Disney Still Hunting Twenty-First Century Fox Assets

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After failing to strike a deal because of price, Disney is once again talking to Twenty-First Century Fox about a purchase of some of Fox’s assets. Comcast, owner of NBC Universal, is also considering a bid for the assets. The assets would likely include the Twentieth Century Fox film and TV studio, Fox’s international assets, and the FX and National Geographic cable channels.

Disney’s interest in Fox’s assets comes at a time when the iconic firm has had to rethink the future of its media networks. Since cable television started rising in popularity in the United States in the 1980s, the business model of cable television networks has been fairly static. A successful television network charges the cable or satellite provider an affiliate fee for the privilege of carrying the station, with the remainder of income coming from advertising. The dual-income stream provided by cable television meant that cable television stations, though having less viewership than the traditional network stations, have been extremely lucrative.

Creating a network that can deliver paid television to millions of homes is extremely expensive. According to the US Telecom and Yankee Group, a total of $216 billion was invested in cable television networks in the United States between 1996 and 2013. Satellite networks have generally been cheaper and able to reach more remote areas, but lack other benefits of cable, such as the ability to run high-speed internet and telephone services through the same network.

Economies of scale dictated a separation between content and distribution. Content and distribution companies have had overlapping ownership. For many years, Time Warner housed both today’s Time Warner as well as Time Warner Cable and Comcast now is a major content provider via NBC Universal. But, the enormous investment required to distribute content meant that the only economical form of distribution was for multiple content companies to negotiate with a distributor, who then packages a plethora of channels for the end consumer.

With the rise of streaming services, the old cable television model is becoming antiquated. Netflix currently has $320 million of fixed assets on its balance sheet and has accumulated depreciation of another $320 million, implying an original investment of $640 million, in order to generate revenue that is approaching $10 billion. Meanwhile, large cable distributor Charter Communications carries fixed assets of $33 billion at an original cost of $44 billion in order to generate about $30 billion in revenue. The transaction costs of distributing content to end consumers have fallen so drastically, it may not be all that necessary to have aggregators of content the way cable and satellite providers traditionally have been, shifting the bulk of entertainment value towards the content itself. The phrase “content is King” may never have been truer than it is today.

The Most Lucrative Cable Television Channels

RankNetworkOwnerRevenue (in millions)Valuation (in millions)Affiliate Fees per Subscriber (per month)Subscribers (in millions)Average Viewers (in thousands)
1ESPNDisney (80%) / Hearst (20%)$10,100$30,000$7.2187850
2Fox NewsTwenty-First Century Fox$1,800$11,600$1.41891,400
4TNTTime Warner$2,400$10,000$1.9090820
5Discovery ChannelDiscovery Communicaations$1,000$8,300$0.4591610
6Disney ChannelThe Walt Disney Company$1,650$7,100$1.4091950
7ESPN 2Disney (80%) / Hearst (20%)$1,300$7,000$0.9087250
8TBSTime Warner$1,300$6,600$1.0092620
10Fox Sports 1Twenty-First Century Fox$1,700$5,100$1.3084180
12CNNTime Warner$1,100$5,000$0.8091750
13FXTwenty-First Century Fox$850$4,500$0.7090520
14HGTVDiscovery Communicaations$650$4,400$0.2591880
16Food NetworkDiscovery Communicaations$550$3,800$0.2593600
17National Geographic ChannelTwenty-First Century Fox$525$3,200$0.3089270
18LifetimeDisney (50%) / Hearst (50%)$700$3,000$0.3591450
19TLCDiscovery Communicaations$480$3,000$0.2590400
20AMCAMC Networks$600$2,900$0.5091540
21Cartoon NetworkTime Warner$560$2,800$0.30911,000
22FreeformThe Walt Disney Company$520$2,700$0.3589450
24History ChannelDisney (50%) / Hearst (50%)$600$2,500$0.3091640
25A&EDisney (50%) / Hearst (50%)$550$2,500$0.3090460
26Spike TVViacom$600$2,400$0.5083400
27Comedy CentralViacom$475$2,300$0.2590320
30TV LandViacom$330$1,900$0.2088480
Source: Economics Wire estimtes.

Indeed, Netflix itself is spending astronomical sums on acquiring content. The company is guiding towards $7 billion – $8 billion in expenses for the production of original content and the acquisition of content rights in 2018.

A company like Disney has multiple ways that they can approach this new world of content distribution. The company has announced two streaming services (after pulling its content from Netflix): one sports-themed and one Disney themed. The ability to drive subscribers to those streaming services depend on the kind of content Disney can place on the service.

The sports-themed streaming service is not much of a mystery. It will feature the company’s ESPN branded stations as well as the other sports-themed networks it owns such as the SEC channel. An investment has previously been made by Disney in the company that stream Major League Baseball games to help with the platform.

Disney also has plenty of content from its existing assets. It owns the kid-friendly stable of Disney and Pixar animated films that include Frozen, Inside Out, Toy Story, and Up. Its acquisition of Lucasfilm has brought the Star Wars and Indiana Jones franchises and Marvel provides a sleight of successful superhero films. On top of that, Disney can offer access to Freeform, it’s family-friendly cable network as well as The Disney Channel and it’s half-owned A&E Networks, that include Lifetime, The History Channel, and A&E. Of course, Disney also still owns the ABC network.

Still, the addition of assets from Twenty-First Century Fox would bolster Disney’s slate even further by adding content in areas Disney does not own. One would be The National Geographic Channel. The station would be a perfect non-fiction complement to Disney’s assets and logical platform to distribute DisneyNature films. It would also add FX, an entertainment network – something Disney does not have – with original programming such as The Shield and Nip/Tuck.

The Twentieth Century Fox movie and television studio could entrench Disney’s content advantages over rivals even further. Fox’s film studio has had the fourth largest take at the box office this year, while Disney is second. A combination of the two studios would create a behemoth with a 30% share of the box office.

This Year’s Biggest Movie Studios According to Box Office Mojo

RankStudioStudio OwnerMarket ShareBox OfficeMost Popular MovieNumber of FilmsAvg Gross
1Warner BrothersTime Warner20.3%$1,965Wonder Woman30$65
2Buena VistaThe Walt Disney Company18.1%$1,753Beauty and the Beast11$159
3UniversalComcast15.1%$1,463Despicable Me 315$98
4Twentieth Century FoxTwenty-First Century Fox12.3%$1,194Logan16$75
5SonySony8.8%$854Spider Man: Homecoming25$34
6LionsgateLionsgate8.6%$832La La Land22$38
7ParamountViacom5.0%$487Transformers: The Last Knight16$30
8STX EntertainmentPrivate Equity1.9%$189A Bad Moms Christmas8$24
9The Weinstein CompanyPrivate Equity1.3%$125Lion8$16
10Focus FeaturesComcast1.1%$111Atomic Blonde9$12
11Open Road FilmsTang Media Partners1.1%$108The Nut Job 2: Nutty by Nature9$12
12Fox SearchlightTwenty-First Century Fox0.7%$67Gifted11$6

Disney may ultimately fail in its pursuit for Fox’s assets or be outbid. But, should it win it would have an enormous content library that would make it an extremely tough competitor to Netflix or any other streaming service.


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