FOXA - Twenty-First Century Fox Inc

[Foreign Tuffett]

Why hasn't anyone been able to successfully compete with Fox for almost two decades? Can anyone list examples of failed competitors?

 

Also, while I'm not fully defending Lachlan, his investment in REA Group has been impressive. In 2004, he paid $2.25 Million cash and $8.5 Million in contra advertising for a 44% stake, with an option to buy more shares in the future. He ended up accumulating 61% of the company and used his "megaphone" to push REA's products. News Corp's stake in REA Group is now worth around $9.6 Billion. I'm assuming he's looking for other ways to do this sort of thing. The Credible/Stars Group acquisitions were probably made with similar logic.

 

The 10 year option to buy 18.5% of FanDuel seems like an asymmetric payout feature of this stock.. the option states that the stake can be purchased for their 2021 market value. Currently, FanDuel and DraftKings run a duopoly in sports betting.

 

This article from last year covers the competition fairly well:

 

https://www.hollywoodreporter.com/news/fox-news-hasnt-ever-faced-a-real-conservative-tv-rival-will-change-1250427

 

That's a good point about the REA Group investment.

 

Yes, the sports gambling investments sector investments have performed well so far and there is definitely significant latent value in the optionality Fox has. A few months ago MoffettNathanson valued this optionality at  ~$2 billion.

 

More broadly, Fox has a variety of valuable non-core type assets: huge tax shield, ~50 acre 'Fox Lot' in LA, 4 million shares of Flutter stock, received $490 million in August from Disney to finalize tax arrangement from 21st Century transaction, closed on Tubi for $440 million in late March so haven't seen much revenue contribution in financials yet.

[fareastwarriors]

What about Sinclair?

[spartan]

Why hasn't anyone been able to successfully compete with Fox for almost two decades? Can anyone list examples of failed competitors?

 

Also, while I'm not fully defending Lachlan, his investment in REA Group has been impressive. In 2004, he paid $2.25 Million cash and $8.5 Million in contra advertising for a 44% stake, with an option to buy more shares in the future. He ended up accumulating 61% of the company and used his "megaphone" to push REA's products. News Corp's stake in REA Group is now worth around $9.6 Billion. I'm assuming he's looking for other ways to do this sort of thing. The Credible/Stars Group acquisitions were probably made with similar logic.

 

The 10 year option to buy 18.5% of FanDuel seems like an asymmetric payout feature of this stock.. the option states that the stake can be purchased for their 2021 market value. Currently, FanDuel and DraftKings run a duopoly in sports betting.

 

This article from last year covers the competition fairly well:

 

https://www.hollywoodreporter.com/news/fox-news-hasnt-ever-faced-a-real-conservative-tv-rival-will-change-1250427

 

That's a good point about the REA Group investment.

 

Yes, the sports gambling investments sector investments have performed well so far and there is definitely significant latent value in the optionality Fox has. A few months ago MoffettNathanson valued this optionality at  ~$2 billion.

 

More broadly, Fox has a variety of valuable non-core type assets: huge tax shield, ~50 acre 'Fox Lot' in LA, 4 million shares of Flutter stock, received $490 million in August from Disney to finalize tax arrangement from 21st Century transaction, closed on Tubi for $440 million in late March so haven't seen much revenue contribution in financials yet.

 

Great, thanks for sharing the article. The First (Bill O'Reilly) looks like it's coming for them, but time will tell..

 

If you back out the Fox Lot ($1.5B at least due to iconic/specialized nature) and Flutter shares ($670M), you're paying $15 Billion for roughly $2-2.3 Billion in levered free cash flow. The cash tax benefit alone accounts for roughly $5/share and will increase in value if tax rates go up. Lachlan stated that roughly half of FCF will be returned to shareholders, leaving the other half for "growth" acquisitions. If he doesn't completely mess up that other half, I don't see how this stock isn't worth $40-45 today (low double-digit multiple on FCF).

 

18 years of utter dominance...legendary newsman at the helm with significant skin in the game (20% of outstanding common shares, mainly Class B)...very strong FCF generation...very strong balance sheet...potential upside from gambling investments...this company gets no respect!

 

It seems like the market is concerned about a number of things:

1) Next year's advertising revenue, which is myopic.

2) Cord-cutting which, in Fox's case, is less of a concern due to the live nature of their content. As the most recent VIC write-up notes, Netflix gave Fox a nod by stating that their live content is "more resistant to the rise of the internet."

3) Annoyed with Lachlan/management for refusing to return all free cash to shareholders. John Nallen (COO) mentioned that they have a "bias for growth". The market isn't giving them enough credit for some of the moves they're making in the gambling industry.

4) This is purely speculative, but it's probably harder to pitch this stock in certain investment committee meetings because politics is polarizing. You might not want to be that guy/gal that voices support for a right-wing media outlet.

5) They're not a high-flying tech/WFH stock so they're not in the limelight. God forbid CNBC talks about a competitor.

