As one seismic M&A (merger and acquisition) contest in the U.S. — between Comcast and Disney — creeps closer to its conclusion, and another one involving Sky in the U.K. rumbles on, many analysts and investors are again focusing on the intersection — or integration — of major media and telecoms assets on both sides of the Atlantic.
AT&T's successful purchase of Time Warner was the most notable recent example of so-called vertical integration, the combination of a distribution behemoth with a content Goliath. And though the U.S. Department of Justice promised a couple of weeks ago to appeal a judicial ruling earlier this year that permitted that $85 billion mega-merger to proceed, a preponderance of legal experts say the judge's earlier approval will likely stand. And as other industry players prepared to embark on another round of consolidation that is now gathering steam, they awaited the outcome of the U.S. government's initial legal challenge with unalloyed interest.
Now just this past week, shareholders at Disney and Twenty-First Century Fox have approved Disney's $71.3 billion acquisition of Fox's international entertainment assets. Days earlier Comcast CEO Brian Roberts had conceded the price tag for those media properties was too high for him to continue with his rival bid, and rather graciously called off his firm's pursuit. (Full disclosure: CNBC, my employer, is a wholly owned subsidiary of Comcast). The Murdoch family had reportedly preferred the stock element of Disney's offer, with the added benefit that U.S. authorities had already granted conditional antitrust approval for the deal.
Disney has a current market capitalization of close to $164 billion, and from the outset the company was clear about its rationale for splashing out for Fox's movie and TV production house, its U.S. cable channels and indeed its Asian content powerhouse Star India. The ultimate prize is competitive scale and superior content for the coming war over internet streaming. And the 39 percent of Sky that Fox owns could also prove useful to Disney, since the U.K.-based firm possesses some enviable content including much sought-after rights to screen England's Premier League soccer; would provide some cutting-edge distribution technology that will improve the platform offering of whoever ends up as its successful suitor; and represents a diversification opportunity outside the United States with sizeable subscriber bases in Germany and Italy. Disney-Fox has just four weeks to launch another bid for Sky that will outstrip's Comcast's latest offer. Otherwise Sky shareholders may be minded to sell to Comcast, subject as ever to regulatory approval.
This past week a contrarian position on the benefits of such vertical integration (anyone remember the ill-fated AOL-Time Warner deal?) came from Amos Genish, the CEO of Telecom Italia. His firm has partnered with, and competed against, Sky several times in the past decade.
"I don't think that the payback is as clear as people are claiming," he told me at his Rome headquarters last week. He insisted instead that a telecoms giant (Telecom Italia is a top 10 company in one of the world's top 10 economies) should focus on what it knows best, distribution through its networks, but also take "calculated, careful steps" to pick and choose the best content for its customer base.
That selection process is as crucial as ever for media giants — like Disney — that make billion-dollar bets on movie franchises and TV shows. As the company prepares to roll out its own streaming service next year, and perhaps to take majority control of Hulu once the Fox acquisition closes, it is gearing up to face ever tougher competition from Amazon and Netflix.
I appreciate that this fact is far from a fresh insight. But one analyst I spoke to recently highlighted an intriguing possibility. He talked about a future inflection point of peak "eyeball hours" — the greatest number of hours in a day that the average person can physically find time to watch content on a screen, multiplied by the total population worldwide with access to such screens. Once we reach that moment, he explained, every single content provider and distributor would be caught in a deathmatch for survival, in a marketplace that will no longer continue to expand in lock-step with technological innovation and internet penetration. It is conceivable that one day everyone on Earth could have access to an affordable viewing device, fast mobile internet and a reliable power source. Then in the absence of growing frontier markets (Netflix launches new original content for South Sudan! Broadband fibre line reaches McMurdo Station in Antarctica! Facebook user numbers surge in Ecuador's Amazonian rainforest!) Content providers and distributors would be forced to defend their margins as they fight for slices of a global pie that is no longer getting bigger. Some corporate leaders clearly think it's better to begin with a big slice.
Disclosure: Comcast is the owner of NBCUniversal, parent company of CNBC and CNBC.com.
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