Videoage International October 2019

October 2019 V I D E O A G E A mong the many phrases to permeate corporate-speak in recent years is “go big or go home.” It’s a mantra we are hearing — or more precisely, seeing — a lot with legacy U.S. media companies. It seems to be kicking their appetites for acquisitions into overdrive. Examples of ‘going big’ includeDisney’s $71 billion acquisition of 21st Century Fox; U.K.-based Sky being incorporated intoComcast for $39 billion; and AT&T, a relatively small media player after spending a jaw-dropping $67 billion in 2015 for DirecTV just as millions of households were opting to cut the cord, tripling down, acquiring Time Warner (now WarnerMedia) for $85 billion in 2018. AT&T’s media asset acquisitions have become a very public focus of activist shareholder Elliott Management (which holds $3 billion of AT&T shares). On September 9, Elliott sent AT&T’s Board an 8,500-word, no-holds-barred letter blasting the company for what it alleges are inexcusable strategic and execution missteps, with the DirecTV and Time Warner deals front- and-center (see page 38). And one cannot overlook possibly the most well-known reconciliation of companies involved in a corporate divorce, with Viacom and CBS returning to the proverbial altar and re-merging. It still remains to be seen if ViacomCBS has the wherewithal to compete against its much larger competitors. But there’s no shortage of once-mighty names that have fallen to become second-tier entertainment companies that are struggling to find dance partners. Many will go the way of companies such as Kodak, Zenith, Packard Bell, Bell & Howell, Compaq Computer, Blockbuster, Bear Stearns, Lehman Brothers, Radio Shack, and dozens of others. The adage ‘nothing is forever’ should be kept front-of-mind. The MPAA/MPA was once comprised of Disney, Universal, MGM/UA, Warner Bros., Columbia Pictures, Paramount Pictures, and 20th Century Fox. Today, MGM/UA and Fox have left the building, and Netflix has entered. For 75-plus years the core of the entertainment business was producing, distributing, and marke- ting feature-length films. A couple of studios (i.e., Universal and Paramount) have been in conti- nuous operation for more than 100 years. The only place to see a movie until the 1960s was in a theater. But as the number of television households grew in the ’60s, so too did movies on TV. The advent of VHS and Beta players was a pivotal moment for the movie business, despite the fact that most movie executives feared that these players would spell the end of their business. It turned out that the home video player became a savior for the movie industry. A common strategy of legacy media companies today is producing content for direct-to-consumer consumption and operating proprietary over-the- top (OTT) subscription video-on-demand (SVoD) services so that they can compete with the one company that has had more impact on media and entertainment than any other in recent time — Netflix. In 2007, whenMicrosoft and Netflix announced an unprecedented deal for Netflix’s streaming service to be available on Internet and TV- connected XBOX, its market cap was less than $2 billion. At the time this article was written, Netflix had climbed to $140 billion. What did Rupert Murdoch see that prompted him to sell 21st Century Fox to Disney? Some analysts who have followed the media sector for decades believe this brilliant and savvy mogul recognized there was little chance Fox could compete against Netflix and decided to put his eggs in the ‘live’ TV basket. Bob Iger did not mince words during Disney’s August earnings call when he said, “The Fox studio performance... was well below where it had been and well below where we’d hoped it would be when we made the acquisition. It will probably take a solid year, maybe two years, before we can have an impact on the films in production. We’re all confident we’re going to turn around the results of Fox live-action.” The unanswered question: will Disney invest in producing more feature films, or will it stick to developing content for exclusive availability on Hulu and Disney Plus? Disney did not need to spend $70 billion buying Fox to make movies, something Disney has excelled at. Disney’s box office market share for the summer of 2019 was an impressive 42 percent. When was the last time a studio came close to that figure? Variety observed, “Part of the reason that Disney acquired 21st Century Fox was to bring the company’s catalog of content to subscribers as it enters the ‘streaming wars’ to compete with companies like Netflix, WarnerMedia (HBO Max), NBCUniversal, Apple, and Amazon.” In April, at the Disney shareholder meeting, Iger, at the top of the presentation, said that this is “where we’re going.” These are very meaningful words, and soon the company will find out if its competitors will follow. Disney’s highest priority is developing a direct- to-consumer lineup of OTT video services. That is its future — feature film production or producing programming for legacy over-the-air or ‘cable’ television have become lower priorities. By late August, U.S. box office had reached $7.64 billion, representing a 6.4 percent decline from the same period a year ago, according to Comscore. UBS commissioned a poll of 1,000 consumers to get a read on the appeal of Disney Plus with consumers. The findings were released in late August, revealing that 24 percent of Americans said they’re “extremely likely” to subscribe once it’s available in November, which equates to about 30.2 million U.S. households. Another 19 percent said they’re “somewhat likely” to subscribe. European players are not letting the grass grow under their feet. French commercial broadcasters TF1 and M6 and public broadcaster France Télévisions gained regulatory approval to create their own SVoD platform, called Salto, which is expected to launch in the first quarter of 2020. And U.K. broadcasters ITV and BBC announced earlier this year that they plan to partner on the launch of their own streaming service, called BritBox, which is expected to launch in the fourth quarter of 2019. While some may argue that these homegrown rivals to Netflix could be “too little, too late,” they do have an advantage with their volume of local content offerings (including library) and local distribution partnerships that Netflix and others are attempting to replicate. They also pose additional competition for Disney Plus, Hulu, and WarnerMedia’s upcoming streaming services, all of which have broader international ambitions, and Sky’s NOW TV, which operates in the U.K. and Europe. Competing with the U.S.-based streamers overseas will be an uphill battle. According to a new report from Ofcom, the U.K.’s telecommunications and media industry regulator, 40 percent of all U.K. households in Q1 of 2019 subscribed to Netflix, and 21 percent subscribed to Amazon Prime Video. WarnerMedia’s CEO John Stankey, whose role was expanded in early September to include president and COO of parent company AT&T, observed in a summer 2019 Variety interview, “If you’re going to be relevant in entertainment distribution moving forward, you’re going to have to have a scaled product that gets into the most households.” Renowned cable analyst Craig Moffett said they’d (AT&T) need to be cautious moving forward. “It puts them in a real bind,” he said. “They want to preserve their existing business, but they are also worried about missing the market. But if they discount the service too much, they will crater their cash flow.” He added, “They’re stuck in the proverbial spot between a rock and a hard place.” There is nothing like competition. The winner in all of this will be the consumer. Cord-cutting will proliferate. We will undoubtedly see some “losers” amongst entertainment companies as the tectonic plates shift, as they are too small to compete, or even be acquired. While the movie business will likely continue a steady decline, much like landlines did only to be replaced by mobile, the legacy players are praying OTT and SVoD services will more than make up the revenue shortfall. Fasten your seatbelts, it’s going to be a bumpy ride for a while. * Blair Westlake has been an executive in the media and technology industries for more than 35 years. He spent 20 years at Universal Studios, in various roles, including as chairman of Universal TV and Networks Group. He was a corporate vp, Media & Entertainment, for Microsoft for 10 years. Westlake is a principal in the media consulting firm MediaSquareup, and has consulted for CenturyLink and T-Mobile. He serves on various boards, including Saudi Arabia’s Public Investment Fund’s Entertainment Investment Company. By Blair Westlake* What’s In Store As SVoD Proliferates, Spearheads M&A Business Report 36