 

You're amongst good company with Baupost, RenTech, Tweedy Browne. Baupost was adding to their position in the first two quarters of 2019 at significantly higher prices. In my opinion, the story hasn't really changed since then. If anything, we have more clarity regarding their operations/financials because they've simplified their structure. The company was recently repurchasing at around $34-35, with additional repurchases ($250 Million) likely made this past quarter.

 

To be sure, there are concerns. But I don't think the concerns are great enough to warrant a mid-single-digit multiple. They've proven strong FCF in the midst of an economic downturn, which should warrant a re-rating.

[KJP]

 

It seems like the market is concerned about a number of things:

...

 

2) Cord-cutting which, in Fox's case, is less of a concern due to the live nature of their content. As the most recent VIC write-up notes, Netflix gave Fox a nod by stating that their live content is "more resistant to the rise of the internet."

 

 

In my view, this is the main concern.  The narrative:  Streaming video on demand and video games are fundamentally better products than linear TV, so eventually linear TV (and the cable bundle) won't exist, just as the horse as a mode of transportation effectively no longer exists.  Fox currently gets almost all of its profits from FoxNews's position in the cable bundle and the affiliate fees that produces (along with reverse retrans from Fox Network's position in the cable bundle).  FoxNews cannot monetize in the same way outside the bundle (e.g., DTC), so the company is based on a dying business model that will slowly bleed out and always look cheap.  The Fox Network has many of the same problems, and you can't make money broadcasting sports because the sports leagues will suck out all economic profit.

 

Which parts of that are wrong?

[spartan]

 

It seems like the market is concerned about a number of things:

...

 

2) Cord-cutting which, in Fox's case, is less of a concern due to the live nature of their content. As the most recent VIC write-up notes, Netflix gave Fox a nod by stating that their live content is "more resistant to the rise of the internet."

 

 

In my view, this is the main concern.  The narrative:  Streaming video on demand and video games are fundamentally better products than linear TV, so eventually linear TV (and the cable bundle) won't exist, just as the horse as a mode of transportation effectively no longer exists.  Fox currently gets almost all of its profits from FoxNews's position in the cable bundle and the affiliate fees that produces (along with reverse retrans from Fox Network's position in the cable bundle).  FoxNews cannot monetize in the same way outside the bundle (e.g., DTC), so the company is based on a dying business model that will slowly bleed out and always look cheap.  The Fox Network has many of the same problems, and you can't make money broadcasting sports because the sports leagues will suck out all economic profit.

 

Which parts of that are wrong?

 

I'm not saying you're wrong, but I disagree. Here's why:

 

Assertion: Streaming video on demand and video games are fundamentally better products than linear TV. Therefore, linear TV will not exist.

 

Although streaming VOD services are rapidly gaining share of entertainment content, I don’t think that’s the end of the world for Fox. I agree that linear is dying, but after the Disney sale, the value of Fox no longer lies in its entertainment content. The horse is the cable companies, not the live news/sports content. The rapid growth of YouTube TV suggests that the cable bundle isn't dead, it just needs another name ("live bundle"?). As for video games, I think news and sports compete for a different demographic. This is not a big threat.

 

Assertion: Fox News cannot monetize in the same way outside the bundle (DTC)

 

I would argue that in the long-term, Fox News will be able to monetize whatever value their users ascribe to their content. Has the value of live news/sports decreased? Personally, I don’t think so. Advertising impressions have not budged for both news and sports in the past 2+ decades. People continue to tune in. As terrible as this sounds, Fox stands to benefit from increased polarization and anger. As long as people want to consume Fox News/Sports in one way or another, Fox will be able to monetize them. What they're really selling is the value of their content. The value/quality of sports content is out of their control, but the value/quality of news content is entirely within their control.

 

Tuning into Ben Shapiro, Joe Rogan, Bill O’Reilly, or some other podcast/show certainly holds value (e.g. Spotify’s deal with Joe), but it is not a perfect substitute. I don’t know how else to put this but watching those guys just isn’t the same. There is a professional sharpness to Fox that, in my opinion, can’t be supplanted. It has unique appeal; in the way it presents news, how it says things half the country is thinking, how it stirs people's emotions and defends half of America. And there is an “officialness” to them that surprisingly hasn’t been mimicked in 18 years and counting. Paul Ryan sits on the board, they regularly have figures from the “establishment right” come on their show, it is a matter of ego for these people to say that they went on Fox News. Newt Gingrich recently went on the Ben Shapiro show and got around 63,000 views. Going on Hannity would get him 3.5 Million views. Even though guys like Ben and Joe are Fox’s competitors, it will be tough for them to build vast live news/sports capabilities. Fox has distinct organizational competencies built from decades of covering news/sports that simply can’t be mimicked with a chequebook. To think that Shari Redstone can somehow pull a rabbit out of her hat would be a stretch.

