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How FANG Left the Media Business Snakebitten

There’s no debating the #MeToo movement was the biggest story in the entertainment industry in 2017. But this year could also be remembered for another profound transformation: the way the FANG stocks took quite a bite out of the media business.

Two of the letters in that acronym stand for Facebook and Alphabet-owned Google, which have sunk their teeth deeper than ever into the advertising revenue that keeps the entire media ecosystem afloat, from TV to newspapers.

The other two letters belong to Netflix and Amazon, owners of the reigning subscription VOD services. 2017 saw an acceleration in their already lavish spending on original series and films, putting a tight squeeze on the U.S. pay-TV business and box office.

Perhaps nothing personifies the depth of the shocks administered by the FANG stocks than Rupert Murdoch, who earlier this month clearly indicated their competitive threat prompted his stunning decision to offer a massive chunk of 21st Century Fox to rival Disney for $52.4 billion.

Can there be a more dramatic illustration of the shadow cast over Hollywood by its neighbors to the north than the sight of this mogul par excellence disassembling his empire to confront the new world order? A career Goliath was instantly downgraded to a David.

As formidable a threat as they present, this fearsome foursome don’t even categorize themselves as media companies. It’s a conveniently timed notion, given ceaseless controversy regarding how much responsibility new-media moguls like Mark Zuckerberg and Susan Wojcicki have for the objectionable content on their platforms.

Whether they can be classified as media or not, this much is clear: tech titans are co-opting Hollywood’s core competency – premium video – as a key weapon in their war to keep billions of users worldwide on their respective platforms for as long as possible. That’s why it’s not so much Silicon Valley vs. Hollywood as it is Hollywood being caught in the crossfire of a conflict much bigger than just video, stretching from cloud computing to smart speakers.

“We are all watching an epic battle unfold for who will control human attention,” was how FX Networks chief John Landgraf framed it last summer in a speech to the Television Critics Assn.

Regardless of who the combatants are here, the battleground is unmistakable: mobile screens. Time spent on apps or the web on smartphones has more than doubled over the past two years, according to Nielsen’s Total Audience report for the second quarter of 2017, while TV viewing has drooped 6% over the same period. Mobile is supplanting TV as the most important playing field, and it’s anything but level for the media companies looking to keep eyeballs on their content.

With eight consecutive quarters of 20%-plus growth in the U.S., digital advertising doesn’t even seem to be stoppable by the host of issues that call into question its very efficacy, from ubiquitous ad blockers to brand safety concerns. But as impressive as that might seem for an entire digital ecosystem, the reality of the marketplace is that there is Google and Facebook, and then there is everyone else. IAB estimated the duopoly collected 83% of the digital advertising growth in the second quarter, up from 73% in the same period in 2016 and 63% in 2015. The two companies split the top eight most popular apps among themselves.

Meanwhile, Netflix and Amazon are quickly amassing global footprints few domestic programmers could match: eMarketer projects Netflix will have over 139 million users and Amazon, 96.5 million, by 2020. That reach requires a content supply funded by their massive 2018 content budgets of $8 billion and $4.5 billion, respectively. Amazon is already projected to spend an eye-popping $250 million on the rights for an upcoming “Lord of the Rings” TV adaptation. The two players have already proven they can crank out bona fide hits, “Stranger Things” being perhaps the best example.

The progress the SVOD category has made in TV is just beginning to get replicated in film. The first quarter of 2018 will be a telling indicator as these companies throw their weight around film festivals where they’ve become the deepest-pocketed buyers. Amazon has already gotten significant traction on the awards circuit with “Manchester By the Sea” and “The Big Sick.” Netflix hasn’t been as successful on that front, but it’s ready to remedy that, projecting the release of 80 movies next year.

That tonnage is not great news for U.S. box office, which declined 2.5% over last year; the exhibition business is busy consolidating to escape the downturn. The home entertainment business that was once a reliable cushion for studios’ bottom lines is dropping even more precipitously. A premium VOD system that could either cannibalize or revitalize both of those windows remains entirely theoretical.

All that said, the film biz is no worse for wear than any other part of the Hollywood landscape; signs of decline are everywhere. Broadcasting and cable TV advertising were down in the third quarter of the year a combined 12%, or 2.3% without the Olympics in the year-ago comparison, according to analysts Cowen & Co., which attributed this third consecutive quarter of decline to the share shift moving to digital. Revenues were likely dragged down by ratings, which were down 12% among viewers 18-49 on a C3 basis in the second quarter, according to MoffettNathanson.

True, an underappreciated amount of that viewing is happening within the pay-TV world of DVR and VOD weeks later, but the industry is still struggling to measure that viewing in order to monetize it. Advertising isn’t the only concern here, either. Annual growth on the $47 billion in affiliate fees content companies collected from distributors in 2016 is slowly tapering off as cord-cutting accelerated this year. MoffettNathanson characterized the 2.7% rate of decline registered by the pay-TV subscriber base in the second quarter as the steepest ever; it reached 3.1% in the third quarter.

