During his session Wednesday, Sept. 21, at the Goldman Sachs Communacopia 2016 conference, 21st Century Fox CEO James Murdoch sat down with Goldman Sachs analyst Drew Borst to discuss a long list of subjects. The 50-minute discussion was a chance for James to talk about positioning 21CF for the future, the many opportunities Hulu and the general streaming environment presents, the strength of FOX News, 21CF’s capital allocation and more.
Here are some key quotes from the session, which is available for replay:
On focusing on major brands to achieve creative excellence: “We’ve really spent a lot of time over the last number of years simplifying our operating model; simplifying our approach; focusing on core brands that really matter for customers around the world, be it STAR, or National Geographic, or FOX, or the Sky businesses, which we are a substantial minority in, and focusing on those brands and making sure that that’s what we are doing and not spending a lot of time doing other things so that we can really have a simpler operating model – simpler to understand, simpler to manage and more straightforward where we are making capital allocation decisions with respect to how to invest organically in those businesses and grow them.”
On positioning 21CF as a nimble organization for the future: “We really think the shape of the business over the next five [years], 10 years and beyond is different and requires a slightly different skill set, and we are really building that. In the last year, we’ve made a lot of progress organizationally towards that goal and we feel pretty good about where we are.”
On focusing on consumer experience for video consumption: “…I focus a lot on starting with the customer and working backwards from there, and what’s working for the customer and what isn’t. How does it relate to their life stage, the decisions they make, the ease of discoverability of content, for example – how all of that works. And I find that simply outsourcing and washing your hands of the customer experience is a pretty dangerous place to be.”
On the opportunity in the streaming environment: “This is what’s so exciting about the streaming environment: Even on an authenticated basis, which is fundamentally still a commercial wholesale relationship, we can create a customer experience that’s very rich and very powerful. We can actually license our programming in the right way. We can create series stacks, multiple season stacks, etc. We can make our product much more discoverable in those environments and that’s why [we are doing a lot of work on] apps like FOX NOW or FXNOW or FOX Sports GO, which are really in their infancy… We’ve actually created a whole group around pulling that together with some of the best experience from around the world in terms of customer user experience development to review all of those apps in that authenticated environment, which is ultimately available to 80 million to 90 million in the U.S.”
On priorities before thinking about direct-to-consumer: “Whether or not we choose one day to independently price a direct-to-consumer offering domestically here in the U.S. is a decision that can be made at that time, but we are focused on building the capability [so] that even in an authenticated environment we have the user experience right, we have the ability to monetize and innovate in terms of advertising experience, and we have a data capability across the piece that really makes sense. [When] I look at, for example, what we’ve been able to do with the Sky businesses with Sky Go, which you know over half the customer base uses, but it started many, many years ago with licensing programming in the right way to make it available on a multiplatform basis. So while it may feel like you are trying to consume an elephant – that it’s too complicated – the licensing deals are in place. If you start now, there’s enough time to get it done, and you just have to keep working through what those issues and barriers are in the business.”
On spurring competition and innovation with Hulu: “…with Hulu, we said we are not going to wait for lots of people to do this. We can provide some of that competition ourselves, but we also want to see a lot of it, so we licensed to Sling our full set of brands. We license to Sony Vue. We will license to others and we want to see more of that downstream competition to start…”
On Hulu as a roadmap for its owners: “I think the opportunity to create a platform for video distribution and video consumption, sort of on both sides of it, through Hulu and also to then maybe create a bit of a roadmap for others to come in from the standpoint of how they license, how they think about things, is just enormous. I think it’s enormous for the industry, enormous for all the partners, and I think Hulu in and of itself is an enormously valuable asset and will continue to be valuable and grow.”
On the digital advertising appeal of the streaming business: “…Hulu is the most attractive place for us from a digital advertising perspective right now in terms of yields, pricing, low ad loads, the opportunity to innovate with new ad products and we think that’s very exciting. So, in essence, the streaming business as a percentage of our total consumption and distribution can grow, and indeed grow share as well as just grow in absolute terms, so even if it takes customers away from what you call I think the traditional MVPDs, under the right circumstances that’s a huge positive and from the standpoint of customer experience, from the standpoint of innovation, from the standpoint of yield and monetization as well. So we think that that’s OK and we are very comfortable with having multiple competitors going through that and actually really changing this industry downstream.”
