Case 5 Disney Fox 2
Case 5 Disney Fox 2
Case 5 Disney Fox 2
Case
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Abstract
The case explains the acquisition of 21st Century Fox, Inc. by The Walt Disney Company,
whereby Bob Iger, CEO of Disney, intended to compete against Netflix Inc by venturing into
streaming services. The video library and entertainment shows owned by 21st Century Fox were
believed by Iger to enhance Disney’s ability to compete against Netflix. On November 12, 2019,
Disney launched its streaming service, Disney+, in the United States. However, the integration of
the assets of 21st Century Fox into Disney faced several challenges. Additionally, the company’s
profit for the third quarter of the 2018–19 fiscal year (April to June 2019) did not satisfy the
expectations of investors. Iger believed that the turnaround of 21st Century Fox and its ability
to contribute to Disney’s performance would take a few years. What challenges is Iger likely
to face with this acquisition and how should he resolve them? Are there any synergies in the
acquisition? What impact does Iger’s move have on the entertainment industry in general?
Case
Learning Outcomes
By the end of the case study discussion, students should be able to:
• Explain how the past strategic actions of a firm determine its future course of action.
• Examine synergies in acquisition.
• Describe challenges associated with an acquisition.
• Examine how strategic actions of a firm influence the industry structure.
Introduction
On March 20, 2019, The Walt Disney Company (henceforth referred to as Disney) completed the much-
anticipated USD 71 billion acquisition of the entertainment assets of 21st Century Fox, Inc. (henceforth
referred to as Fox) (Palmeri & Sakoui, 2019). Disney is in the entertainment business, “with operations
in media networks, park experiences & consumer products, studio entertainment and Direct-to-Consumer
networks and channels” (“Walt Disney Co/The,” 2019). Fox was owned by media mogul Rupert Murdoch, who
had led the company for more than 40 years (Palmeri & Sakoui, 2019). With this acquisition, Disney intended
to directly compete against Netflix Inc., and gain a significant position in the online streaming industry. Netflix
is in the business of Internet subscription service, providing subscribers access to television shows and
movies (Palmeri & Sakoui, 2019). On November 12, 2019, Disney launched a streaming service, Disney+,
in the United States (Palmeri & Sakoui, 2019). According to Bob Iger, CEO of Disney, Disney+ was a family-
focused streaming service with original content. Disney+ hosted all the classic Disney films (Palmeri & Sakoui,
2019). By March 31, 2020, Disney was expected to launch its streaming services in European countries such
as the UK, Germany, France, Italy, and Spain (Hazelton, 2019).
When Disney’s performance in the third quarter of 2019 (Disney’s fiscal year begins in October and continues
to September) did not meet investor expectations, the company attributed it to the disappointing performance
of Fox and stated that improving the financial performance of Fox may take a few years (Palmer, 2019).
Disney was under intense scrutiny from investors to prove the worth of the USD 71 billion Fox acquisition
in the long run (Smith, 2019b). Will this acquisition help Iger compete against Netflix? What should he do to
make this acquisition successful? What impact can Iger deliver on the entertainment industry dynamics if this
acquisition is successful?
Background
Company
Disney is headquartered in Burbank, California. It was founded in Los Angeles in October 1923 by Walt
Disney and his brother Roy O. Disney. By 2019, Disney, including its subsidiaries, operated in four business
segments: Media Networks, Parks and Resorts, Studio Entertainment, and Consumer Products & Interactive
Media (“Form 10-K: The Walt Disney Company,” 2018). The global revenue of Disney increased from USD
45 billion in 2013 to USD 70 billion in 2019 (Watson, 2019b). Of the total global revenue of 2019, Disney
generated 35.7% revenue from the media networks segment; 37.7% from the parks, experiences, and
products segment; 16% from the studio entertainment segment; and the remainder from direct-to-consumer
and international segment (Watson, 2019b). The net income of the company during this period increased
from USD 6 billion to USD 10 billion. Compared with 2013, when Disney had total assets of USD 81 billion, in
2019 Disney’s total assets were USD 194 billion (Watson, 2019b). Globally, Disney had 223,000 employees
(“Disney: Number of Employees,” 2019). Between 2010–11 and 2017–18, the number of viewers of the
Disney Channel in the United States declined from 2.16 million to 0.76 million (Watson, 2019b).
