Streaming Strategy

The finalization of Walt Disney Co.’s $71 billion acquisition of 21st Century Fox’s movie and television assets will impact the Valley economy as the region’s largest company suddenly grows even larger. The transaction effectively eliminates one of Hollywood’s traditional studios, although Disney will continue to operate from the Fox lot in Century City. That makes three studios based in the San Fernando Valley, with Disney in Burbank joining Warner Bros. Entertainment, also in Burbank, and Universal Studios, in Universal City. Two studios remain on the other side of the hill – Paramount Pictures Corp. in Hollywood and Sony Pictures Entertainment Inc., in Culver City. For Disney, the acquisition sets the stage for the launch of its Disney+ streaming service later this year. The deal makes Disney even more of a powerhouse than it was already. Joining Disney’s ownership of the Marvel Cinematic Universe, the “Star Wars” and Pixar franchises will be such programs and film franchises like “The Simpsons,” “X-Men” and “Planet of the Apes.” Gene Del Vecchio, an adjunct professor of marketing at USC Marshall School of Business, called the deal a win in every way for everyone involved – Disney, Fox, shareholders and the public. “That’s because from the content side, people who are in love with ‘Star Wars,’ people who are in love with Marvel are going to be able to see interesting combinations of characters that they love moving forward,” said Del Vecchio, who as a marketing consultant and strategist has worked with Disney, among other media companies. The acquisition was first announced in December 2017 in a deal valued at $52 billion but hit a snag some six months later when Comcast Corp. entered the negotiations in an unsuccessful bid to buy the Fox assets. In response, Disney increased its offer to $71.3 billion. The deal closed on March 20. The purchase represents continued consolidation in the entertainment industry. Last year, AT&T Inc., in Dallas, bought Time Warner Inc., parent of Warner Bros. in an $85 billion deal. Prior to that, cable operator Comcast had bought a majority stake in NBCUniversal in 2011, and two years later bought the minority share still controlled by General Electric Co. Paul Dergarabedian, senior media analyst in the Sherman Oaks office of Comscore Inc., a media measurement and analytics company, said that consolidation among these companies make sense because they are already overlapping. On the plus side, when done properly consolidation can offer resources in the marketing and distribution side and on the creative front, Dergarabedian said. “The downside is you don’t want one entity to be so big that it dilutes the smaller brands within that ecosystem,” he added. Streaming future In the battle over content and distribution, a deal like the one for Fox was a long time in the making, said Del Vecchio. It is the latest piece of a puzzle that Disney Chief Executive Robert Iger has been putting together, starting with the acquisition of Pixar in 2006, moving to the purchase of Marvel Entertainment in 2009 and Lucasfilm in 2012. With the Fox deal, Iger is ready for a bigger battle with the streaming services of Netflix Inc. and Amazon.com Inc. “It is getting nastier and nastier,” Del Vecchio said. Netflix and Disney had been on the same page at one time, with the Los Gatos media company distributing Disney content and contributing up to $150 million in licensing fees to the studio. Then Netflix started enticing away key showrunners, including Shonda Rhimes, whose shows including “Grey’s Anatomy” and “Scandal” aired on Disney-owned ABC network; and Ryan Murphy, whose shows “Glee,” “911” and “American Horror Story” air on Fox broadcast or cable channels. “Disney thought he was probably going to come over with the acquisition, but Netflix poached him,” Del Vecchio said. Later this year, Disney will offer its Disney+ streaming service in direct competition to Netflix, as well as Amazon Prime. Additionally, with the acquisition Disney gets a controlling share of Hulu, another streaming service that is co-owned along with Comcast and AT&T. “Streaming is right up there for the strategic rationale for this deal,” said Tuna Amobi, senior equity analyst who covers Disney at CFRA Research in New York. Albert Soler, an entertainment lawyer in New York, called the acquisition a good strategic move on Disney’s part as it looks for quality content to sustain the company for the next 20, 30 or even 50 years. “How do they do that?” Soler asked. “By being able to create spinoffs, sequels, crossovers and new stories.” With the acquisition, Disney brings into its domain movies that it did not own previously. While Disney may own Lucasfilm, the original “Star Wars” trilogy had been owned by Fox. Additionally, while owning Marvel, the company did not have rights to films featuring the X-Men characters, Deadpool or the Fantastic Four, all Fox properties. “Those are billion-dollar ideas,” Del Vecchio said. “Just imagine a film in which X-Men meet some of the Avengers.” Dergarabedian said there are rumors of bringing some of the X-Men characters into the Marvel Cinematic Universe, adding that it creates mindboggling opportunities if Disney were to go that route. The combination of Disney and Fox content builds more of a powerhouse in terms of their footprint and market share, Dergarabedian said. “By integrating the two and the synergies created will create endless possibilities down the road in terms of the creative realization and manifestation of what all this brain power, creativity, content and archival mythology bring to bear,” he added. “For me, that is really exciting.” Executive layoffs The entertainment industry sources all agreed that the acquisition will result in layoffs that are expected at Fox and not at Disney. Just how many is yet to be determined but termination notices started going out on March 21. Among the first jobs cuts were senior-level executives in film distribution and marketing on the Fox lot. Del Vecchio said he was hearing as low as 2,000 workers to “one crazy estimate of 7,500.” Soler, the entertainment attorney, said it could be in the range of 3,000 to 4,000 employees. “It is a necessary evil in this sense because you do have to make sure you are running efficiently and effectively,” Soler added. “Having redundancy in departments probably isn’t the way to go.” These numbers back up what Amobi, the analyst at CFRA, has been hearing that the layoff figures “are all over the place.” “I don’t think at this stage that the company itself has a good handle on what the final number will be,” he added. But Amobi and investors are less interested in the number of employees who may lose their jobs than on how workforce cuts will impact operating leverage, and how the cuts will affect the key strategy of direct-to-consumer streaming. “We are less focused on the number of layoffs, which from a modeling perspective would mean little to investors who are more focused on the quantifiable impact to the bottom line,” Amobi added. Iger, in a message to Disney employees after the deal was finalized, said that he wished he could tell them that the hardest part was behind them. He barely hinted at the follow-up steps. “What lies ahead is the challenging work of uniting our businesses to create a dynamic, global entertainment company with the content, the platforms and the reach to deliver industry-defining experiences that will engage consumers around the world for generations to come,” he wrote. New Fox The Fox assets that Disney didn’t buy include cable sports and news networks and the Fox broadcast network. With the deal complete, the so-called new Fox can concentrate on those businesses. “They are shedding themselves of the parts of the business that were less profitable and keeping the ones that are cash cows,” Del Vecchio said. The Murdoch family, the longtime owners of Fox, renamed 21st Century Fox to Fox Corp. and began trading on the Nasdaq on March 19. Lachlan Murdoch, son of family patriarch Rupert Murdoch, is the chief executive and co-chairman along with his father. Going the route of spinning off the cable and broadcast networks was a recognition by the Murdochs that they could not compete in the new, streaming arena and it was better to concentrate on the things it can compete on, Del Vecchio explained. The Disney model was not the Fox model. Disney has theme parks that can help promote its movies and vice versa. It also has a wide-reaching consumer products network. For instance, Del Vecchio said, “Toy Story 3” did $1 billion in global box office. Adding in all the ancillary and retail sales connected with the 2010 film, its revenue totals to about $10 billion. “Fox did not have that kind of power,” he added. “It was recognition by Fox to hunker down and concentrate on the things that it does best.”