Harold Vogel, CEO of New York-based Vogel Capital Management and author of Vanita Kohli-Khandekar about the Disney-Fox merger and its implications for Star India. Edited excerpts:
What are the big assets that the Fox deal brought for Disney? Will it add value or do you see Disney writing down some of the assets?
Fox added significant assets to Disney that included real estate, The Simpsons, cable networks including FX and National Geographic as well as a substantial film library of TV and film classics. Also included was part of Hulu and Sky and the Indian cable network. Murdoch was brilliant as he realised he couldn’t compete on capital required in the new streaming world and the rising costs of major film production. The problem was because Comcast came in late and bid for the same assets, the ultimate price ($71.3 billion) paid by Disney was especially high (about $20 billion over the initial offer).
Then came the costs of merging the two companies, right-sizing the management staffs, and the virus, of course. Merging two companies
of this type and size was difficult because of different management cultures and strategies. But there was great enthusiasm about the future of Star. Comcast eventually won Sky, a dubious proposition because the price was also very high, but Disney got full control of Hulu, which was good. The latest Fox films, however, were mostly duds, so there was a need for writedowns of the latest projects. This was not good. In all, Disney will likely retain these assets and eventually get them running smoothly. But that awaits relief from the virus.
So far, the value contribution has been nil because of the virus and partly because the price paid was too high. Otherwise Disney’s record of acquisitions has been excellent on the large ones including Pixar, Lucasfilm, Marvel and streaming tech. The record on smaller acquisitions, primarily in game software, has been poor, with many writedowns over 20 years. But note that all of these were under $1 billion, so no big harm.
This is Disney’s third attempt at the Indian market in about 27 years. But it doesn’t look like it has learnt anything. Why is it so fixed about the Disney method?
Disney is generally very experienced and impressive on brand management and knows what psychological buttons to push in developing film, TV and film projects. But obviously, it takes a long time for companies
like Disney to learn about and adapt to countries such as India in which there are so many different languages, cultures and economic variances in abilities to pay. The current turmoil at Star India is related, in my opinion, to the distractions of integrating the massive Fox assets and the across-the-board destruction of Disney earnings and cash flows that came with the virus. Also, the transition from Bob Iger to Bob Chapek as CEO and the departure of Kevin Mayer, who lost the race to be CEO, have been disruptive. With such changes, the company, probably no company, would have the management bandwidth to deal with problems at Star.
Fox is very entrepreneurial, while Disney a is structured and bottom line-driven firm. How will the two cultures reconcile?
The Disney culture will prevail as few previous Fox executives remain at the merged company. Disney has also just signalled a massive reorganisation, separating content creation and distribution/marketing activities into more precisely defined divisions. This is ostensibly to impress investors about the seriousness of commitment to streaming and competition with Netflix for global dominance. This move probably increases efficiencies in some ways, but I don’t think it yet means much.
Part of the problem is that the streaming companies
do not generally release reliable relative performance data on streaming, and major talent would probably not like to be thrown together with streams of hundreds or thousands of new and popular older films and shows. For the streaming companies, the direct-to-consumer data is obviously valuable, but the rapidly rising costs of hiring major talent will likely impair profitability.
Has Disney faced issues because of its culture on other acquisitions or markets?
It will take a few years to fully integrate the Fox assets, especially including Star India. It will also be a few years for the parks and film/TV divisions to revert to previous levels of prosperity. Much will depend on how soon the pandemic is tamed. I would expect this to start to happen by early next year, but in all respects Disney is going full speed ahead on streaming activities. For India, this strategy is a bit questionable as linear TV and cable networks are not yet at the stage of a massive switch to streaming. Eventually, Disney will get it all right, but not any time soon as there are too many moving pieces.