Analysis: A Fox-Time Warner deal would give Murdoch new heft in China

Phoenix Media Investment (Holdings)

21/07/2014 06:00

By Ronald Grover  
    July 21 (Reuters) - Rupert Murdoch's plan to buy Time Warner 
 TWX.N  would help the Twenty-First Century Fox  FOXA.O  
chairman make larger inroads in China, a fast-growing market 
that media moguls are finding hard to crack. 
    Time Warner's board rejected Murdoch's $80 billion offer, 
but the Fox chairman is expected to continue the chase.  
    A deal would create a giant with more than $37 billion a 
year in revenues in the United States and Canada. It would also 
nearly double the revenues Fox generates from the emerging media 
markets in Latin America and Asia/Pacific. 
    "He sees 3 billion new consumers coming into the market and 
a rising middle class in China and India, and mobile devices and 
strong demand for content," said Mario Gabelli, the CEO of GAMCO 
Investors, in an interview with Reuters Insider, "He's going to 
be able to create Netflixes of his own." 
    Gabelli owns shares of both Fox and Time Warner. 
    Last year, Fox generated 42 percent of its revenue outside 
the United States and Canada. The company's Asian revenues, 
including those in Japan and China, grew by 40 percent, to $2.1 
billion, over two years. 
    Time Warner's collection of cable channels would compliment 
Fox's programming in key territories.  
    In Latin America, where Fox faces off against large local 
players, Time Warner's Turner unit operates Chilevision, a large 
broadcaster in Chile, and also shows its TNT entertainment 
channel, Cartoon Network and locally tailored regional channels 
such as the kids channel Tooncast.     
    Turner offers three well-regarded channels in India, POGO, 
Cartoonito and Toonami, which could help Murdoch's Indian 
programming behemoth Star India, which broadcasts 44 channels in 
seven languages. 
    HBO would likely be Fox's big draw in foreign markets. The 
pay channel, with a history of hit programs such as "The 
Sopranos," has around 84 million subscribers outside the United 
States, beaming its shows into more than 70 countries, and sells 
programming from HBO and Cinemax into 150 countries.  
    In China, with Time Warner in the fold, Murdoch would be 
able to focus more squarely on profiting from what movies and TV 
shows the government allows.  
    In January, he sold Fox's 47 percent stake in Star China TV, 
which owns three 24-hour Mandarin channels, and in October sold 
off Fox's remaining stake in Chinese TV company Phoenix 
Satellite Television. These move come in the face of 
restrictions on foreign ownership of China media assets. 
    "Murdoch is not unique. The Chinese government says, 'We 
cannot let these people control our media,'" said William Yu, an 
economist at UCLA's Anderson School of Management, who focuses 
on emerging Asian economies.  
     A Fox spokesman had no comment. In recent earnings calls 
and conferences, Fox President Chase Carey has stressed the 
company's strategy of selling off assets it couldn't own. 
    "Long term, I still think that you ultimately want to either 
own and operate or monetize," he said at a UBS media conference 
in December. 
    Doug Young, a professor at Fudan University Journalism 
School, cautioned against overestimating the potential in China. 
"Taking two studios and combining, you'll get a company with 
twice as many growth prospects in China, but in terms of either 
having many assets in China, it's just a market for licensing 
and selling," he said. 
    Still, the China potential is alluring. Consulting and audit 
firm EY estimates revenue from China's media and entertainment 
industry will reach $138 billion by 2015, from $59 billion in 
2010. The country already has embraced streaming video and EY 
sees advertising revenue jumping. 
    Its mobile web users, the most in the world, are expected to 
hit 750 million by 2017, according to data from China-based 
consultancy iResearch. 
    Currently, China limits to 34 the total number of movies 
foreign companies can import. China's box office last year grew 
27 percent, to $3.6 billion, second only to the $10.9 billion 
million U.S. market.  
    "Transformers: Age of Extinction," a movie distributed by 
Viacom's  VIAB.O  Paramount studio, has so far sold more tickets 
in China than the United States. 
    With its muscular films such as the "Harry Potter" and "Lord 
of the Rings" fantasy franchises, Time Warner's Warner Brothers 
studio gets frequent quota approval.  
    "China is a great market and we've all wanted to be there 
for years," said former Viacom president Frank Biondi, one of 
the first U.S. media executives to visit the country. "But for 
all the upside, there's the obvious downside that the government 
controls everything - what gets put into movie theaters, what's 
put on TV." 
    A merger would allow Murdoch to use the Warner Brothers 
studio to claim more quota slots. In 2013, seven Warner Brothers 
films were granted a release in Chinese theaters, and six for 
Fox, according to Box Office Mojo.  
    Fox's Hollywood studio last year produced 14 movies, to 
Warner Brothers' 25 films. Fox has also agreed to co-produce 
five Chinese language films with Chinese studio Bona Film Group. 
 BONA.O  
    Warner's movies generated $155.9 million from three of its 
films that ranked in China's top 20 last year, including 
"Gravity" and "Man of Steel." Fox's three films in the top 20, 
including "The Wolverine," generated $80 million, according to 
Box Office Mojo.  
    A few of Time Warner's Cartoon Network shows appear on the 
state-owned China Central Television, and its HBO pay channel 
provides a five-hour block of programming as well. HBO's 
offering included a censored version of its fantasy hit "Game of 
Thrones".  
    "It's a huge opportunity," said former Paramount President 
Sid Ganis, whose Jiaflix company advises movie companies in 
China, "and media companies are only now beginning to figure the 
market out." 
 
 (Additional reporting by Malathi Nayak, Denny Thomas and Paul 
Carsten; Editing by Peter Henderson) 
 ((ron.grover@thomsonreuters.com)(213-955-6760 or 
213-300-0900)(cell)) 
 
Keywords: TIMEWARNER FOX/INTERNATIONAL