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

The Sunday Telegraph - Money & Business - - Front page -

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

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