 

As for DTC and other online services, I'll use YouTubeTV as an example.. it costs $64.99/month which is around the nationwide average cost of expanded basic cable TV. Subscribers are growing rapidly (currently around 2 Million). Why wouldn't Fox be able to extract value from YouTube TV and the like? The entertainment content is causing bloating in the cable bundle, not the live content. I think people are still willing to pay for that.

 

Assertion: You can’t make money broadcasting sports because the sports leagues will suck out all economic profit.

 

I agree that this is possible but not probable. Sports leagues have a small set of customers that are capable of carrying out their broadcasts in a professional manner, i.e. Fox, CBS, NBC. This allows for potential price collusion. Leagues also want to deal with customers that have nationwide distribution; they care about money and reach. Big tech companies are viable competitors in this space, but not everyone can hook up their internet to their TV set yet, and many Americans don't have access to fast internet, etc. In other words, sports leagues have nowhere else to go and will have to deal with the big 3 networks for the foreseeable future. Assuming sports broadcasts are eventually wiped out of the picture for Fox, I don't think they are much less valuable because their news segment still makes the vast majority of FCF.

[Spekulatius]

 

It seems like the market is concerned about a number of things:

...

 

2) Cord-cutting which, in Fox's case, is less of a concern due to the live nature of their content. As the most recent VIC write-up notes, Netflix gave Fox a nod by stating that their live content is "more resistant to the rise of the internet."

 

 

In my view, this is the main concern.  The narrative:  Streaming video on demand and video games are fundamentally better products than linear TV, so eventually linear TV (and the cable bundle) won't exist, just as the horse as a mode of transportation effectively no longer exists.  Fox currently gets almost all of its profits from FoxNews's position in the cable bundle and the affiliate fees that produces (along with reverse retrans from Fox Network's position in the cable bundle).  FoxNews cannot monetize in the same way outside the bundle (e.g., DTC), so the company is based on a dying business model that will slowly bleed out and always look cheap.  The Fox Network has many of the same problems, and you can't make money broadcasting sports because the sports leagues will suck out all economic profit.

 

Which parts of that are wrong?

 

Yes, I think this is a pretty good outline for the bear case and it is really hard to argue why this is not going to happen. It’s more of a matter of when then if, imo. Quite frankly, I think the generation that is growing up right now will not watch much linear  TV any more.

Fox also has the renewal of the NFL right coming up in 2022, which could prove to be a watershed moment for them. It’s not their biggest cash cow, but according to analysts estimates Fox sports is still 25% of their cash flows, so losing the NFL rights could really hurt.

[spartan]

 

It seems like the market is concerned about a number of things:

...

 

2) Cord-cutting which, in Fox's case, is less of a concern due to the live nature of their content. As the most recent VIC write-up notes, Netflix gave Fox a nod by stating that their live content is "more resistant to the rise of the internet."

 

 

In my view, this is the main concern.  The narrative:  Streaming video on demand and video games are fundamentally better products than linear TV, so eventually linear TV (and the cable bundle) won't exist, just as the horse as a mode of transportation effectively no longer exists.  Fox currently gets almost all of its profits from FoxNews's position in the cable bundle and the affiliate fees that produces (along with reverse retrans from Fox Network's position in the cable bundle).  FoxNews cannot monetize in the same way outside the bundle (e.g., DTC), so the company is based on a dying business model that will slowly bleed out and always look cheap.  The Fox Network has many of the same problems, and you can't make money broadcasting sports because the sports leagues will suck out all economic profit.

 

Which parts of that are wrong?

 

Yes, I think this is a pretty good outline for the bear case and it is really hard to argue why this is not going to happen. It’s more of a matter of when then if, imo. Quite frankly, I think the generation that is growing up right now will not watch much linear  TV any more.

Fox also has the renewal of the NFL right coming up in 2022, which could prove to be a watershed moment for them. It’s not their biggest cash cow, but according to analysts estimates Fox sports is still 25% of their cash flows, so losing the NFL rights could really hurt.

 

I just don't think cord cutting is as much of a concern for news in general - see attached. Intellectual dark web guys, like Shapiro, Rogan, Rubin, Gaad Saad pose a threat.. but they're too cerebral for Fox viewers. Fox is more laidback/entertaining and isn't afraid to air a few good looking blondes to reel in the geezers..

[Foreign Tuffett]

Nice to see a thread on COB&F where users are actually engaging with points made by other posters.

 

 

I think KJP outlines the bear case really well. Cord cutting is the biggest risk here. Like I mentioned last month, both of FOX's segments are dependent on pay TV subs.

 

 

A few points, mostly bullish:

 

Streaming/Video on demand (VOD) services are clearly better than linear TV for scripted content. However, news and sports content almost demand live viewing. At Fox's big IR day last May management stated that "Over 90% of TV news content is consumed live." This is consistent with common sense, right? No one is watching reruns of Wolf Blitzer or Fox & Friends.

