Fox in the Mouse House could give Disney an edge in streaming wars

FILE PHOTO: The Twenty-First Century Fox Studios flag flies over the company building in Los Angeles
FILE PHOTO: The Twenty-First Century Fox Studios flag flies over the company building in Los Angeles, California U.S. November 6, 2017. REUTERS/Lucy Nicholson /File Photo

November 8, 2017

By Lisa Richwine

LOS ANGELES (Reuters) – If Walt Disney Co <DIS.N> buys some Twenty-First Century Fox <FOXA.O> businesses, it could provide a quick path for the traditional media giant to create a substantial competitor to Netflix Inc <NFLX.O> in the battle for TV and movie viewers.

The two companies reportedly held talks in recent weeks about a potential sale of Fox’s FX and National Geographic channels, its movie studio and some other international assets to Disney, according to media reports. The discussions had stopped as of Monday but could restart, the reports said.

Television viewers have been rapidly embracing online services like Netflix over traditional pay TV packages, a shift that is enticing deep-pocketed technology companies like Amazon.com Inc <AMZN.O> and Facebook Inc <FB.O> into video offerings.

Investors who have driven Netflix shares to record highs this year were selling on Tuesday, sending the company’s stock down more than 2 percent. Disney and Fox shares rose roughly 1 percent each as analysts said a deal between the two media giants could benefit Disney’s planned streaming push.

“It could be very formidable,” said Bruce Tuchman, a media investor, entrepreneur and adviser to streaming services like iflix. “They wouldn’t have to leave the confines of their own company to build a competitive service.”

Disney announced in August it was pulling its first-run movies from Netflix starting in 2019 to put them on a Disney-branded service.

With Fox, Disney in the future could yank Fox programming from Netflix and put shows like “The Simpsons” and movie franchises including “Avatar” alongside Disney classics such as “Beauty and the Beast” plus “Star Wars” and Marvel films.

That would leave a hole in Netflix. Fox made up 17 percent of Netflix’s top-rated shows by IMDb as of June, while Disney made up 7 percent, according to MoffettNathanson and YipitData.

Disney and Fox also each own roughly 25 percent of streaming service Hulu, which could serve as another platform for content.

Disney, Fox and Netflix had no comment.

In August, Netflix’s chief content officer, Ted Sarandos, told Reuters that his company was investing more in its own programming to counter moves by traditional media companies.

“That’s why we got into the originals business five years ago, anticipating it may be not as easy a conversation with studios and networks” to license their programming, Sarandos said.

Netflix plans to spend $8 billion on content next year, the company has said. Disney spent $13.5 billion on content in fiscal 2017, about half of it on sports programming, according to MoffettNathanson estimates.

Disney will be starting its online service more than a decade after Netflix, which now boasts 109 million streaming customers around the world. Disney could expand its global reach if it acquires Fox TV channel Star India and the company’s stake in European pay TV provider Sky Plc <SKYB.L>, which already has made inroads in the streaming market.

Needham & Co analyst Laura Martin said Disney needs to buy a film library from Fox or another big company to compete directly with Netflix. “Disney’s libraries are very high quality, but they are very small,” Martin said. “They could not do it alone.”

(Reporting by Lisa Richwine in Los Angeles, Jessica Toonkel in New York, and Munsif Vengattil in Bengaluru; Editing by Lisa Shumaker)