21st Century Fox (FOXA) shares have traded firmly in the low- to mid-$30s for most of the year, despite the company’s tendency to grab headlines. In July, Chairman, CEO and majority shareholder Rupert Murdoch caused a stir with a boĂ‚ÂĂ‚ÂĂ‚Âld, but ultimately unsuccessful, play to purchase Time Warner (TWX) for nearly $90 billion. While it underscored the company’s willingness to do whatever it takes to position itself for success in the constantly changing entertainment industry, its stock took a more-than 10% dip after the brazen attempt, and remains in that range today. Thus, prospective investors in the mass media corporation would need to believe in its ability to flourish under Mr. Murdoch’s guidance as well as grow after a successor takes the helm. So, is 21st Century Fox built for long-term success? At their current value, do the shares offer any investment appeal? In this article, we will attempt to address 21st Century Fox’s near- and long-term prospects by taking a brief look at its business and performing an easy-to-follow SWOT analysis of the company, evaluating its Strengths, Weaknesses, Opportunities, and Threats.
Business
21st Century Fox is a global media corporation and one of two companies created through the split of Rupert Murdoch’s News Corporation in 2013. While the publishing business retained the News Corp. (NWSA) name, Fox develops, produces, and operates the company’s vast production and broadcasting assets. It derives business from four main operating segments: Cable Network Programming, which consists mostly of the production and licensing of content through cable, broadcast satellite, and telecommunications providers; Television, which operates the company’s 28 full-power broadcast stations; Filmed Entertainment, the operator of the company’s various film and television production studios; and Direct Broadcast Satellite Television, which provides programming to international markets like Italy, Germany and Austria. The company also holds equity interest in a variety of media ventures, including a roughly 39% stake in BSkyB, the British entertainment and communications provider. Through its various operations, the company relies primarily on affiliate broadcast fees, subscriptions, advertising fees, and content licensing and retransmission revenues to support the top line.
Strengths
Original Content
Content is king in the entertainment industry, as the distribution ecosystem changes to favor more readily accessible, cost-effective methods of consuming media. Industry titan Disney (DIS) has relied on its popular sports cable network ESPN, as well as newly-acquired studios like Pixar, Marvel and Lucasfilm to drive its brand of Americana into the modern age, while newcomers like AMC Networks (AMCX) produce highly rated programs to drive viewership higher. 21st Century Fox has a foot in virtually every genre and medium of on-screen entertainment through its cornerstone Fox Entertainment Group. In film production, it owns the rights to “Avatar,” “X-Men” and other highly valuable properties. In television, it produces original shows on basic and cable television like “American Idol,” “American Horror Story” and “It’s Always Sunny in Philadelphia.” Additionally, the various units often share symbiotic relationships. For instance, the company’s FX Networks won the rights to syndicate Fox Broadcasting’s “The Simpsons” for the first time in the show’s quarter century of airtime.
Diverse Offerings
The company owns or has holdings in virtually every aspect of the entertainment ecosystem. From content creating, to distributing, to airing, syndicating, and ordering to retail, Fox is exposed to a number of different revenue streams. Fox Broadcasting, Fox Television, and various film and television producers are among the many media assets the company operates across the media spectrum. Few competitors can match the company’s breadth of investments and media offerings. We think 21st Century Fox is more than capable of producing and marketing new content, but its ability to either distribute it internally or release it through affiliate or broadcasting agreements will decide success. Contracts with various international media companies, notably IMAX (discussed below), will help to ensure Fox’s audience grows. Deals with the NFL and MLB allow the company to maintain a foothold in the cable sports market, one of the most lucrative spaces on television. This also serves to support the company’s nascent cable channel, Fox Sports One, which will compete head-on with ESPN and Comcast’s (CMSCA) fledgling NBC Sports.