----

One way to think about the company is to divide it into good co/bad co based on whether or not it produces and owns the content it airs. So Fox News and the 17 local TV stations are the good co, and the Fox Network and FS1/FS2 are the bad co.

 

Fox News, Fox Biz, and the local TV stations produce their own evergreen news content

 

As KJP points out, the sports leagues have every incentive to capture as much value as possible. Thus, over time, we should expect Fox Network and FS1/FS2 to have low margins. It's also possible that Fox will simply overpay for sports rights (US Open says "hi").

 

This good co/bad cos situation is complicated by the fact that one of the reasons Fox pays up for sports rights is so that viewers carry over from sports events to local news and other programming like "The Masked Singer (had its Season 3 premiere immediately after the last Super Bowl)

----

I do think FOX has been quietly preparing to possibly launch a Fox News/Fox Biz streaming service some time in the future: Buying Tubi, launching Fox Nation, launching Fox News International, spending $200 million to build a "streaming and technology" hub in Arizona, etc

 

[KJP]

Are local affiliates actually "good cos"?  Look at the FCF yields of Gray Television or Nexstar.  The equity markets appear to be saying these are really questionable business models.  The debt markets, though, arguably suggest otherwise (this industry has some of the widest splits between levered FCF yields and debt yields). 

 

EDIT:  Thinking about this a bit more, I suspect there are MVPD subscriber decline curves (along with estimates of how retrans fees will be split over time) that would reconcile the FCF and debt yields of these companies, but I'm too lazy to try to calculate such an implied curve.  Has anyone see any analysis of this? 

 

 

 

[Foreign Tuffett]

Are local affiliates actually "good cos"?  Look at the FCF yields of Gray Television or Nexstar.  The equity markets appear to be saying these are really questionable business models.  The debt markets, though, arguably suggest otherwise (this industry has some of the widest splits between levered FCF yields and debt yields).

 

Gray and Nexstar appear to own primarily smaller market stations, whereas basically all of FOX's stations are in the largest US cities (14 of the 15 top designated market areas per 10-K).

 

Someone correct me if I'm wrong here, but I don't think it's possible to parse out the economics of FOX's local stations from the disclosure provided. Management discussed the strong margins of its local news content a bit at the IR Day (page 26 of the transcript).

 

 

[KJP]

Are local affiliates actually "good cos"?  Look at the FCF yields of Gray Television or Nexstar.  The equity markets appear to be saying these are really questionable business models.  The debt markets, though, arguably suggest otherwise (this industry has some of the widest splits between levered FCF yields and debt yields).

 

Gray and Nexstar appear to own primarily smaller market stations, whereas basically all of FOX's stations are in the largest US cities (14 of the 15 top designated market areas per 10-K).

 

Someone correct me if I'm wrong here, but I don't think it's possible to parse out the economics of FOX's local stations from the disclosure provided. Management discussed the strong margins of its local news content a bit at the IR Day (page 26 of the transcript).

 

You are right that Gray and Nexstar have many stations in smaller locations.  See, e.g., slide 6 here:  https://www.nexstar.tv/wp-content/uploads/2020/08/NXST-Investor-Deck-8-20-20.pdf

I can also see the argument that stations in bigger markets should be structurally more profitable because they can spread their fixed costs (particularly news production) over many more viewers.  But I think the viability of local broadcasters is tied to the viability of the networks that provide them most of their content and to the bundle, as a growing percentage of their revenue is retrans.  GTN and NXST also likely have high levered FCF yields in part because they're quite levered.

 

Somewhat related:  What are the odds that by 2030 the highest rated video news product in (i) New York City, (ii) in the United States, and (iii) globally in the English language will be branded and produced by the New York Times and available via streaming, perhaps at no additional cost to its digital subs?  I think it's much higher than zero.

[bizaro86]

Are local affiliates actually "good cos"?  Look at the FCF yields of Gray Television or Nexstar.  The equity markets appear to be saying these are really questionable business models.  The debt markets, though, arguably suggest otherwise (this industry has some of the widest splits between levered FCF yields and debt yields).

 

Gray and Nexstar appear to own primarily smaller market stations, whereas basically all of FOX's stations are in the largest US cities (14 of the 15 top designated market areas per 10-K).

 

Someone correct me if I'm wrong here, but I don't think it's possible to parse out the economics of FOX's local stations from the disclosure provided. Management discussed the strong margins of its local news content a bit at the IR Day (page 26 of the transcript).

 

You are right that Gray and Nexstar have many stations in smaller locations.  See, e.g., slide 6 here:  https://www.nexstar.tv/wp-content/uploads/2020/08/NXST-Investor-Deck-8-20-20.pdf

I can also see the argument that stations in bigger markets should be structurally more profitable because they can spread their fixed costs (particularly news production) over many more viewers.  But I think the viability of local broadcasters is tied to the viability of the networks that provide them most of their content and to the bundle, as a growing percentage of their revenue is retrans.  GTN and NXST also likely have high levered FCF yields in part because they're quite levered.

