FOXA - Twenty-First Century Fox Inc

[KJP]

Are local affiliates actually "good cos"?  Look at the FCF yields of Gray Television or Nexstar.  The equity markets appear to be saying these are really questionable business models.  The debt markets, though, arguably suggest otherwise (this industry has some of the widest splits between levered FCF yields and debt yields).

Gray and Nexstar appear to own primarily smaller market stations, whereas basically all of FOX's stations are in the largest US cities (14 of the 15 top designated market areas per 10-K).

Someone correct me if I'm wrong here, but I don't think it's possible to parse out the economics of FOX's local stations from the disclosure provided. Management discussed the strong margins of its local news content a bit at the IR Day (page 26 of the transcript).

You are right that Gray and Nexstar have many stations in smaller locations.  See, e.g., slide 6 here:  https://www.nexstar.tv/wp-content/uploads/2020/08/NXST-Investor-Deck-8-20-20.pdf
I can also see the argument that stations in bigger markets should be structurally more profitable because they can spread their fixed costs (particularly news production) over many more viewers.  But I think the viability of local broadcasters is tied to the viability of the networks that provide them most of their content and to the bundle, as a growing percentage of their revenue is retrans.  GTN and NXST also likely have high levered FCF yields in part because they're quite levered.

Somewhat related:  What are the odds that by 2030 the highest rated video news product in (i) New York City, (ii) in the United States, and (iii) globally in the English language will be branded and produced by the New York Times and available via streaming, perhaps at no additional cost to its digital subs?  I think it's much higher than zero.

[bizaro86]

Are local affiliates actually "good cos"?  Look at the FCF yields of Gray Television or Nexstar.  The equity markets appear to be saying these are really questionable business models.  The debt markets, though, arguably suggest otherwise (this industry has some of the widest splits between levered FCF yields and debt yields).

Gray and Nexstar appear to own primarily smaller market stations, whereas basically all of FOX's stations are in the largest US cities (14 of the 15 top designated market areas per 10-K).

Someone correct me if I'm wrong here, but I don't think it's possible to parse out the economics of FOX's local stations from the disclosure provided. Management discussed the strong margins of its local news content a bit at the IR Day (page 26 of the transcript).

You are right that Gray and Nexstar have many stations in smaller locations.  See, e.g., slide 6 here:  https://www.nexstar.tv/wp-content/uploads/2020/08/NXST-Investor-Deck-8-20-20.pdf
I can also see the argument that stations in bigger markets should be structurally more profitable because they can spread their fixed costs (particularly news production) over many more viewers.  But I think the viability of local broadcasters is tied to the viability of the networks that provide them most of their content and to the bundle, as a growing percentage of their revenue is retrans.  GTN and NXST also likely have high levered FCF yields in part because they're quite levered.

Somewhat related:  What are the odds that by 2030 the highest rated video news product in (i) New York City, (ii) in the United States, and (iii) globally in the English language will be branded and produced by the New York Times and available via streaming, perhaps at no additional cost to its digital subs?  I think it's much higher than zero.

Hard to predict the future. The highest rated program of 2030 could also easily be "Netflix Nightly News" hosted by Kylie Jenner and Ryan Reynolds. Either scenario would be bad for Fox, of course.

[Foreign Tuffett]

I remember when a major source of news for the young-ish crowd was Jon Stewart's "The Daily Show", which was technically satire.

But I think what what is or is going to happen on w/ TikTok, NYT, etc is largely irrelevant here. I don't watch Fox News myself, but know many that do. They aren't the type to be using TikTok and want nothing to do with the NYT.

Think of Fox News as a "safe space" for Americans conservatives who want conservative commentary, but aren't interested in the more hard core financial stuff that the WSJ and Bloomberg provide. There is a massive audience for this type of content, which is why Fox News has been #1 in cable news since 2002 and the #1 channel in cable for over 4 years.

[KJP]

I remember when a major source of news for the young-ish crowd was Jon Stewart's "The Daily Show", which was technically satire.

But I think what what is or is going to happen on w/ TikTok, NYT, etc is largely irrelevant here. I don't watch Fox News myself, but know many that do. They aren't the type to be using TikTok and want nothing to do with the NYT.

Think of Fox News as a "safe space" for Americans conservatives who want conservative commentary, but aren't interested in the more hard core financial stuff that the WSJ and Bloomberg provide. There is a massive audience for this type of content, which is why Fox News has been #1 in cable news since 2002 and the #1 channel in cable for over 4 years.

I think you're right that FoxNews currently has a core following.  But I don't think that answers the question of whether Fox's current economics are based on the continued existence of the cable bundle. 

After a bit of googling, it appears that FoxNews gets about $2/month/sub in affiliate fees and has about 83 million subs (slowly declining), which is essentially everyone who has a cable bundle.  That's annual affiliate fee revenue of $2 billion.  They have annual cable-segment-wide affiliate fee revenue of $3.87 billion.  I assume the $1.87 billion difference between 2 and 3.87 represents affiliate fees they get from their other five cable networks combined (FoxBusiness, FS1, FS2, BigTen Network, and Fox Deportes).  Based on my understanding, cable channels negotiate on a companywide basis with MVPDs, so I suspect a fair amount of the $1.87 billion represents the leverage FoxNews gives Fox in negotiations with MVPDs.  So, let's assume FoxNews is really in substance generating $3+ billion in affiliate fees.

