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Technology, Media & Telecom

Disney Fox Deal What Will The Department Of Justice Think

Energy

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Trading Of US Linear TV Advertising Shifting To Programmatic Trading

Every Industry Is Now A Technology Industry

Online Video Bolstering Consumer Home Video Spend, Spearheaded By Subscription Streaming


Disney Fox Deal What Will The Department Of Justice Think

Highlights

The following post comes from Kagan, a research group within S&P Global Market Intelligence.

To learn more about our TMT (Technology, Media & Telecommunications) products and/or research, please request a demo.

Dec. 26 2017 — There has been such a frenzy of media coverage focused on the acquisition of a significant amount of 21st Century Fox Inc. assets by the Walt Disney Co. (finally announced on December 14), but few have focused on the long, arduous journey ahead, as the two companies attempt to convince the government that the combination is a good thing. Although remarks from President Donald Trump have been favorable to the deal, it will be hard to reconcile the Department of Justice nixing the acquisition of Time Warner Inc.'s Turner by AT&T Inc. while approving the acquisition of some of the crown jewels of the media industry by the Walt Disney Co.

There are four areas that we believe the government will focus on:

The Walt Disney Co.'s share of content will be immense. Looking just at U.S. box office (the combined company will also have a huge share of TV productions, plus a huge film & TV library), Disney had a 26.6% share of the domestic box office in 2016, while Fox released films that garnered 13.5% of the box office that year. The only two studios that came close were Time Warner at 16.9% and NBCUniversal Media LLC at 13.6%.

The DOJ is likely to frown upon a company which, on a good year, has 40% of the domestic box office compared to 52% for all of the other major studios combined. There are two reasons for this.

First, exhibitors are having a tough time with the box office weakness, and their cash flow margins are precariously thin. Disney's dominance at the box office will give them further leverage to increase the split of the box office (known as rentals) that it receives from exhibitors, which will only further erode theater margins. "Disney is becoming the Wal-Mart of Hollywood: huge and dominant," Barton Crockett, media analyst at B. Riley FBR, told Bloomberg Businessweek following the deal's announcement. "That's going to have a big influence up and down the supply chain."

Second, Walt Disney has already signaled that they want to keep their content exclusive to them during the post-theatrical release window for their two new OTT streaming platforms, announcing in August that their deal with Netflix would not be renewed. Since there will be no open bidding process for this content, the DOJ could raise issues around this, causing Disney to have significant pricing power over consumers, with what some believe is must-have content. Disney executives have announced that their Disney-branded OTT service will debut with a price-point significantly below Netflix Inc. (their other sports streaming service will be dubbed ESPN Plus). Over time, however, as more content is added, the price will likely go up. Disney has revealed that it will have four to five movies per year that will be exclusive to the OTT platform, while airing the Disney, Pixar, Marvel, and Star Wars films after they play in theaters. There will also be exclusive TV series based on the Marvel and Pixar libraries, as well as a "High School Musical" series.

We think the DOJ will focus on the concentration of sports rights. Although in theory ESPN (U.S.) and the regionals don't compete, the rising cost of sports rights is concerning to multichannel operators and consumers, and it has been the driving force behind cord cutting and cord shaving.

Walt Disney will likely argue that sports rights are not an issue as the RSNs aren't bidding against ESPN for national sports rights. That's because they are broken down into tiers, where the national networks like ESPN and FS1 bid on the first- and second-tier rights. These are the nationally televised games, and usually the top bidder gets the first pick of the most competitive and nationally relevant games that week.

The remaining third-tier rights are available to the regional sports networks, which get the exclusive in-market broadcasts based on a specific team's TV territory, which is determined by the league. These rights are negotiated between the RSN and the local teams themselves. The national rights are negotiated by the national networks and the leagues.

The majority of a team's games are available in-market on the RSN, with the exception of any exclusive nationally televised game.

There is an argument that the national networks compete with RSNs for viewers, as most local fans want to watch/cheer for their local teams. The reason RSN sports rights are so valuable is that they own exclusive in-market rights. So in any given market across the nation, most local fans will prefer to watch the RSN over a national telecast of other teams.

The Fox Regional Sports networks' market share of affiliate fees is huge at 49%, with Comcast Corp. being the No. 2 player.

