Okay, welcome everyone. I'm pleased to introduce for our second fireside of the day John Nallen, who's the Chief Operating Officer of Fox Corporation. John, welcome.
Thanks, Brian. Thanks for having us.
Thanks for joining us. Maybe to start off, it's, you know, it's been five years almost to the day since Fox completed the sale of most of its assets to Disney and created the new Fox. Since then, the industry has gone through quite a bit of change with cord cutting and a shift in consumption towards streaming. How do you see video distribution evolving from here? How will it impact Fox's networks and content? And how is Fox positioning itself for that future?
There's a lot to unpack there. There is, so. Well, start with the five years. I mean, it's been remarkable that in this five-year period, the focus of the company has maintained itself on principally news and sports during that period. And during that five years, we've renewed a significant amount of our virtually all of our sports rights. We've renewed once, maybe twice, our major affiliate deals during that period. On screen, I think we just done a fantastic job: news, sports, and local. Tubi was an acquisition we made during that period, which is a growth engine I'm sure we'll talk about today. And from a capital allocation standpoint, we've returned a substantial amount of capital during that period to the shareholders in the form of buybacks and dividends. So we're set up we had a great five years.
We're not taking a victory lap by any means. We've got a lot of it was about establishing ourselves for the next five and 10 years. And to focus on your question about video distribution, I firmly believe that looking forward, if we sit here five years from now having the same conversation, the biggest distributors of our product will still be the biggest distributors we have today. The Pay TV system will be the most important revenue stream for us from an affiliate revenue standpoint. Now, a lot will happen in between. There'll be a lot of direct-to-consumer products out there addressing the market that's outside of Pay TV. There'll be a lot of self-funding that people will be doing outside. But as they do that, there'll be an eye back to Pay TV to see is that a more efficient consumer buy for them.
But there is just no question that the largest revenue stream on our distribution side will still be from the major names, many of which you'll have here today. And we'll evolve. We'll put products into the market that will be responsive to that market that's outside of Pay TV. Because otherwise, you can run a valuation on Fox where if we didn't do that, you would just take the Pay TV universe, run a DCF, put a terminal on the end, and say, "Okay, that's Fox." But that's not the way we're going to run and grow the company. It will be to address the bigger market that's out there from a distribution standpoint.
One of the ways you're going to address it, you know, it was the recent announcement with Disney and Warner of the plan to introduce the sports bundle later this year. Tell us about the strategic calculus behind your decision. You know, what are the benefits to the business? What are the risks and potential unintended consequences? You know, for example, accelerating Pay TV declines, impacts on affiliate renewals, that sort of thing. Could you maybe talk about that a bit?
Yeah. There's obviously been a lot talked about and written about the platform since we announced it a few weeks ago. You've written a piece as well. I firmly believe that the platform is not a catalyst for accelerating Pay TV declines. Whatever will happen in the Pay TV universe will happen independent of the B2C product we're putting out on this platform. This platform is addressed to a market that's unserved right now, an entirely the cord cutters and cord nevers that are outside of Pay TV. Come back to a point I just made, that Pay TV is just too important to our business for us to be disruptive to it by introducing products that will accelerate Pay TV declines. So, it's a niche product.
You will have heard, last week, Lachlan mentioned our expectation is in 4.5-5 years to have five million subs in this product. It will be a premium product. And I think once you know, people said, "Well, it's an incomplete product. How is that going to serve the consumer?" Well, I come back to this point of self-funding. That will occur. But as it occurs, the consumer has to be mindful about the Pay TV environment and see, are they do they have a much more efficient buy by staying in or moving into Pay TV. So importantly, I, like I say, I don't see it as a catalyst. In Pay TV, we're running about 8%-8.5% declines on Pay TV subs now.
I'm hopeful that that will ameliorate itself so we get to a core Pay TV universe that's focused primarily on news and sports, and that we will serve the independent market of Pay TV through other products. Otherwise, I come back to my valuation point.
Yeah. Yeah. Do you think the sports bundle may end up just highlighting the value of some of the virtual MVPD services that are out there? You know, when you think about $45-$50 for the sports bundle versus, you know, $73 for, you know, the low-end of the virtual MVPD products, which are, you know, pretty complete, it just seems like the value lies much more in the virtual MVPD products.