Acquisitions
Between 1993 and 2019, Disney made 23 acquisitions. Iger, who became the CEO of Disney in 2005, was
responsible for 14 of these acquisitions (until early 2019), of which the four most notable were Pixar, Marvel,
Lucasfilm (creator of Star Wars), and Fox (Smith, 2019a). The first three acquisitions earned Disney more
than USD 34 billion at the global box office between 2006 and 2019 (Whitten, 2019). After Disney acquired
Pixar in 2006 for USD 7.4 billion, it earned more than USD 11 billion at the global box office through Toy Story,
a computer-animated franchise produced and created by Pixar in 1995. Pixar earned about USD 3 billion from
the Toy Story franchise between 1995 and 2005 (Whitten, 2019). According to experts, this did not happen
coincidentally, but because of appropriate content developed by Disney after acquiring Pixar (Whitten, 2019).
Paul Dergarabedian, a senior media analyst at Comscore, stated that Disney should have been given credit,
“not just for the acquisition but for the execution.” He added: “Had other companies bought these brands,
the market share might have been split up, but we don’t know what other studios would have done with
these brands” (Whitten, 2019). Similarly, since releasing the first Disney-produced Marvel movie in 2012, the
company earned more than USD 18.2 billion at the global box office (Whitten, 2019). In 2019, Disney had a
box office share of 38% in the United States, which had been around 10% in 2005 (Whitten, 2019).
The Disney–Fox deal was first triggered in 2017. After Disney acquired Marvel and Lucasfilm in addition to
its existing animation studios (Walt Disney and Pixar), the company was considered a pop-culture juggernaut
(Sims, 2019). Commenting on the potential of the Fox acquisition, Iger stated, “We’re excited about this
extraordinary opportunity to significantly increase our portfolio of well-loved franchises and branded content”
(Zeitchik, 2019). After the USD 71 billion Disney–Fox deal, Disney gained further dominance in Hollywood
and the entertainment industry (Whitten, 2019).
Disney did not acquire the entirety of Fox. The network TV channel and news and sports programming
remained with Fox. Fox wanted to focus solely on news and sports, as it believed them to be cheaper to
produce and to have the greater potential for higher profit margins than original TV and film productions
(Parrish, 2017). Disney owned entertainment assets of Fox, including: the 20th Century Fox and Fox
Searchlight film studios; the cable channels, FX and National Geographic; the Fox TV production company
(which owned The Simpsons); most of Hulu, a huge library database of classic films stretching back more
than 80 years; and the rights to Marvel’s X-Men (Clark, 2019).
Combatting Competition
Globally, in 2019 the revenue from the video streaming industry was USD 25 billion (see Figure 1) and there
were 1.07 billion users. Of the total revenue of 2019 from the video streaming industry, 46% was derived
from the U.S. market. In the second and third positions (in terms of revenue generation) were China (7%)
and Japan (5.6%) (“Video streaming (SVoD),” 2019). It was projected that, by 2023, revenues from the video
streaming industry would increase to USD 30 billion (“Video streaming (SVoD),” 2019).
Netflix is a major player in the video streaming industry. Headquartered in Los Gatos, California, Netflix was
cofounded in 1997 by Reed Hastings and Marc Randolph. In 2018, Netflix’s annual revenue was USD 16
billion and its net income was USD 1.21 billion (Watson, 2019a). In 2018, the number of Netflix subscribers
in North America was 66 million, which was projected to increase to 77 million by 2023. In 2018, Netflix had
7,100 full-time employees (Watson, 2019a). In October 2018, Netflix enjoyed a global video streaming traffic
share of 26.6%, followed by HTTP media streaming and YouTube, which had a traffic share of 24.4% and
21.3% respectively (Watson, 2019a).