The DOJ could argue that the RSNs paired with ESPN would give the Walt Disney Co. significant leverage with multichannel operators, which would allow them to significantly increase prices to distributors, and, in turn, increase prices for consumers. As the graphics below show, ESPN and the Fox RSNs together would account for 30% of all affiliate fees for basic cable networks and RSNs, and a massive 58% of affiliate fees for basic cable sports networks and RSNs.

The DOJ will likely focus on Walt Disney becoming the majority owner of Hulu LLC, a major growth engine in both OTT in the U.S. and VSP with its still-in-trial Hulu Live offering. Although the partnership agreement related to Hulu has not been made public, there have been numerous leaks in the press about the partners requiring unanimous consent of the three 30% shareholders — Comcast/NBC Universal, Walt Disney, and 21st Century Fox (Time Warner Turner holds a 10% equity stake) — for major strategy decisions.

Rich Greenfield (co-head of research, managing director and media and technology analyst at BTIG LLC's research division) wrote in December that many investors believe Disney wants to buy Comcast's 30% stake and fold Hulu into its streaming service. However, it's extremely unlikely Comcast would sell its interest in Hulu, as this would only hurt Comcast's video business if Hulu were exclusively available only as part of a Disney bundle.

In addition, Greenfield wrote that he believes that this refusal will ultimately result in Walt Disney selling its stake in Hulu to Comcast/NBCUniversal.

Many of these issues could be resolved by Walt Disney entering into a consent decree with the government with various concessions, as Comcast did in 2011 to get approval of its purchase of a majority stake, which later became full ownership, in NBCUniversal. The biggest sticking point is likely to be one of the same stumbling blocks in getting government approval of AT&T's acquisition of Time Warner Turner, with the government claiming that AT&T could make a large portion of its content exclusive to AT&T, or alternatively pricing it so high that competitors don't believe it would be economically feasible to carry the channels or license the content. This same issue could be raised in the Disney-Fox transaction.

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Watch: Power Forecast Briefing: Fleet Transformation, Under-Powered Markets, and Green Energy in 2018

Steve Piper shares Power Forecast insights and a recap of recent events in the US power markets in Q4 of 2017. Watch our video for power generation trends and forecasts for utilities in 2018.


Technology, Media & Telecom
Trading Of US Linear TV Advertising Shifting To Programmatic Trading

Oct. 08 2018 — Both buyers and sellers of traditional linear TV advertising, not including connected TV or over-the-top video, are moving toward the adoption of programmatic trading. In 2017, Kagan estimates that $690 million or 0.9% of total linear TV spend was traded programmatically. Within the next five years, that figure is expected to climb to $9.76 billion or nearly 12% of total linear TV advertising revenue. MVPDs are forecast to trade the greatest percentage of their ad inventory programmatically in 2022 with 30% of ad revenue from programmatic trading.

Kagan defines programmatic trading as being automated and data-enhanced, not just one or the other. Trading may be through a private or open marketplace and does not have to be through an auction, which is more common in digital video advertising.

There are several issues holding participants back from programmatic trading. Unlike digital programmatic marketplaces, where there is a seemingly unending supply of ad inventory, linear TV has a finite supply. Demand for TV inventory exceeds the supply, so there is still an attitude of "If it isn't broken, don't fix it." TV ads are also bought well in advance, not immediately.

While many agencies have experimented with the programmatic trading of linear TV, not all are on board. Many of the advertisers and agencies are interacting directly with the supplier platform rather than going through a demand-side platform, or DSP, today. In their experiments, the agency needs to use separate platforms to aggregate inventory and tie it together, which is a lot of work.

The lack of inventory is one factor holding back programmatic trading. The only way it takes off is to make linear TV inventory available in some type of buyer platform that can combine the various supply platforms. It is even more complicated when the buyer wants to bring in connected TV (OTT).

Agencies do like the automation capabilities of programmatic, particularly where the process takes a lot of time. An algorithm may do better in areas such as weighting estimation, the first pass at scheduling and the negotiation process as well as postings and billings. The process of buying inventory is not difficult, but computing where a buyer will be able to find its preferred audience is. Therefore, interest in automating the planning and analysis to find an optimal audience is high.

We forecast a gradual uptake for programmatic trading with continued testing in 2018. Broadcast stations and networks, cable programmers, and MVPDs need to add more inventory to programmatic platforms before agencies begin using it in earnest. It will take time for all parties to feel comfortable transacting in a new way.

