A Blog by Jonathan Low


Dec 15, 2017

How Disney Will Benefit From the Fox Acquisition

Intergalactic domination.

This makes Disney the sole legacy media company capable of taking on the tech giants which have come to dominate entertainment. JL

Brooks Barnes and Tiffany Tsu report in the New York Times:

The acquisition, which would make Disney a colossus unlike anything Hollywood has ever seen, is the biggest counterattack from a traditional media company against the tech giants that have aggressively moved into the entertainment business. Disney has already announced a plan to introduce streaming services. With the movies, TV shows and sports programming it provides, the company will now have the muscle to challenge Netflix, Apple, Amazon, Google and Facebook in the fast-growing realm of online video.
In a move that will reverberate from Hollywood and Silicon Valley to TVs and smartphones around the world, the Walt Disney Company said Thursday that it had reached a deal to buy most of 21st Century Fox, the empire controlled by Rupert Murdoch, in an all-stock transaction valued at roughly $52.4 billion.
While the agreement is subject to the approval of antitrust regulators — and the Justice Department recently moved to block a big media company, AT&T, from becoming even bigger — Disney is acknowledging that the future of television and movie viewing is online. The acquisition, which would make Disney a colossus unlike anything Hollywood has ever seen, is the biggest counterattack from a traditional media company against the tech giants that have aggressively moved into the entertainment business.
Disney has already announced an ambitious plan to introduce two streaming services by 2019. With this deal and the wealth of movies, TV shows and sports programming it provides, the company will now have the muscle to challenge Netflix, Apple, Amazon, Google and Facebook in the fast-growing realm of online video.
“The pace of disruption has only hastened,” Robert A. Iger, Disney’s chief executive and chairman, said in an interview. “This will allow us to greatly accelerate our direct-to-consumer strategy, which is our highest priority.”
At the same time, the agreement means that one of moviedom’s most celebrated studios, 20th Century Fox, will be downsized, with some operations folded into Walt Disney Studios or refocused to make films for online distribution. Founded in 1935, the Fox studio championed Marilyn Monroe, produced classics like “The Sound of Music,” released the first “Star Wars” movie and, more recently, turned “Avatar” into the biggest ticket-seller of all time.But lately, as most of Hollywood has, 20th Century Fox has struggled to keep pace with the changing way younger audiences view content — namely on an internet-connected device. Some analysts interpreted Mr. Murdoch’s sudden willingness to sell as his reading the writing on the wall: The business climate is going to become tougher for old-line Hollywood.
To complete the integration, a legacy-defining task, Mr. Iger, 66, agreed to renew his contract for a fourth time, delaying retirement from July 2019 to the end of 2021 and effectively ending speculation about whether he might run for president in 2020. Mr. Murdoch asked Mr. Iger to stay as a condition of the deal, which was valued at $66.1 billion including debt.
As part of the acquisition (if it goes through) and his extension agreement, Mr. Iger will receive restricted stock awards — many tied to performance — worth more than $100 million, Disney disclosed on Thursday in a regulatory filing. Once the combination is complete, Disney will bump up his performance-based annual target bonus by 66 percent, to $20 million.
Not included in the acquisition: Fox News, the Fox broadcast network and the FS1 sports cable channel. In the news release announcing the Disney deal, Mr. Murdoch said he would spin those businesses and a handful of other properties, including the 20th Century Fox lot in Century City, which Disney is not buying, into a newly listed company. Mr. Murdoch also still controls his newspaper-focused company, News Corporation, which has holdings that include The Wall Street Journal.The deal got its start with a casual get-together over the summer at Moraga Vineyards, Mr. Murdoch’s Bel Air winery. There, Mr. Iger and Mr. Murdoch chatted about the way technology was roiling the media business, according to Mr. Iger, who came away thinking — to his surprise — that Mr. Murdoch might be open to a merger discussion. Mr. Iger said he called him a few weeks later in August to propose more serious talks.
There was at least one due-diligence meeting at Mr. Murdoch’s apartment in Manhattan with senior management. As the agreement was being completed on Tuesday, Mr. Iger had lunch with Mr. Murdoch in London. (Mr. Iger was in town for a premiere of “Star Wars: The Last Jedi,” which arrives in theaters on Friday.)
“I know a lot of people are wondering, ‘Why did the Murdochs come to such a momentous decision?’” Mr. Murdoch said on a conference call with investors. “Are we retreating? Absolutely not. We are pivoting at a pivotal moment.”
Mr. Murdoch’s older son, Lachlan, 21st Century Fox’s executive chairman, added that the move was “about returning to our roots as
lean, aggressive challenger brand” that would be “focused at the beginning on must-watch news and live sports.”
