The Real Reason Disney Is Spending $70 Billion
What can you buy for $70 Billion?
It’s not a rhetorical question. Let’s delicately walk through what you could theoretically purchase with Mark Zuckerberg’s net worth:
You could (could, not would) buy 1.8 Billion egg McMuffins from McDonald’s
You could provide clean drinking water to all of the developing world for about 60 years (give or take)
You could buy 21st Century Fox
As you might have heard earlier today, Disney has finalized a deal to purchase 21st Century Fox for about $71.3 Billion.
Three questions probably arose in your mind as you read that previous statement:
why doesn’t Disney just provide clean drinking water to underdeveloped nations for that much?
what exactly is 21st Century Fox?
why in the world would anyone pay so much damn money for it?
To avoid any unforecasted disappointed, I can’t truly answer question #1, but I will take you through the real reasons why Disney (and Comcast) are so interested in acquiring this company.
So, let’s dive in.
This entire battle for control over 21st Century Fox is part of a much larger effort to win a media war.
Cable companies are not doing so hot right now. Consumers like you and me are simply just not okay with paying for bundled packages of TV, internet, and phone.
In fact, we’ve never been okay with it.
In the modern world, all three of those aforementioned items can be listed as necessities (yes, I understand this is a developed, “spoiled”, luxurious view of the world - but then again, so is paying $70B for a company).
In the past, we’d meet these needs the most efficient, cheapest, and simplest way possible - by signing up for Comcast and Verizon bundled deals. We got reliable internet, a landline, and 120 channels of sports, soap operas, news, and cooking shows.
And then Reed Hastings, the CEO of Netflix, revolutionized the way media was distributed and created.
Here’s a visual on the number of cable subscribers in the US in recent history.
(not an actual graph of anything - my point being that cable subscription numbers are dropping every year)
Here’s a visual on Reed Hasting’s smiling as he analyzed the drop in cable subscribers.
Okay - so why the drop?
In the past content used to work like this:
Warner Bros would make a TV show like Friends
Pay-TV companies like Comcast and DIRECTV would offer Friends and other shows to you for a fixed price per month
NBC would show you 21 minutes of Friends, along with 9 minutes of advertisements
Users started realizing that they didn’t watch 80% of the channels they paid for and that they hated advertisements.
And so the Netflix model of no-ads, and content-at-your-fingertips arose, which now looks like:
Netflix makes content like House of Cards
They offer it to you for a fixed price every month
No ads are shown
The value proposition of Netflix has become appealing to a point that over 60% of Gen Z and Millennials now use streaming services to watch TV.
“Okay - so cable sucks, and Netflix is an awesome alternative to that. I already knew that - I saw some Netflix last night. What in the world does this have to do with Disney or 21st Century Fox?”
Disney wants to be a part of this B2C ecosphere (and be the best at it).
Disney currently earns their revenue from 4 major business segments - media networks, studio entertainment, parks & resorts, consumer products & interactive media.
The first two bolded segments (media) combine for over 60% of their total revenue, and you might be very surprised by what composes Disney controlled media.
Here’s a tiny but exhilarating sample of what Disney owns:
ESPN (sports, sports, sports)
The Disney Channel (I stopped watching post the Zack and Cody era)
Pixar (Incredibles 2, Toy Story, Finding Nemo)
Marvel (Avengers, Black Panther, Iron Man)
LucasFilms (Star Wars, Indiana Jones)
Cable is breathing its last breaths, and movie theaters are fighting tooth and nail to reduce the amount of profit they have to share with Disney.
In short, a lot of what Disney earns money from is creating and selling content - and they’re running out of places to show their content.
Disney used to broadcast a lot of their content through Netflix, before Bob Iger, CEO of Disney, raised a very important question: “What happens if Netflix refuses to host our content one day, and Cable is a word embedded in history books?” (I paraphrased something that could’ve been discussed in the boardroom)
Disney has a minority ownership in Hulu, as do Fox and Comcast - and Disney wants majority ownership of Hulu with this acquisition of 21st Century Fox.
Without getting into the weeds of it, Disney also owns a majority share in a company called BAMTech - a one of a kind company that’s infamous for streaming services - so much so that the MLB, WWE, HBO all utilize it. What's often glossed over, when it comes to streaming services, is the efficiency required to run an effort this large - millions of users, thousands of pieces of content, storage and quick access of data, smooth user experiences, the ability to handle large loads, etc. With Hulu and BAMTech, Disney seems to be in good shape for the challenge.
And now we tie it back all together.
Disney makes a lot of money from content (ESPN, Disney Channel, Star Wars)
But their old method of delivering content is about to vanish (Cable)
And their alternative method of delivering content isn’t reliable (Netflix)
So they’re fighting to collect even more content (21st Century Fox)
To get ready to roll out their own streaming service in 2019 (using BAMTech)
And transition Hulu watchers, Spotify listeners (remember the packaged plan), Cable haters, Disney theme park season pass holders to their brand new content-leading streaming service.
Imagine an on-demand video service that has your sister’s favorite live sports, your mom’s favorite news channels, your dad’s favorite movie listings, your grandparents’ favorite soap operas, and your favorite childhood Disney movies - all in one place, on all your devices.