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Technology
Every Industry Is Now A Technology Industry

Highlights

And every company is now a technology company.

Sep. 28 2018 — As machine learning (ML), artificial intelligence (AI), and robotics become commonplace and enter the operations of mainstream organizations, leadership teams are finding that failure to harness and leverage AI puts them behind the competition. Repeatable tasks are carried out by bots in a fraction of the time and employees are more focused on adding value, which means companies on the forefront of technology can be more reliable, more user-friendly, and faster to market.

In this highly disruptive environment, one traditional truth of business has withstood, or has perhaps even guided, these technological advances: above all, the customer experience is king. More than ever before, businesses have effective technologies at their fingertips to quickly and effectively address customer pain points, while at the same time dramatically improving their internal operations.

At S&P Global Market Intelligence, we strive to get beyond the buzzwords and truly deliver essential insight. And second to this, we strive to adopt real operational efficiencies into our delivery that are paralleled by the workflow efficiencies we promise to our customers. To that end, we are committed to remaining on the cutting edge of emerging technologies, first through optimization, then automation.

Download a recent analysis of how we’re applying new technology like natural language processing to structure data, robotic process automation to deliver insights faster, and predictive analytics to stay ahead of the market.

You can also view this analysis in Spanish, Portuguese, Mandarin, and Japanese.

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Technology, Media & Telecom
Online Video Bolstering Consumer Home Video Spend, Spearheaded By Subscription Streaming

Highlights

The following post comes from Kagan, a research group within S&P Global Market Intelligence.

To learn more about our TMT (Technology, Media & Telecommunications) products and/or research, please request a demo.

Sep. 20 2018 — Spending on home entertainment is rising toward levels not seen since 2004, when consumers spent $24.37 billion building massive home-video libraries of DVDs and VHS cassettes. Since then, the optical-disc market saw more than a decade of significant declines as consumers shifted to digital entertainment. By 2012, total spending on home entertainment was down to $20.13 billion, with $4.13 billion coming from online video while DVDs and Blu-ray discs accounted for $12.88 billion and multichannel PPV/VOD contributed the remaining $3.13 billion.

Fast forward to 2017 and the mix of consumer spending has changed significantly. Consumers spent a total of $22.62 billion on home entertainment from multichannel, online and disc retail/rental sources. Online spending accounted for $13.00 billion of that total while spending on discs dropped to $6.84 billion and multichannel PPV/VOD shrank to $2.79 billion.

While the data might seem like good news for traditional providers of home entertainment, a key component of the growth in digital spending is the rise of subscription video on demand. The majority of online spending is going to over-the-top services like Netflix, Hulu and Amazon Prime, which increasingly have focused on creating original programming (mainly episodic TV) rather than licensing content from Hollywood studios.

Removing subscription streaming from the consumer spending pool paints a less favorable picture for traditional content providers. In 2012, consumers spent just $1.43 billion on non-subscription online video purchase/rental, and a total of $17.44 billion excluding the SVOD component. By 2017, while consumer spending on online video overall had risen to $13.00 billion, some $10.47 of that came from streaming subscriptions versus $2.53 billion from online video purchase/rental, and total home-entertainment spending was just $12.16 billion excluding SVOD.

Spending on sell-through home video peaked in 2006 when consumers shelled out $16.53 billion for DVDs and VHS cassettes. Since then spending has declined by hundreds of millions (sometimes billions) each year. In 2017, consumers spent $6.50 billion on DVD and Blu-ray sell-through and electronic sell-through. This seems to suggest that people are becoming less and less interested in adding to their home-video libraries and are turning to the more affordable streaming options. The story is similar for the home-video rental segment, which saw consumer spending peak in 2001 at nearly $8.45 billion before dropping to $2.87 billion by the end of 2017.

This has to be a somewhat unsettling trend for the major film studios, and is likely a key factor in shifting their strategy to focus on major franchise films and low-cost genre fare. The former tend to have broad worldwide appeal and can still move enough video units to help offset their high production and distribution costs. The low-cost genre fare, on the other hand, may be more risky and not sell as well internationally, but has a fair chance to break even. If the latter films lose money, the successful franchise films typically cover the losses.

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