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Media Merger Mania: Fox Sells Sky Stake

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On Wednesday, 21st Century Fox (FOXA - Free Report) , owner of a 39% stake in European cable company Sky, would sell that stake to Comcast (CMCSA - Free Report) after losing a protracted bidding war for a majority position in the company that was presided over by the UK government.

On Saturday, the UK Panel on Takeovers and Mergers – which acts in a capacity similar to the U.S. Federal Trade Commission – accepted Comcast’s final bid of 17.28 pounds/share for Sky which is equivalent to $22.60/share at current exchange rates and values Sky at just over $40B.

In June, Disney (DIS - Free Report) outbid Comcast for a $71B purchase of a significant amount of Fox assets and will reportedly use the proceeds of the Sky sale to expand its streaming entertainment services.

These deals come on the heels of the recently approved merger of AT&T (T) and Time Warner.

So why all the merger frenzy in the Media space? Netflix (NFLX - Free Report) and Amazon (AMZN - Free Report) .

For decades after the advent of widely available cable television services in the 1980s, cable companies operated under a fairly simple business model. They provided monthly services of a basic package of broadcast channels for a set fee and offered premium channels as an ala carte addition to that basic service. They also sold advertising during programming.

Direct TV, now a subsidiary of AT&T and The Dish Network (DISH - Free Report) emerged in the 1990s, and although they changed the medium for delivery of service, the basic offering remained the same – a monthly subscription in return for a selection of broadcast channels that were watched live by viewers.

Then came Netflix.

Originally a mail order service which customers could use t order movies over the internet and have the actual DVDs delivered in the actual mail, Netflix now streams vast amounts of content over the internet, on demand to over 130 million customers, more than half of which are outside the U.S.

Because the amount each Netflix subscriber pays is relatively constant at $10/month and the company offers guidance about how much it plans to pay for content – its biggest expense by a wide margin – subscriber growth has become the most-watched figure in quarterly reports as an insight into Netflix’s future earnings.

In addition to content purchased from the original owners and creators, Netflix now also produces its own original content, especially series like "Orange is the new Black" and "Stranger Things" which are frequently “binge-watched” by subscribers who consume whole seasons of programing in a single session.

And Amazon...

Amazon has capitalized on the popularity of streaming with its Amazon Video offerings which includes television shows for rent or purchase as well as a menu of original programming and licensed content available to Amazon Prime subscribers. Subscription services now make up more than 5% of Amazon’s total sales and have grown at better than 50% YoY in 5 of the last 6 quarters.

“Cutting the Cord”

Traditional cable operators had grown accustomed to offering a package that incudes cable, internet and phone services, but increasingly, consumers have been piecing together the parts they most use, often from different providers and including streaming entertainment.

Although it generally still involves cable home internet service, customers can now pick and choose the services they actually use most and avoid paying for services that don’t provide them with value. Younger customers are increasingly using mobile devices with unlimited cellular data to gain access to their entertainment choices without an old-fashioned television or cable box.

A Streaming Future

These changes to the industry have blurred the lines between content production, content delivery and other media services, hence the push toward consolidation in the industry. The former leaders in the cable industry are rapidly being reorganized to provide entertainment services that look more like Amazon or Netflix, offering consumers a wide range of choices outside the framework of the traditional cable TV provider relationship.

As technology advances, so does the business landscape as companies compete to offer their customers bigger and better services - and this is exactly what’s driving the recent Media Merger Mania. Investors can expect the consolidation action to continue as the existing players gird themselves for battle with the innovators and create the new media giants of tomorrow in the process.

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