Yeah. Yeah. Perversely, you're right. Perversely, when you add up a number of these B2C products, you come back you know, YouTube TV is the example you're giving at that price level, which has all of our products, not only the products that are in the platform but those that are offered by our peers and competitors. So, you know, there's a perverse way of looking at this that, in fact, promotes Pay TV by looking at the value equation. The people that have left, that are cord cutters, cord nevers, I just think they have left the system forever.
Yeah.
They will look for different ways to accumulate their entertainment, sports, and news product. And this was just one solution to that market. But it may be a moment for it to be a stickier opportunity for Pay TV when you look at the pricing in the B2C world.
Right. Okay. You mentioned Tubi in your opening remarks to the first question. That's been a significant driver of engagement and ad revenue growth for Fox ever since the acquisition in 2020. I think what investors are really trying to understand is, you know, how large that Tubi ad revenue pool could ultimately become, what will steady-state profitability be like for Tubi, and, you know, will Tubi's role within Fox change over time as the distribution landscape kind of continues to evolve?
I think taking the last one first, I don't I don't think there's a dramatic change in what Tubi will be for Fox. It's an AVOD service. It's number one. Nielsen has it now at 1.5% TV viewing on Nielsen Gauge. It serves an audience 60% of which are cord cutters and cord nevers. So advertisers are able to get to a segment that they would be unable to reach through traditional advertising means. Its secret sauce is obviously its user interface, its algorithms, but more importantly, its library. There's 240,000 episodes and films on there. We just did a deal recently with Warner Bros. to bring DC Films and some of their television product to the market. So I I don't see it evolving into, you know, ad-free tiers or an SVOD system. I I its sweet spot and its growth spot is around AVOD.
steady-state, our expectation is you're at 20%-30% margins off of this business. Right now, in the library, about 95% of the library is revenue share. The balance is licensed and original content. Having said that, the viewing is a little more disproportionate. We have a third of the viewing from licensed and original content, two-thirds from revenue share. But obviously, in a revenue share model, your margin is starting at a 50% margin off of the revenue and then working your way down. So we think, you know, a 20%-30% margin contribution is a substantial contribution by that business, which will be one of the growth engines of Fox. If you look out as to where Fox is headed, the investment we're making in Tubi will turn to become a real contributor to the business longer term.
Maybe to follow up on that for a second, how do you get from where you are now in margins to where you want to be? Is it a matter of just better leveraging that licensed content to improve the margin on it, or are there other areas of investment that are diluting the margins today that will, you know, scale or just become less over time?
Well, I think it's more about the growth of the top line and contribution of original and licensed product in the disproportionality of the viewing represented by the disproportionality of the content acquisition that we make. So I think once, you know, it's a business where engagement is extraordinarily high, the revenue has not yet caught up to the engagement given some of the pressures out in the market. But look, this business, there's been talk about it being a billion-dollar revenue business shortly, and that's, I wouldn't debate that. That's, and it's grown from virtually nothing to be a billion-dollar revenue business. So it's a, to get to those margins, it's all about top-line growth.
Okay.
We're not spending disproportionately on either content marketing, promo, subscriber acquisition, where that's an area where we'd have to focus on cost reductions. It's really about top-line growth.
Understood. Maybe to shift gears a little bit, can you talk about what you're seeing in the ad market? It'd be great if you could talk about, you know, different areas of the market that your business is focused on, you know, sports, national news, local, and general entertainment where I know you have less exposure.
Yeah. There's a lot a lot there, a lot to talk about. Clearly, it's a nuanced market overall. But if you look at the place where we play the most, two-thirds of our advertising revenue is generated from sports and news. And that is the area where it's healthiest right now, particularly in sports. So if we unpack it a bit, sports, we had a superb postseason in the NFL. We had a bit just a rocky schedule early on in the regular season that contributed to ups and downs. But the postseason, incredibly strong. Obviously, we didn't have the Super Bowl this year, but it was a record Super Bowl. And we quite like that because that Super Bowl gets handed to us for next year.
