Disney and Fox

This past week, Comcast and Disney ended their bidding war over Fox. Comcast dropped out of the bidding and Disney thus won with an offer to pay $71.3 billion for much of Fox. This potential deal needs to be approved by the shareholders of both companies, which will likely happen later this month. The deal has already been pre-cleared for potential antitrust violations.  Meanwhile, Comcast is still trying to acquire Sky, which is somewhat coincidentally 39% owned by Fox, and which Fox is still separately trying to acquire though signs point to Comcast winning this fight, currently valued at $34 billion. A significant contributor to Comcast pulling out of the bidding for Fox was that Comcast increasing its bid for Fox was actually also increasing the price it would need to pay for Sky per British indirect ownership and takeover rules (through the "chain principle").


Disney is buying a number of assets, but the deal also excludes a significant set of what is currently Fox. They are acquiring Fox's Hulu shares - meaning the combined Fox/Disney will own 60% of the company, FX, National Geographic, 20th Century Fox, and over 300 international channels. Disney itself owns a litany of businesses, including Walt Disney Pictures, Disney Music Group, ABC, Pixar, ESPN, Marvel, Lucasfilm, theme parks, the BAMTech streaming platform and a slew of other properties (e.g. half of A&E). Disney is not acquiring Fox News, Fox Business, Fox Broadcasting, and its sports channels (FS1, FS2, Big Ten Networks and 22 regional sports channels) - this will be spun off into a new company, the ownership of which will be distributed to existing Fox shareholders.

The exclusions here are substantially around the terms required by the DOJ for antitrust approval to avoid concentrations in broadcast distribution and sports coverage. While in these last couple weeks we've seen the Sinclair - Tribune merger effectively be rejected and an appeal filed against the AT&T - Time Warner merger, the Fox - Disney merger had a somewhat more straightforward path. There is some contention as to whether politics played a part (the DOJ emphatically says no, of course). Separately, while the Sky acquisition is primarily for international reach and distribution, it does appear that Comcast is trying to acquire more content. It already owns NBC and Universal, and it might be not be unreasonable to expect eventual offers for large content companies including Viacom, Discovery, Lions Gate, etc. or others like MGM and Sony Pictures. This might face the same sort of opposition that AT&T - Time Warner is facing, though the resolution there was initially and may eventually be in favor of the AT&T merger.

The media industry continues to evolve and this deal is a clear signal that Disney intends to compete in the next iteration. Between Fox and Disney, their films have amounted to nearly 50% of the 2018 box office to date. An antitrust analysis that believes that movie theater sales are particularly important may not have approved this merger in the current form. Movie theater sales are only a fraction of content distribution, and platforms like Netflix, Amazon Prime, Roku and Hulu are increasingly important. Within TV consumption alone, connected TV has grown from 7.7% of share in June 2016 to 15.9% in June 2018 - roughly doubling in two years and growing by the largest percent and overall share in that period, and much of that growth is due to Netflix etc. Transaction was predicated substantially, though not entirely, on connected TV.

Disney recently restructured their company, creating discrete units for parks, experiences and consumer products, and media networks and studio entertainment. The new experiences and consumer products will oversee Hulu, and it will be adding to its content roster for its new, to-be-formally-announced direct-to-consumer streaming platform (powered by BAMTech) - intended to be a direct competitor to Netflix. Few companies have the streaming technology and content library to compete with Netflix, but the new Disney will have both. It's worth noting that Disney's current market cap is roughly the same as Netflix. Netflix is valued much more favorably, however, with a price-to-earnings (P/E) ratio of around 150, compared to Disney - which is around 17. Disney's annual revenues were $55B - roughly 5 times greater than Netflix's. 

As it relates to the ad tech ecosystem, there are a number of angles to consider. First, Fox, through its TrueX acquisition and leadership under Joe Marchese, has been at the forefront of innovative monetization for TV. Fox has led with 6-second ads and generally focusing on ways to reduce the ad load by trading an abundance of low-attention ads with a smaller number of high-attention ads (Bob Iger, Disney's CEO, has been a vocal proponent of the same strategy). This has been a very positive trend. The spun-off New Fox will retain this team and disposition, but will be less influential. New Fox will likely continue to try to maximize its revenue using a similar tactic. It is possible that distribution-focused New Fox will draw the attention of cable companies like Charter, Cox, Altice, etc, who may seek to create integrated competition for AT&T (post Time Warner Merger) and Comcast. Fox has also been a member of OpenAP, a consortium to standardize advanced audience targeting in premium TV ads, whereas Disney has not.

Disney has historically not been focused on developing ad tech. That said, the company recently introduced Luminate, a data-driven, targeted ad product that is an alternative approach to OpenAP. This consists of linear optimization, digital private marketplaces, and programmatic guarantees - plus attribution with solutions like Nielsen and Samba. In effect, this is an integration of data through various channels that can be applied by the marketer to drive and measure their advertising, and is increasingly being applied to all channels of Disney's content - including linear TV (to a degree) - but this is largely implemented through third-party ad tech. Disney has an open role for VP ad tech that focuses substantially on ad insertion, transcoding and reporting. Disney will have an increasingly bifurcated strategy around content monetization. Hulu and their media networks are ad-supported models. Disney will also have a non-ad-supported model through its new streaming platform. Hulu already struggles to a degree with the challenge that many of their most loyal users  pay to not see ads, Disney's sales teams may face this challenge more acutely as the monetization strategy split spreads throughout the organization. It is unclear what Disney will do with Hulu after this acquisition and it is unclear what the relationship of Hulu will be to Disney's now streaming service.

Comcast, meanwhile, is expanding its addressable TV footprint. It already owns Freewheel, possibly the leading video ad server along with DFP. Through the likely Sky acquisition, it will also be acquiring the Sky Audio Visual Exchange - Sky's programmatic platform that covers owned-and-operated platforms as well as linear and VoD inventory - and its addressable ad platform, Sky AdSmart. The industry is clearly moving to two clear paths. One is viable, premium, for-pay streaming platforms that have truly compelling content portfolios - of which there can be only so many. The other is improving video monetization through increasingly effective advertising in conjunction with ever-improving audience targeting and measurement.