Netflix Is the Reason Behind the Disney, Fox Deal Talks

November 6, 2017, 11:25 PM UTC

Reports of recent acquisition talks between Walt Disney and 21st Century Fox on Monday sent shockwaves through the media and entertainment worlds.

CNBC, citing anonymous sources, reported that Fox, founded by billionaire Rupert Murdoch, had talked about selling most of its business to Disney, while Bloomberg later reported that the two sides are no longer actively discussing a deal. The talks reportedly did not center on a complete takeover because federal regulators would prevent Disney, which already owns ABC, from owning two broadcast networks. Similar rules would also likely preclude a combination of ESPN, Disney’s top cable network, and Fox’s own sports networks.

But, even a deal that would transfer Fox’s movie and television production studios, along with the FX cable network and international assets like Asia’s Star TV and Europe’s Sky, into Disney’s already massive portfolio of media and entertainment assets would represent a huge shift of power in the industry.

Even if deal talks are stalled at the moment (21st Century Fox declined to talk and Disney did not immediately respond to Fortune‘s request for comment), the unconfirmed reports were enough to get investors excited on Monday, as Fox’s stock jumped nearly 10% and Disney shares rose 2%.

So, as the world ponders whether a media mega-deal could be coming, the question becomes, “Why?” The CNBC report notes that Fox’s leadership fears the company will be unable to expand quickly enough to stave off competition from growing digital rivals like Netflix and Amazon (both Fox and Disney also own stakes in the streaming service Hulu) along with its fellow traditional media rivals. If that’s true, then Fox’s assets could be up for sale whether or not talks with Disney ever resume.

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Increased competition from companies like Netflix would also likely be a big motivator for Disney if it does move forward with a splashy acquisition like buying most of Fox’s assets. Disney’s movie studio has seen huge success in recent years, especially following its acquisitions of Lucasfilm and Marvel Entertainment, and adding Fox’s own portfolio of entertainment properties would give Disney that much more intellectual property to exploit as it looks for a leg up in Hollywood’s content wars (Netflix could spend $8 billion on original programming in 2018).

Fox’s entertainment properties include the entire back catalog of The Simpsons (nearly 30 seasons of the animated show), as well as the TV and film rights to Marvel’s X-Men characters, thanks to a deal that preceded Disney’s 2009 purchase of the iconic comics company. Disney has since turned the Marvel Cinematic Universe into a money-making machine that regularly churns out billion-dollar blockbusters, but roping in more of Marvel’s classic characters could expand the company’s plans in terms of film, TV, and merchandising.

Meanwhile, more enticing synergies also exist between Fox’s film unit and another of Disney’s biggest movie properties, the Star Wars film franchise, as Fox currently owns the physical distribution rights for the first six Star Wars films (the original trilogy and the three prequels) until they revert to Disney’s Lucasfilm in 2020.

A Disney-Fox deal would help Disney stockpile more original programming that it could use to build up the standalone streaming service it announced in August. Disney said this summer that it will stop streaming new programming on Netflix, starting in 2019, as the company plans to launch its own streaming service to compete with the likes of Netflix and Amazon. Adding Fox’s offerings to Disney’s existing media properties (Marvel, Lucasfilm, Pixar, Disney Animation, ABC, etc.) would certainly help make Disney’s standalone streaming play more attractive to customers who already have a wealth of digital entertainment options.