Hey there, time traveller!
This article was published 20/7/2014 (915 days ago), so information in it may no longer be current.
Rupert Murdoch's $80-billion bid for Time Warner could trigger a new round of media mergers.
With competitive threats and bewildering changes in technology upending their business models, media companies are on the prowl for partners to control costs and add more content to their libraries.
Murdoch's bid, submitted last month by his film and TV company, 21st Century Fox, has fanned the anticipation for an industry consolidation that had already been escalating at a feverish pace. His move, which Time Warner rejected, surprised industry watchers and analysts, who had been on alert for new mergers but nothing as gigantic as the Murdoch deal.
"I think it will have a ripple effect," says Tony Wible, an analyst at investment firm Janney Montgomery Scott. "A lot of that has to do with programming costs. They need to merge to keep those costs in check."
The eagerness shown by Murdoch, respected for being a step ahead in the turbulent industry, has sent a clear message to his competitors, says David Tawil, president of hedge fund Maglan Capital, which has invested in media companies. "This clearly puts a stake in the ground," he says. "Murdoch is on the prowl. If he doesn't do this deal, he'll do another deal. He is bulking up. Then smaller players are going to have to bulk up."
A few media companies large enough to compete with Murdoch -- Disney, CBS and Viacom -- may start a bidding war for Time Warner, analysts speculate. CBS and Viacom, whose boards are chaired by media mogul Sumner Redstone, may decide to merge. Google, which owns YouTube and is installing its own cable Internet pipes at a few markets, could be on the hunt for valuable video programming.
Disney could be eyeing Discovery Communications following its expansion in Europe and Latin America, Wible says. Discovery owns a majority stake in Eurosport, a sports network in Europe, and it would expand Disney's sports portfolio abroad beyond ESPN. "Disney is underexposed in Europe," he says.
Smaller cable network operators -- Scripps Networks Interactive, with HGTV, Food Network and Travel Channel; Starz; and AMC Networks, which airs The Walking Dead -- also could be looking to find a new home, Wible says.
Discovery, which owns Discovery Channel, Animal Planet and TLC, has approached Scripps for an acquisition, but the talks have been suspended for now.
Shares of the media companies still sitting on the sidelines rose Wednesday and Thursday in anticipation of future deals.
"We do not think Disney needs to make any significant deal given the company's clear strategy," wrote Michael Nathanson, an analyst at MoffettNathanson, on its blog. "The harder question is what does buying a smaller pure play like AMC Networks or Scripps Networks really get you?"
China's growing appetite for overseas assets could influence the rate of consolidation. Earlier this week, Chinese online giant Alibaba Group and film studio Lions Gate Entertainment struck a partnership to launch a streaming service in China. "Our libraries of historical titles are enormously valuable over there," Tawil says. "Anything with robots or monsters, they go crazy and we've got a ton of that over there."
Media companies looking for partners have a variety of motives. Chief among them:
-- Content is king -- again: The media industry's focus on the value of content is resurfacing quickly. Media companies and pay-TV providers have focused on developing better, cheaper and faster distribution, resulting in a wide array of ways to get TV and movies.
Netflix has led the way in streaming, with many followers. Cable companies offer on-demand viewing through set-top boxes. Google's YouTube offers fresh -- and professional -- content. Paying per episode is common for iTunes users. It's gotten easier for content companies to distribute.
"Technology has advanced far enough that barriers to entry for distribution are not all that high," Tawil says. "The real barrier now is that you've got to have content."
Netflix understands this and chose to emulate HBO by producing original content. Murdoch's appetite for HBO and Time Warner's rich bucket of sports programming -- it has extensive contracts with the NBA, NCAA and MLB -- is at the heart of his unsolicited bid.
"There is only one NFL. Regardless how big Fox and Time Warner ever got, you're going to see rates going up by double," Wible says, adding the primary goal in sports programming isn't to lower acquisition costs but to aggregate as much live content as possible.
Acquisitions also enable media giants to get their hands quickly on popular sci-fi or superhero movie franchises that are reliable revenue-generators at the box office, Tawil says.
- Response to other side: Pay-TV providers are getting larger through acquisitions, and it was inevitable the companies that provide content to them -- and get paid for it -- will want to get bigger, too. Comcast has a $45-billion deal to merge with Time Warner Cable. AT&T has submitted a $48.5-billion bid to buy DirecTV. Both await federal approval.
The emergence of Netflix, Amazon and other on-demand channels that allow customers to pay for recently aired TV episodes threatens the profitable pay-TV ecosystem. Having a portfolio of widely varying content would empower cable networks when they sit down to negotiate with online distributors.
- Affiliate revenue: TV advertising revenue is still rising, but the rate of increase has slowed as advertisers divert some of their spending to digital platforms such as online video. That makes media companies more dependent on affiliate revenue, the money pay-TV providers pay cable networks. Presumably, larger media companies with better content can dictate more favourable financial terms, Wible says.
-- USA Today