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Mickey Mouse Becomes Mega Mouse

Neil Boyd-Clark, Managing Partner, Media and Resources Analyst

When Bob Iger, Walt Disney’s Chairman and CEO announced that the company would be making a significant strategic shift in August this year, few might have imagined that this shift would include making the world’s premier premium content company even bigger, but that is exactly what has happened. Embedded in Disney’s decision to launch its own Disney and ESPN branded SVOD services was a message to all other premium media content operators: Get Big or Get Out, because scale and breadth of content are set to become important comparative advantages in a world where some of the biggest corporations on the planet including Apple, Amazon and Alphabet are leveraging their global reach to enter the premium video content development market.

Iger’s announcement meant that Rupert Murdoch and 21st Century Fox were suddenly under pressure to develop their own global online content distribution strategy. Previously it might have been possible for Hulu, a joint venture between established media players, Fox, Disney, NBC and Time Warner to become the natural SVOD alternative to Netflix, given the vast amount of premium content that these companies have at their disposal. But Iger’s strategic shift called this into question, not only was Disney going it alone, but they also retained a strategic stake in Hulu, which might prevent Fox from using Hulu as their content delivery vehicle and in any event Hulu is US focussed and a competitor with global reach to take on Netflix was required. After examining their options, the Murdoch’s recognised that rather than building their own direct to consumer content delivery service, they would be better off combining their premium content with Disney to create a content company with significant scale and even better global reach.

Disney and Fox have announced that the two companies will effectively merge (excluding select assets including Fox Broadcasting, Fox News, Fox Business Network, Fox Television stations, FS1, FS2 and Big Ten Network which will be spun out into a new company) in an all scrip deal, whereby 21st Century Fox shareholders will receive 0.2745 Disney shares for each 21st Century Fox share that they own and Disney will also take on US$13.7bn of Fox Net Debt. Fox shareholders will thereby become shareholders in Disney and account for roughly 25% of Disney’s expanded shareholder base. In exchange for the issue of new shares, Disney will add 21st Century Fox’s video production businesses, including Twentieth Century Fox, Fox Searchlight and Fox 2000 which are the homes of Avatar, X-Men, Fantastic Four, The Simpsons and Modern Family as well as US cable networks including FX Networks, National Geographic and Fox Sports Regional Networks. Disney will also extend its global reach via the addition of Fox Networks Group International, Star India and Sky Plc.

The additional content from Fox’s studio’s will support Disney’s SVOD launch and the addition of Sky and Star India will complement Disney’s ESPN sports content, providing access to the key sports content in the UK (English Premier League Soccer), Germany (Bundesliga soccer) and India (Indian Premier league cricket). Disney has already signalled via the impending launch of the ESPN SVOD service that it intends to manage any transition from subscription television based sports content delivery to the online environment in a measured fashion and we would expect the addition of compelling global sports content would enhance the ESPN SVOD service over time.

In essence the deal brings two leading content creation companies together in a complementary fashion to facilitate the rollout of a global direct to consumer video offering capable of overtaking Netflix and competing with Amazon and Apple. We should expect further corporate activity as NBC, Time Warner, Discovery and even Sony and CBS will be reviewing their options for global content distribution.

Neil Boyd-Clark is a Managing Partner and Resources and Media Analyst. This is a financial news article to be used for non-commercial purposes and is not intended to provide financial advice of any kind.
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© Arnhem Investment Management, 2017