Why News Corp and Disney should merge: A perfect storm is on the way for cable TV

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Updated: August 6, 2012 See video above

January 3, 2012  By Steven Greer, MD

The cable TV business model is still printing money, despite high user dissatisfaction with the cable delivery companies and the poor quality of content found on most channels. How long will that disconnect last? When will the cash cow dry up?

Last quarter, News Corporation (NWSA) reported record revenue from their largest division, which is cable TV. Fox News (and other European assets) earned $775 Million, up 18% in a global recession. In comparison, the Fox broadcast TV (e.g. American Idol, the Simpsons, etc) pulled in only $133 Million. Multiply all of those numbers by four to get the annual revenue for the calendar year 2011, which computes to approximately $4 Billion from cable TV.

Disney’s (DIS) largest revenue producer, by far, is their cable operation led by ESPN. Last quarter, Disney cable brought in a record $3.5 Billion, up 11%. The next closest money printing machine within Disney was the theme park division, which pulled in $3.1 Billion on the top line. For the full calendar year 2011, Disney will make more than $13 Billion in revenue from cable TV.

The reason TV content creators earn so much more from cable than from broadcast TV, despite many millions more watching broadcast TV, is that the networks charge the middlemen cable providers hefty fees to carry their channels, in addition to charging advertisers to place ads. For CNBC as an example, they get about half their revenue from fees collected from the Cable Guy. ESPN fees equate to nearly a $5 per month charge in each cable TV subscriber’s bill.

The networks keep jacking up the fees and holding the NFL and other content as hostage unless the Cable Guy pays up. Content is King and they know it.

This is why the networks recently agreed to absurdly high fees to the NFL, some $24 Billion over many years, despite the actual revenue to be collected from broadcasting those games to be nowhere nearly enough to offset the fees. In the bigger picture, the premium NFL content allows the networks to have the advantage at the bargaining table.

As a result, cable providers, such as Time Warner, Comcast, or Verizon have been losing those negotiations with the networks and simply passing on the costs to the consumer, amidst the recession. Monthly cable TV now well exceeds $100 per month in most regions.

There are signs of successful pushback from the cable providers. New cable TV channels are failing. The Oprah Winfrew Network (OWN) is struggling to get cable providers to pay the fees and distribute it to viewers. In New York. Time Warner recently cancelled the deal with MSG, so millions on viewers will no longer be able to see Knicks and Rangers games. The Fox Business Network, despite being part of the powerful News Corp family, had trouble getting picked up by cable providers and only recently reported a profit after launching in 2007. Fox Business could actually be considered a success by current standards. It is unlikely that small independent cable channels will succeed as they did decades ago.

What would happen if Americans and Europeans, in droves, suddenly stopped paying $150 or more per month to receive cable TV? What if everyone started using their fancy new iPad or Apple TV screens to watch video content delivered via the Internet, bypassing the Cable Guy?

Ask any cable TV executive the question, “Will people stop paying for cable TV soon?” and all of them will answer, “No way. Content is King. We have the monopoly on content”. But that is no surprise. For any mature industry, the insiders are the last to acknowledge major paradigm changes on the horizon.

A perfect storm is on the way for the cable TV industry, and might hit as soon as Q4 2012 with a salvo from Apple (AAPL). First, the average cable TV subscriber is broke and can barely make ends meet with groceries, mortgages, and gas. High-speed Internet alone costs around $60 per month. However, Internet plus cable TV is a whopping $150 per month when all fees and taxes are added. Is ESPN’s Monday Night Football essential when free broadcast carries the other games? Are MSNBC, TLC, or MTV essential for those families, especially when delayed versions are on the Internet via Hulu and other portals?

Then, add to this perfect storm the appeal of the newer TV interfaces via Xbox or iPad that surpass the 1970’s cable TV remote control by light years. Very soon, the old remote control will simply become unacceptable to anyone under the age of 30 and the important advertising demographics.

Thirdly, there will finally be some easy-to-use solutions for watching Internet video on one’s large living room TV, arriving later this year. Apple TV and a new iPad are the likely forms.

The final fuel to this perfect storm, later on in 2013, will be the original content created directly by new forms “studios” and thousands of smaller independent channels, all delivered via the Internet bypassing cable providers. The hit cable show “It’s Always Sunny in Philadelphia”, now on Comedy Central and FX, started as an online production made by some guys with a digital camera for $85. Google, Netflix, and other larger companies have original content productions in the works.

The cable providers are already seeing reductions in subscribers and are trying to diversify into other businesses. Time Warner wants to offer home security, for example. However, the traditional studios haven’t yet felt the pinch. In fact, they are earning record revenues. This scenario is untenable. The day of reckoning is near at hand.

When industries start to contract, like the pending implosion of the cable TV industry as people cancel their subscriptions, mergers ensue as the best way to cut costs and gain “synergies” (i.e. layoffs). One good fit for a cable TV content creation merger would be News Corp (NWSA) and the larger Disney (DIS).

Disney’s ABC already partners with Fox News given the lack of cable news operations for Disney. The broadcast TV and film studios for both companies would be easy integrations with huge synergies. The News Corp print and Disney theme parks have no overlap and would not create a cannibalizing situation.

Perhaps most pressing for News Corp is the uncertainty created by the ongoing European tabloid scandals and British Parliament investigations. With his son James taking fire, the successor to News Corp’s Rupert Murdoch, now 80 years old, is uncertain. All of these issues would be diminished or resolved if News Corp were folded into Disney.

One could argue that the record revenues of the cable TV content creators is a sign of a viable growing industry. However, financial analysts also know that the bubble is always biggest before it bursts.

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One Response to Why News Corp and Disney should merge: A perfect storm is on the way for cable TV

  1. John says:

    Steven – thank you for an excellent article

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