With Murdoch No Longer a Giant, Who Will Rule the Next Generation of Media? | 2017's Biggest Business Stories ①

The year is almost over, and we're running 10 pieces on the most important business news of 2017 — stories that either foreshadowed a shift in an industry's landscape or were the result of one.

No one understands the value of scale better than Rupert Murdoch — as a buyer or as a seller.

On the morning of December 14, North American time, Disney announced a deal with Murdoch's 21st Century Fox. Murdoch sold most of the company's core entertainment assets — the film studio 20th Century Fox, 22 regional cable sports networks, the National Geographic Channel, the FX cable network, Britain's Sky and more — to Disney for $66.1 billion, keeping only a few things for himself, among them the Fox broadcast network and Fox News.

That means the 86-year-old Murdoch has thrown away most of what he spent 60 years buying, and was willing to upend the succession plan he had drawn up for his two sons to do it.

Closing a deal this consequential, for everyone involved, took Murdoch just two months. Even he couldn't help marveling at it in an interview.

Given how he has run his marriages, decisiveness is plainly part of Murdoch's character. But his read on the media business is no secret either. A report in The Wall Street Journal, citing people close to the family, said the Murdochs had recently begun to doubt whether 21st Century Fox was big enough to meet the challenge coming in the next few years from internet companies such as Netflix, Amazon, Apple, Google and Facebook.

None of his moves to get bigger went smoothly. Over the past few years Murdoch tried, as he always has, to extend the map of his media empire. In June 2014 he offered to buy Time Warner, hoping to take HBO and Warner Bros. In September 2015 he struck a deal with the National Geographic Society, turning it into a for-profit organization under his control. At the end of 2016 he went after Britain's Sky again, hoping to own outright a company he had wanted for years. As recently as this November, Reuters reported that Murdoch called AT&T twice about buying the CNN network.

Apart from the National Geographic Society deal, most of these bids failed — blocked by antitrust worries and government scrutiny, or refused by the targets themselves.

In August 2017, 21st Century Fox published its annual report for the fiscal year from July 2016 to June 2017. Revenue and profit were both up, and Wall Street was still worried. Over the previous three years the company's stock had fallen 25%. With more and more people watching entertainment online, Wall Street had little faith in a company built on cable television, broadcast networks and film.

As Murdoch tells it, in October he got a call from Disney CEO Robert Iger asking to buy assets from 21st Century Fox. It was a good opportunity. His obsession with scale, it seemed, would now have to run the other way.

That scale is king in the media business is a lesson Murdoch's father taught him, by word and by example.

In January 1921 Keith Murdoch became editor of The Herald, a Melbourne paper, and by remaking it as an eye-catching tabloid he raised its circulation by 50%. After that he bought other newspapers, and even radio stations, in bulk, because he believed every outlet he owned could raise the profile of the others and support their business.

Keith Murdoch died in 1952. Rupert Murdoch took over the family business and inherited his father's thinking almost intact. Most of the papers under his control followed the tabloid formula. The Economist called it "the modern tabloid": a mix of sexual titillation, moral scandal and political warfare. It was not respectable, but it sold. Some people hated the approach — Steve Jobs's widow, Laurene Powell Jobs, among them. Jobs once joked that if Murdoch ever came over for dinner, he would have to hide the kitchen knives without telling his wife. Laurene now owns The Atlantic.

On the whole, though, Murdoch's influence has always come from scale, and scale from constant acquisition. In Australia alone he bought local papers in New South Wales, Queensland, Perth and Sydney within a few years. Even today the papers Murdoch controls account for 59% of Australia's national daily newspaper circulation.

Buying was also how Murdoch got into other countries. In 1968 he bought Britain's News of the World, and The Sun the year after. Lance Price, deputy communications director under Tony Blair, called Murdoch "Britain's 24th cabinet minister": "At 10 Downing Street, every big decision had to take three people's views into account: the prime minister, the deputy prime minister and Murdoch."

In 1973 Murdoch entered the American market by buying the San Antonio Express-News. In 1984, by buying the film studio 20th Century Fox, he began assembling a media group under the Fox brand, including Fox News and the Fox network. In 2007 he bought Dow Jones, owner of The Wall Street Journal. Congress once held hearings over Murdoch, and the worry buried deep in lawmakers' minds was whether he might use News Corporation to interfere with press freedom and free speech.

Yet as Murdoch has pointed out on many occasions, neither of his two companies — 21st Century Fox and News Corporation — is the world's largest media company. Comcast, Time Warner and Viacom all hold assets of comparable size or larger. Murdoch is called a media mogul only because his personal grip on his companies is the tightest, and because he has succeeded in making his own authority stick inside them.

In that sense Murdoch's buying strategy is only the media business in miniature. From its beginnings, the importance of scale gave this industry a natural pull toward consolidation.

As early as the 1920s, when Keith Murdoch was just taking over The Herald in Melbourne, the Hearst chain founded by William Randolph Hearst had already become a large media group. Besides magazines and radio, Hearst owned 28 newspapers in 18 big American cities, and one in four Americans read a Hearst paper every day.

And as Hearst and Keith Murdoch both showed, consolidation in media was never confined to one medium. Newspapers, radio, television, film, publishing — anything that carried content could be absorbed, and the fit between different media multiplied the returns. A film could open in theaters, then air on a television network, reaching more viewers and a bigger market.

By the 1980s the giants — Time Warner, Comcast, Viacom, Disney, 21st Century Fox — had more or less set the shape of the North American media industry. A big reason was the spread of cable television, which struck at the old film studio business. In the end, capital, Wall Street above all, tied the old studios and the television companies tightly together, and defused the threat the new medium posed to the old one.