Weaknesses
Reliance on Advertising
Despite the diversity of its portfolio, 21st Century Fox relies mightily on advertising, affiliate, and subscription fees, which contributed about 70% of total business in 2014. While it has performed admirably in boosting these segments by producing popular content and growing its broadcasting networks into lucrative markets, its long-term success will hedge on its ability to market content on new platforms. Its failed play at Time Warner suggests that Fox has yet to establish a strong enough footprint in the space.
Opportunities
Consolidation
In each of its segments, 21st Century Fox is constantly seeking out new acquisitions. Over the course of a little over a year, the Cable Network Programming unit purchased majority interests in three separate businesses. As a result of the transactions, the company now owns 100% of a Latin American television distributor and an Indian broadcaster, as well as an 81% stake in the YES Network, a regional sports network that owns broadcasting rights to baseball’s New York Yankees and basketball’s Brooklyn Nets. To fund many of these moves while continuing to support other operations and shareholder-friendly initiatives, the company will also pursue certain divestitures of noncore properties. Fox’s $9.3 billion sale of Sky Italia and Sky Deutschland in July to the above-discussed BSkyB is proof of the company’s aggressive flexibility on the merger and acquisition front.
International Growth
With footholds in India (Fox International Channels owns Star India, which airs 49 channels in 7 different languages) and Latin America, Fox has a solid foreign presence. The company also boasts equity holdings in various broadcasters and distributors across Europe.A recently inked agreement with IMAX aims to boost the international grosses of several upcoming film releases, too. Under the tenets of the deal, “Penguins of Madagascar,” “Exodus: God and Kings,” “Night at the Museum: Secret of the Tomb” and “Taken 3” will be released on screens throughout Europe, Asia, the Middle East, and Latin America. While IMAX’s immersive screens and cutting-edge technology are its most prized assets, its real value exists in the global demand for its products, so Fox is wise to align itself with the company as it maximizes its own global reach.
Threats
Digital Gold Rush
As customers continue to prefer more convenient, cost-friendly options for consuming media, the companies that comprise the entertainment industry are looking to innovate their distribution models. The success and popularity of Netflix’s (NFLX) eponymous streaming service underscores this shift. One major risk related to launching a digital platform like Netflix is the sheer cost of the enterprise, as it requires sizable and constant investment in technology and other aspects of operation. One of the company’s cable brands, FX Networks, launched a digital on-demand offering, which will still require a cable contract to enjoy. The service will boast archives from a number of highly rated programs like “The Simpsons” and “Sons of Anarchy.” While the move to build something of an online presence is a positive, it remains to be seen if Fox is ready to commit to a full-fledged move into the digital space, outside of the traditional cable-provider ecosystem. For its part, Fox does own roughly one-third of subscription streaming service Hulu, a Netflix-like product that hangs its hat on offering more recent episodes from a competitive variety of networks.
Strength of Competitors
The company is constantly engaged in competition with global, national and local broadcasters, production studios, cable networks and other types of corporations. Through its subsidiaries, 21st Century Fox vies constantly for market space against smaller, more regionally focused broadcasters, and box-office supremacy versus major studios like those owned by CBS Corp. (CBS) and Viacom (VIA). Fox is constantly trying to increase its audience. While it continues to realize success on the top line, the cost of doing business at this level is high. The company devoted nearly $3 billion to advertise last year’s film slate, up from $2.2 billion in 2013.
Conclusion
To prosper in the entertainment industry means being able to produce and distribute popular content, then turning that content into money. As 21st Century Fox continues to build up its content offerings in preparation of a digital disruption of the traditional media distribution model, it is also making investments in key areas in its broadcasting business. Fox will face scrutiny from regulators and experience headwinds due to its increasingly global nature. Though the earnings potential here will be improved by a number of shareholder-friendly actions (the company is set to purchase around 90 million shares over the five-year window), pressure to grow often leads to pressure on margins, which can hurt profit growth.
At the time of this article’s writing, the author did not hold any positions in any of the companies mentioned.
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