Here's Why Rupert Murdoch Offered $US80 Billion To Buy Time Warner

Rupert James Lachlan MurdochAPRupert Murdoch, center, Chairman and CEO of News Corporation, walks with his sons Lachian Murdoch, left, and James Murdoch, right, at the Allen & Company Sun Valley Conference in Sun Valley, Idaho.

21st Century Fox has put Time Warner in play.

According to Andrew Ross Sorkin, 21st Century Fox offered to pay $US85 per share to buy Time Warner. At that price, the deal would be valued at $US80 billion.

Why is 21st Century Fox interested in buying Time Warner?

It is likely related to Comcast buying Time Warner Cable, AT&T buying DirecTV, and Sprint reportedly looking at buying T-Mobile.

Those companies control distribution. As they consolidate, they gain more power over the content companies — 21st Century Fox, Time Warner — that rely on them for distribution.

Here’s how the TV business works: Fox News, which is owned by 21st Century Fox, gets almost $US1 per subscriber from Comcast, and other cable companies. That $US1 causes tension between the two companies. For Fox, it’s the lifeblood of its operations. It gets ad revenue, too, but the ad business comes and goes, the subscriber fees don’t. They remain steady, and they are steadily growing.

It’s not just Fox News that gets those fees. All the channels these companies own — HBO, TBS, TNT, FX, Fox Sports One, etc. — get fees from companies. All the distributors — Comcast, Time Warner Cable, Verizon, etc. — fight to keep those fees low to protect their own profits.

With consolidation on the distribution side, those distribution companies have better leverage in any deal over subscriber fees. It’s a lot easier for Comcast to say, “We’re not paying you more for Fox News” if it has more control over the TV market. It can really choke out Fox News, and cut down on how many homes it’s in. That cuts down on ad revenue, and obviously, eliminates the subscription fee altogether.

However, if Rupert Murdoch, the CEO of 21st Century Fox, can go to Comcast and say, you better pay up for Fox News otherwise we’re going to pull access to TNT, TBS, Fox Sports, and so on, he’s going to be able to negotiate from a better position of strength.

This is a particularly important time for something like this. The trend of cord cutting is slowly starting to take shape. Technology companies are getting smarter about investing in content and building digital video offerings. That could lead to downward pressure on subscriber fees. By having a bundle of channels, 21st Century Fox will have a better shot of protecting its fees during negotiations.

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