Old media challenge the tech giants in battle for scale
Fox’s dalliance with Disney suggests the need for a plan B in rapidly shifting landscape, writes Christopher Williams
James Murdoch, the chief executive of 21st Century Fox, does not give the impression of a man keen to retreat from the media industry that has made his family’s vast fortune. In meetings he speaks with table-slapping intensity about the future of entertainment, mapping out a landscape in which the rising titans of the technology industry must be challenged by strong media owners to ensure creativity is rewarded.
His passion for the coming fight is partly why many seasoned Murdoch observers were so astonished by news last week that Fox had held talks to sell most of its assets to Disney. Fox’s film studio, its production companies and television channels were in play. Even more intriguingly, its 39pc stake in Sky was also discussed. The talks are no longer active but it was widely reported, including by Murdoch newspapers, that they could be restarted. For Sky shareholders awaiting an £11.7bn cheque from Fox, it looked like bad news. The Competitions and Markets Authority (CMA) is investigating the planned takeover of Britain’s dominant pay-tv operator and plans to publish its preliminary findings the week before Christmas. If Fox is entertaining bid interest from Disney, does that mean the Murdoch clan fear their ambitions of full control of Sky will be dashed again?
Contingency planning may be smart. Britain’s chaotic political scene could deliver a Labour government firmly opposed to the takeover. Yet selling most of $50bn (£38bn) Fox seems an improbable retreat for a family that has been expanding its empire for 50 years. The industrial logic of a combination of Disney and
Fox’s most choice assets is clear enough. The shift to internet delivery of entertainment is handing power to a small handful of technology-led behemoths. Amazon, Apple, Facebook, Google and especially Netflix are drawing in subscribers at the expense of traditional pay-tv operators.
The trend is more developed in the United States but is accelerating in the UK too. One respected industry forecast suggests Sky will lose 1.5m satellite subscribers by 2020. It is already down by more than 600,000 from a peak of 9.5m three years ago.
The building market power of streaming services gives them a whip hand in negotiations with the likes of Fox over programme fees. Netflix demands global rights on the cheap. Programme owners are trying to fight back. The BBC’S commercial arm spent £50m on its own online store and found very few viewers used it instead of Netflix, shutting it down after only 18 months.
The Hollywood studios are meanwhile taking a more cautious approach to selling their material to the streamers. Fox’s revenues from Netflix actually declined in the most recent quarter despite the service’s rapid growth, as James Murdoch withdrew some programmes to monetise them elsewhere. Netflix’s $7bn-a-year push into making more of its own series is partly a counter strike. “Sometimes these big, global, exclusive licences that Netflix, for example, favours don’t fit,” said James Murdoch last week. Both sides know they will have to live with each other in the long run, however. Bulking up via mergers is viewed by media investors as one way to ensure the entertainment industry keeps its slice of the pie. “Consumer behaviour is changing at a rate that no legacy media company is prepared to deal with and decades of over-earning are being disrupted by the internet,” says BTIG research analyst Rich Greenfield in a note to clients. “As headwinds rise, we believe the only way to maximise shareholder value is [for Fox] to sell.” Lachlan Murdoch, joint chairman of Fox alongside Rupert, last week refused to comment on the company’s talks with Disney but rejected claims the family are “asset collectors”. “Historically the truth is we have always been asset builders,” he said. He also shot down claims that Fox would be better off as part of an even bigger media giant. “There is a lot of talk about the growing importance of scale in the media industry,” he said. “Let me be very clear: Fox has the required scale to continue to execute on our growth strategy and deliver increased returns to shareholders.”
He has changed his tune. It was only three years ago that the Murdochs mounted an audacious $80bn takeover bid for rival studio Time Warner, the owner of Game of Thrones maker HBO. Time Warner rebuffed Fox and then fell to a £85bn bid from the telecoms leviathan AT&T last year.
Last week it emerged that just as Fox has struggled to win approval for its Sky takeover, AT&T is facing opposition from US authorities. Regulators have demanded a spin-off of major assets including channel CNN to give the deal the green light.
The Murdochs provide fertile ground for conspiracy theories, and the timing of the leak of their talks with Disney has stoked speculation that they may believe Time Warner could come back into play if AT&T fails to meet regulatory hurdles. The focus on CNN, hated by president Trump, with whom Rupert speaks often, has led to claims opposition to the deal has been stoked by the White House.
James, at least, is understood to believe that the massive balance sheet a deal with Time Warner could create would put Fox in a stronger position in the shifting landscape. It would have swooped for Sky sooner if its 2014 approach had been successful, for instance.
James last week said he remains confident he will prevail in his pursuit of Sky, a company he formerly led as chief executive through a major expansion into broadband. The deal hinges on the fate of Sky News, a high-profile but little-watched channel that makes losses but is at the centre of questions over outsized Murdoch sway in the British media, and broadcasting standards.
Sky has told the CMA that if the deal with Fox is blocked it could be forced to review and even close Sky News, although the threat is not taken particularly seriously. Major independent shareholders have supported the losses the channel makes on grounds it is a keystone of Sky’s brand, particularly in influential political and media circles. Andrew
One respected industry forecast suggests Sky will lose 1.5m satellite subscribers by 2020
Bulking up via mergers is viewed as one way to ensure the entertainment industry keeps its slice of the pie
Neil, the BBC interviewer and founding chairman of Sky, told the CMA that Sky News was “very important” to the brand. “Launching Sky News was a commitment to spending money in Britain and providing a news channel with British values and British views, perhaps even a British view of the world or at least a view from the world based from here,” he said.
Fox is understood to believe that threats over Sky News will have limited effect anyway. Closing the channel would lead to a reduction in the range of news sources available, which would match the concern the CMA is investigating if the deal is approved. It is possible that the Murdochs will not be allowed to regain full control of Sky, not least because of the increasingly uncertain political weather. Such a humiliation would be a bitter blow, especially for James, who is uninterested by the News Corp publishing side of the family’s empire. Without Sky’s direct customer relationships, Fox would look more vulnerable to the power of technology titans in the new world of entertainment. With the company’s typically fraught shareholder meeting this week, its dalliances with Disney may be taken as a sign the Murdochs know there is much at stake in the UK.
The stars from
X Men Apocalypse from 21st Century Fox, right, and director Philip Martin and Matt Smith in South Africa filming The Crown, above, for Netflix, which is drawing in subscribers at the expense of Fox