MickeyBlog Disney News – Disney Buys Fox
“Content is king.”
Bill Gates argued in favor of this premise in a prophetic 1996 essay. More than 20 years later, the statement is more accurate than ever before. As Netflix ascended, the strength of their Over the Top (OTT) service was its content library. In the days before major corporations appreciated the value of digital content, Netflix signed exclusive deals that gave them a spectacular amount of movies and television shows that they could stream for a modest price.
The Deal That Changed Everything
One of the most important contracts Netflix possessed was with Starz Entertainment, an unheralded premium channel that owned a crucial license. They could air Disney movies earlier than normal in their digital window, oftentimes three or four months prior to more established pay channels such as HBO and Showtime. Netflix’s agreement gave them the right to do the same thing, and this contract changed the face of internet media consumption, almost by accident.
In February of 2012, the deal between Starz and Netflix expired. In the process, Netflix lost roughly 1,000 movies and television shows from their library. You may not have noticed, but Netflix’s content catalog has diminished in quantity every year since then. Movie studios have grown wise about the value of their content; they no longer offer expansive licensing deals on the cheap.
As I documented on a different site, Netflix had to boost their spending for content creation. In the words of TechCrunch, those “costs are ballooning” out of control. Netflix once paid others for the rights to their products. Now, the company has to pay for entire productions, a huge chance in the financials of their business model.
The Deal That Shocked the World
All of these issues facing Netflix also explain the biggest corporate news of the year. The Walt Disney Company has purchased almost all of 21st Century Fox’s assets. This deal was rumored last month, but both sides took a step back to re-evaluate. In the interim, corporations including Comcast had a chance to bid, too. Comcast actually made a better bid for the assets, but Fox ultimately preferred Disney stock. It’s a jaw-dropping turn of events best described in a simple statement.
Disney just swallowed Fox whole.
That’s a slight exaggeration, but it’s largely based in truth. Corporation transactions such as this one, while extremely rare, are possible. In the case of Fox, their founder is 86-years-old. Rupert Murdoch wanted to sell high on all of its assets in case the market for them suddenly collapsed. Many of these assets are television- and movie-based, two industries currently experiencing cataclysmic change, largely due to the Netflix situation discussed above.
The Fox Business Model
Cable television ratings were steady for the body of two decades. Then, the wheels fell off. Fox’s business model was sustained by channels such as Fox News, Fox Business, FX Network, Discovery Channel, Fox Sports, and so forth. Fox had a simple but elegant kind of vertical integration that functioned as the foundation of their company.
The corporation would produce television shows under the 20th Century Fox brand. Then, they would air those programs on their own Fox Network as well as competing networks. These other channels would pay licensing fees for the programs similar to what Netflix did. In exchange, Fox willingly created content for other networks. As an example, Modern Family has anchored ABC’s television lineup since 2009, but it’s a Fox production.
Fox can double- and triple-dip on revenue through this model. First, they license the first-run content on their own network or someone else’s. Then, they offer the syndication rights to local channels such as your city’s network affiliates. Simultaneously, they license these rights to a cable channel. After the introduction of Netflix, Fox could even redistribute their own content via a streaming service for a FOURTH payment on the same content. Wouldn’t you love to get four paychecks for the same work? That’s what Fox had accomplished over the course of many years of shrewd business decisions.
The Disney Business Model
The Walt Disney Company has a slightly different business model. They value their intellectual property in a rare and profound way. A corporation can do that when they have such a vast array of potential revenue sources for the same content.
As I’ve previously discussed, Disney has four core businesses. They are Media Networks (television channels), Parks and Resorts (the happiest places on Earth), Studio Entertainment (Disney movies), and Consumer Products & Interactive Media (merchandising and licensing). Disney earned $55.1 billion in revenue from these four divisions during fiscal 2017. The most profitable segment by far was the parks division, while critics assailed the company for its cable television struggles.
When Disney CEO Bob Iger evaluates a potential deal, he has to look at the big picture, which sounds cliché but is especially true with this corporation. A Disney IP purchase has ripple effects across a multitude of different industries. Does the product have merchandising opportunities? Can Disney use it to strengthen their cable channels? Could it become a videogame app? Will kids like it? How about their parents?
Iger has to see the whole board when he researches potential acquisitions. His track record indicates that he’s exceptional at this feat, possibly the best the company’s had since Walt Disney himself. Iger has bought Pixar, Star Wars, and Marvel in deals that all almost immediately paid for themselves. All of these purchases happened due to his willingness to broker deals that others might view as impossible.
A Chance Encounter Changes TV History
Bigwig CEOs run into each other more than you might realize. They have a tendency to show up at the same exhibitions and charity functions. In particular, CEOs in the same industries run into each other regularly. A chance encounter between Fox’s Rupert Murdoch and Disney’s Iger is what triggered this acquisition. Murdoch incidentally mentioned to his counterpart that he had thought about selling Fox’s assets. Iger once again saw a rare opportunity to augment Disney’s already-extensive IP library.
The two parties finally came to an agreement that they announced last Thursday, December 14th. This announcement sent shockwaves through the entire realm of content. In acquiring the overwhelming majority of Fox’s assets, they now stand apart as the alphas of IP. Sure, they may have already held that title, but the new IPs removed any lingering doubt.
What Did Disney Get?
Disney purchased virtually the entire Fox media library. There were only a handful of items that didn’t interest Iger and his staff. Those are Fox Sports, Fox News, Fox Business, Fox the network, the local Fox broadcast affiliates, FS1, FS2, and the Big Ten Network.
