The Disney talks (DIS) to buy most Fox assets (FOX) (FOXA) are surely one of the most interesting things that happened in the industry in a long time and confirms a clear trend towards consolidation after of several other announced agreements, such as the merger between Discovery Communications (DISCA) and Scripps Networks Interactive (SNI), the acquisition proposed by Fox of the European pay-TV giant Sky plc (OTCQX: SKYAY) or the largest and most controversial processes of merger between AT & T (T) and Time Warner (TWX)
Media companies try to improve their competitive position now that the growing penetration of broadcast services is pushing customers towards simpler packages that have proven to be incremental to the total consumption of media, but that may put at risk the pricing of media networks with cable TV providers or other TV companies. levy of payment, in addition to the fact that the transmission services lead to the dilution of margins for the same providers of cable television and pay television. In this context, the acquisition of Fox's assets by Disney makes sense if we consider the potential benefits in terms of IP growth and how this would make Disney's future broadcast service more attractive, but it also shows that the integration vertical does not only involve the end of pay TV as well (with the inclusion of Sky). This is something I did not expect and makes the strategic focus a little different from what I thought. Anyway, I think the acquisition of Fox's assets would be a smart move, for many reasons.
Stronger Bargaining Power
Although Disney is already one of the strongest players in the Media Networks industry, the acquisition of Fox's assets would strengthen its position further and give the company more bargaining power with the cable television providers.
According to several sources, the agreement includes the sale of the FX network, National Geographic, Star, regional sports networks, film studios and participations in pay television. the giant Sky and the Hulu broadcast service, and some other properties. What would not be included in the agreement are the news and commercial news divisions, the broadcast network and the Fox sports.
It seems that Disney wants to strengthen its bargaining power with cable television networks, in addition to its expansion in the world of transmission. By adding FX Network and National Geographic to their offers, they can maintain greater pricing power with affiliates, which can compensate for the negative effects of cable cutting. This is nothing new or against the strategic approach of Disney. We know that in the recent past, higher affiliate rates have been able to compensate for most of the weakness that results from cutting the cable. In the fourth quarter, for example, the Media Networks division reported a 3% decrease in revenues and a 12% decrease in operating profits, two negative rates that would have been even more negative if Disney had not increased its rates. membership. Management stated:
The Q4 cable results were approximately comparable with the previous year. At ESPN, the growth in affiliate revenue was offset by higher programming costs and lower advertising revenue. The higher spending on programming was mainly due to an increase in the contract rate for the NFL. The advertising revenue on ESPN fell to a low digit in the quarter, as the higher rates were more than offset by a decrease in impressions. […] Total Media Networks' affiliate revenues increased 4% in the quarter, due to the growth of both Cable and Broadcasting. The increase in affiliate income was driven by 7 points of growth due to the higher rates, partially offset by a 3 point decrease due to a decrease in subscribers.
By adding Fox Networks, National Geographic and regional sports networks, Disney has an even larger share of the most important networks, increasing the pricing power they have with cable television and pay-TV providers, since The amounts that the company can charge MVPDs for their cable services depend to a large extent on the quality and quantity that they can provide. These additions seem to fit very well with Disney's current assets, which include ESPN, Disney and Freeform Networks.
The move should not include Fox's transmission network since the FCC rules prohibit a company from owning more than one of the United States, so there would be no change in that segment.
I am a little more puzzled by the inclusion of Sky in the deal, since it implies a vertical integration in the paid TV segment that I did not expect. By increasing their bargaining power at the top end of the business, I thought it would make more sense to leave the fund to other companies to take advantage of the stronger bargaining power. For some reason, Disney's approach seems to be different. At first glance, I thought that including Sky in the deal could be a must to access the other parts of the business, but it would not make much sense given the size of the Sky division. Then I understood that it can also be part of a precise strategic approach.
Effects in Studio Entertainment
The effects in Entertainment studio are probably the most important. It is known that 21st Century Fox produced many of the most successful films in the history of video entertainment. The combined content library would eclipse Disney's already huge library of successful productions. Disney would have in its hands franchises like X-men, Ice Age and Avatar, to name a few.
I do not think I exaggerate if I say that Disney has a proven touch of Mida when it comes to acquisitions. in the studio entertainment division. Only three tests: Pixar, Marvel, Lucasfilm. I'm pretty sure that Disney will be able to turn some of the Fox franchises into gold as they have with Marvel and the Star Wars saga. Do not get me wrong, many of Fox's assets are already gold, but Disney's ability to turn every franchise that buys into a growth catalyst is something we can not ignore. Many are skeptical that a character like Deadpool or a franchise like X-Men do not fit well in the universe of Disney superheroes and may distort the image of the company. I think these fears are definitely exaggerated. We do not need a series of X-men vs. Avengers to further boost a franchise like X-Men, although we're sure some fans would like to see such teams and the Marvel universe almost realized. Neither do we need the new assets to be coherent with the positioning of the Disney brand. Recall that X-Men already has the Marvel brand and this has not been a problem for the productions of the Marvel brand of Disney. And X-Men is just part of the deal. The Fantastic Four saga would be easier, and I can imagine a new series of spin-offs from "The Thing". I can also imagine how Disney could take over the Avatar franchise after James Cameron declared that Avatar 3 and 4 might not happen.