 

Somewhat related:  What are the odds that by 2030 the highest rated video news product in (i) New York City, (ii) in the United States, and (iii) globally in the English language will be branded and produced by the New York Times and available via streaming, perhaps at no additional cost to its digital subs?  I think it's much higher than zero.

 

Hard to predict the future. The highest rated program of 2030 could also easily be "Netflix Nightly News" hosted by Kylie Jenner and Ryan Reynolds. Either scenario would be bad for Fox, of course.

[Foreign Tuffett]

I remember when a major source of news for the young-ish crowd was Jon Stewart's "The Daily Show", which was technically satire.

 

But I think what what is or is going to happen on w/ TikTok, NYT, etc is largely irrelevant here. I don't watch Fox News myself, but know many that do. They aren't the type to be using TikTok and want nothing to do with the NYT.

 

Think of Fox News as a "safe space" for Americans conservatives who want conservative commentary, but aren't interested in the more hard core financial stuff that the WSJ and Bloomberg provide. There is a massive audience for this type of content, which is why Fox News has been #1 in cable news since 2002 and the #1 channel in cable for over 4 years.

[KJP]

I remember when a major source of news for the young-ish crowd was Jon Stewart's "The Daily Show", which was technically satire.

 

But I think what what is or is going to happen on w/ TikTok, NYT, etc is largely irrelevant here. I don't watch Fox News myself, but know many that do. They aren't the type to be using TikTok and want nothing to do with the NYT.

 

Think of Fox News as a "safe space" for Americans conservatives who want conservative commentary, but aren't interested in the more hard core financial stuff that the WSJ and Bloomberg provide. There is a massive audience for this type of content, which is why Fox News has been #1 in cable news since 2002 and the #1 channel in cable for over 4 years.

 

I think you're right that FoxNews currently has a core following.  But I don't think that answers the question of whether Fox's current economics are based on the continued existence of the cable bundle. 

 

After a bit of googling, it appears that FoxNews gets about $2/month/sub in affiliate fees and has about 83 million subs (slowly declining), which is essentially everyone who has a cable bundle.  That's annual affiliate fee revenue of $2 billion.  They have annual cable-segment-wide affiliate fee revenue of $3.87 billion.  I assume the $1.87 billion difference between 2 and 3.87 represents affiliate fees they get from their other five cable networks combined (FoxBusiness, FS1, FS2, BigTen Network, and Fox Deportes).  Based on my understanding, cable channels negotiate on a companywide basis with MVPDs, so I suspect a fair amount of the $1.87 billion represents the leverage FoxNews gives Fox in negotiations with MVPDs.  So, let's assume FoxNews is really in substance generating $3+ billion in affiliate fees.

 

If the bundle fell apart and FoxNews had to go DTC, how many subscribers would it take to rebuild that revenue stream?  At $10/month they'd need 25 million subscribers to generate $3 billion in revenue, and I suspect there would be significant additional overhead in running such a DTC operation.  My gut says there aren't 25 million people who would pay $10/month to subscribe to FoxNews, but that could be wrong, particularly if there is significant international demand for FoxNews.

 

Of course, that math far too simple and there are other variables at play, e.g., would DTC subscribers tolerate ads and if so, how valuable would they be with dynamic ad insertion and full knowledge of who is being shown each ad?  But in this post I'm more trying to come up with a way to think about how dependent Fox is (or is not) on the current structure of pay TV.

[dwy000]

Most of the streaming alternatives to the cable bundle pay the same affiliate fees to the channels as the cable company does.  Sometimes even higher because a Comcast or Charter can negotiate a volume discount (30m subs vs 2mn for YouTube TV).  The reason YouTube TV has increased its price about 5 times since it set up is because they aren't making money off it due to distribution costs to content providers. There now isn't much of a price difference.

 

The other thing is that the providers will negotiate for bundles of channels not just one.  People seem to think that they pay $100/month for 200 channels but only watch 20 so they want to pay $10/month. Thats not how it works.  Discovery will often charge the distributor very little more for carrying 8 channels than just 1 (which usually isn't even an option).

 

Cable vs streaming is of less relevance than what people are watching. Sports and news will always be consumed live.  And the local networks are increasingly oligopolies. If you want to find out what is happening in your city you will inevitably go to the local news channel or their website.  National news is nice but doesn't tell you local happenings and the only other options are radio (dying) or newspaper (life support).  That's why there is a huge premium on your cable bill for sports and local news. Those are the big costs to both streamers and cable.

[KJP]

Most of the streaming alternatives to the cable bundle pay the same affiliate fees to the channels as the cable company does.  Sometimes even higher because a Comcast or Charter can negotiate a volume discount (30m subs vs 2mn for YouTube TV).  The reason YouTube TV has increased its price about 5 times since it set up is because they aren't making money off it due to distribution costs to content providers. There now isn't much of a price difference.