The media business has faced its share of adversity over the years, but taken all together it’s hard to remember a time when the industry was in this fragile a state.

* * *

But media moguls aren’t taking all this lying down; to defang FANG, they’re fighting with fire. They are remaking their companies in the same mold as their tech rivals, first by striking the deals necessary to scale into a group of fewer but bigger businesses that can at least approach the size of a quartet boasting a combined market capitalization of $1.9 trillion. They are also pivoting toward their rivals’ style of data-driven streaming direct to the consumer. As Murdoch summed it up in the wake of the Disney deal, “Silicon Valley is spending tens and tens of billions on entertainment programming,” he told NPR. “So it makes sense to bulk up the entertainment side, so that we’ve got a company that can go direct to consumers in a big way.”

Nothing defined the media sector more in 2017 than the mergers and acquisitions that have been the order of the day to appease an increasingly skeptical Wall Street. In addition to the Fox-Disney stunner, there was the $14.6 billion union of Discovery and Scripps completed in November. More such deals seem inevitable next year, such as the potential for Shari Redstone to engineer the reunion of CBS Corp. and Viacom. Maybe someone in Silicon Valley will finally buy one of the content companies as well.

But while the business-friendly Trump administration was always expected to usher in an era of aggressive dealmaking, another mega-pact risks being derailed by the Justice Department: The contested union of AT&T and Time Warner will be headed for the courts in March.

How’s that for cruel irony: A deal is being questioned for amassing too much power in the hands of a few companies who are getting overpowered by Silicon Valley.

But in other ways, Washington D.C. is sending far less ambiguous signals that the media business is welcome to reconfigure itself as it pleases. The new Republican-led FCC has been driving deregulation at breakneck speed, clearing the path for growing giant Sinclair to close its own deal to snap up Tribune Media in a station business bound for some serious consolidation.

Maybe it makes sense that entertainment and politics found their fortunes inextricably bound this year — because both worlds are reeling from the impact of a formidable outside force breaking in, resolved to change the rules of an anachronistic game. Much like Donald Trump rocked Capitol Hill, tech giants have upset Hollywood’s own apple cart.

***

Then there’s the other way Big Media is responding to Big Tech: streaming. Disney CEO Bob Iger made perhaps the sector’s boldest move of 2017 by announcing plans to spend $3.75 billion to acquire the rest of Bamtech and use the company to power OTT strategies for its two biggest brands, ESPN and Disney, in the coming years.

It’s a remarkable pivot, one that signals a distancing from the obscenely profitable linear channel business on which media companies have long been dependent in favor of cutting out the middleman: pay-TV distributors. Like streaming services, Disney wants to establish a direct, data-rich relationship with consumers; acquiring parts of Fox means fueling up to fill this upcoming OTT pipeline.

Murdoch’s son Lachlan saw a precedent being set with Disney’s move, as he acknowledged in a September investor’s meeting. “I don’t think there’s a major media company on the planet that ultimately won’t have a direct-to-consumer product launched in the short to medium term,” he observed.

There’s already plenty of more modestly ambitious products of that ilk in the marketplace; CBS All Access is coming off a banner year that saw its own expansion into original programming, and an international expansion is coming next. Still other innovations in streaming increased a traction that had barely begun in 2016. The advance of virtual MVPDs like DirecTV Now and YouTube TV amassed a collective footprint of 4 million subscribers heading into 2018, according to Morgan Stanley.

It’s a wildly experimental moment in the video marketplace right now, one so glutted with alternatives that a shakeout is inevitable. Dreams any of these players have of catching up to FANG must also be tempered with a cold reality: It’s going to be mighty hard to compete as long as those companies don’t have to bother maintaining the quarterly profits investors will continue to insist on seeing out of traditional media firms.

It’s not like the state of affairs the media business finds itself in 2017 really should have come as much surprise. FANG didn’t suddenly pounce on Jan. 1; these companies have been slithering their way going back years toward the coiled position from which they’re currently suffocating the sector.

Which leads in to the most troubling aspect of Silicon Valley’s invasion: It’s entirely possible it’s just begun. As if Facebook and Google weren’t enough to worry about, Amazon is just beginning to make its own play for ad dollars. Verizon’s Oath, Snap and Twitter will be cranking up their own efforts, all targeting a highly lucrative, though very distant, third-place perch.

Facebook and Google are also poised to step up their own contributions to the subscription-video arms face as they step up their own content investments via new-ish initiatives Watch and YouTube Red, respectively. Perhaps the biggest vulnerability just barely broached in recent years is the most lucrative asset in the conglomerates’ portfolio: TV sports rights, multibillion-dollar packages that tech companies could easily bid away from the linear channels.

And for those who understand the tech sector not as FANG but as FAANG, the extra A will finally make its presence felt in Hollywood when Apple pledges to bring at least $1 billion to its own budding original content efforts in the coming years. It’s the one company that dwarfs even the formidable FANG.

It doesn’t matter how many letters are in the word; they spell big challenges ahead for the media sector just the same.

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