Is The Disney Fox Faster Than The Netflix Hare?

A look at this potential Disney/Fox merger.

Disney/Fox acquisition talks are certainly exciting on a tentpole creative level considering the ties Marvel has with Fox, not to mention the distribution rights Fox has on Lucasfilm’s original Star Wars trilogy. However, these talks also foreshadow a potential increased consolidation among major studios and offer a symbol of the film entertainment industry's current slate.

It's important to note that this editorial will focus on this potential buyout only from a film and TV entertainment perspective. There’s a lot of moving parts to both Disney and Fox, which means there are a lot of motivations for these talks. Certainly, ESPN’s dramatic revenue decline and how that wears on Disney’s bottom-line must be a significant factor, but this isn’t Birth.Movies.Sports.Death.

There are certainly concerns about the merging of two major Hollywood Studios. Let’s look at the combined marketplace domestic box office of Disney and Fox (and Fox Searchlight) since 2005, when Bob Iger become head of Disney.

2017 is obviously prior to Star Wars: The Last Jedi’s upcoming release, so the 2017 market share is only going to increase. If Disney keeps the status quo and maintains the same release strategy with “Fox” content, there probably is some legitimate concern that one studio could represent a third or more of the total domestic theatrical pie. This should raise red flags with antitrust regulators, especially when looking at the last four years.

Also, it's important to note, and we will get into more of this later, that movies obviously have revenue streams outside of their theatrical runs. Pay TV revenue (which is used to license content for places like Netflix and Amazon and HBO) for theatrical product is perhaps the most important of these revenue streams and often acts as a safety net for expensive marketing campaigns. Pay TV revenue is licensed as a percentage of theatrical box office so for our purposes we are going to assume that theatrical box office likely drives all these other revenue streams and therefore, the market share of these other streams is likely very similar to the theatrical ones. In short, if the Disney/Fox merger will occupy 33% of the theatrical marketplace, it will likely occupy 33% of the digital and subscription space (for film) as well.

However, one recent trend for the studios is a reduced number of titles released each calendar year. Disney, Fox, Paramount, Sony, Universal and Warner have gone from releasing over 200 titles a year to between 150 and 175 (including films released by specialty divisions). Disney, despite major acquisitions of the high demand production companies Marvel and Lucasfilm, has been a driver of this shift. You see a dramatic reduction from 2009 to 2010. Disney bought Marvel in 2009.

Why the decrease in content? Almost all the studios had arthouse divisions. Now only Sony and Fox do, and all three have seen better days despite regular expensive acquisitions at film festivals from Fox. Second, studios have largely shifted their focus towards an age audience demo whose theatrical attendance overrepresents their population size, specifically folks aged 12-39 who make up 57% of frequent movie-goers (people who go to the cinema once a month or more) per the MPAA’s 2016 Theatrical Market Study. Finally, studios have seen that original content, which makes up over 90% of all films (from all distributors) that get a theatrical release, average far less per title and in total only make up about 50% (or less) of the total revenue pie. Another way of saying this: people greatly prefer established franchise content and studios have decided to give it to them.

So I would argue that Disney is not going to merge the two production companies, but will greatly reduce or even eliminate Twentieth Century Fox and its arthouse label Fox Searchlight and incorporate the franchise pieces (Marvel properties licensed to Fox) and select Fox movie franchises it sees potential in continuing (Avatar, maybe Night at the Museum given its family friendly content). The others, including Die Hard, Alien, Planet of the Apes, Kingsman, Predator, Home Alone, The Omen, and Ice Age will likely be turned into TV and streaming properties. This eliminates any logical antitrust concerns and is consistent with Disney’s overall focus on bigger but fewer theatrical titles.

Streaming Properties! Streaming properties are likely what got us here and where this is all going. I’m sure the focus on specific demos and franchise content hasn’t sat well with everyone. By reducing content and putting most of their eggs in the franchise films basket, the studio theatrical model is increasingly tenuous. Domestic box office is down in 2017 after being up year over year in 2015 and 2016. Domestic admissions have declined since their high in 2009 of 1.42 billion, so revenue is only up because of increased ticket prices. More importantly, the international market is incredibly volatile and can no longer be counted on as a growth market due to a hostile Chinese government unwilling to let Hollywood studios dictate their terms. At home, streaming platforms like Netflix are changing consumer behavior by shifting home entertainment to the cheapest way to consume content – all you can eat subscription models. It's also no secret Netflix dismisses traditional theatrical distribution and only releases their movies in limited theaters for awards qualifications and to placate talent.

