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Fox Will Be Lean After Disney Deal, But Will It Be Mean?

The pending acquisition of the bulk of 21st Century Fox’s assets by the Walt Disney Co. turns the latter into a content giant the likes of which has never been seen. But it also turns the former into a leaner, more focused entity whose future is radically changed from what most observers envisioned for it just months ago.

The new 21st Century Fox consists of three key assets — Fox Broadcasting, the 28 Fox Television Stations, Fox News, and cable channels Fox Sports 1 and 2 as well as the Big Ten Network and Fox Deportes.

It is a company that is effectively out of the business of producing entertainment content, and far less invested in the distributing said content. Fox is focused instead on news and sports programming, which remain less vulnerable to downward trends in linear television ratings than scripted and reality entertainment. The new Fox would also be safely removed from the uncertain world of theatrical film.

DISNEY-FOX: MEGA-MERGER
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In a Dec. 11 report, analyst Michael Nathanson valued a post-Disney deal Fox at $22.7 billion — with 76% of that value coming from Fox Sports and Fox News. In an earlier report last month on the possible deal, Nathanson wrote, “As we have long believed, the future of traditional linear networks and linear viewing consumption will predominately be live and concentrated in sports and news verticals.”

The biggest and most immediate changes are likely to be felt at Fox Broadcasting, which will be divorced from studio 20th Century Fox Television. Fox will thus become the only broadcast network not affiliated with a television studio. Speculation has been that Fox Broadcasting would shift to a focus on news and sports.

During a conference call on Thursday, however, Rupert Murdoch indicated that Fox would remain a player in entertainment programming, even after the separation from the sibling 20th Century Fox TV studio. Fox will be an attractive partner to studios not aligned with a broadcaster, notably Warner Bros. TV, Lionsgate and Sony Pictures TV.

“We can make our own programs (or buy) from 20th,” he said. “As the networks make more and more of their own programs, people like Warner Bros. and Sony will be looking to us to buy programs. We’re in a strong position for getting all the programs we need.”

Fox Broadcasting and 20th Century Fox Television are both currently headed by Fox Networks Group chairmen and CEOs Gary Newman and Dana Walden. The businesses split at a time when integration between broadcast networks and sibling studios is highly prized. With linear ratings in decline, broadcast networks are increasingly touted as valuable to their parent companies as first-window platforms for content that can be monetized abroad and on other platforms in subsequent windows.

“The cash cow for many of the networks is putting on shows that they produce, then having the global distribution and syndication rights, which is where a lot of the money really is,” said media consultant Brad Adgate. Losing a relationship with a studio means that Fox Broadcasting loses a great deal of its ability to build value for a new 21st Century Fox. But it still may be able to leverage its position as a buyer to negotiate financial stakes in new programming. “Fox may open up negotiations with studios and say, ‘Look, if you want us to put this on the network, we want some sort of equity stake,'” Adgate said.

And without having to worry about supporting a studio, Fox Broadcasting may be able to program more strategically than it has in recent years.

“Not having a relationship with a production company could actually be freeing,” Katz Media Group’s Stacey Schulman said. “We’ve looked at this model for the last 20 years and thought it would be beneficial for networks to own the back end of content that came out of their own libraries. But sometimes it leads to shows being given chances for longer than they should be given chances in time periods they shouldn’t be given”

Without that constraint, Schulman added, Fox “may actually program better for themselves. And if they go into more reality content that will probably make the network younger in median age than it is now. So that will benefit it in terms of attracting younger skewing brands.”

The deal is unlikely to cause much change to Fox News’ cable channels, whose carriage contracts were negotiated separately from those of entertainment brands such as FX and National Geographic. But the news operation could see increased synergy with broadcast.

“They obviously have a strong news product which they haven’t really cross pollinated with their broadcast network that much,” said Schulman. “In light of that and the fact that they’re losing a big content library and production arm, you might see more news production coming from the Fox News side showing up on the network.”

Sports already plays a large role for Fox Broadcasting, where Sunday afternoon NFL telecasts are typically the highest rated programs anywhere on television, and baseball’s World Series has enjoyed two consecutive years of strong viewership. But Fox Sports 1 and 2 have yet to develop into legitimate challengers to Disney-owned ESPN’s dominance in cable sports programming. “In terms of the sport-media world, Fox Sports 1 is a niche broadcaster still,” said Windy Dees, a sports-administration professor at the University of Miami.

Meanwhile, Fox is losing a key asset in its regional sports network group, which moves to Disney — and which Nathanson values at $23.5 billion, more than any other asset in the acquisition. Observers, including Nathanson, had originally anticipated that the RSNs would stay with Fox as a valuable component of a news-and-sports strategy.

And looking back to broadcast, even NFL football is less of a boon to broadcast than it has been in the past, as ratings, which for years defied gravity, continue to slide.

“That’s by far their biggest, strongest piece,” Dees said of Fox’s NFL package. “But I think the issue with that is what’s the future of the NFL and are we at a tipping point? The ratings decline is a concern.”

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