Fox Corp’s political dilemma

Fox News is a financial powerhouse. The most watched cable news network in the US for over 15 years, it hit record viewership last quarter. Combined with Fox Business, it generated about $2.5 billion of EBITDA on $5.4 billion in revenue last fiscal year.

That business — which has benefitted from a lack of serious competition on the conservative side of cable news — is threatened, however. Its editorial support of Donald Trump is backfiring as he becomes a competitive threat.

Whereas other conservative politicians have feared Fox News’ influence over their constituents’ opinions, Trump has captured many Fox News fans’ loyalty and is trying to walk away with them.

Trump is widely reported to have plotted the launch of his own cable news network during his presidential campaign in 2016; that ambition is likely on his mind whether he wins or loses reelection. Over the last few months, the US President started regularly criticizing Murdoch’s network on Twitter, calling for alternatives to replace it, and promoting small, fervently pro-Trump news outlets like OAN. He is trying to sever Fox News fans’ loyalty to the network.

Even if he doesn’t launch a competitor that becomes a major threat, his ability to undermine Fox’s market share (and profitability) against other new competitors could be quite meaningful.

Context
Since he took over the Adelaide News is 1952, Rupert Murdoch built a global media empire repeating a strategy of selling sensational, anti-elite, social conservatism to working class whites frustrated by snobbery of elite institutions and fearful of cultural changes. His 1996 launch of Fox News to challenge CNN, HLN, and the nascent MSNBC in the US national cable news market continued that pattern.

As with his other news properties, Fox News drove customer loyalty and undermined competitors by preaching that it was the only media brand they could trust. Like any great consumer brand, Fox News made its target customers not just enjoy the product but feel part of a movement, feel belonging to a tribe.

Murdoch places a high value on wielding political influence. He was willing to subsidize enormous losses at key newspapers like the New York Post due to their political influence. Influence has trumped ideology, with News Corp properties repeatedly switching political party allegiances in Australia and the UK over the decades depending on how much Murdoch was included in vs excluded from the Prime Minster’s inner circle. (I wrote a longer analysis of Murdoch in 2017.)

Problem
If Trump leaves office in January 2021, he will want to remain a daily fixture of attention and his own network is the only way to achieve that without limits on what he can do or say.  If he remains in office, he may pursue a Silvio Berlusconi-like set-up of working as head of state while owning his own major news network which acts as a cheerleader. (His administration has shown a weaker interpretation of conflict-of-interest rules than prior administrations so this may be possible.)

No easy resolution
Murdoch making Fox News’ coverage more submissive to Trump in order to stop his attacks would be a bad business strategy:

  1. It doesn’t make financial sense. The degree of deference to conspiracy theories and offensive rhetoric that would entail would turn away too many advertisers. Fox News has a track record of drawing the line when primetime hosts’ controversial comments cause advertisers to flee.
  2. Trump wants to be the owner and commander of his own show. There is no deal that both Trump and Murdoch would agree to for bringing Trump into the Fox Corp fold after the presidency (with regards to equity ownership and/or revenue share of a show and operating authority).
  3. Loyalty to Trump would never be reciprocated for long. It would only make him more of a competitive threat for the future since Fox would have built him up even more.

Turning on Trump presents an obvious business problem too: Fox News could lose a large chunk of its viewers. Americans have become so politically divided — and Fox News’ brand so polarizing — that there’s no business opportunity on the crowded left wing of political news for Fox to shift to either.

What’s Next
Murdoch’s only playbook here is to eliminate Trump as a competitive threat to his business while maintaining the loyalty of dedicated Fox News viewers who currently love him.

I find it likely that over the next few months, Fox Corp and News Corp properties will gradually undermine Trump’s image among their US audiences. Fox News coverage will shift to favor a new torchbearer who advocates “Trumpist” policies but lacks Trump’s erraticism and narcissism. Murdoch would play king-maker in selecting and promoting this new leader…someone who lacks the ambition for their own network.