If we look the other place where there was just great momentum and I think an inflection point in viewing, last year and will continue is college football. I mean, for us, the Ohio State-Michigan game, we peaked at 23 million viewers. And I think everybody's viewing on college football was just extraordinary last year. And our Big Ten Saturday represented a real contribution to growth of viewing against where we were. And we just see that continuing. Staying with sports, it's quieter now for us. So we have NASCAR, which is going fine. Daytona 500, we had a rain delay, moved it from one day to the other so that impacted ratings. I don't want to say surprisingly, but baseball is extraordinarily healthy for us right now in early bookings. Season begins the end of the month.
But what we're seeing a bit anecdotally is some RSN money moving up nationally.
Okay.
That's contributing to the health there. On the news side, national is still great. Pricing is strong. Well, I'm sure we'll talk about ratings as we go through this. The place where we were impacted in Q1 and Q2, much less so now in Q3, is direct response pricing. It's just a lot of pressure on direct response pricing. On the local side, there's a lot of pluses and minuses when you look at year-on-year, Super Bowl, political, number of games. When you cut through it all, the local market for us is about flat year-on-year. Clearly, what we're all pointed to and focused on is the upcoming political season. We've got five battleground states inside of our footprint in Georgia, Wisconsin, Arizona, Michigan, Pennsylvania. Those are all really big targeted spends. We've got 16 Senate races inside of our markets.
There's big down-ballot issues and races that are going on. So once and I know some spending is at least of the presidential side has started already. The piece we missed, quite frankly, all of us, is the primaries. There wasn't much spending.
Yeah.
Obviously, nothing on the Democratic side and less so, not less so, but less than expected on the Republican side.
Right.
So, locally, what we'll look forward to is sometime July, August, a real kick-in of spending in what could be a record presidential and Senate race going forward. Tubi, if you look at that advertising, we were up 17% in Q2 on Tubi growth. We're pacing at or above that still. So the Tubi machine continues to do quite well. Then the entertainment side, as you said, it's a much smaller piece of our business. But that's probably the most challenged in the market is entertainment viewing, entertainment pricing. Right now, that that's the most difficult. But it's a small piece of our business.
Right. You mentioned direct response, which, you know, has obviously been a focus. Is that pricing kind of, you know, just left, you know, at this level that it's been for a long time, or is it actually starting to tick up? Wondering if you could comment on that.
Yeah. We're seeing slight improvements in direct response. So we're down in the first couple of quarters. We were down high teens-20s% as far as pricing, comparable year-on-year.
Yeah.
We're down high single digits now. So it's come back, and sequentially, the pricing has moved up. It's just not. It's not just a comp year-on-year.
Yeah.
It's also a sequential improvement.
Right.
I should mention, you know, one of the focused on the national side, one of the one of the areas are categories that we talked about before. And it's just interesting because pharma is now such a big spend on the national side. We had 50 brands that came to market last year. Obviously, none of them are falling off patent, so they'll continue to spend next year. Auto, 16 million units scheduled for the current year, up from where it was a year ago. So that's continued to be healthy. And surprisingly, travel, you've you've experienced it yourself just watching television, a lot of travel ads both for states and cruises and and trips, which is benefiting benefiting the market. Where on on the local side, auto continues strong for the same reason at national. And retail home improvement is a category we've seen doing quite well.
The one that's consistently negative now, in the local side, which was a boon for us, is wagering.
Yeah.
Because that has now moved to a national level because it's a much more efficient buy for those betting companies to be buying nationally as opposed to locally now.
Is the category? Are you even up on that? When is it just a shift from your local business to your national business, or?
Well, it's better. The shift to national is helpful because it's a better buy. It's a more expensive buy.
Yeah.
For us. So I'd say overall, if I look at our whole book of business on advertising, we're up in wagering.
Yeah.
Because they are spending more on a national level. And particularly given what I described earlier, the sports success we had in the fall, a lot of money was put toward wagering there.
Right. Okay. Maybe we can talk about affiliate revenue for a moment. Can you talk about the affiliate revenue outlook both on the MVPD and on the station side? I think you just completed a renewal cycle. Maybe if you could talk about what you achieved there and, you know, when we'll see the full impact on results and, you know, just any color on when the next renewal, you know, begins or cycle begins.