As Disney geared up to compete against Netflix, Fox’s acquisition and especially its entertainment assets
(such as its vast library of movies and entertainment shows) were critical for the success of Disney+ (Sims,
2019). To better compete with Netflix in the long run, Disney intended to create more of a “buffet-style lineup”
that could appeal to multiple demographics given it already held brand power (Katz, 2018). Netflix launched
“original content,” such as 93 original movies per year, compared with Disney’s release of ten movies in
2018. Disney aimed at making big event films after Fox’s acquisition, rather than pursuing Netflix’s quantity
approach. With Fox, Disney was able to scale up projects such as the Avatar sequels, releasing its product
every month to control the box office (Sims, 2019). In 2018, analysts expected Fox’s assets to contribute
about USD 19 billion in revenue and USD 3 billion in profit annually to Disney’s portfolio (Bond, 2018).
Commenting on Disney’s advantage with the Fox acquisition in streaming services, Sean Cullen, executive
vice president of product and technology at Fluent Inc (which is a company that analyzes media business
Dynamics of the Disney–Fox Merger
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data), stated, “The first pillar will be Disney’s soon-to-launch streaming service aimed at family-friendly
content and should house all content from its Disney-branded, Pixar, Marvel and Lucasfilm properties” (Katz,
2018). Commenting on the increased stake in Hulu after the Fox acquisition, he further mentioned that “Hulu
already established itself as a destination for mature, award-winning content such as The Handmaid’s Tale
and Castle Rock. Under Disney’s control, it seems to be a natural home for Fox, FX and ABC content” (Katz,
2018). According to Cullen, Disney’s strategy was similar to creating a cable TV experience, where special
interest programs were produced to target the different niches of audiences (Katz, 2018).
Disney had competition not only from Netflix, but from other video streaming service providers including
Amazon Prime Video, Apple, HBO, WarnerMedia, Facebook, YouTube, and several other online distribution
platforms (Katz, 2018). Commenting on Disney’s ability to excel in this clutter, Cullen stated, “Consumers’
appetite for all of these paid services may be unknown, but the upside for Disney to go direct-to-consumer is
tremendous. Disney may, in fact, be the only major conglomerate with a truly womb-to-tomb market strategy”
(Katz, 2018).
Commenting on Disney’s ability to manage the same, Jim Fosina, chief executive officer of Fosina Marketing
Group (a digital media provider), commented,
There’s no better brand than Disney to demonstrate this. The company knows how to merchandise and
integrate properties and assets so as to grow the overall size of the financial pot. Consumers will expect the
same richness of ‘Disney World experiences’ in these new content extensions. All good news for the end user
customer. (Katz, 2018)
In August 2019, Disney reported earnings per share of USD 1.35 for the quarter ending in June 2019.
Analysts, however, expected this to be approximately USD 1.75 (Zeitchik, 2019). Disney also reported
revenue of USD 20 billion for the third quarter, compared with analyst expectations of USD 21.50 billion.
Disney could not meet expectations, despite some of the biggest blockbusters of 2019 in the quarter, such
as Avengers: Endgame, which was one of the highest-grossing movies of all time. Iger and other Disney
executives blamed Fox movies for Disney’s disappointing results (Zeitchik, 2019). Fox released two movies
between April and June 2019: Breakthrough, which was a modest hit, and Dark Phoenix, an X-Men sequel
that was a major flop at the box office. The movie earned just USD 252 million worldwide, considered to
be the lowest of any of the 12 X-Men films (Zeitchik, 2019). Christine M. McCarthy, Disney’s chief financial
officer, mentioned that projections about Fox “reflected our assumptions about [its] business at the time …
and a couple of businesses came in significantly lower” than projected, especially the film studio projection
(Zeitchik, 2019).
Disney performed comparatively better in the fourth quarter of 2019 (July to September), as expectations
from analysts about the company’s earnings per share and revenue were much lower compared with the third
quarter. In the fourth quarter, Disney’s earnings per share was at USD 1.07 against an expectation of USD
0.95, and its revenue was USD 19.10 billion against a market expectation of USD 19.04 billion (Feiner &
Palmer, 2019).
