Shares in Twenty-First Century Fox Inc (NASDAQ:FOXA) rose sharply on Nov. 6 after reports Walt Disney Co (NYSE:DIS) might buy Fox’ entertainment assets for its coming streaming service.
The strange thing is, so did shares of Disney.
Analysts were cheering the potential deal, believing it would assure the success of the service and make the bundle competitive with Netflix, Inc. (NASDAQ:NFLX).
It would be a dream come true, that would permanently cement Disney CEO Bob Iger’s legacy, they said.
It would certainly be good for the analysts, whose bullish calls on Disney stock have gone unheeded this year. Most DIS analysts have the stock on their buy lists, but the stock is down so far in 2017. It would be good for Fox shareholders, as that stock is also down for 2017.
But would it solve Disney’s problems?
The Bull Case for Disney
Disney reported $5.9 billion in revenues from its media networks last quarter, mostly from ESPN sports, and $2.4 billion from its movie studio. Both figures were down from a year earlier. Netflix reported nearly $3 billion in revenue from its streaming service, which costs as much as $14 per month.
The assumption is that, with the Fox library, Disney could quickly duplicate Netflix’ success. Netflix reported over 105 million worldwide subscriptions last month. Then there’s ESPN, which the analysts think could sell multiple packages for multiple sports — a football package, a baseball package, a basketball package.
Thus, the bull case goes, the problem of cable “cord-cutting” goes away. Not only that, but Disney becomes a retailer of its service, meaning increased margins. Instead of paying $150 per month for cable service, consumers will pay Disney that money directly, and Disney will then have the power to increase prices regularly, as Netflix and cable have been doing.
It’s a wonderful dream. But that’s what it is, a dream.
The Real Competition
The objection to cable isn’t just based on its cost, but its waste. Consumers are buying a lot of channels they don’t watch. There are only so many hours in the day.
Netflix is usually consumed for 1.5 hours each day. A $14 charge for 45 hours of entertainment is a good deal. Disney’s bundle can only succeed by cutting into that time. If you subscribe to both a Disney and Netflix service, you will be paying $28 per month for that 45 hours. Still a good deal. Maybe you’ll pay another $14 for an ESPN service, and add another 90 minutes of TV to your day, a total of $42 per month.
The average cable bill now costs over $100 per month. Even if you’re buying multiple streaming services, and even if your internet bill rises, you are still saving by cutting the cord.
Besides, the real threat to cable TV isn’t Netflix at all. It’s video games.
Younger consumers spend many hours playing video games. The average time spent on gaming per consumer is up to almost 2 hours per week and the average 21 year old will now spend as much time gaming as going to school. I have raised two kids myself, and since the turn of the century I’ve had no competition for the TV clicker.
The Bottom Line on DIS Stock
You know who’s terrible in video games? Disney. You know who else is? Fox.
In the competition for couch time, the choice isn’t just between cable and streaming. The choice is between TV and video games. This deal doesn’t fix the real problem bedeviling either Disney or Fox. It just pretends to.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this article.
