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Disney-Fox Deal Will Create a New Beast in the TV Jungle

What do you get when a Mouse eats a Fox?

The Walt Disney Co. chairman and CEO Bob Iger is betting whatever it is, it will be big enough to compete with Netflix and fast enough to outrun other television companies as the video business evolves from a linear to a streaming on-demand, direct-to-consumer subscription model.

By acquiring most of 21st Century Fox in a $60 billion deal expected to be announced this week, Disney will be transforming the TV ecosystem, creating a new content giant — based on DNA that’s very different from a vertically integrated behemoth like Comcast or the still-possible combination of AT&T and Time Warner.

Looking at Disney’s desperation for scale and Fox’s belief that, despite its own hugeness, it can’t grow fast enough, one wonders where all of the smaller media companies fit in as they try to deal with not only Netflix, but Facebook, Google, Amazon and Apple, all gearing up to spend billions on programming.

To win and keep subscribers, Disney will need vast amounts of content. When Iger explained Disney’s subscription strategy, he confessed that the company’s product would cost less than Netflix, because it would offer less content at first.

21st Century Fox can provide a lot of content with both a deep library of movies and TV shows, as well as active film franchises such as Avatar. And not just the shows that air on Fox’s cable and broadcast networks like The Simpsons, but hits like NBC’s This Is Us and Showtime’s Homeland.

Unlocking Library’s Value

For the Murdoch family, which controls Fox, a sale might be the only way to unlock the unrealized value of that treasure trove of content.

Disney was among the first to call attention to the erosion of the traditional pay TV ecosystem. It warned two years ago that revenue growth at mighty ESPN would slow because the sports programmer’s subscriber count was dropping amid cord-cutting and cord-shaving, as viewers went over-the-top to find programming.

“We believe creating a direct-to-consumer relationship is vital to the future of our media businesses, and it’s our highest priority this year,” Iger said during Disney’s quarterly earnings call in November.

At the time it seemed Disney with its Disney, Star Wars, Pixar and Marvel brands might have enough content to venture into the subscription world.

Back then, few imagined that the Murdochs — known for audaciously accumulating assets — would become sellers.

But last week, Disney and Fox were putting the finishing touches on arrangements that would shift assets between newly formed entities that would greatly reduce the taxes on the impending transaction.

Sanford C. Bernstein media analyst Todd Juenger compared Disney’s situation versus Netflix to Walmart’s with Amazon. Disney’s stock will rise, as Walmart’s has, if the market decides that like Walmart, Disney is the last biggest scale player left in the industry, has a digital strategy and will move ahead, consolidate its power and accrue value.

Until the deal becomes official — and it’s still unclear that a Justice Department moving against the AT&T-Time Warner merger would allow this — many questions linger about the future of these valuable assets.

What are the succession plans for Iger? It’s unclear if he will stick around beyond his planned retirement data of 2019 in order to integrated the Fox assets and implement his streaming strategy.

Disney Could Get a Murdoch

Reports emerged last week that Rupert Murdoch’s son James Murdoch, now CEO of 21st Century Fox, would become a senior executive at Disney, and could eventually replace Iger, relieving Disney of its unending succession drama.

Disney will also have a challenge merging its squeaky-clean, family friendly brand with Fox’s edgier content, and keeping the brands distinct. Most analysts are watching how the Fox regional sports networks will fuse with ESPN, which has been laying off staffers as it adjusts to shrinking subscribership.

Iger said ESPN will also be introducing an over-the top business next year based on an app that will give users access to all sorts of sports programming. Will home-team games be part of that package?

As for Murdoch, the Fox broadcast network will be his focus, but without a studio to fill its schedule with sports, news and reality programing, what would it be worth?

At a time when retransmission-consent payments represent the growth in broadcast network revenues, will cable operators and other distributors pay up for the new format?

Furthermore it’s unclear what the remaining Fox assets — including Fox News Channel, Fox Business Network and FS1 — are worth. Would they be combined with The Wall Street Journal and the New York Post at News Corp.?

Analyst John Janedis of Jefferies pegged “RemainCo Fox” at $10 a share. “We believe that the stub’s value is underappreciated at these early stages,” Janedis said.