On March 21, 2019, several executives of Fox were given pink slips. This was part of 4,000 layoffs that
Disney planned across different units of Fox. Disney promised stakeholders that by 2021 it would achieve
USD 2 billion in synergy savings, so layoffs were inevitable (Littleton & Lang, 2019b). In the first round of
layoffs, senior executives of Fox, who commanded high salaries, lost their job. Next, Disney moved down the
corporate ladder. Many job losses occurred in an effort to prevent duplication with existing Disney operations
in areas that were far less vital to the work of producing, marketing, and distributing content (Littleton & Lang,
2019a). For example, international sales and distribution, marketing, and administrative support jobs lost their
significance in the world of global streaming platforms (Littleton & Lang, 2019b). Amongst different divisions,
the Fox film business was expected to be particularly affected, especially jobs in its marketing, sales, and
distribution arms (Littleton & Lang, 2019a).
According to Disney employees, the reason for the poor performance in the third quarter was executive
turnover at Fox. One former Fox employee stated that Fox executives in marketing and other departments
were asked to leave too quickly (Littleton & Lang, 2019a). In fact, immediately after the acquisition Disney
removed Elizabeth Gabler, head of Fox 2000, which Iger admitted made the transition difficult (Fleming Jr.,
2019; Littleton, & Lang, 2019a). Gabler was responsible for overseeing the production of several successful
mid-budget films, including The Fault in Our Stars and The Devil Wears Prada, under the Fox 2000 label
(Fleming Jr., 2019).
Executives of Fox retained by Disney, however, were not provided much autonomy. For instance, although
Disney retained Emma Watts (Fox’s production chief) to manage the Fox label, she had little autonomy as
Iger intended to chart “a new direction” for Fox under the Disney umbrella. Disney’s co-chairmen, Alan Horn
and Alan Bergman, were asked to “apply the same discipline and creative standards” to Fox as they did
to Disney subsidiaries Pixar, Lucasfilm, and Marvel (Zeitchik, 2019). Moreover, Disney had a traditional and
conventional culture, whereas Fox followed more of a Darwinian approach—i.e. a competitive and survival-
of-the-fittest approach to management (Littleton & Lang, 2019a).
Although Murdoch kept the 20th Century Fox studios, a significant number of studios were leased to Disney
for at least seven years, as per the terms of the acquisition. That implied that a vast majority of 21st Century
Fox businesses that were owned by Disney (after the acquisition) were to be housed in the 20th Century Fox
spaces (Littleton & Lang, 2019b).
Producers at Fox were also concerned that some of their movies would premiere on the streaming platform
of Disney+ instead of being releasing in theaters (Littleton & Lang, 2019a). These producers were also
concerned that several projects, which were in different stages of production, were being terminated if they
were not considered “Disney-friendly” (Littleton & Lang, 2019a). Iger, however, mentioned that the studio
would make R-rated movies after the acquisition of Fox. This was a rating Disney had avoided, as it tried to
preserve a family-friendly image (Littleton & Lang, 2019a). Commenting on this move, John Hodulik, a media
analyst at UBS, stated, “I think they talk about potentially rationalizing the film slate. Having two large studios
under one umbrella, they want to make sure the slate is optimized so that they don’t end up competing with
themselves” (Littleton & Lang, 2019a).
Lloyd Greif, chief executive at investment bank Greif & Co, stated, “Basically, they [Disney] become the
800-pound gorilla in the media landscape. It gives Disney even greater clout from a streaming standpoint,
and even greater clout from an exhibitor standpoint” (Faughnder, 2019). With a high market share in the
movie industry, Disney was expected to pressure theater owners to allocate a greater portion of the box office
for its films (Faughnder, 2019). In terms of revenue distribution, even before acquiring Fox, Disney received
more than 60% of the box office receipts for its biggest movies, which was higher than the typical 50% split
for movies (Faughnder, 2019). Doug Creutz, a media and entertainment industry analyst with Cowen & Co.,
stated, “This is unquestionably bad for the theater companies.” He added, “Disney has been dominant, and
they will dominate more now” (Roxborough, 2019). Disney and Fox had several overlapping advertisers. For
example, in 2018, 57% of the advertisers ran ads with both of them (“Mergers & acquisitions special edition,”
2019). It is likely that Disney would have more bargaining power over these advertisers due to the acquisition.
At the time of Disney’s acquisition of Fox, Netflix had a forward price-to-earnings ratio of approximately 57
and an enterprise value/EBITDA ratio of about 97. Disney’s forward price-to-earnings ratio was 15 and its
enterprise value/EBITDA ratio was 11 (Sherman, 2019). As Netflix was much higher valued than Disney, Iger
believed that media investors saw Netflix with greater upside. Because of this investor sense of the near
future, Iger invested in the Disney streaming capability (Sherman, 2019).
