Reports of the film industry’s impending death have been greatly exaggerated. It’d be more accurate to say the business is consolidating, with earnings for some major studios soaring in recent years and others taking big write-downs. Head and shoulders above everyone else is Disney, which reported profits of $2.5 billion in 2016 and made five of the 10 most successful films of the year (including the top three). The company, which owns Lucasfilm, Marvel Studios, and Pixar, already makes almost $1 billion more than its next biggest rival. That casts the news of its reported interest in acquiring Fox in an even more daunting light.
The deal Disney and Fox discussed, initially reported by CNBC, would sell “most of” 21st Century Fox to the Walt Disney Company, though not the broadcast network or its sports programming (Disney already owns ABC and ESPN, making similar acquisitions moot and possibly illegal). This acquisition, which has apparently been discussed “on and off” for weeks and is currently inactive according to the Wall Street Journal, would focus on Fox’s film studio, smaller cable channels like FX and National Geographic, and international assets like Sky TV. It would, essentially, amount to a merger of the first and third biggest movie studios, resulting in a potential monopoly that my colleague Derek Thompson noted could be illegal.
What’s unsettling is that Disney is already focused on making films on the largest scale possible, leaving little room for the kinds of mid-budgeted dramas and comedies that used to thrive in Hollywood. If Fox were subsumed, that would leave Disney with only four major rivals: Warner Bros., Paramount, Universal, and Sony, all of which also rely on revenue from other sources (mainly television) to make money. Disney/Fox would be a corporate monolith like no other, with an even larger stable of superheroes to throw around.
As the CNBC story describes, Fox supposedly opened talks with Disney because of a “growing belief among its senior management that scale in media is of immediate importance and there is not a path to gain that scale in entertainment through acquisition.” Disney, it seems, is the only company with the “scale” that Fox has in mind—the kind of limitless funds that can compete with expected future rivals like Amazon, Google, and Netflix. This line of thinking may seem a little strange coming from Fox, the company that distributed the most successful film ever made (James Cameron’s Avatar, which has four sequels in production) and owns the rights to the X-Men franchise, which has been a solid earner for almost 20 years.
But this rumored sale underscores something frightening about the direction of the industry: Even Fox, with all its resources (it spent revenues of $8.5 billion in 2016 and made a $1.3 billion profit) is looking at the increasingly expensive future of moviemaking and considering taking itself out of the picture. Last year, CEO James Murdoch criticized an entertainment-industry approach to mergers and acquisitions that seems to value “scale for scale’s sake.” But if Fox can’t hack it anymore, it’s hard to imagine how Universal (owned by Comcast), Sony, and Paramount (owned by Viacom) will manage, given that they already devote much less revenue to filmmaking.
The answer to lower profits may be in scaling back and focusing on smaller-budgeted movies; look at the success of films like Get Out and Split, which earned Universal hundreds of millions in 2017. A major flop like Monster Trucks (on which Paramount took a $115 million write-off in 2016) harms a studio’s bottom line so much more because of the inflated budget. And yet a major hit like Universal’s Jurassic World in 2015 will practically double profits; the company saw its earnings cut in half the following year without a similar blockbuster. Most important of all is stock values (Disney’s immediately rose when rumors of the Fox purchase swirled), which unsurprisingly respond best to the kind of global hit only possible with the biggest franchises.
For now, the Disney-Fox deal appears to be in a holding pattern; fans hoping for an Avengers vs. X-Men movie will have to wait and see. The very idea of such a merger would have seemed ludicrous just a decade ago, when Disney’s biggest franchise was Pirates of the Caribbean—before it had bought Lucasfilm outright and started making a Star Wars movie every year. Hollywood is changing quickly, and competition from the likes of Amazon and Netflix are only going to speed things up. Studios are realizing they’ll have to adapt to survive, even if it means joining forces with former rivals or tech giants.