Yeah. So our business, I remember being back in the investor day five years ago trying to have everyone appreciate how simple our business really is now. I mean, half our directionally, half our business is advertising, and half our business is distribution. That's and I remember the complexities of the News Corp business. I've been around for 30 years, where I had to deal with a lot of other issues. But it's a much simpler business. So the half that's distribution, we obviously have a lot of focus on. What we've seen, as I said earlier, is a decline, consistent decline of 7% ticking up to 8%, ticking up to 8.5% in volume coming down. Yet through that, what you've seen in our sequentially last few quarters results is holding serve or an increase to our affiliate revenue.
And that speaks to the power of the focused Fox channels, particularly in sports and news. They're part of every Pay TV bundle. They're a must-have. I'll give an illustration later about Fox News dominance. But it's, they're just important to the Pay TV system, those channels. So in the renewals that we've completed, they've all been importantly quiet. There hasn't been. You haven't heard Fox out there going dark, a lot of noise, marketing us against them, them against us. Just hasn't happened.
Yeah.
The discussions have been very clear, very very intense, no question about that, but also constructive as to what Fox can deliver for the Pay TV bundle. We're through, for fiscal 2024. We're finished our renewals for the year. We don't have any left.
Yeah.
We'll continue again in the autumn, next year with about a third of our portfolio renewing there. But that's the way you should really think about our business now going forward. We'll roughly have 25% to a third of our affiliate revenue renewing every year.
Okay.
That's really just the cadence that we're under. These deals are normally around three years, some extend to four. But if you just now get in a rhythm of every three years having a third of your book renewing at that point. But we feel, look, we feel great with the rights we have secured, with the ratings that we've got. It's a constructive conversation that we have on the affiliate side.
As you work through this current cycle, did anything change relative to the last one as far as terms or structure of the agreements, just, you know, broadly speaking?
Not really. I think there's been more attention after the Disney-Charter discussion around two things. One is long-tail networks and their importance or lack thereof in distribution and affiliate pricing.
Yeah.
The second is D2C products and what rights the pay subscriber has over D2C products that the content company is offering independently in the market.
Yeah.
Luckily for us, we don't have long-tail networks. And up until recently, we haven't had a D2C product other than Fox Nation that's out there. So the construct has been pretty traditional. And again, we're focused on the success of the Pay TV bundle because it's just so vitally important to our business.
Yeah. You mentioned Fox Nation. That that's been at the center of the news streaming as a strategy. Based on Steve's comments on your earnings call, it sounds as though maybe you're pulling back somewhat on investment there. I don't know if that's the right read, but I just wanted to ask you, I guess, you know, what is happening at Fox Nation? You know, what have you learned about the consumer appetite for the service? Is it, you know, turning out to be more niche than you expected? And, you know, what's the future of that business?
So I wouldn't have read or shouldn't we read Steve's comments as being any de-emphasis of Fox Nation.
Okay.
Fox Nation, vitally important, complementary product for the avid Fox News fan. We are not pulling back materially [on] investment in Fox Nation. In fact, we've got a programming suite looking forward to revitalize what's being offered inside of Fox Nation. Now, clearly, we had a decline in engagement where, when Tucker Carlson left Fox Nation because we used to do separate programming there, but that engagement has ticked right back up with new programming that we've put into it. There's been commentary that Fox Nation has a subbase around 2 million subscribers. I wouldn't dissuade you from that. That's generally where we are. We're looking for growth in that subbase, not maintenance of it.
Okay.
But it's hovered around that level for 18 months or so, recognizing that there is a core group of Fox News fans that will take this service. Not every Fox News fan is going to take this service independently. But it's a it's a vital part. Clearly, if we ever go D2C and Fox News, which is not. I'm not here to announce we're doing that by any means, having the Fox Nation engine of subscription, video search, everything else is quite helpful in in being able to launch a product like that.