Why didn’t Disney want these assets? The answers all make sense. Fox Sports features many former ESPN personalities such as Skip Bayless and Colin Cowherd that Disney didn’t want back in the fold. The cable channel doesn’t own many exclusive broadcasting rights to major sports save for soccer, which isn’t an ESPN favorite. So, those three sports channels were a non-starter.
Disney also couldn’t own a second television network, which ruled out Fox. For similarly complex FCC reasons, Disney also couldn’t take the various Fox affiliates. As for Fox News, suffice to say that Disney and Fox’s political leanings aren’t similar. Recent issues with sexual harassment claims involving broadcasters also could have caused public relations problems if Disney had moved forward with that acquisition.
The only mystery is the Big Ten Network, which seems like a great fit with Disney’s plans. Disney bought all of the other regional sports networks that Fox had owned such Fox Sports New England, Fox Sports Tennessee, and even the YES Network, the cable channel for the New York Yankees. Big Ten sports seems to fit well with this
Other than these insignificant assets, Disney for all intents and purposes now owns everything related to Fox. All of the brands such as The Simpsons, Family Guy, Firefly, Futurama and The X-Files are Disney brands now, as strange as that may seem. Yes, it will take some getting used to, and I should add that the transaction doesn’t execute immediately. In fact, it could take a year or more to receive final approval from the federal government.
Why Did Disney Want Fox’s Stuff?
Remember when Disney bought ABC and ESPN? Okay, you might be too young for that. How about when Disney bought Pixar? Or Marvel? Or Star Wars? All of these acquisitions share a commonality. They expanded Disney’s branding opportunities. Disney could sell ESPN t-shirts and build ESPN restaurants. They could reboot Disney’s flagging animation unit with the fresh talent from Pixar. They could make an entire Marvel Universe full of movies. And they could make a new trilogy of Star Wars movies while selling billions of dollars’ worth of Star Wars merchandise.
The thing about Disney is that the company is everywhere. It has tendrils in all facets of society. While Disney (presumably) can’t build a Simpsons themed land at Walt Disney World right now, they CAN sell Simpsons merchandise. They can also produce a long-awaited sequel to The Simpsons Movie. And they gain the rights to the show’s episode library.
The library is the most fascinating part from Disney’s perspective. In 2018 and 2019, the corporation will introduce not one but two new streaming services. One is ESPN+, an OTT version of the Worldwide Leader in Sports. Disney previously promised the rights to 10,000 live sporting events. In gaining all of the Fox Sports regional networks, they now have an unprecedented sports library. It’s basically a monopoly since Disney will have most of the sports telecasts that matter.
The second channel is Disney’s OTT movie and television service, the so-called Netflix killer. Media analysts have derided this nickname, claiming that Disney didn’t have enough content to match Netflix. Whether those claims were valid previously (and I say they weren’t), they’re patently absurd now. Disney is THE dominant force in digital broadcasting now, and I say that more than a year before their service debuts.
The statement is true on two levels. By gaining Fox assets, Disney now owns controlling interest in Hulu, a 16-million subscriber service (although some reports estimate only 12 million). Disney has the right to turn these customers into users for upcoming service, giving the new OTT channel a massive built-in audience. Even if they don’t do that, they now own a lot of the content that populates Hulu. And that brings me back to The Simpsons.
In 2013, several major businesses bid on the streaming rights for The Simpsons. Fox eventually fell back to vertical integration by “selling” the rights to FXX, a Fox-owned cable channel. Anyone who has watched FXX knows that roughly half of its content is The Simpsons. Personally, I use the Simpsons World app almost obsessively.
FXX has the streaming rights to this channel through at least 2021. Disney’s new service debuts in 2019. Could The Simpsons eventually wind up on the service? Oh, that’s almost a certainty. The fascinating part is that the new OTT channel could feasibly LAUNCH with The Simpsons. After all, Disney now owns FXX and The Simpsons. There’s nothing stopping them from using one of the most famous television programs of all-time as a marketing tool for their OTT service…which makes it a very real threat to Netflix.
Netflix simply cannot monetize the way that Disney can. The company that brought digital streaming into the mainstream does one thing very well. They sell an entertainment service for a monthly fee. Disney can do that, too…BUT Disney can also sell merchandise for their IPs, develop theme park attractions based on the premises, and license their rights to third parties.
From Netflix’s perspective, what just happened is a nightmare. All of Fox’s content is off the board now, at least unless Disney generously sells some of those streaming rights to their competitor. I view that as unlikely. Instead, Iger’s team now controls more content than anyone in the history of the industry. They have cornered the market on valuable entertainment IPs, and that’s the end-game here.
In April of 2017, an analyst caused a stir by speculating that Apple might buy Disney. The thought process was that – wait for it – content is still king, and Disney had more of it than anybody else. The analyst didn’t like their means of distribution, however. At the time, Disney’s entertainment division relied too heavily on conventional television, especially cable.
Only eight months later, Iger has deftly navigated his corporation out such a danger. Now, they have more power in entertainment distribution than Apple or Google or Amazon or any of the other tech giants trying to invade digital media. The future of Disney is assured, and the launches of ESPN+ and Disney’s OTT service are almost certain to overperform now. If content is king, Bob Iger is emperor of Hollywood.
David Mumpower is the author of the Disney Demystified series. For only $4.99 each, you can read book one about Disneyland or book two about Walt Disney World. The softcover books also make amazing stocking stuffers this holiday season!