Fox and Disney Gear Up for Battle for the Millennials

 | Aug 09, 2018 | 3:22 PM EDT
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After wrapping up earnings for both companies, analysts watching both Twenty-First Century Fox Inc.  (FOX) and potential Fox buyer Walt Disney Co. (DIS) see streaming services as an important revenue driver for each company, targeting the coveted demographic of millennials.

According to a Pew Research report published in March, millennials are projected to overtake baby boomers as the largest adult generation in America next year.

Millennials are the most likely generation to be cord-cutters, registering a 30% drop in time spent watching traditional TV over the past six years, according to study by Omnicom Group's Hearts and Science. On top of that, one in three young households does not have a cable or satellite TV subscription.

To reach the millennial market, the traditional revenue centers of each business will not suffice. Hanging on to the past would only make it easier for current millennial kingpins Amazon and Netflix to continue their usurpation of traditional media companies.

In its August 8 earnings presentation, Fox touted better-than-expected revenue in part, due to higher advertising revenues from their Streaming Video on Demand (SVOD) services, a key market in the race to reach this demographic.

Chief financial officer John Nallen added that the increase was driven by a rise in streaming content during the August 8 earnings presentation, noting a concerted effort to grow this segment and adapt to the new media landscape.

Morgan Stanley analyst Benjamin Swinburne zeroed in on the streaming impact in a note on August 9.

"Thanks to continued growth in [virtual multi-channel video programming distributors] including YouTube TV and Hulu, the cumulative number of Fox network subscribers in the US grew year over year," he explained in his growth outlook for the company.

As Disney CEO Bob Iger touts his push into DTC and OTT content, the transfer of streamable Fox products is a definite benefit in appealing to a millennial audience.

Yet Fox will not only provide an advantage in streaming services, but also an expand portfolio in popular millennial media. Most notable is Vice Media LLC, as Fox's $70 million stake in the company would be added to Disney's $400 million holding when the transaction is finalized.

A substantial holding in the company will lend Disney a major share of the millennial market. Vice was recently valued at nearly $6 billion by TPG. 

With 60% of Vice's readers consuming content on mobile, the enlarged holding will add to Disney's overall stake in the millennial market immediately.

The combination of factors supplemented by the acquisition will be pivotal in giving Disney exposure and expertise necessary to compete in DTC markets against current champion Netflix, which it has termed its number one priority.

"The DTC program is necessary to compete with Netflix," Gabelli & Co. analyst Brett Harriss told RealMoney.

"I'm not sure if it will be a direct competitor to Netflix necessarily, as people might have both Disney and Netflix apps, but Disney definitely needs to be in that market."

From the company's two recent earnings releases, Fox's assets and streaming results appear synergistic with Disney's DTC plans.

How much market share the two can wrestle from Netflix and Amazon will be a story to follow in 2019 as Disney launches its DTC program just as millennials become the largest consumer market in the US.

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