Disney-Fox Rumors Underscore Changing Business Landscape, Even for Murdochs

Investors are salivating over the possibility that the Walt Disney Co. will snap up parts of 21st Century Fox. Reports that the two media companies had held talks in recent weeks sent Fox shares soaring on Monday. It also signals that in an increasingly fractured media landscape — one in which must-stream entertainment is disrupting traditional ways of monetizing movies and shows — size still matters.

“This is a deal that would dramatically transform the content landscape,” said Tuna Amobi, an analyst with CFRA Research. “The play for scale in terms of content may justify why Disney would want to do this.”

Amobi notes that Disney is launching its own streaming entertainment service. If it wants to compete with Netflix and Amazon, both of which have a head start in terms of licensing content and building a user base, it helps to have access to Fox’s films, as well as the programming it produces for the likes of the FX Networks and National Geographic TV. The deal would not include the Fox Broadcasting Co. network, the Fox Television Stations unit, and the Fox Sports and Fox News operations, which would help the company avoid anti-trust opposition to a possible sale.

It’s also a sign that the world is changing and that Fox, the once-mighty media conglomerate that Rupert Murdoch built with a tireless zeal for acquisitions, may feel it can’t compete in a world of Silicon Valley and telecom behemoths. Amazon is making movies and shows, Apple is getting into the content game, and Facebook is also making noise about challenging Hollywood. All have deep pockets.

At the same time, Fox rival Time Warner (which Rupert Murdoch unsuccessfully tried to buy in 2014) is being gobbled up by AT&T. These companies don’t have to make money the old fashioned way. They sell telephone and data services (in the case of AT&T) or household goods (in the case of Amazon). They want to use movies and shows to interest people in buying devices or sticking around their e-commerce platform. It’s additive. That leaves Fox trying to compete by selling tickets to movies, licensing content, and selling advertising. Given that advertising revenues are shrinking and box office is hitting historic lows, it makes sense that Fox would be feeling the heat.

“The game has moved on to bigger players,” said Hal Vogel, a veteran media analyst. “They’re feeling competitive pressure.”

Fox knows it must increase its scale. That’s why it made its play for Time Warner in 2014, but its options are limited, analysts say.

“I think they want to get out of the business completely,” said Laura Martin, an analyst with Needham & Company. “Fox can’t wait for someone to sell to it and it can’t afford someone who would help it get all that much bigger.”

If Fox is motivated to join forces because of the digital barbarians at its gate, Disney CEO Bob Iger might be compelled to make a deal due to legacy-building. While running Disney, Iger has built a reputation for big, company-transforming acquisitions. He’s shelled out billions for the likes of Pixar, Lucasfilm, and Marvel, building the company into an entertainment conglomerate with few equals. Fox would be the biggest acquisition and the cap on a career at the top that’s currently scheduled to end in 2019 when his contract is up.

“With Bob Iger’s tenure coming to a close, there’s a sense of urgency to do something significant,” said Amobi. “It could be his swan song.”

CNBC, which broke news of the talks, said the two sides are not currently in discussions. Still, the mere fact that Murdoch, so used to being buyer, not seller, would even entertain parting with vast swaths of his empire, is shocking. It might also be prescient.

“It could end up being a damn smart move,” said Vogel. “He could be getting out when the going is good.”

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