Yeah. Maybe we could talk about programming a bit. Over the past year, there have been a lot of changes to the Fox News prime time schedule, as you alluded to a second ago with Tucker leaving. How's the current schedule performing? What have ratings been like? Do you foresee additional adjustments to programming at Fox News this year?
So we changed the programming in July. And if I look at this over the last three quarters, year-on-year, Q1, we were down high teens ratings, prime time. Q2, similarly. Right now, in January and February, we're about even with where we were a year ago. So a really marked improvement, in the prime time schedule, ratings that have occurred. I think the strength of Fox News, you can illustrate from two recent events. Last week, State of the Union speech, the number one channel in America for viewing of that speech was Fox News.
Mm-hmm.
Every broadcast, cable, whatever, it was Fox News had the number one viewing. In addition, a couple of weeks earlier with Super Tuesday, Fox News outrated CNN and MSNBC combined on coverage then. So oftentimes, you've raised it in the past with me, when we see change of administrations, people question what will happen to Fox News. Here, we have an administration that you would question whether it's a Fox News fan. Yet the biggest viewing of the State of the Union speech was by Fox News fans at that point in time. So I think, you know, Fox News continues to go from strength to strength. Suzanne and her team are, you know, focused on the schedule, but there's no changes that are in discussion that I'm aware of.
Yeah. Yeah. I mean, I guess I mean, given what you said, it sounds like you should see strong if you sustain current ratings, you should see strong growth in the September quarter as the costs get easier.
Well, exactly. Well, plus, we have you know, for us, we're looking at two Super Bowls this year, right? We've got the Football Super Bowl, but we've got the Election Super Bowl going forward. So from Fox News, the coverage is just going to dial up beyond the incredible coverage they've had covering Ukraine, Middle East, all those issues. But we've got a big 2025 ahead of us when you look at those two big events.
Yeah. Okay. Shifting to sports, over the past year, you've opted not to renew WWE. You did renew NASCAR with a trimmed-down schedule. Is the FOX Sports rights portfolio complete at this stage? Could you envision adding any new rights over the next few years? And, you know, conversely, are there any current rights that you have, that, you know, maybe don't make sense or aren't as must-have, you know, in the future as those renewals come up?
Yeah. I don't want to keep using this five-year history. But during that period, beyond the ones you described.
Yeah.
We transferred our U.S. Open golf contract. It was the only golf we had. Didn't make sense for us to continue to do that. And obviously got out of Thursday Night Football even a year earlier than expected, when we transferred that or when Amazon acquired that contract. But no, I think we've renewed our foundational rights, as we refer to them. The NFL contract goes out another 10 years, and that'll be to 2028. NASCAR, we just did a seven-year renewal. College football takes us out till the mid-2030s. We've got just a strong portfolio to look forward to. And there's no big renewal for us of our foundational rights on the horizon. There are other products that are out there. I mean, clearly, there's a lot of talk about the NBA.
We've never been in the NBA business other than when we had the RSNs. So there's not; there shouldn't be an expectation that we'll be players in the NBA renewal. But, no, if you look at our sports portfolio, I don't think it's lacking. And when we look at the schedule or the calendar for the year, it's hard to figure out where you would put some of these events because we've got Big Fox, FS1, FS2, and they're pretty full with sports events through the calendar. So it'd be a bit of a challenge for us. And when we look at sports rights, clearly, we're looking at the advertising revenue. But we're also looking to, can we incrementally drive affiliate revenue, incremental to what we're getting either on retrans or in the affiliate fees?
Mm-hmm.
Thursday Night Football was a great example where the Sunday package is what was driving the affiliate revenue that we were getting from distribution. Incrementally, having Thursday wasn't as much of an impetus to that as Sunday alone would be.
Yeah.
So the loss of Thursday wasn't as big an impact to us on Retrans given that we had the marquee product on Sunday.
Right. How about the general entertainment side of the business, whether it's on the FOX Network or on TV? You know, how's the programming performing? You know, any major changes for next season? And, maybe if you could, you know, just elaborate on how the incremental TV investment is being deployed.
