The Most Important Thing Fox Will Bring to Walt Disney in a Merger

Walt Disney (DIS -1.43%) and Twenty First Century Fox (FOXA) (FOX) shook the entertainment world when they announced their massive union.

The $50 billion deal gives Disney control over Fox's entertainment empire, including its film and television properties. This would add to Disney's already massive content library, giving it ownership of important titles like Avatar, The Simpsons, and countless other franchises.

On this episode of Industry Focus: Consumer Goods, Vincent Shen is joined by Fool.com contributor Daniel Kline to discuss what effect the deal will have on future streaming services, ESPN and sports, and what federal regulators may do.

A full transcript follows the video.

This video was recorded on Dec. 21, 2017.

Vincent Shen: I'm setting aside a few minutes here for you, Dan, especially, because you're our resident cable and entertainment specialist.

Dan Kline: Oh, and this is a big one.

Shen: Right? I know you wanted to share your thoughts on the Walt Disney and 21st Century Fox deal that was announced a couple of weeks ago. I've worked my way through a lot of the breakdowns, the predictions for how Disney will leverage its purchases from Fox, especially the TV and film properties. We're talking about Avatar, X-Men, classics like Home Alone. If the deal goes through, we should start seeing Disney flex its new muscle by the end of 2018. What's your take?

Kline: It's a huge intellectual property deal. You mentioned some of those. There's hundreds of other properties. Die Hard, so many things that could be done, The Simpsons, Family Guy. Fox produces This Is Us for NBC; there's just so many different shows. And when you look at the ability to exploit intellectual property, Disney is the king of this. They already have an Avatar Land, so that brings their theme park and the movie business more aligned, which is good. Their ability to do spin offs for their streaming services, to create everything from video games to bed sheets to theme parks, Disney should be able to shore up its movie division, meaning that right now they can put out eight or nine movies a year between Pixar, Star Wars, Marvel, Disney animation, that are almost guaranteed hits. You mentioned to me personally Pete's Dragon. There are things that fail. But in general, they're going to be able to line up even more hits. This brings the X-Men home, so they will be able to integrate the X-Men into the greater Marvel Universe but also probably put out one or two, maybe a group movie or an individual movie every year. So the box office potential for Disney is huge, but so is their ability to create television shows for ABC, or spin off things with their streaming network. That's the crux of this deal.

There are some other things. The regional sports networks will bolster ESPN, because what they'll be able to do is take the live studio shows that they do in those markets, cut back some of the cost of those by using national ESPN programming, but also have the local feel with reporters in those markets. They should be able to get more bang for the buck out of each of those networks than Fox was able to with the, let's call it little watched FS1, which is not part of the deal. Disney won't be taking that. So this will become a whole synergy for Disney built around all this great IP with a nice little added benefit from the sports networks.

Shen: Yeah. You mentioned the IP angle. I think, on my end, it really amazes me that, at the beginning of last year, 2017, Disney had no streaming services to compete with Netflix besides its minority stake in Hulu. But in the next year-and-a-half, give or take, Disney will have majority control of not only Hulu but two other offerings -- the sports-focused ESPN Plus is expected in early 2018, and then they have that Disney-branded option that's still in the works.

I also have a break down here of domestic box office receipts from the past three years. If you add up the ticket sales for both Disney and Fox, the combined entity would have had an average 35% market share from 2015 to 2017. So again, that gives you a sense of the scale and how much strength they have in the industry.

Kline: And there are going to be some regulatory issues here. It wouldn't shock me if they had to either sell off a stake in Hulu or have an agreement where they share control, because Hulu and the Disney potential streaming service do have some conflict. Now, you could absolutely pivot Hulu to be more of the livestreaming channel service, which is something Hulu is going to offer, but there's a lot of conflict. On the movie side, the numbers are a little bit deceptive, because Disney is probably not going to put out as many movies as Fox did. So, you're they're going to see some movie production move elsewhere. Disney is going to cherry-pick. That division is going to get smaller. It's absolutely going to put out the movies that can make $500 million at the box office. It's not going to put out the bottom 30 movies that Fox put out that, on an aggregate basis, combined, did a lot at the box office, but don't make a lot of profit and don't lead to theme park rides. Because if you look at everything Disney has been doing in its theme parks -- and I live in Florida, I'm a Disney passholder, I spend a lot of time at the theme parks, basically everything is being rethemed to a Disney character. So Epcot got rid of the Land of Energy, they're putting in a Guardians of the Galaxy ride. There was a bird exhibit at Animal Kingdom that's becoming an Up exhibit. Everything in Disney's world is moving toward this synergistic intellectual property model.

Shen: Yeah. And whether that's the theme parks or consumer products or things for television shows and elsewhere.