Disney and Fox: The Merger of the Century?

Disney has been in talks with Fox regarding a potential and extremely large network purchase, rumored to include the FX cable network and Twentieth Century Fox studio.

Entertainment media has radically changed in the past decade, with many consumers tilting towards streaming media and independent networks such as Netflix. Disney’s discussions with Fox may indicate a new direction for the company, which has been struggling to compete with other networks in terms of unique and popular television programming.

Let’s take a look at what this acquisition would look like, and what it could mean for the entertainment industry at large.

Cable TV is Disney’s largest sector of business, accounting for 30% of its total revenue. Unfortunately for the company, its popularity with children and families has been in decline.

These changes have occurred in part due to the growing popularity of streaming media and issues that Disney has had communicating with its audience. A purchase of 21st Century Fox may be the right call if it is attempting to recapture more of its own audience and branch out into additional demographics.

Though the majority of Fox would be sold to Disney in this deal, Fox would still be able to retain some of its company. Notably, Fox would still retain both its sports and news networks.

As with many cable companies, Fox has also been struggling in a new and disrupted space. Being able to pare down to two of its well-performing niches could give Fox the opportunity to further its own financial goals while becoming a leaner and well-optimized business.

Implied in this deal is the idea that Disney may be able to compete with streaming services through acquiring additional resources and media. Netflix has been pouring significant sums of money into the development of new and timely content, much of which is backed by strong amounts of data regarding what viewers are interested in. As a direct reaction to this, Disney has launched its own exclusive streaming media service, through which it intends to distribute many of its own media properties. Movies will be directly released to this streaming service starting in 2019. Companies are consequently competing to build their media content.

Disney and other cable networks are struggling to compete with Netflix because of their relatively narrow bands of content. Netflix has an exceptionally large library, ranging from documentaries to comedy shows. Disney and similar networks generally have a fairly restrictive focus. By purchasing Fox, Disney would be able to create a larger repository of varied content, and would then stand a better chance against Netflix than both Disney and Fox independently.

This is a phenomenon that is fairly common when industry disruption occurs; it is why taxis have been unable to compete with ride share services and why Netflix was able to excel in areas that Blockbuster could not. Large companies tend to have difficulties pivoting when their industries change very quickly. Disney and similar media giants have not been able to shift into Netflix’s direction — and the direction of other streaming services — quickly, and thus have been losing market share. A notable exception is HBO, which similarly began to pump money into creating compelling content.

Moving forward, investors should be aware that the entertainment market is changing and that stocks that were traditionally considered to be staples — such as Disney — may eventually suffer from the same issues as the video rental industry and brick-and-mortar bookstores. Though these stocks may be a gamble in the short-term, this deal may be a positive one for Fox and Disney. Many analysts are looking upon it as a favorable move from Disney, as Disney is both acknowledging the changes in their market and taking action to resolve it.

Disney’s deal with Fox — whether it succeeds or not — is notable not only to investors but also to those who are interested in streaming media and the entertainment industry as a whole. As a deal, the Disney buyout of Fox would likely increase the fundamental strength of both companies. However, it’s necessary primarily because of the steam that traditional cable TV networks are losing in lieu of the rise of streaming services.

Regards,

Ethan Warrick
Editor
Wealth Authority


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