 

The other thing is that the providers will negotiate for bundles of channels not just one.  People seem to think that they pay $100/month for 200 channels but only watch 20 so they want to pay $10/month. Thats not how it works.  Discovery will often charge the distributor very little more for carrying 8 channels than just 1 (which usually isn't even an option).

 

Cable vs streaming is of less relevance than what people are watching. Sports and news will always be consumed live.  And the local networks are increasingly oligopolies. If you want to find out what is happening in your city you will inevitably go to the local news channel or their website.  National news is nice but doesn't tell you local happenings and the only other options are radio (dying) or newspaper (life support).  That's why there is a huge premium on your cable bill for sports and local news. Those are the big costs to both streamers and cable.

 

Several have opined that (i) people value local news highly, and (ii) it must be viewed live.  Are either of these statements true?

 

1.  If news in itself was valuable and people were willing to pay for it, why have newspapers collapsed?  It is because we're living in a post-literate society in which people hate reading?  Or is it because the traditional print newspaper was bundle that different people valued different parts of -- classifieds, sports coverage, movie listings, etc. -- and thus could unsuccessfully be unbundled via the internet?  If it's the latter, I question the assumption that people actually highly value local news and would pay for it if asked.  And even if they did, it's not obvious to me that such a core group ultimately would favor paying to subscribe to the local TV news channel over a substack.

 

2.  For people who do value the typical 5pm local news program, what difference does it make to them whether they watch it at 5pm, 7pm, or 9pm?  How does watching it a few hours after some others have watched it make it less valuable to them?  Besides traffic and some of the weather forecast, what is so highly time sensitive about the local news?  And don't we know have even better ways to get instantaneous information about those issues (e.g., Waze and weather apps). 

 

In light of the points above, how much of the existence of the 5pm local news is simply an anachronism that exists because of historical (and now outdated) distribution methods and technologies?

[dwy000]

Most of the streaming alternatives to the cable bundle pay the same affiliate fees to the channels as the cable company does.  Sometimes even higher because a Comcast or Charter can negotiate a volume discount (30m subs vs 2mn for YouTube TV).  The reason YouTube TV has increased its price about 5 times since it set up is because they aren't making money off it due to distribution costs to content providers. There now isn't much of a price difference.

 

The other thing is that the providers will negotiate for bundles of channels not just one.  People seem to think that they pay $100/month for 200 channels but only watch 20 so they want to pay $10/month. Thats not how it works.  Discovery will often charge the distributor very little more for carrying 8 channels than just 1 (which usually isn't even an option).

 

Cable vs streaming is of less relevance than what people are watching. Sports and news will always be consumed live.  And the local networks are increasingly oligopolies. If you want to find out what is happening in your city you will inevitably go to the local news channel or their website.  National news is nice but doesn't tell you local happenings and the only other options are radio (dying) or newspaper (life support).  That's why there is a huge premium on your cable bill for sports and local news. Those are the big costs to both streamers and cable.

 

Several have opined that (i) people value local news highly, and (ii) it must be viewed live.  Are either of these statements true?

 

1.  If news in itself was valuable and people were willing to pay for it, why have newspapers collapsed?  It is because we're living in a post-literate society in which people hate reading?  Or is it because the traditional print newspaper was bundle that different people valued different parts of -- classifieds, sports coverage, movie listings, etc. -- and thus could unsuccessfully be unbundled via the internet?  If it's the latter, I question the assumption that people actually highly value local news and would pay for it if asked.  And even if they did, it's not obvious to me that such a core group ultimately would favor paying to subscribe to the local TV news channel over a substack.

 

2.  For people who do value the typical 5pm local news program, what difference does it make to them whether they watch it at 5pm, 7pm, or 9pm?  How does watching it a few hours after some others have watched it make it less valuable to them?  Besides traffic and some of the weather forecast, what is so highly time sensitive about the local news?  And don't we know have even better ways to get instantaneous information about those issues (e.g., Waze and weather apps). 

 

In light of the points above, how much of the existence of the 5pm local news is simply an anachronism that exists because of historical (and now outdated) distribution methods and technologies?

 

For 1 (newspapers) there are three arguments - a) the news is stale by the time you get it; b) people want to watch video; c) they have been displaced for their most valuable advertising - classifieds.

 

For 2 (local news), it makes no difference whether you want to watch at 5pm or 11pm.  Either way it's live, it's local and is updated to the minute.  Nobody is going back 3 days later and watching the news on-demand (which is the issue with scripted shows). The point is not the timing in the evening, it is the local part.  If there is a warehouse fire downtown or the mayor got caught with his mistress, the only place to get that information is your local news station.  CNN and Fox won't carry it.  When people watch the election results this year they will use CNN/Fox for the Presidential outcomes but for your local congress and senator people will turn to the local news station.  There is simply no other place to get local news.  That's why it is so valuable.  The only question is how many local stations are really needed.  It's more than one but probably not 5-6 (unless you live in a massive city).