So on the entertainment side, Rob Wade's team, we're just doing an incredible job. We have the number one series in Next Level Chef, 18-49. Four of the top five new series on the network are on the network. Fox has got four of the five. You can look up the names. Some of them are odd, Krapopolis and Grimsburg and others like that. But they're doing fine. And we'll continue to announce new product. Our upfront is May 13th. So, you've been in there in the past, Brian. You'll see announcements around what next year's schedule will hold. At TV, where we're focused really is on originals but don't get concerned because when people talk about originals off network, they think about the SVOD-type spending into original entertainment, which is not what we do.
Up until recent change in leadership, we spent an amount on originals that was based on volume. They were less expensive but a lot that we put out there. We were able to determine, based on the information we have on users, what kind of originals to make because you know what the viewing habits are, and you want to pump more toward it. What we're doing now is taking the same dollar investment in originals but concentrating it on slightly bigger swings, something that we can get behind and promote and market, and that will have a longer shelf life to it than the originals that we have.
So again, at the upfront, you'll hear us announce some calendar of new originals for TV that you'll notice are bigger swings, but again, nothing in the context of what you'd see the SVOD players spending for their originals.
Okay. What should we expect in terms of growth and content amortization expense for Fox this year?
You know, it's a mixed, confusing spreadsheet when you have to go through it because we.
We just want to know what's at the bottom of it.
Yeah. Well, I can just kind of parse through because we had the Super Bowl last year. We don't have it this year. Number of playoff games differed year-over-year. So that's just pollution in there.
Yeah.
But when you cut through it and look at what the near-term impacts of it are, in the current year, it's the step up in our new NFL deal. That's at the heart of our step up in costs this year.
Okay.
From there, you'll see a more normalized cost increase going forward. But first-year step ups for all of us are really the thing we look to absorb and then monetize as we go out further. So there's not a big increase in entertainment costs. There's not a big increase in news costs when I look across the company. TV will have some increase in costs related to programming. But the sports step up is the most notable one out of our portfolio.
Okay. Running short on time, so I'm going to try to reprioritize a little bit. I think one question that I really wanted to hit on is, and I don't know what you're going to say in response to it, but a lot of people want to know, you know, just how the appetite is for Fox to participate in industry consolidation if the opportunity presented itself. You know, I think there's a lot of people out there who believe the argument for doing so is becoming more compelling for Fox as the Pay TV industry base continues to shrink. You know, this, you know, sort of could be the right time.
Yeah. Well, I think I can capture a number of thoughts in thinking about a response to that. Capital allocation, valuation, consolidation are probably all part of it. And there's no one more frustrated on the valuation side than me, given what we've achieved. You look at the value of TV, our the lot, our betting assets, our tax assets, some of the others where you parse that away and look at the fundamental value and trading multiple of our assets. And it's just frustrating.
Yeah.
I like, is the which therefore is relevant to consolidation because if we were and we are very interested in increasing the growth of the business through acquisition. But our currency, from an equity standpoint alone, is highly undervalued.
Right.
In order to do that consolidation using equity currency. Our balance sheet is incredibly strong. We've got the cash flow generation of the business is very high. Our debt levels are incredibly manageable. We just paid $1.25 billion in January, February back. And our cash flow just continues to accrete to the balance sheet. So in lieu of finding a consolidation or M&A opportunity that's so accretive to us, I come back to the undervaluation of the stock where we plowed $5.2 billion into buybacks because that's the best return our shareholders can get right now on deploying that capital. But I'm hopeful that the remaining shareholders, net of the buyback, are going to enjoy a lift in valuation and a lift in growth either through organic investment, M&A, or other deployments of capital. But yeah, we're not closed to opportunities in the industry.
We just are frustrated that we run from a currency standpoint and that we haven't found anything so compelling and so accretive.
Right.
That we would turn and say, "All right. This is where we're headed.
What about from the other perspective as a maybe a seller?
I was about to say we're not good sellers, but five years ago, we were good sellers.
Great seller.
It hasn't crossed their minds.
Yeah.
There's no inbound about it. Now, I'm not suggesting that we're open for business on it. But it's not. We're much more focused on growing the business than we are in selling the business, so.
Okay. All right. Just about out of time, so it's a great place to wrap up. Thank you, John. Appreciate it.
All right. Thanks so much. Okay.