On the currency challenge for digital video ads: “One of the challenges with it is currency, is…just the language and the currency of the advertising marketplace, and ratings, and views and all that stuff is not ideal today, both on the broadcast side and in terms of capturing all the viewing that’s really happening. But even worse, the apples-to-apples comparison with online video views. When you are in a digital environment, what side are you on, and when you look at Facebook, video impressions at one second or two seconds, or scrolling past, all of that stuff is really confusing for advertisers. And I think fundamentally it is devaluing the attention that our platforms deliver and we need to fix that. And that’s something that the whole industry needs to fix, but we are certainly not waiting. We are trying to develop these products and just get our sales shoes on and go out and sell them.”
On how FOX Sports 1 and 2 were built: “…I think you have to be mindful of not just how you are investing in the sports, but also do you have a model and a brand that can actually get out there and get in front of customers in the right way. Our investment in FOX Sports 1 and 2, creating that out of specialized channels like Speed and Fuel and stuff, has been a great experience. I think the peak investment was – and this is a good example of organically investing in the business…$250 million, $300 million, and just three years later, it’s now producing…over $100 million of profit and we see a huge amount of room to grow because it’s fundamentally underpriced relative to what it delivers for customers with baseball, NASCAR…the [U.S.] Open and other things like that.”
On the challenges of “Peak TV”: “So [FX Networks and FX Productions CEO] John [Landgraf] has been pretty outspoken about this peak TV thing… And look, it does make things a little bit difficult. I don’t think it’s as acutely a price inflationary issue more than – rather it’s really about quality. It’s just harder when you have that much in production, how you are casting things; how much time you have; how you are pulling the whole team together; how you get the concept together, etc. All that stuff is very difficult. Now that said, John talks about this a lot. At the same time, FX is probably more prolific than ever, more successful creatively than ever. The business, even though we are investing in an increase in volume over the next year, is a very profitable business. The volume of production means that quality is hard to come by and you just have to have great people and you have to be a place where people can come and do great work, the best work they’ve ever done, and you have a culture that really enables that across the board, and that’s – you asked me before what I was focused on. It all comes back to: Are you a place where people are doing the best creative work they’ve ever done, and can you make a home for those folks who can come and do that at a diversity of output and a volume of output that’s sustainable? And that’s our focus. That’s what we are trying to do.”
On the opportunity at National Geographic Channel: “I think we have a much bigger opportunity there to make it something that’s really relevant that can drive higher affiliate fees, that can be part of an overall franchise reaching customers in the millions through all of its different businesses. And that means we need to invest more in programming. So we’ve taken our programming budget. We’ve increased it, but we are also focusing greater investment in fewer hours and really having tent pole global entertainment and…global factual series, some scripted that are great.”
On the strength of FOX News: “…when you have a difficult situation like that, a personnel situation that was really troubling, the important thing is to be totally transparent. The important thing is to move quickly and to make sure that the team understands that they are not to skip a beat and the business is going to be bigger than any one person, and I think the FOX News business continues to be very strong… So I think the business looks very strong. It actually, from a ratings perspective, has been stronger than ever, and you’ll see ups and downs, but we feel like it’s really got a very good franchise and one that we are keen to continue with.”
On the film business: “I am proud of the fact that we’ve been able to do that by managing the cost base in the right way, by having a distribution machine that is very, very efficient and by being sensible about the choices that we are making. But fundamentally, we have to make better movies. We have to do it more consistently. We need to focus on the creative process, I think, maybe more consistently. And to that end, that’s what the business is focused on.”
On the need to reform movie windows: “[We] have to think about and do something about windowing. We need to think about premium electronic sell-through more aggressively. We have to think about these crazy holdbacks that the theater owners put in place in terms of these blackout periods that really make a lot of problems for movies. But, again, they are like an arbitrary holdback that we have in the TV industry where a customer really doesn’t care. If I sit down and say, ‘Well, there’s this thing, the National Association of Theater Owners, and I need to rest the movie and then I’m going to go into DVD.’ The customer just tunes out. Our business rules are of no interest to families who just want to see the movie.”
On being good stewards of 21CF’s capital: “[As] I said on the shareholder call, our earnings call…the other month…pay attention to what we don’t do. So when I look at our track record over the last almost 10 years in terms of M&A, it’s actually been disciplined. We’ve shown you that we are willing to sell things. We’ve shown you that we are willing to organize our business, simplify our business, etc. And the things that we’ve passed on from that are all rumored out there and everyone gets worried about – AOL, Yahoo!, UFC, DreamWorks, Time Warner – there are prices that become too high that don’t benefit our shareholders, and we are very mindful of that. So I want to be clear with you: We are very, very mindful of capital allocation, and being good stewards of capital is something we are super focused on. And when we make a decision to say we want to go from 16 to 18 shows at FX, it doesn’t sound like much, right? That’s a big decision for us. There’s an investment hurdle there. We want to understand how it changes the business. We want to understand how that enhances the business over time. We are very serious about that.”