[CorpRaider]

Thanks.  That's interesting actual data on the "new aggregators" (Goog, Roku, Amzn, AAPL, NFLX?, etc..) and the balance of power versus the networks/content providers.  It seems like a more favorable environment than negotiating with/against comcast, charter and the other physical cable companies where the consumer literally had to have a hole punched in their wall and stuff to change and get your content if that was even an option. (Sounds like the real time data of new aggregators versus the bundlers backs up this theory).  Cable bundlers were also trying to compete with the content creators btw, such as starting their own channels or making you give John Malone a slice of your network in order to carry it.  Seems like it's a lot easier for NBC to reach you around Roku, they could just give out free fire sticks or google sticks, if Roku wanted to go to the mattresses.

 

Also if big tech really wants to get a proctology exam from DC, the content creators are pretty good at creating narratives.....just saying.

[dwy000]

Thanks.  That's interesting actual data on the "new aggregators" (Goog, Roku, Amzn, AAPL, NFLX?, etc..) and the balance of power versus the networks/content providers.  It seems like a more favorable environment than negotiating with/against comcast, charter and the other physical cable companies where the consumer literally had to have a hole punched in their wall and stuff to change and get your content if that was even an option. (Sounds like the real time data of new aggregators versus the bundlers backs up this theory).  Cable bundlers were also trying to compete with the content creators btw, such as starting their own channels or making you give John Malone a slice of your network in order to carry it.  Seems like it's a lot easier for NBC to reach you around Roku, they could just give out free fire sticks or google sticks, if Roku wanted to go to the mattresses.

 

Also if big tech really wants to get a proctology exam from DC, the content creators are pretty good at creating narratives.....just saying.

 

You're still going through the cable company (and drilling that hole in your wall) to get the internet access to stream those networks.  There's little difference between the cable company bundle and the streaming bundles at the end of the day.  Same channels, same shows, same on demand.  Price, so far, is a bit lower for streamers but that's only because they are losing money to gain customers.  That can't last.

 

Also, of note, Comcast and Charter have recently reinstated broadband limit caps on their home internet.  It's a very high level (for now) but streaming falls under that cap while cable access of the same shows/networks does not.  They will also generally offer internet cheaper in a bundle with cable than just naked internet.  So you have to measure not just the comparable cost of streaming cable with traditional cable but don't forget to add in the higher internet price when comparing.

[CorpRaider]

Yeah, no comment on the cable cos (I personally would pay ~50% higher not to have to deal with cable company) just saying if I'm Fox and I get into a dispute with Youtube TV it's perhaps less onerous than back when they might be fighting with time warner cable or cox and offering to subsidize directv as part of the fight.  It's two clicks and I can switch.

[spartan]

Thought it would be useful to inject some data into this discussion.

 

Michael Nathanson (respected media analyst) asked 5,000 households the following question: are you a regular sports viewer? (Defined as weekly/daily/monthly viewing of sports.) You could argue that 5,000 households is a relatively small sample size, but he seems to think the data is reliable.

 

Yes = 53%, of which 90% still pay for the cable bundle.

No = 47%, of which 67% still pay for the cable bundle.

 

Nathanson found that most sports viewers are predominantly male (no surprise), there is no significant difference in age amongst viewers (somewhat surprising), and there is a clear positive correlation between sports viewing and income levels (very surprising). Sports fans tend to have much higher income levels.

 

Of those regular sports viewers, what other content do they watch? 84% of them said news.

 

Based on this sample, along with other studies, Nathanson was able to conclude that of all the pay TV subscribers (98 Million at the time of the study):

 

- 51% are regular sports and news fans (50 Million)

    - 81% are still paying for traditional TV

    - 10% have vMVPD

- 9% are regular sports viewers only (9 Million)

    - 69% are still paying for traditional TV

    - 16% have vMVPD

- 26% are regular news viewers only (25 Million)

    - 74% are still paying for traditional TV

    - 6% have vMVPD

- 14% are non-sports and news viewers (high risk cord cutters – 14 Million)

    - 44% are still paying for traditional TV

    - 7% have vMVPD

 

So, what is the resting place of cord cutting? Big question, but we can at least agree that the non-sports and news viewers (14%) will cut quickly. Therefore, that leaves roughly 85 Million. However, as I’m sure many would agree, it will likely be much less. (Maybe 40-50 Million?) Fundamentally unknowable variable. Nathanson uses an interesting analogy: will pay TV mirror the decline of magazines or music (pre-streaming)? In other words, will the decline be rapid or gradual? Interestingly, niche lifestyle magazines (InStyle, People, etc.) grew total paid subscribers over the past 20 years. “There’s something about the magazine and delivery of that content that stayed valuable.” Nathanson is of the view that live news/sports fall into this category.

 

Another question he posed: How often do you or someone in your household use the following service to stream content?

