Fox’s Sports and News Strategy Has Served It Well, but Greater Challenges Lurk as Industry Evolves

Senior Equity Analyst

Matthew Dolgin

Fox’s strategy differs from its biggest traditional media peers, and its business has been far more resilient as a result. Although it has outperformed in the past few years, we think its dependence on the traditional pay-TV bundle for nearly all its revenue is problematic over the long term.

The two major areas where Fox differs from peers are: 1) its departure from entertainment production and, to a large extent, entertainment programming, to focus on live news and sports; and 2) its decision not to operate a large-scale subscription-based streaming service. 

Consumers are much more likely to watch sporting events and news programs in real time, and Fox has been able to grow advertising revenue while peers have floundered as linear viewership declines and television advertising dollars have waned. Also, the premier sports content to which Fox holds rights and Fox News’ popularity with cable viewers has given Fox bargaining power with pay-TV distributors. Despite ongoing cord cutting, Fox’s revenue from pay-TV subscribers has continued to grow, as Fox has negotiated higher affiliate fees. Fox receives more than $8 per domestic pay-TV subscriber per month from pay-TV providers and affiliated local networks.

Problems for Fox will arise if pay-TV subscribers perpetually decline and the pay-TV bundle eventually crumbles. We assume Fox will license all its programming to streamers, but we doubt this avenue will make up for its current affiliate revenue. As long as its streaming partners have fewer subscribers than the current number of pay-TV subscribers, Fox would have to extract higher fees per subscriber than it does now from pay-TV customers, a tall order for streaming services that have other significant content costs to contend with. We expect a similar challenge with the streaming sports joint venture that Fox is creating with Warner Bros. Discovery and Disney, and a preemptive move toward streaming licensing risks accelerating the demise of the traditional bundle. Ultimately, we believe the pay-TV bundle is best for consumers and companies like Fox, but unless that bundle can be repurposed for the streaming age, we expect Fox will face long-term challenges.

Business Strategy & Outlook

We are now assigning a no-moat rating to Fox, primarily reflecting the industry shift that has befallen all firms that rely heavily on the pay-TV business model rather than company-specific factors. In other words, we have not yet seen an overriding shift in Fox’s competitive positioning, but we have more doubt that any firm relying primarily on linear television is likely to generate excess returns on invested capital over the next 10 years as fewer consumers pay for linear television.

Fox has undertaken a different business strategy from most traditional media peers. Most importantly, it continues to rely almost exclusively on traditional pay-TV for revenue. Also, after effectively selling most of its entertainment assets and studios in 2019 through Disney’s acquisition of 21st Century Fox, Fox’s owned programming focuses predominantly on news and sports. We see the wisdom in focusing on live programming, which has been more resistant to the decline in linear TV viewership, and in not competing to offer yet another subscription streaming service in a field where the economics haven’t justified them. However, even if Fox continues to deliver high-value live content and its networks are must-haves for pay-TV distributors, its content alone is insufficient to save the pay-TV bundle it relies on.

Fox operates only in the US, where we estimate that the number of pay-TV subscribers has fallen by more than 30% over the past decade and a half. We estimate that only about half of US households now pay for TV service, and the number continues to decline. Fox’s only notable presence outside of linear television is through various websites and the Tubi streaming service, which does not require a subscription and is supported solely by advertising revenue. Based on occasional management disclosures, we estimate Tubi makes up less than 5% of Fox’s total sales. Tubi viewers can see programming from the Fox broadcast network—though not live—and a combination of linear and on-demand programming. However, most of this programming is dated or lower-tier content.

In both its television segment (which includes Tubi and the websites) and its cable network programming segment, Fox relies primarily on revenue from advertisers and affiliate fees from pay TV-distributors or local affiliates of the Fox broadcast network. With relatively stable demand for live news and sports viewing, Fox has generally continued growing both advertising and affiliate revenue since its separation from 21st Century Fox. 

As one of only four major broadcast networks in the US that can reach nearly every household with free access over the air, the Fox network is a unique asset that has value, in our view. We believe the reach of broadcast networks gives them a modest edge in attracting premier content. Fox has long maintained rights to NFL football games on Sunday afternoons and occasional Super Bowls, the World Series and other Major League Baseball games, and World Cup soccer matches, among other sports programming. It now also has rights to Big Ten football games. 

Fox News remains dominant in cable news and has a brand that consistently attracts a large audience. This network alone has developed some network effect qualities, as politicians and top network personalities want to appear on Fox News to reach a big audience, thereby making it more difficult for other networks promoting a Republican point of view to draw viewers and secure wide distribution with pay-TV providers.

However, we have difficulty proclaiming that these advantages will prove durable, especially in an era where fewer consumers pay for and watch linear television. 

The Fox broadcast network does not own any of its most attractive content, including sports and entertainment programming, meaning it regularly needs to renew licensing agreements at market rates. While we believe broadcast networks like Fox have advantages for content producers, those advantages are not dispositive. As more technology firms compete for sports rights on their streaming platforms, licensing rights may become more expensive. While a content provider might prefer Fox and its brethren, broadcast networks don’t have such substantial advantages that they can avoid bidding aggressively, often against firms that have far greater financial resources than Fox has. 

Fox News’ advantage over television competitors remains strong, but we believe it could become less impactful over time. In addition to the decline in pay-TV subscribers, Fox News may face a demographic problem. Its audience skews older, and there are no guarantees that subsequent generations will pick up the slack after coming of age with other means of consuming news. 

Above all else, however, we don’t think Fox can fight against the broader trend of fewer people paying for and watching linear television. No matter how valuable Fox’s networks are, consumers primarily pay for them by subscribing to a broader TV package or watching Fox programs (and drawing advertisers). In the long term, unless the decline in pay-TV subscribers ends, Fox will likely need to evolve its business model. We suspect this would entail licensing programming to other streaming platforms or making more of its content more accessible for free, but we can’t yet say that it’s likely either of these scenarios would enable Fox to remain economically successful.

None

Economic Moat

Twenty-First Century Fox

Fox Corp. delivers news, sports and entertainment content. The company provides news under the brands FOX News Media, FOX Sports, FOX Entertainment and FOX Television Stations. It operates through three segments: Cable Network Programming, Television, and Other, Corporate and Eliminations. The Cable Network Programming segment consists of the production and licensing of news and sports content distributed primarily through traditional cable television systems, direct broadcast satellite operators and telecommunication companies and online multi-channel video programming distributors. The Television segment consists of the acquisition, marketing and distribution of broadcast network programming. The Other, Corporate and Eliminations segment consists of the FOX Studio Lot, Credible Labs Inc, corporate overhead costs and intracompany eliminations. The company was founded on May 3, 2018, and is headquartered in New York, NY.

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Fox Corp. engages in providing television production and broadcasting services. It also provides news under the brands FOX News Media, FOX Sports, FOX Entertainment and FOX Television Stations, and Tubi Media Group. It operates through the following segments: Cable Network Programming, Television, and Other and Corporate. The Cable Network Programming segment refers to the production and licensing of news and sports content distributed primarily through traditional cable television systems, direct broadcast satellite operators, and telecommunication companies and online multi-channel video programming distributors. The Television segment focuses on the acquisition, marketing, and distribution of broadcast network programming. The Other and Corporate segment relates to the FOX Studio Lot, Credible Labs Inc, corporate overhead costs, and intracompany eliminations. The company was founded by Keith Rupert Murdoch on May 3, 2018, and is headquartered in New York, NY.

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