The acquisition of Fox Studios opens a new world of possibilities. My positive point of view is based on the evidence that Disney gave us over the years.
- Let's start with Lucasfilm, which was bought for $ 4 billion. With the momentum started with The Force Awakens, it is estimated that the franchise will generate almost $ 1 billion in annual profits for Disney and I see no reason to believe that the number will decrease. International growth will probably boost revenues even more. This without the potential effect of future Indiana Jones films.
- The Marvel franchise was purchased for $ 4 billion in 2009. In May of 2017, Disney had raised almost $ 11 billion in box office numbers, amounting to almost $ 12 billion if we included the $ 816 million Thor Ragnarok. When estimating a 60/40 split between Disney and theaters, we can estimate that Disney's revenues were around $ 7,039 million (60% of $ 11,732 million). With an operating margin of 28% of the Studio Entertainment division (for the last 10 K), the operating profit generated by the Marvel films is probably around $ 1,970 million, without considering the rights of television, merchandise, video game rights And everything else. 19659017] I am confident that the Disney administration will be able to take advantage of many of Fox's assets as it did with the other franchises it has purchased. The potential growth of the Studio Entertainment division is probably not the same due to the already large size of the studies acquired, but interesting synergies will be generated.
Anyway, there is another aspect that is even more important: the effect of having the content of the two companies under the same roof, now that Disney has decided to expand in the transmission market.
Strategic implications for the streaming service
Disney's decision to take its content out of Netflix (NFLX) may be already annoying for the transmission giant, given the amount and quality of its programming and the particular appeal for young customers, who are the main Netflix customers. Considering that Fox's "Content" division is almost equal to Disney's Studio Entertainment division in terms of revenue ($ 7,707 million and $ 8,379 million in revenue in the last 10-K, respectively), we can assume that the huge library Disney's content and bargaining power would double in the case of a deal.
I guess the company will extract additional Netflix content to make it exclusive to its next broadcast service and Hulu. My opinion is that most of the strategic lines announced for the next broadcast service will involve all the other studies that the company will buy. This will include the production of additional movies and series that are exclusive to the new broadcast service. I would probably state the obvious if I said that a similar move would be a very bullish factor for the Disney broadcast service and a big problem for Netflix.
It is clear that the acquisition of Fox's studio division with its huge library of valuable IPs boosts Disney's prospects in broadcasting service. If the deal closes, Disney will have four major broadcast divisions that show little or no overlap with each other:
- ESPN +, which will be released in a few months and will include Disney's sports entertainment offerings in the United States. This can be improved by the inclusion of some of Fox's assets, such as regional sports networks.
- The new Disney brand broadcast service that will be launched in 2018 and that will include content from Disney, Pixar, Star Wars and Marvel's most exclusive series and movies from the aforementioned franchises. With the acquisition of Fox, the service will probably include other content such as Blue Sky's productions (Ice Age, Rio, Robots, etc.), other Marvel productions such as the Fantastic Four saga, Avatar and additional content chosen from the huge library of Fox.
- Hulu is a more "generalist" broadcast service, which could have a small overlap with the Disney brand platform, but will target an adult audience more effectively. With Disney-Fox potentially extracting its content from Netflix and making it exclusive to the mentioned platforms, it will become an essential service for many households.
- Sky's broadcast platforms, which include the Pay-Tv Sky service available online and Now TV, which is roughly the European equivalent of Hulu. It is likely that Disney will replicate the strategic lines implemented in the national market, converting its exclusive content to Sky and Now TV and making them essential for many customers in Western Europe.
My positive view of Disney's prospects in broadcasting the service would be much more positive, since the huge and rich content library is a competitive advantage that other players could never replicate.
We will need to see if something real will result from the conversations between the two If the agreement closes, I can foresee a very positive impact on the Disney business (and the combination of both) because:
- Media Networks will have greater bargaining power that will allow Disney to negotiate better membership fees. It will also create interesting cost synergies that can generate some leverage.
- Studio Entertainment will double in size, with multiple positive effects that include greater bargaining power with media networks and cinemas.
- A content library that you do not have is the same and can enhance the company's transmission services.
- More IP to create additional content from proven and successful concepts.
If the price paid by Disney is appropriate, the agreement has the potential to be an excellent catalyst. In particular, I see the effects of combined content on broadcast services as a tremendous boost for Disney's business and broadcast companies as excellent drivers of growth.
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