There has been speculation that Mr. Murdoch’s other son, James, who is chief executive of 21st Century Fox, would join Disney in a senior role. Mr. Iger told investors on a conference call that that had not yet been decided.
“He will be integral to helping us integrate these companies over the next number of months,” Mr. Iger said. “Over that time, he and I will continue to discuss whether there is a role for him here or not.”
The Murdochs declined an interview request.
Disney, which owns ABC and ESPN, hopes 21st Century Fox will supercharge its plans to introduce two Netflix-style streaming services. Disney’s first major streaming effort, ESPN Plus, will arrive in the spring. A second and still unnamed offering, built around the company’s Disney, Marvel, Lucasfilm and Pixar brands, will roll out late next year. Rounding out its streaming portfolio will be Hulu, an established service that focuses on older viewers with programming that includes ABC shows.
Mr. Iger is buying 21st Century Fox’s minority stake in Hulu, resulting in majority control of the streaming service by Disney, which previously owned 30 percent. Comcast and Time Warner also have stakes in Hulu.
The Disney-Fox merger is happening as the Justice Department fights AT&T’s $85.4 billion acquisition of Time Warner in court. Mr. Iger acknowledged that antitrust regulators would heavily scrutinize Disney’s purchase but expressed confidence about winning their approval. Sarah Huckabee Sanders, the White House press secretary, said Thursday that President Trump had spoken with Rupert Murdoch and “congratulated him” on the deal.
It was a striking contrast to Mr. Trump’s negative view of the AT&T deal, which some have interpreted as an attempt to punish CNN, the Time Warner-owned network that is often the focus of Mr. Trump’s ire. AT&T and Time Warner are not direct competitors, however, and some antitrust experts have said the Disney-Fox deal should receive similar scrutiny. Should it not, the Justice Department could face criticism regarding its political independence.
“If they look at it from a consumer point of view,” Mr. Iger said, “they should quickly conclude that the aim of this combination is to create more high-quality product for consumers around the world and to deliver it in more innovative, more compelling ways.”
When Mr. Iger announced Disney’s streaming strategy in September, he said, “We’re going to launch big, and we’re going to launch hot.” At the time, his comment was viewed in Hollywood as old-fashioned showboating.
Not anymore.
Disney is buying the Fox television studio, which has 36 series in production, including “The Simpsons,” “Homeland,” “This Is Us” and “Modern Family.” Disney’s significantly smaller TV factory, ABC Studios, has delivered series of inconsistent quality and lost its biggest hitmaker in August when the “Grey’s Anatomy” producer Shonda Rhimes decamped for Netflix.
To augment ESPN Plus, Disney is adding 21st Century Fox’s chain of 22 regional cable networks dedicated to sports, including the YES Network, which carries New York Yankees games.
As part of the deal, Disney will also get the FX and National Geographic cable networks, and stakes in two behemoth overseas television-service providers, Sky of Britain and Star of India. That component of the deal would seem to contradict Disney’s push to lessen its reliance on traditional television, a business built on third-party cable subscriptions that is now in decline as people turn to streaming services for home entertainment.
But those assets serve another of Mr. Iger’s strategic goals: making Disney more of an international player. Disney has major operations in Europe, Japan and China, where it opened Shanghai Disneyland last year. But most of Disney’s profit still comes from the United States, where ESPN dominates, despite recent struggles, and annual attendance at Walt Disney World in Florida and the Disneyland Resort in California totals 162 million people.
With the acquisition, “Disney goes from being a juggernaut to being a megajuggernaut,” Steven Cahall, an analyst with RBC Capital Markets, wrote in a note to clients.
Mr. Cahall and other analysts said the acquisition would likely prompt other entertainment companies to join forces as a competitive maneuver. Speculation immediately surrounded Viacom and CBS, which share common ownership; Lionsgate, which owns Starz; Metro-Goldwyn-Mayer, which controls rights to the James Bond franchise; and Sony Pictures Entertainment, which has struggled with low box office market share.
Since taking over as Disney’s chief executive in 2005, Mr. Iger has greatly expanded Disney’s theme park operations, opening in Shanghai against all odds and nearly tripling the size of Disney Cruise Line. Walt Disney Studios, bolstered by Mr. Iger’s acquisitions of Pixar, Lucasfilm and Marvel, has become Hollywood’s runaway leader.
But pulling off the acquisition of 21st Century Fox dwarfs those deals and will create complex integration challenges. Some executives who work at Fox’s studio offices in Los Angeles have been complaining bitterly about the prospect of Disney cost-cutting. Disney said it expected the acquisition to yield at least $2 billion in total cost savings.
And though Mr. Iger played down any antitrust issues, others in Hollywood have already disagreed.
“The antitrust concerns raised by this deal are obvious and significant,” the screenwriters’ union, the Writers Guild of America West, said in a statement on Monday, calling media consolidation a “relentless drive to eliminate competition.”