Quibi’s misaligned incentives

published an article yesterday about Quibi’s rough start, relative to the amount of capital raised and spent. I’m a big believer in the opportunity for mobile-native content formats so sad to see it. I highlighted four main issues I saw:

  1. Miscalculating the risk of launching during the COVID-19 lockdown.
  2. Undervaluing the central role of interactivity in mobile-native entertainment (and overvaluing short content lengths).
  3. Creating misaligned financial incentives with the wrong content partners.
  4. Launching Quibi like a movie instead of like a startup.

The misalignment of financial incentives is something that jumped out at me in particular. Quibi aimed to pioneer a new content format, but it turned to the biggest names in traditional film/TV to do so…the “incumbents” who have the least need to innovate and the greatest opportunity cost on their time.

Quibi’s deal terms to lure VIPs let them repurpose their content for traditional film/TV formats after 3 years. It reduced the risk of their time being wasted on a project for a startup that flops, but it also created a disincentive to innovate a new format. Producers want the ability to repurpose their content so naturally create a Quibi show that’s not that different from traditional TV.

Aligning incentives would have meant focusing the deal on financial upside for creating a hit in a new format. The biggest names in Hollywood probably wouldn’t have bought into that, but rising star creatives looking to make a name for themselves would have…and that’s the better group to turn to in taking risks and pouring time into experimentation.

It’s always a red flag when startup founders say they need big celebrities involved; it hints that the product isn’t differentiated and compelling enough to excite consumers on its own. Quibi seems to have way over-indexed on thinking VIPs were the key to helping its content stand out rather than using its funding to take more risks (and more time) in product/production innovation.

This was a section in today’s newsletter. You can subscribe here.

The decline of the theatrical window

(This was originally published as a section in today’s newsletter. Sign up here.)

The news: Universal Pictures animated film “Trolls World Tour” has earned $95m in its first 3 weeks on-demand, having skipped its theatrical release due to Covid-19. Universal said they will release more films direct to VOD as a result.

US and European cinema trade groups NATO and UNIC criticized Paramount. The CEOs of top cinema chains AMC and Cineworld (Regal) threatened to no longer carry Universal films in theaters if Universal proceeds. (Read more)

The takeaway:

  1. The shutting down of cinemas is forcing studios to take risks they needed to take anyway in releasing films on-demand. Positive results from this during Covid-19 will make it much more likely the practice continues (at least for same-day release with theaters) after.
     
  2. Direct-to-VOD release doesn’t need to generate more topline revenue than a box office release to be more profitable, since the studio is only getting half the box office earnings but 80% of VOD earnings.
     
  3. Threats by cinema chains are empty. They have no leverage to negotiate here. Already struggling, they need every dollar they can get to survive after this crisis. Even if blocking a studio’s films would hurt the studio over the year ahead and be an effective long-term strategy, cinemas can’t afford the short-term loss. It may even expose them to shareholder lawsuits.

Webinar on the state of kids media

I hosted a webinar on TechCrunch about the state of kids media amid the Covid-19 crisis. My guests were:

  • Craig Donato, chief business officer of Roblox, the $4 billion gaming platform that counts the majority of U.S. kids age 9-12 among its active users.
  • Nancy MacIntyre, co-founder and CEO of Fingerprint, the company behind Kidimo, a leading subscription video and gaming service for children.
  • Dylan Collins, co-founder and CEO of SuperAwesome, the London-based creator of “kid-safe” adtech and privacy tools.

Read the transcript or watch the video here on TechCrunch >>

Interview with Lightspeed’s Jeremy Liew about always-on media startups

I spoke with Jeremy Liew, general partner at Lightspeed Venture Partners and the first investor in Snapchat, about his interest in media startups whose content runs in the background while we do other primary tasks. Read our transcript on TechCrunch >>

My interview with Laura Martin of Needham & Company

I saw leading Wall St media analyst Laura Martin of Needham & Company debate the future of Netflix on stage at the Banff World Media Conference in June and caught up with her after to expand on her assessment of the streaming giant and the streaming video landscape more broadly. Check out the transcript of our conversation on TechCrunch >>

Wall St analyst Laura Martin on the fate of Netflix, breaking up Google, EU regulation, and a decade of more money for Hollywood