If the bundle fell apart and FoxNews had to go DTC, how many subscribers would it take to rebuild that revenue stream?  At $10/month they'd need 25 million subscribers to generate $3 billion in revenue, and I suspect there would be significant additional overhead in running such a DTC operation.  My gut says there aren't 25 million people who would pay $10/month to subscribe to FoxNews, but that could be wrong, particularly if there is significant international demand for FoxNews.

Of course, that math far too simple and there are other variables at play, e.g., would DTC subscribers tolerate ads and if so, how valuable would they be with dynamic ad insertion and full knowledge of who is being shown each ad?  But in this post I'm more trying to come up with a way to think about how dependent Fox is (or is not) on the current structure of pay TV.

[dwy000]

Most of the streaming alternatives to the cable bundle pay the same affiliate fees to the channels as the cable company does.  Sometimes even higher because a Comcast or Charter can negotiate a volume discount (30m subs vs 2mn for YouTube TV).  The reason YouTube TV has increased its price about 5 times since it set up is because they aren't making money off it due to distribution costs to content providers. There now isn't much of a price difference.

The other thing is that the providers will negotiate for bundles of channels not just one.  People seem to think that they pay $100/month for 200 channels but only watch 20 so they want to pay $10/month. Thats not how it works.  Discovery will often charge the distributor very little more for carrying 8 channels than just 1 (which usually isn't even an option).

Cable vs streaming is of less relevance than what people are watching. Sports and news will always be consumed live.  And the local networks are increasingly oligopolies. If you want to find out what is happening in your city you will inevitably go to the local news channel or their website.  National news is nice but doesn't tell you local happenings and the only other options are radio (dying) or newspaper (life support).  That's why there is a huge premium on your cable bill for sports and local news. Those are the big costs to both streamers and cable.

[KJP]

Most of the streaming alternatives to the cable bundle pay the same affiliate fees to the channels as the cable company does.  Sometimes even higher because a Comcast or Charter can negotiate a volume discount (30m subs vs 2mn for YouTube TV).  The reason YouTube TV has increased its price about 5 times since it set up is because they aren't making money off it due to distribution costs to content providers. There now isn't much of a price difference.

The other thing is that the providers will negotiate for bundles of channels not just one.  People seem to think that they pay $100/month for 200 channels but only watch 20 so they want to pay $10/month. Thats not how it works.  Discovery will often charge the distributor very little more for carrying 8 channels than just 1 (which usually isn't even an option).

Cable vs streaming is of less relevance than what people are watching. Sports and news will always be consumed live.  And the local networks are increasingly oligopolies. If you want to find out what is happening in your city you will inevitably go to the local news channel or their website.  National news is nice but doesn't tell you local happenings and the only other options are radio (dying) or newspaper (life support).  That's why there is a huge premium on your cable bill for sports and local news. Those are the big costs to both streamers and cable.

Several have opined that (i) people value local news highly, and (ii) it must be viewed live.  Are either of these statements true?

1.  If news in itself was valuable and people were willing to pay for it, why have newspapers collapsed?  It is because we're living in a post-literate society in which people hate reading?  Or is it because the traditional print newspaper was bundle that different people valued different parts of -- classifieds, sports coverage, movie listings, etc. -- and thus could unsuccessfully be unbundled via the internet?  If it's the latter, I question the assumption that people actually highly value local news and would pay for it if asked.  And even if they did, it's not obvious to me that such a core group ultimately would favor paying to subscribe to the local TV news channel over a substack.

2.  For people who do value the typical 5pm local news program, what difference does it make to them whether they watch it at 5pm, 7pm, or 9pm?  How does watching it a few hours after some others have watched it make it less valuable to them?  Besides traffic and some of the weather forecast, what is so highly time sensitive about the local news?  And don't we know have even better ways to get instantaneous information about those issues (e.g., Waze and weather apps). 

In light of the points above, how much of the existence of the 5pm local news is simply an anachronism that exists because of historical (and now outdated) distribution methods and technologies?

[dwy000]

Most of the streaming alternatives to the cable bundle pay the same affiliate fees to the channels as the cable company does.  Sometimes even higher because a Comcast or Charter can negotiate a volume discount (30m subs vs 2mn for YouTube TV).  The reason YouTube TV has increased its price about 5 times since it set up is because they aren't making money off it due to distribution costs to content providers. There now isn't much of a price difference.

The other thing is that the providers will negotiate for bundles of channels not just one.  People seem to think that they pay $100/month for 200 channels but only watch 20 so they want to pay $10/month. Thats not how it works.  Discovery will often charge the distributor very little more for carrying 8 channels than just 1 (which usually isn't even an option).