 

- Netflix

    - 40% daily

    - 40% few times a week

- Amazon Prime

    - 25% daily

    - 40% a few times a week

- Hulu

    - 40% daily

    - 35% a few times a week

 

Nathanson also reiterated what many have already said on this forum: the next few years (he predicts around 5 years) are going to be great for consumers, producers, people who own facilities, people who do hair and makeup, and many others in the “content supply chain”. This could lead to other interesting investment opportunities. It is hard to argue against the notion that Amazon, Disney, Hulu, Netflix, Apple, et. al. will continue to spend for content in a race to scale up.

 

Therefore, IMO the overarching thesis for an investment in Fox has to be this: smaller revenue base but higher take rate. Higher pricing power regardless of volume declines. Live news and sports will not be severely disrupted. In addition, Fox's strong balance sheet and unique assets (Fox Studio Lot, gambling investments) give investors a reasonable cushion.

IMO a major weakness to the Fox investment thesis is the threat of Amazon and the rising cost of sports rights. Much to Nathanson’s surprise, Amazon is the only Big Tech player that’s making a serious foray into sports rights. They’ve purchased rights for select games in the past and recently acquired rights for an NFL playoff game (https://www.wsj.com/articles/amazon-expands-nfl-coverage-with-playoff-game-11602702168). They seem to be willing to pay up for the real/imagined synergies with Prime Video. As a side note, this made me respect Amazon a bit more. They make data-driven decisions and aren't afraid to take chances.

 

Another weakness is the possibility that Netflix, YouTube, and other streaming services will add more advertising minutes in their videos. What if Netflix decides to change their pricing model and add a minute of ads here and there? (Another Nathanson point.) Where will that ad money come from? As ads become more targeted and data-driven, Fox’s lack of “relationship with the customer” will become a weakness when trying to sell ads.

 

And lastly, there is a real weakness with Lachlan. Although he has made some impressive bets in the past (REA Group), he doesn't seem to be driven by shareholder return. The guy paid $150 Million for the Chartwell Mansion...I'll let you draw your own conclusions on that one. In addition, John Nallen (COO) mentioned that the company prefers growth acquisitions over "reducing the denominator". While it might make sense for someone like Mark Leonard to say something like that - presumably because there are many more accretive opportunities in vertical market software - it's a little cringe to hear that from a company that operates in a somewhat stagnating industry.

 

One last general point: Nathanson thinks many vMVPD's have a profitless future (and I think correctly). The rise of vMVPD subs is slowing the decline of pay TV subs, but the networks/content they’ve chosen as bedrocks of the vMVPD experience have immense pricing power. As the price of content continues to grow, higher COGS = lower profit. Either they increase subscription prices or absorb losses to maintain subs. Either way, the future doesn’t look good for vMVPD’s.

 

Talk 1:

Talk 2:

 

[Spekulatius]

The growth over value statement from Lachlan makes me think twice investing in FOX. It makes no sense whatsoever for Fox shareholders. Fox is a mature cash cow business. If Fox doesn’t distribute cash now, when will they do so?

[Spekulatius]

How credible is the threat that as a fallout from the election, Foxnews could get hew competition? It seems like Newsmax is the most credible contender and it is easy to see that if Trump endorses (or invests in them) they could peel of 20% of Foxes viewer, as this article stipulates?

https://www.nbcnews.com/business/business-news/trump-separates-fox-news-what-s-next-both-n1245549

 

I don’t have cable, but when I had, I don’t think newsmax was anywhere in the channel lineup. Is this the case now? the other one seems to be OAN which I don’t think has much distribution either. With streaming , distribution would be easy to achieve with some marketing, if those two outlets bundle together and gain some heft.

 

When ai looked at this a while ago, the thesis is that Foxnews owns right wing media for the foreseeable future, but now, I am not that sure. (No position currently).

[JRM]

I think there are probably enough people programmed to watch Fox News that won't switch to anything else.  They're talking about viewership numbers being down.  Could it possibly be because the election is over?

 

My guess is Fox News will continue to find ways to spread anger and fear to its loyal viewer base (same as all the other 'news' channels).

 

Habits are hard to change, and people have short memories. 

[Spekulatius]

^ I think you should revise your post and avoid value statements. i don’t generally watch Fox news (I don’t have cable TV) so this is solely meant from an investment perspective.

 

I owned the stock before and got two good trades out of it and one went bust when I sold at $24-25. My thesis at that point is that Fox owns right leaning media and now I am not sure any more it’s a given.

 

I assume the pie (for right leaning media) stays the same and if Newsmax or another source can get a much larger slice of the pie, then this has to come from Foxnews viewership. Foxnews constitutes the vast majority of FOX Corporation’s value so this could be material even if only 20% of the viewership get lost, as the NBC news article stipulates. It is pretty simple conceptually, but I don’t  know how to handicap the probabilities. I think it would be priced in if FOX trades around $20/ share (the recent lows in March) but maybe not fully at $26.