Murdoch surrender signals accelerating OTT swing

Rupert Murdoch’s recent $60 billion sell out to erstwhile rival Disney ends a dynasty that had been developing for 50 years, splits the family and has significant ramifications for the UK pay TV market since its biggest operator Sky will effectively change hands. But all this pales behind the greater global significance in suggesting that even an $80 billion-dollar regional empire cannot stop the Internet juggernaut represented by GAFAN or various anagrams such as FAANG.  Certainty from the video perspective Netflix justifies this inclusion in a big five alongside Apple, Amazon, Google and Facebook. If anything Apple should be the one left out given its relatively small commitment to video so far which is exceeded by one or two other OTT players such as Hulu.

While Murdoch’s capitulation may have something to do with his age and a declining appetite for risk, it is really about a combination of content, distribution and global reach. Sky could almost be called a global player given its pay TV presence in leading European markets like the UK and Germany, in the US through the Fox’s TV production business along with FX and National Geographic, while it also had the Star Network in India. But in the end it lacked the coherence or size necessary to compete strongly in what some call the post-OTT era.

As far as Murdoch goes, the eventual end was anticipated 12 years ago by Andrew Neil, the man he appointed as editor of the UK Sunday Times in the early 1980s when he spearheaded a long, bloody but ultimately successful campaign against what they considered to be Neanderthal print unions desperately defending outmoded and uncompetitive working practices. Neil wrote in 2005 that the dynasty was bound to end when Rupert went because he alone had the genius to hold together an empire that was disjointed both geographically and in the operating sectors ranging from newspapers of various qualities to pay TV operators, while also battling for original content. In the event it has happened while Rupert is still alive but that is because he was feeling the rising heat of OTT.

There is an irony here. Murdoch himself has admitted to being defeated not so much by the market force on the ground from FAANG as we shall call it but the ability to raise capital. This is a result of the highly inflated stock market ratings of FAANG compared with Sky based on expectations of future revenue growth which enables them to outspend it in content. The rules look different for traditional media companies which still have to pay dividends on the basis of short term profits.

At the same time Sky in the UK especially has been hitched to an inflationary spiral of sports rights that it cannot afford to surrender, but equally make it hard to remain profitable. There are signs of some of the FAANG weighing in, while at the same time ultimate rights holders such as the English Premier League may be poised to go direct to the consumer as some sports leagues are already doing in the US.

The irony lies in the fact that it is an older dynasty still, Disney, to which Murdoch is selling out and not one of the FAANG, which would not be interested anyway. Disney to some extent faces the same challenge from FAANG as 21stCentury Fox, but is better placed to withstand it. It has a strong foundation in content from which it can build out more coherently through distribution and owns the global ESPN sports network. It is significant that in August 2017 Disney announced it was ending its distribution agreement with Netflix while buying majority ownership of BAMTech, the streaming video company founded by Major League Baseball, for $1.58 billion.

This put Disney on course to launch its own direct to consumer OTT service in 2018, likely in time to include live sports drawn from ESPN’s content suppliers including the NFL or NBA and MLB in the US. Disney is therefore very much up for the fight against FAANG and its problem is that at double the capitalization of 21stCenturyFox it needed to grow a little bit bigger still, leading to the acquisition.

This comes at a time when FAANG collectively is becoming a major force in pay TV as a whole and not just OTT. It is likely in 2018 to pass the 10% share level of total US pay TV revenues, while accounting for about two thirds of revenue growth. Perhaps more to the point from Murdoch’s perspective, there is a significant changing of the guard among the OTT players, with Amazon continuing to gain at the expense even of the others and overtaking Netflix to become the US revenue leader sometime around the end of 2018.

This depends very much on how the measurement is done given that one of Amazon’s strengths lie in the diversity of its monetization model, which includes digital rentals, subscriptions, electronic sell-through (EST) and bundles of third-party TV apps, as well as fees from the premium Prime bundle. Adding all this up is a matter of intelligent guesswork, but the very diversity itself will help gain market share, coupled with leveraging its huge e-commerce base. It also helps Amazon cater for diverse local markets by juggling with the models, which can be a sticking point for others. Netflix has been successful in catering for local markets on the content front through local production, but is still hitched to its SVoD model and has perhaps been insufficiently flexible on pricing. Its rivals are hoping to gain ground in the subscription linear OTT market where again Netflix is showing reluctance to play.

The other major driver of OTT revenue growth is advertising where there is scope for precise targeting and personalization with Google and Facebook the big players given Netflix’s absence and Amazon’s relatively limited impact so far. Google and Facebook probably account between them for about half of advertising-funded video-on-demand (AVOD). Here Amazon’s video platform diversity has been a disadvantage because it presents a fragmented target, which is why it has been working to unite these within a coherent advanced advertising platform to be unveiled early in 2018.

The existing Amazon Advertising Platform (AAP) suffers from being just a traditional exchange connecting advertisers with diverse sites including many outside Amazon. There is little high precision targeting and a failure to aggregate customers within coordinated campaigns or exploit user analytics effectively, which Amazon is aiming to put right.

So the members of FAANG have different strengths, but to Murdoch the whole has appeared increasingly as a multi-headed monster in his nightmares that he could only escape by waking up, or selling out.4