In Europe, giants such as Bertelsmann and Vivendi began expanding after the 1990s. Bertelsmann grew from a theological publishing house into a large media company spanning television, books, magazines and music. The French company Vivendi reached a market value of nearly 30 billion euros.

21st Century Fox's predecessor was called News Corporation. Before the split it reached into publishing, newspapers, magazines, broadcasting, sports leagues, film and television. Then, in 2013, under the weight of the scandal in which its News of the World was found to have hacked the phones of countless celebrities, politicians, soldiers and even families of those killed in the London subway bombings, News Corporation broke in two. Publishing, newspapers and magazines kept the News Corporation name; everything else went into 21st Century Fox.

As the internet spread, the big media groups whose scale had once given them authority began treating diversification as a way to hold off the crisis.

Netflix, Amazon and Apple each launched a video service, and the number of people watching cable television started to fall. For the past few years this has tormented media executives, especially when Wall Street analysts put them through the same questions over and over.

Murdoch fought back. As early as 2005 he led the $580 million purchase of the social network MySpace. But News Corporation and MySpace had nothing in common — one old-guard, the other new — and the whole market eventually went to Facebook. And as internet companies passed $100 billion in market value one after another, buying another MySpace became all but impossible for Murdoch.

Falling back on the next best thing, Murdoch sought mergers with other media companies, hoping a wider audience would give him more say in the industry. The other media companies, though, did not seem to grasp how serious their situation was.

In 2014, after Murdoch's bid for Time Warner failed, Time Warner CEO Jeff Bewkes said: "Generally speaking, big mergers always bring a whole set of problems. It's a choice with both opportunity and challenge in it. And a decision on that scale usually disrupts the rhythm of everyday work. So I'd encourage everyone to take a longer view, and to think it through more fully when we consider whether to become part of a big company."

Two years later, Time Warner became the first media giant to sell itself. In October 2016 the telecom giant AT&T bought Time Warner for $85.4 billion.

Rich Greenfield, a media analyst at BTIG, wrote, in a tone of pure sarcasm: "Time Warner chairman and CEO Jeff Bewkes and his management team saw where the entire traditional media industry was headed: continued decline. We believe Bewkes will ultimately be remembered as the smartest CEO in the business — he knew when to sell the company and when to get out, in order to win the most value for shareholders."

This may have been Murdoch's last try. With 21st Century Fox worth just over $60 billion, chasing a Time Warner worth more than $80 billion was perhaps still reasonable, but Disney at more than $160 billion and Comcast at more than $180 billion were plainly out of reach.

Hence the deal settled at top speed, in two months.

"Murdoch tries to buy, and when he can't buy, he doesn't get mad — he sells," said Laura Martin, an analyst at the investment bank Needham & Company, quoted in The New York Times.

Now that he has sold 21st Century Fox, Murdoch has passed the pressure wholesale to Disney. Disney's television business, ESPN above all, has been sliding for several quarters running. Wall Street keeps asking Disney for a better answer to the problem. On the analyst calls after each earnings release, someone always asks whether Disney would consider another acquisition — the implication being that Disney should buy Netflix, or be bought by Apple.

Iger's position has stayed ambiguous, but the change in his wording shows Disney's confidence thinning. At first he would say flatly that he believed in the value of the ESPN brand. Later Disney decided to launch two streaming services, one built on ESPN and one on Disney's own film and television content. Iger called it "an incredibly important, very major strategic shift."

In his 12 years as Disney's CEO, Iger has grown used to solving problems by buying things. Some small deals, like the short-video company Maker Studios, did not work out, but Pixar, Marvel and Lucasfilm all became important engines of growth.

Even by that standard, buying 21st Century Fox is extremely bold. Disney's earlier deals were mostly about film production and branded IP; this time the main assets it is buying are distribution — television networks. And the $66.1 billion price is four times what it paid for Pixar, Marvel and Lucasfilm combined.

Outsiders have no way of knowing how long Disney had been planning this, but by Murdoch's account the two sides had been talking for two months. Disney's urgency is obvious.

The warning signs have been getting louder. In September 2017 two internet companies, Apple and Amazon, joined the race for the rights to the James Bond franchise. The full rights to the 007 series were estimated to be worth between $2 billion and $5 billion.

Not long after, Amazon Studios head Roy Price said the studio would work from now on to develop big-budget films made for a global audience. The three science-fiction projects it announced were adapted from comics or novels, and it had also hired Wong Kar-wai to direct the American series Tong Wars. Worth noting: Price left in October over sexual harassment allegations.

In October, Netflix chief content officer Ted Sarandos said Netflix would put out 80 original films next year and release all of them within the year. That number, if it happens, would make Netflix the largest film studio in the world, no question.

In response, Disney will launch the streaming service ESPN+ next spring, while the other service, built around Disney, Marvel, Lucasfilm and Pixar, is scheduled for the second half of 2019. To get the streaming services done, and to absorb 21st Century Fox, Iger has postponed his retirement for the fourth time.

For now this looks like a war about time. Will internet companies master the media giants' ability to make content first, or will the media giants first break the internet companies' hold on the new medium?

Buying 21st Century Fox lets Disney push back the day of the decisive battle. In theory Disney has shored up its advantage in content, and more television channels will strengthen its hand in distribution in the short term — though, as with Murdoch's purchase of MySpace, the final victory will depend on whether Disney can shape what the next generation of viewers wants and how they behave.

Cover image: Esquire; a still from Deadpool