Netflix doesn’t want, or realistically need, studio content. Their content budget is the subject of much debate because they spend more then they can hope to profit, but they need to provide fresh content to retain their 100+ million worldwide subscribers. They produce studio level content themselves and license a lot of third party independently produced content. They’ve also embraced original content and content for demos the studios have increasingly moved away from. They’ve made public their plans to go after 80 original titles in a year. Netflix is desperately trying to be a studio with a healthy slate of new movies and TV shows each year so the TV revenue that studios relied on to cover their losses is becoming less and less available. More people now watch more TV content via Netflix than from any other distributor including Disney and Fox.

The most interesting event happening in the film entertainment world is a race to see if Netflix can become Disney before Disney can become Netflix. Netflix has over 100 million subscribers worldwide but Disney has loads and loads of high-demand content. Netflix is trying to create content now to keep their subscribers happy and to get new ones. Disney needs to start accumulating subscribers on a subscription platform, and then they also need to start filling it with new, non-theatrical product. The key word here is “non”. As mentioned earlier, Fox has lots of franchises that have declined as more sequels are made. Fox also has a wealth of TV content from their TV empire. Finally, Fox, along with Disney, is a co-owner of Hulu, which has around 9 million subscribers already and brand awareness. Disney can easily take over Hulu after they acquire Fox and use that as its main streaming platform.

Streaming may feel like a new shiny toy, but we’re honestly already at a tipping point. Streaming services are very similar to what consumers have been wanting for a while: a la carte cable channels. Cable has been able to bundle hundreds of channels no one watches with a few that people do while consumers have been asking for the ability to just pay for the channels they want. However, what people don’t realize is that the prices of the channels they want will likely be very similar to the prices they are paying now for all the bundled channels. So, if cable goes away and is replaced by over the top (OTT) streaming platforms, consumers will likely pay about the same as they were paying for cable. That means they will only want six or seven of these services at the most. Considering there are more distribution outlets, both for film and TV, than that, and some of these distribution outlets (Warner, I’m mostly looking at you) have multiple platforms, then it’s another race to be one of the OTT services that most people have. This is why Amazon offers their subscription OTT platform, one they spend millions of dollars a year acquiring content for and over a hundred million dollars a year to release theatrical and chase awards for, entirely for free to their Prime members. Disney must create an offering now that will be appealing and then attract at least half the subscribers Netflix has before Netflix can accumulate enough high demand original content on its own.

This all leads me to my earlier conclusion: the studio model is unsustainable and increased consolidation among the major studios and the mini-majors (Lionsgate, A24, Bleecker Street, and STX along with new arrivals Annapurna, Entertainment Studios, and Aviron) is likely. This may be a completely reactionary path of thinking, but I wouldn’t be surprised if the industry shrinks down to 4 majors : AT&T (who is trying to acquire Warner but up against a DOJ lawsuit), Comcast (who already owns Universal, who distributes several mini-major home entertainment houses including Bleecker Street, and STX) Disney, and maybe a mainland China distribution company made up of content created by production companies like Legendary. This will likely lead to a lot fewer movies being released theatrically. While it’s true that some of the space vacated by the studios will be filled in by the mini-majors, it’s a giant question whether they can meet the same level of consumer demand given that they don’t own IP on franchise content and that’s not what the masses want. Fewer movies means fewer theaters too, which is why theaters continue having trouble find common ground with studios on collapsing the windows to faster digital exploitation. Ironically, they may wish they have as studios are already working with Netflix on shorter windows to streaming for international exploitation so having a shorter window to transactional is a better benefit for the studios. It’s a different revenue stream so you can do a theatrical release which will make most of its business over 30 days, then go to iTunes and then go to streaming. Now, studios are just skipping the first two parts internationally. Domestic can’t be far behind on select titles. If theaters had just allowed this shorter window, they wouldn’t have empowered Netflix so much.

Ultimately, if you just care about content, if you just care that Wolverine is going to be in an Avenger movie or the original Star Wars trilogy will finally be available in 4k in its unaltered form or that Ridley Scott will be able to explore his Alien/AI ideas through TV movies, the way the world is headed is great. But this brave new world poses a lot of challenges for theatrical exhibitors and for both creators and audiences of non-studio content who value the theatrical experience.