The enormous deal is the latest move toward consolidation in Hollywood.
What’s in it for Disney?
Elisabeth Moss in “The Handmaid’s Tale,” an original series from Hulu. CreditGeorge Kraychyk/Hulu, via Associated Press

More television production

Fox’s television division is one of the most prolific content producers in the business. Shows include “The Simpsons,” “This Is Us,” “Modern Family,” “American Horror Story” and “Homeland.”
The (comparatively small) equivalent at Disney is ABC Studios, which has recently struggled to produce hits. In August, it lost its biggest hitmaker, Shonda Rhimes, who created “Grey’s Anatomy” and “Scandal,” to Netflix.
Streaming is a market that Disney plans to break into in a big way. This year, the company announced two coming services: one, powered by sports programming from ESPN, set to begin next year and another, scheduled for 2019, to be built around movies and TV shows.

Disney hopes that the Fox television juggernaut can supercharge its ambitions by producing original series for the services and providing access to a catalog of older offerings. Fox would also contribute its stake in Hulu, the streaming service that shows ABC content and original programming like “The Handmaid’s Tale,” giving Disney a majority share.

A scene from "X-Men: Apocalypse," the ninth film in the X-Men franchise. From left, Jennifer Lawrence, Rose Byrne, James McAvoy, Lucas Till and Nicholas Hoult.CreditAlan Markfield/Twentieth Century Fox Film Corporation

X-Men, the original ‘Star Wars’ and more

In the 1990s, when Marvel was just starting out as a movie company, a licensing agreement gave control of the X-Men and Fantastic Four franchises to Fox. Disney bought Marvel for $4 billion in 2009; the deal with Fox brings optioned characters, including the edgy Deadpool, back into the Marvel fold.
Disney, home to “Frozen,” “Toy Story” and “The Avengers,” will pick up other film franchises — namely “Avatar,” for which there were four sequels in production as of April. Fox also owns the “Ice Age” animated series and the rebooted “Planet of the Apes” franchise.
Disney could also decide to take Fox’s older properties out of retirement, including “Night at the Museum,” “Home Alone,” “Doctor Dolittle” and “Alvin and the Chipmunks.”
Lucasfilm, which spawned the popular “Star Wars” films, has belonged to Disney since 2012. But Fox has retained the distribution rights to the first film, “Episode IV — A New Hope,” in perpetuity.

The on-field set of ESPN’s “Monday Night Football” for a game in Seattle last month. CreditTed S. Warren/Associated Press

Regional sports networks to bolster ESPN

Fox will bring its collection of regional sports networks to the table, including the YES Network that carries New York Yankees games, helping to fortify ESPN and its streaming service.
Fox’s sports channels often hold exclusive rights to broadcast local professional and college games in the United States. The channels also have deals with teams from Major League Baseball, the National Basketball Association and the National Hockey League.
That has proved lucrative for the company, drawing advertising revenue.
ESPN has struggled this year, with 1.4 million cable subscribers abandoning its flagship channel, taking away tens of millions of dollars in revenue. The network has tried to attract more local viewership and to re-engage fans lost to video clips on their mobile devices.

Visitors at the Shanghai Disney Resort's opening ceremony last year.CreditNg Han Guan/Associated Press

A bigger international presence

Disney is already a global behemoth, with major operations in Europe, Japan and China, where it opened its Shanghai Disney Resort last year.
But the company gets a lopsided amount of its profit from North America.
Mr. Murdoch got his start in Australia, New Zealand and Britain and has developed a stable of international businesses, some of which will now be Disney’s.
That includes Sky, the largest media company in Europe, in which Fox holds a nearly 40 percent stake; the National Geographic cable channel, which reaches hundreds of millions of homes overseas and has Fox as a majority owner; and Star India, a sizable Indian media company that is a subsidiary of Fox.

Stacey Snider became the chief executive of 20th Century Fox last year. CreditAlberto E. Rodriguez/Getty Images for CinemaCon

An infusion of female executives

The deal could also bring diversity to Disney, where every business division is run by a man. Fox has a sizable roster of female executives.
The list includes Stacey Snider, the head of 20th Century Fox; Emma Watts, the vice chair; Dana Walden, who leads Fox Television Group; Nancy Utley, the president of Fox Searchlight Pictures; and Courteney Monroe, the chief executive of National Geographic Channel.


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