool.

Also, Disney would secure all four of James Cameron’s planned Avatar sequels, which would also complement Disney’s significant investment in an Avatar-themed attraction at the Animal Kingdom in Orlando. There are also other critical film franchises including Alien, Home Alone, Die Hard, Planet of the Apes, Predator and Independence Day. Disney would also secure the distribution rights to the original Star Wars films.

On the television side, Fox is one of the leading producers of scripted programming with signature shows including The Simpsons, Family Guy, 24, Modern Family and This Is Us. With this wide array of content franchises, Disney will also diversify the breadth and depth of its current content offerings.

Live content model
Having adopted the challenger strategy to build its news and sports businesses, Fox is unquestionably a dominant leader in both these arenas, with the Fox network also benefiting from NFL and MLB broadcasts. In addition, while overall television consumption is down, broadcast television declines are much lower than that experienced by cable networks. Most importantly, live television will continue to be an attractive medium for advertisers and for pay TV operators showing must-have content.

The Simpsons is one of Fox’s best-known properties

In addition, Murdoch has always thrived as a news professional. A streamlined Fox could open opportunities for potentially merging these assets with News Corp, which houses key assets such as The Wall Street Journal, The Times and Harpers Collins.

There are many possible scenarios that can emerge from these conversations. And while we don’t know the ultimate outcome, we know that business models in the industry will be significantly impacted. Murdoch, recognising that he didn’t have the required assets to challenge the large digital incumbents, opted to challenge the industry itself to change its business models to build sustainable media enterprises for the 21st century, even if it means dismantling his own empire. Of course, there is the possibility that if a deal does get done with Disney, Murdoch may also solve the CEO succession problem there.

today's correspondent

Mary Ann Halford Senior advisor FTI Consulting

For more than 20 years, Mary Ann Halford has been actively building businesses in the media and entertainment industry in the US and internationally. She has worked as both an operator and a consultant.

As a consultant, she is currently a senior advisor to FTI Consulting as well as independently consulting clients, largely in the television broadcast industry. During her five years at FTI, she was a key leader in building and developing the firm’s media and entertainment practice in both the US and EMEA. Most recently, she was a senior MD in London, launching the firm’s practice in EMEA.