Twenty-First Century Fox, Inc. (FOX) is to be a different kind of Fox and will hunt for selective media content only, after casting out the entertainment parts of its media pursuit to The Walt Disney Company (DIS). Through the transformation, the company is adapting to the fast-changing and yet increasingly fragmented media landscape and focusing on a narrower set of Fox brands in news and sports programming to actually capture a larger crowd. More viewers mean better ratings and coveted content in the eyes of content distributors. Free from the burden of having to deliver costly hit shows and blockbuster movies, the slimmed-down new Fox is the real money-making “Predator.”
Letting Go 20th Century Fox and All the Cable TV Entertainment Networks– Really a Loss for Fox?
Twenty-First Century Fox was set up only five years ago in 2013, when 20th Century Fox movie studios and all the cable entertainment and TV assets were carved out from News Corp. (NWS). Mr. Murdoch wanted to retain the Fox name for the newly separated company that would oversee all the film and TV productions and continue to thrive in the 21st century.
But what a difference a short period of five years has made. The still fresh Twenty-First Century Fox is further breaking off its film and TV entertainment assets from the remaining TV news and sports content. The media landscape is shifting faster than perhaps what Twenty-First Century Fox had anticipated at the time of its formation.
The rapid change in the media landscape has taken place in both content creation and distribution. But it’s the unprecedented democratization of content creation that has really affected Fox’s thinking about its latest reorganization. It’s no longer only the six major film studios and big-name cable and broadcasting TV networks that can produce movies and TV shows. Streaming service providers have all gotten their hands on movie making and debuting their own TV shows. The world of entertainment content creation has become very crowded.
It’s a foxy move by Fox to get out of the movie-making and TV-entertainment business, even if that means giving up on its prized 20th Century Fox. For anyone lamenting Fox’s losing the iconic movie studios and its other known brands of cable TV entertainment networks, don’t! Fox sees a better route in navigating through the future media landscape, that is, the ubiquitous TV news and sports programing.
Without massive productions of cable and movie entertainment programs, the new Fox will cast itself as a nimbler TV news and sports programmer, ending any heavy maneuver in scripted content creation.
Getting on Everyone’s Content Distribution Platform
If Fox didn’t mind losing Sky (SKYAY), the pay-TV distributor, which it helped found and has become a content distribution powerhouse in Europe, it’s certainly not worried about attracting content distributors for its news and sports programing. In fact, news and sports programming is such specialized media productions and may have less competition than the entertainment part of the media business.
Since news and sports programming is distributed to much more audiences without the regard to viewers’ varied entertainment tastes, it can be in higher demand by content distributors of both traditional pay-TV and nascent OTC. All this plays right into the hands of the new Fox. As much as viewers love hit shows and blockbuster movies, there’s no replacement for live news and sports, also the central element of the increasingly popular OTC live TV offerings.
To complement all that, Fox can further build its own self-distributed streaming service upon what it already has, namely Fox Nation. Self-distribution may feature selective or alternate programming separate from its regular TV channels to meet different viewing needs without cannibalizing on pay-TV. Focusing on live news and sports for the general population, Fox can easily get on everyone’s distribution platform to reach a larger audience for more financial gains.
The new Fox with a wider audience for all-embraced news and sports content will be in the hunt to become a media darling of both pay-TV and over-the-top (OTC) providers.
Fatter Targets in Sight for the New Fox in Future Content Chase
Between Fox’s two main business segments, cable network programming and filmed entertainment, revenue contributions for fiscal 2018 ended June 30 were 67% vs. 33%. Despite garnering more publicity with all the attention-grabbing film titles, the filmed entertainment was a much smaller revenue contributor.
Within Fox’s cable network programming, many channels such as Fox News, FS1 and FX Networks all contributed to increases of affiliate-fee revenue in 2018. But Fox News was the primary source of advertising-revenue increases due to its ability to command higher ad pricing.
Aside from the few FX originals, reruns from Fox content library may not continuously drive either rate increases for affiliate fee or higher pricing for advertising revenue. Based on these hard financial results, it’s logical that Fox has come to the practical conclusion about shedding the entertainment part of its cable channels along with the film business.
Fox’s decision to pass over its entertainment business may have also been prompted by operating margins: a respective 34% and 11% for cable network programming and filmed entertainment in 2018. The filmed entertainment segment took away more resources on a relative basis, while contributing less revenue. Similar levels of operating expenses may also be assumed for its cable entertainment operations. Without heavy entertainment spending, news and sports programming may further lift margins for the new Fox’s remaining cable business.
The new Fox will be more cost-effective without having to incur the usually larger spending, something required of TV shows and movies that don’t always come with proportionate revenue contributions.
Investor Note
Among all the recent business pairings on display by some of the main media outlets: AT&T (T) and Time Warner, Comcast (CMCSA) and Sky and of course, parts of Fox and Disney, Fox’s selling its entertainment assets to Disney sheds more lights on the clarity of a media company’s future business success. The new Fox has likely grabbed the biggest awards at the conclusion of the Disney’s buying spectacle: less competition, wider demand and higher profitability for its future news and sports programming.
JW Investments Associates: Research & Management 