This piece first appeared in News Items, a newsletter that covers four “subjects” — a world in disarray, the financialization of everything, advances in science and technology and politics, global and domestic. News Items is distributed 6x weekly (Monday through Friday and a weekend edition). It also features commentary by me or Mary Williams Walsh about one or the other of the four “subjects” listed above. That said, here’s the piece:
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Disney’s once and current CEO, Robert Iger, made news last week when, as CNBC reported, he “opened the door to selling the company’s linear TV assets as the business struggles during the media industry’s transition to streaming and digital offerings.” Disney’s “linear TV assets” include ABC and ESPN. Mr. Iger said both companies were not necessarily “core” to the parent company’s future.
It’s unlikely that these thoughts popped into Mr. Iger’s mind as he was chatting with CNBC’s David Faber “live” from the Allen & Company summer conference in Sun Valley, Idaho. Such thoughts are not the sort of thing the CEO of one of the world’s largest (and most important) entertainment conglomerates mentions casually.
As you can imagine, a predictable uproar ensued. Upon his return to Los Angeles, Iger embarked on some textbook corporate damage control, reassuring executives and minions at the “linear TV assets” that selling those companies was not necessarily “the plan” or “a plan,” it was more like the idea of a plan, which one might muse upon when talking to Mr. Faber on a beautiful day in a beautiful place, surrounded by the biggest big shots in finance, media and technology. As if to prove his commitment to something he’s clearly no longer committed to, Iger declared that he was “ridiculously passionate” about ABC News. As are we all, no doubt.
The short answer to the question of why Iger would be “thinking” about selling ABC and ESPN is pretty straightforward: He overpaid for the entertainment assets of (what is now) Fox Corp. That mistake, combined with the pandemic shutting down its theme parks and ongoing digital disruption, left Disney exposed to the valuation whims of “Wall Street strategists.” The whims have been grim. Disney’s stock price is down 22% since the summer of 2018.
Initially, Iger’s strategy was simple: Get bigger. Everyone agreed that three or (at most) four companies would survive the streaming revolution and the acceleration of digital disruption. Those of significant size and scale just might. A few might even thrive. Everyone else would be acquired or ground into dust. All concerned agreed it was a zero sum game. The key was to stay one step ahead of the game and not be (metaphorically) house poor.
Back in the mid-2010s, get bigger was certainly the strategy of one Rupert Murdoch, seller of Fox’s entertainment assets. A few years before he sold those assets, he had tried and failed to acquire Time Warner. His thinking back then was the same as Iger’s three years or so later. You either got bigger or got crushed. Unable to get bigger, via an acquisition of Time Warner, Mr. Murdoch decided to not get crushed.
Murdoch’s decision to sell Fox’s entertainment assets shudders through the corporate offices of the “entertainment industry” to this day. Why didn’t we do that? Why didn’t we get off the dance floor before the music stopped? Why weren’t we sellers, instead of buyers, when the market was, as Murdoch once put it, “a bit toppy”? Why indeed.
People forget that Disney’s original offer to Fox was $52.4 billion in stock. Six months and one Comcast counter-offer later, the deal closed at $71.3 billion in cash and stock. But hey, what’s $20 billion in cash and stock when money is free? It’s not really that much money. What’s $20 billion when the Fed is raising interest rates with unprecedented speed? It’s a lot of money.
How to be like Rupert Murdoch now is the new question. The number one rule in business or finance is buy low, sell high. Rule number two is stop dancing and find a chair before the music stops. Murdoch had done both. Disney had done the opposite.
Given the new financial “environment”, is it even possible to buy low and sell high, anytime soon? Or is the only real option to sell, or sell off parts, and make do with a disappointing payday or a smaller, reconfigured enterprise.
Happily enough, there are two sets of buyers of “entertainment assets”; private equity and Mega-Tech. Both were in SRO attendance at the Allen & Company summer camp, so presumably there were “discussions” about “the future” of the entertainment business there.
There are good reasons why both private equity and Mega-Tech might be interested in acquiring “entertainment” assets. The private equity “industry” has grown dramatically over the course of the last 15 years or so. There are three times as many firms, they have vast amounts of “dry powder” (uninvested investor capital) and there are fewer and fewer “big deals” to be done, since smart private equity firms have already done the most financially attractive ones. Too many firms with too much money chasing too few deals will drive up the price of acquisitions. So, from Hollywood’s point of view, that’s good. But the larger point is that “dry powder” has to be put to work and there’s a case to be made that entertainment assets are worth more than the “markets” assert.
Mega-Tech is interested because they have the platforms and mind-boggling numbers of “users” and customers. Facebook, for instance, has ~2 billion “daily average users,” one-quarter of the world’s population, and enough servers and high-speed computing power to reach all of them in real time. What they may lack (or may not, depending on how you look at it), is more “engaging” content. Putting, say, ESPN on Facebook would make Facebook the world’s leading sports “network” overnight by orders of magnitude.
So there are buyers. Alas, they’re smart buyers, who (generally speaking) abide by the laws of buy low/sell high and don’t make it a habit of staying on the dance floor too long. Watching Disney or Warner Brothers Discovery get ever more desperate to sell assets to “clean up” their balance sheets is not something a smart PE fund or a major “tech platform” company would find unappealing. They’d enjoy it; chumming the waters every so often to keep the press talking about how desperate the entertainment companies are to sell assets.
Some day, maybe sooner than later, someone is going to pull the trigger and buy, say, ESPN. Or buy, say, CNN, ABC and ESPN and meld the three into one company. In the latter case, ABC News could be sold or shut down immediately, as the “newco” would have CNN as its “news provider.” We could talk about a dozen other scenarios for recombinations and/or divestitures, but you get the idea, so let’s not.
The day nears, if it’s not already here, when “get big or go home” officially becomes “get what you can and move on.” Iger’s musings marked the beginning of the countdown to that day or those days. No one disputes that that day or those days are coming. No one disputes that the buyers will be private equity and/or Big Tech.
All of this is one of the reasons the “Hollywood strike” (by writers and actors) will likely last a very long time. Management of virtually every entertainment company is looking to sell all or parts of its businesses (or attract “investment partners” in their businesses). The price for those assets will not be enhanced by higher labor costs, higher residual fees and limited ability to deploy artificial general intelligence (AGI) to enhance production and constrain costs. There has to be progress there. No progress puts a cap on the valuations of “entertainment assets.”
It’s the new Hollywood. Fittingly, perhaps, Rupert Murdoch closed the last chapter. AGI begins the new one.