Iger was extremely keen to compete with Netflix and spent approximately USD 20 billion more than he initially
planned on the Fox acquisition (Sherman, 2019). Disney, at the time of the acquisition, was developing
Disney+ and Iger wanted the Fox content to be streamed on the Disney+ platform, including such series
as The Simpsons, Modern Family, and the X-Men and Fantastic Four characters (Sherman, 2019). Iger
specifically mentioned,
Our acquisition of 21st Century Fox was driven by our strong belief that the addition of these great
businesses, brands, franchises and talent will allow us to move faster, reach farther and aim
higher—especially when it comes to building direct connections with consumers. (Sherman, 2019)
Another reason for the acquisition was that Fox had experience in streaming service and Disney did not. The
Fox platform, FX Plus, offered an ad-free streaming service to subscribers for a USD 5.99 monthly fee and
offered access to more than 1,400 episodes of FX programming, such as Atlanta, American Horror Story,
Damages, It’s Always Sunny in Philadelphia, The Shield, Sons of Anarchy, and Terriers (Spangler, 2019).
Although Disney wanted to add the Fox video library content to its portfolio, it also realized that 21st Century
Fox films were performing poorly in the box office. Fox studio reported a USD 170 million operating loss in
the second quarter of 2019. To improve performance, Disney decided to begin from the very beginning with
Fox to rectify the performance (Alexander, 2019). Iger mentioned, “It will probably take a solid year, maybe
two years, before we can have an impact on the films in production” (Alexander, 2019).
Road Ahead
Disney was primarily a traditional media company possessing expertise in creating cinematic experiences that
could entice viewers to movie theaters (Sims, 2019). Netflix, in contrast, specialized in winning subscribers
through a variety of viewing options (Sims, 2019). Commenting on Disney’s ability to succeed in the streaming
services business, Fosina stated, “In a world where the value of a media company is represented by its ability
to create content that engages and retains market-able audiences, Disney is merging with the ‘mother-lode’
of great brands and content.” He further mentioned, “Leveraging this content can continue to keep a strong
connection between young viewers and those who are growing up within the Disney family” (Katz, 2018).
Experts believed that a successful acquisition could provide a road map in the entertainment industry for
further consolidation (Littleton & Lang, 2019a).
Disney+ was launched in the United States in November 2019 and the monthly and yearly subscription plans
were priced at USD 6.99 and USD 69.99 respectively (Chen, 2019). Subscribers also had a bundle package
option for USD 12.99 per month. The bundle package included Disney+, Hulu, and ESPN+. In March 2019,
Iger suspended the licensing deal that Disney had with Netflix with its theatrical releases, such as Captain
Marvel, which were now being prepared for launch on Disney+ instead of Netflix (Clark, 2019). Thus, Disney
movies would no longer be available on Netflix. Whether the Fox acquisition would help Iger to achieve his
goal of successfully competing with Netflix will not be known for several years.
Discussion Questions
Further Reading
Aleixo, J. (2019, February 1). Comprehensive guide to handling M&A. Emptech.com. https://emptech.com/
mergers-acquisitions-comprehensive-guide/
Can Disney’s bid for Fox overcome antitrust concerns? (2017, December 19). Knowledge@Wharton,
Wharton School of the University of Pennsylvania. R https://knowledge.wharton.upenn.edu/article/disney-fox-
deal/
Jemison, D. B. , & Sitkin, S. B. (1986, March). Acquisitions: the process can be a problem. Harvard Business
Review. https://hbr.org/1986/03/acquisitions-the-process-can-be-a-problem
Revenue synergies, cost synergies and consolidation. (2015, December 15). Supplement Advisory: Driving
Growth. https://supp-co.com/2015/12/15/revenue-synergies-cost-synergies-and-consolidation/
Shaver, J. M. , Mitchell, W. , & Yeung, B. (1997). The effect of own‐firm and other‐firm experience on foreign
direct investment survival in the United States, 1987–92. Strategic Management Journal, 18(10), 811–824.
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Dynamics of the Disney–Fox Merger
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