The Newsonomics of Murdoch, Time Warner, the $80B Offer and the New Quest for Big, Big, Big
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First published at Harvard’s Nieman Journalism Lab
Rupert Murdoch’s announced $80B pursuit of Time Warner this morning seemed like a bolt out of the blue to many. But the strong winds of consolidation make this kind of foray — and the others likely to follow — absolutely logical. Consider all the kinds of consolidation we’re seeing done, or attempted, in the entertainment/news businesses.
Last year was among the biggest in recent years for local broadcast consolidation, as Tribune, Gannett, and Sinclair, among others, bulking up and Local TV, Belo, and Allbritton taking the money and running.
In February, Comcast made its bid for Time Warner Cable — itself spun out of Time Warner five years ago — and that agreement is in deep regulatory review. (Ironically, if the Fox/Time Warner and Comcast/Time Warner Cable deals were both to happen, the just-spun-out Time Inc. (“The newsonomics of Time Inc.’s anxious spinoff”) would be the only remaining “Time” — maybe a cosmically befitting result.)
In May, AT&T consummated a deal with DirectTV, one that is now before Congress.
Big is back, in a huge way. Of course, it never really went away. But post-Great Recession confidence and deep coffers — 21st First Century Fox has at least $5.5 billion in cash, and access to lots more; Goldman Sachs would finance the Time Warner deal if it were to happen — are now juicing it. But larger forces are shaping the quest for size.
The digital disruption of the TV/film/video businesses is a prime driver. Consumers are moving madly from constrained, through-the-old-pipes broadcast to over-the-top products. The astounding American conversion to global fútbol is in significant part attributable to ESPN mastering its WatchESPN mobile/web experience. Early reports show that such non-”TV” watching produced major new audience; about 3.2 million viewers tuned into WatchESPN’s app to watch the USA-Germany game, for example. (Poor Time Inc. even had to tell its staff not to stream matches at their desks — not because they should be doing real work, but because all the bandwidth was bringing the company’s network to its knees.)
So for this World Cup, masses of Americans learned what it means to “authenticate” through their cable suppliers to follow games on their iPhones and Androids. Now consider ESPN, owned by Disney, and its plans into the future. It commands the highest rates for cable and satellite coverage, about $5.54 per subscriber, by far the highest in the land. Still, though, the rat-a-tat-tat of cord cutting stories and advice, including yesterday’s from the Journal’s Geoff Fowler, will just get louder and louder — and more acted upon.
Think about where this is going. ESPN, like Time Warner’s HBO, wants to have it both ways: keep up its rich stream of cable fees and offer an increasing array of direct-to-consumer products. The pipes companies, however consolidated or not, want to keep the lid on à la carte offerings as long as they can — and partake in some à la carte revenue themselves. (Witness Comcast’s current one-off, pay-per-view selling of movies as just one example.) It’s murky how this will all turn out. You could argue that the digital revolution puts consumers in the driver’s seat, forcing an unbundling. But the bigger the pipes companies get — consider a merged Comcast/Time Warner and AT&T/DirecTV world — the more raw power they have to maintain the legacy business models as long as possible, and then to negotiate the most favorable deals in a cord-cut world.
Today’s attempted deal is, in large part, about that getting a negotiating edge on the other guy. Improve your deal by a few dimes on a cable customer or a revenue share and, over time, billions of dollars hang in the balance.
Then add in the widening blur in emerging screens world. The Supreme Court’s Aereo decision has bought the local broadcast chains some time. It laid to rest immediate doubts about the lucrative and growing retransmission fees the broadcasters get. They are now able to forecast the $7.6 billion in cable and satellite retrans fees by 2019. Of course, to maximize that revenue, big is the operative word. The broadcast consolidation has provided its own clout — an escalating battle of big vs. big vs. big.
Big is completely logical from a corporate point of view. With Netflix, Amazon, Google (and then Apple, Yahoo, and hosts of smaller players) busting down the doors among TV, movies, and digital video, one question is how to manage the digital blur. We know where this is going, with digital video eating up the categories of “broadcast” and maybe even “movies” over time. The question is what the new ecosystem looks like. There, there’s at least a three-part dance. There will be the pipes (cable/satellite) companies, still with huge power in the United States. There will be the studios, producing the bigger, mass video entertainments, like the 21st Century Foxes and Time Warners. Then there’ll be the digital-native companies, stoked by the confidence that years of astounding digital business disruption builds.
All the legacy companies — 21st Century Fox, Time Warner, AT&T, DirecTV, the big broadcast groups, among others — feel the hot uncertain breath of Netflix, Amazon, Apple, and Google on their necks. All of the digital giants are beginning to blast away at the traditional bundles, habits, and pricing. All are eating away at legacy companies’ customers and cash flows. We see uncertain legacy responses like Hulu, which is clearly insufficient in staunching the tide.