Cable vs streaming is of less relevance than what people are watching. Sports and news will always be consumed live.  And the local networks are increasingly oligopolies. If you want to find out what is happening in your city you will inevitably go to the local news channel or their website.  National news is nice but doesn't tell you local happenings and the only other options are radio (dying) or newspaper (life support).  That's why there is a huge premium on your cable bill for sports and local news. Those are the big costs to both streamers and cable.

Several have opined that (i) people value local news highly, and (ii) it must be viewed live.  Are either of these statements true?

1.  If news in itself was valuable and people were willing to pay for it, why have newspapers collapsed?  It is because we're living in a post-literate society in which people hate reading?  Or is it because the traditional print newspaper was bundle that different people valued different parts of -- classifieds, sports coverage, movie listings, etc. -- and thus could unsuccessfully be unbundled via the internet?  If it's the latter, I question the assumption that people actually highly value local news and would pay for it if asked.  And even if they did, it's not obvious to me that such a core group ultimately would favor paying to subscribe to the local TV news channel over a substack.

2.  For people who do value the typical 5pm local news program, what difference does it make to them whether they watch it at 5pm, 7pm, or 9pm?  How does watching it a few hours after some others have watched it make it less valuable to them?  Besides traffic and some of the weather forecast, what is so highly time sensitive about the local news?  And don't we know have even better ways to get instantaneous information about those issues (e.g., Waze and weather apps). 

In light of the points above, how much of the existence of the 5pm local news is simply an anachronism that exists because of historical (and now outdated) distribution methods and technologies?

For 1 (newspapers) there are three arguments - a) the news is stale by the time you get it; b) people want to watch video; c) they have been displaced for their most valuable advertising - classifieds.

For 2 (local news), it makes no difference whether you want to watch at 5pm or 11pm.  Either way it's live, it's local and is updated to the minute.  Nobody is going back 3 days later and watching the news on-demand (which is the issue with scripted shows). The point is not the timing in the evening, it is the local part.  If there is a warehouse fire downtown or the mayor got caught with his mistress, the only place to get that information is your local news station.  CNN and Fox won't carry it.  When people watch the election results this year they will use CNN/Fox for the Presidential outcomes but for your local congress and senator people will turn to the local news station.  There is simply no other place to get local news.  That's why it is so valuable.  The only question is how many local stations are really needed.  It's more than one but probably not 5-6 (unless you live in a massive city).

[CorpRaider]

Thanks.  That's interesting actual data on the "new aggregators" (Goog, Roku, Amzn, AAPL, NFLX?, etc..) and the balance of power versus the networks/content providers.  It seems like a more favorable environment than negotiating with/against comcast, charter and the other physical cable companies where the consumer literally had to have a hole punched in their wall and stuff to change and get your content if that was even an option. (Sounds like the real time data of new aggregators versus the bundlers backs up this theory).  Cable bundlers were also trying to compete with the content creators btw, such as starting their own channels or making you give John Malone a slice of your network in order to carry it.  Seems like it's a lot easier for NBC to reach you around Roku, they could just give out free fire sticks or google sticks, if Roku wanted to go to the mattresses.

Also if big tech really wants to get a proctology exam from DC, the content creators are pretty good at creating narratives.....just saying.

[dwy000]

Thanks.  That's interesting actual data on the "new aggregators" (Goog, Roku, Amzn, AAPL, NFLX?, etc..) and the balance of power versus the networks/content providers.  It seems like a more favorable environment than negotiating with/against comcast, charter and the other physical cable companies where the consumer literally had to have a hole punched in their wall and stuff to change and get your content if that was even an option. (Sounds like the real time data of new aggregators versus the bundlers backs up this theory).  Cable bundlers were also trying to compete with the content creators btw, such as starting their own channels or making you give John Malone a slice of your network in order to carry it.  Seems like it's a lot easier for NBC to reach you around Roku, they could just give out free fire sticks or google sticks, if Roku wanted to go to the mattresses.

Also if big tech really wants to get a proctology exam from DC, the content creators are pretty good at creating narratives.....just saying.

You're still going through the cable company (and drilling that hole in your wall) to get the internet access to stream those networks.  There's little difference between the cable company bundle and the streaming bundles at the end of the day.  Same channels, same shows, same on demand.  Price, so far, is a bit lower for streamers but that's only because they are losing money to gain customers.  That can't last.

Also, of note, Comcast and Charter have recently reinstated broadband limit caps on their home internet.  It's a very high level (for now) but streaming falls under that cap while cable access of the same shows/networks does not.  They will also generally offer internet cheaper in a bundle with cable than just naked internet.  So you have to measure not just the comparable cost of streaming cable with traditional cable but don't forget to add in the higher internet price when comparing.

[CorpRaider]

Yeah, no comment on the cable cos (I personally would pay ~50% higher not to have to deal with cable company) just saying if I'm Fox and I get into a dispute with Youtube TV it's perhaps less onerous than back when they might be fighting with time warner cable or cox and offering to subsidize directv as part of the fight.  It's two clicks and I can switch.