So the efforts at consolidation are as much defensive as offensive. A combined 21st Century Fox/Time Warner would produce about $65 billion in revenues. That’s the size of…Google. Google’s net income this year should be in the neighborhood of $14 billion. Figure a combined 21st Century Fox/Time Warner would come just below that number. The argument: In a Google-dominated world, you have to bulk up to compete.
One other argument is the usually over-hyped “synergies.” Acquiring CEOs like to put big numbers on the likely “synergies” in such consolidation. Murdoch’s first number, subject to the due diligence that Time Warner CEO Jeff Bewkes has so far rejected, is $1 billion, a nice round one. In Amol Sharma’s good take on the Fox pitch today in The Wall Street Journal, he quotes Janney Capital Markets analyst Tony Wible, who said last month about such a deal: “However improbable it may seem, one cannot overlook this megadeal given its immense financial benefits that dovetail with a number of strategic benefits,” noting their combination of cable channels, studios, and rights to major sporting events.
Translation: Synergy as clout. Yes, headcount can inevitably be cut, especially expensive corporate staffs, but redundancy isn’t the major driver here. Market clout — if not quite market domination — is.
Of course, there are a couple of other noteworthy players here: consumers and creatives.
For creatives, this new golden age (quick, to-the-point Derek Thompson explanation here) of boundary-busting, digitally driven, high-quality TV has been an unexpected boon. They’ve got a number of big studios to pitch to and negotiate with, including Fox, TW, Scripps, and AMC, and now the Netflixes, Amazons, and Yahoos. Consolidation of studios could again rearrange the relative bargaining power of the creatives and the network execs. Maybe, digital disruption would open new doors, even if some older ones get boarded up, or maybe not.
For consumers, it’s a blur of big names and unclear implications. All the consolidators, in cable, satellite, broadcast, and studio, make a similar case: We need efficiencies so we can invest in the digital products and technologies of tomorrow, which will produce consumer gain. Usually included is a feint that pricing will go down, given all these efficiencies, though there’s scant evidence of that. Americans already pay about twice as much for TV/internet packages as do our European cousins — and their broadband is usually both faster and regulated.
So where do the regulators fit in here? As I noted last week (“Mind your own business, Facebook and Google”), regulations and laws, regulators and politicians are a couple of decades late and many dollars short in confronting the nature of digital business domination. While the Europeans fight a rear-guard anti-monopoly battle against Google (which is even more dominant there than in the U.S.), the great business boundary-disrupting of digital media has perplexed and flummoxed those trying to figure out The Public Interest here. In many ways, “antitrust,” “the public interest,” and “local station diversity” all seem like artifacts of another age, waiting to be redefined.
That interest is two-fold. We’re all consumers, so the dollars and cents matter. Anti-competitive market domination is an issue. In a world where it’s true that Netflix and Amazon compete with Comcast and Time Warner Cable, it’s tough to sort out the where the frontiers of a given “market” start and stop. If you can’t do that, you can’t define “domination” (“The newsonomics of Comcast’s deal and our digital wallets”).
Secondly, there’s the question of where all this business changes affects us as citizens. To be sure, most of this is about “entertainment,” but that broad category also includes the kind of hard-hitting documentary and storytelling work that HBO, for example, excels in. Then there’s the news component. 21st Century Fox preemptively said in its narrative on today’s offer that it would split off the Time Warner-owned CNN — making the point that it wouldn’t be forced into a shotgun marriage with archrival Fox News. That’s pure Murdochian strategizing. Although it’s hard to see who would have the regulatory authority to review a Fox News/CNN merger (yikes!), Murdoch is paying attention to the court of public opinion and getting ahead of what could be/could have been a major stumbling block. Rupert — and son James — scoped out this one well, and don’t think we’ve heard the last of it, despite Jeff Bewkes’ immediate stonewalling. Time Warner — and much of the entertainment/broadcast landscape — is solidly in play.
Meanwhile, let’s remember that Rupert likes playing more than one game at a time. With persistent word that he wants the L.A. Times and may buy all eight Tribune newspapers if he needs to in order to get to it, we see the next stage of the Tribune modern day soap opera unfolding. Come Aug. 4, Tribune Publishing will finally be split off from Tribune Corp. If Rupert’s people haven’t yet had conversations on the acquisition, expect them to commence over the next several months. Let’s remember he also salted away $2B in split-off News Corp, and Tribune papers may well be bought for a quarter to a third of that sum.