FOX and AWS today announced the signing of a multi-year technology agreement. The agreement calls for FOX and AWS to collaborate on the construction of a “transformative 8K capable media platform on AWS to create, produce, and deliver live and on-demand content across traditional and digital platforms.”
The announcement is well-timed with the AWS re:Invent conference taking in place in Las Vegas. We simply must acknowledge the intended (or unintended) alignment with the title of the press release ‘AWS and FOX Team Up to Reinvent Media Content Delivery.’
Even setting aside the rhetorical flourishes, this is a notable announcement. As part of the Disney acquisition of 21st Century FOX earlier this year, Disney obtained much of the technology operations of FOX – both the technology assets and the engineering teams supporting it. The closest to a crisp statement about the technology assets acquired is the definition of acquired assets (of 21st Century Fox by Disney) in the March 2019 Separation Agreement that includes “any and all Information Technology Assets primarily related to the FOX Business.”
Selling the technology operations created both a critical dependency and an opportunity for FOX.
The dependency takes the form of a transitional services agreement (“TSA”) with former FOX technology operations, now owned and controlled by Disney. It is worthwhile to pause and reflect on the import of the dependency of a media company’s technical infrastructure with a competitor. It is not lost on us that Amazon could receive a similar designation as a competitor – but there is a clear distinction.
The TSA (not a public document) covers broadcast operations, sports production, information systems and technology, along with other corporate functions. It is an agreement with an envisioned two-year duration from the time of the Separation (March 19, 2019) with the potential to extend an additional three months. The services are provided to FOX at Disney’s cost, but – as noted – only until March 19, 2021 or June 19, 2021 at the latest (assuming our understanding of the action dates is correct).
Firm figures for at cost are not available in the FOX filings. The totality of the expense allocation in FOX’s pro forma income statements (an attempt to describe standalone business ahead of Disney transaction) allocated $291 million of expense to general corporate expenses of 21st Century Fox for the 2019 fiscal year. The FOX management team has guided investor that there is an additional $225 million to $250 million of expenses not captured in the allocation that will likely impact the going-forward operations of FOX. Somewhere within this combined $500+ million annual expense bucket lies the technical operational budget of FOX. We mention this figure to add context to the size of the project being announced by AWS and FOX.
Even though Lachlan Murdoch, CEO of FOX, did not utter the word ‘technology’ during FOX’s Q1 2020 earnings call, nothing else Mr. Murdoch discussed on the call is going to matter much if the FOX technical team cannot create a replacement technical infrastructure to address its current, critical dependency with Disney.
What we have said directly above is stated in more formal legal language as a risk factor in FOX’s 10-K filing with the SEC. That text reads as follows (note: 21CF in the below is a reference to the 21st Century Fox assets acquired by Disney),
“…we depend on 21CF for these services and are subject to the risk of 21CF not properly performing its obligations under the transition services agreement. If 21CF is not in compliance with its obligations and following the expiration of the term for a specific transition service under the transition services agreement, the Company will need to provide the covered services internally or obtain them from unaffiliated third parties. The Company may be unable to replace these services in a timely manner or on terms and conditions as favorable as those the Company receives from 21CF. Because the Company’s business historically operated as part of the wider 21CF organization, the Company may be unable to successfully establish the infrastructure or implement the changes necessary to operate independently, or may incur additional costs that could adversely affect the Company’s business. If the Company fails to obtain the quality of services necessary to operate effectively or incur greater costs in obtaining these services, the Company’s business, financial condition or results of operations may be adversely affected.”
FOX has issued public guidance in its filing that it expects to transition away from the services provided by Disney on or before the two-year anniversary.
This time horizon – as of today 15 months away – is then an inherent characteristic of this project. “We look forward to working with FOX on this unique, green-field opportunity to unify and transform the delivery of reliable and innovative content to millions of viewers” states Dr. Werner Vogels, Vice President and Chief Technology Officer at Amazon, at the conclusion of the press release. The tense of the quote is in the future and the person making the commitment is the CTO of Amazon, a company with a market capitalization of $875 billion (just saying again, this is a big deal).
Greenfield, in this instance, doesn’t mean small or starting small. The press release claims this is the first instance where a “single platform will be used to deliver both traditional broadcast and direct to consumer streaming services.” The platform – which we would encourage the parties to brand to allow for more concise reference – will also underpin FOX’s production facilities in Tempe, Los Angeles, New York, and Charlotte.
FOX still owns FOX studios in Los Angeles, a 53-acre site containing 15 sound stages and 1.1 million of rentable square footage. It remains responsible for management of the lot and the management of studio operations including production operations and post-production services. This is a quirky aspect of the Disney transaction since the former 21st Century Fox group (again now Disney) has a seven year lease to facility and the facility is ‘predominantly’ dedicated to Disney production, though again FOX owns the facility and is responsible for the services provided by the facility. In addition, Disney has two five-year renewal options on the facilities.
Tempe is a brand-new broadcast center FOX is constructing within the Arizona State Research Park. FOX’s Chief Financial Officer, Steve Tomsic, indicated FOX is investing between $150 and $200 million over the next two years to build the center. The aligned timing (two years) and press release mention, draw a clear relationship between the AWS and FOX announcement and the Tempe facility build.
Diverting the discussion to cover the production facilities is intended to highlight the scope of the announcement. The new platform is across all operations of FOX, which consists of FOX network, FOX television stations, and FOX cable networks (Fox News, Fox Sports, and Fox Business), as well as the remaining FOX Studio. All together FOX generates over $11 billion of annual revenue. The new platform will now support it, and in the opinion of those quoted in the press release, the new platform will drive the business.
It is wrong to read this as a strict Public Cloud announcement swapping blade servers for on-demand CPU instances. Rather, the announcement also covers – with equal prominence – broader infrastructure requirements such as on-premise hardware, specialized media services, and even professional services. Throw in the mention of a multi-year arrangement and this doesn’t reasonable much of the conventional wisdom of Public Cloud.
Part of the infrastructure will include newer AWS offerings of AWS Local Zone and AWS Outpost.
Local Zone locates compute, storage, database, and related services closer to customers to support single-digit millisecond latency operations. The first AWS Local Zone region is Los Angeles.
AWS Outposts are fully managed and configured compute and storage racks consisting of AWS -designed hardware. In the case of FOX, AWS Outposts will handle on-premise video processing for video editing and graphics.
The commitment to business goals would appear to trump any orthodoxy around form of technology deployment. Those goals are tossed around the press release in series of phrases flavored with words like adaptable, reliable, scalable, responsive, data-driven, transformative, and innovative.
The scope and ambition is one part necessity from the Disney transaction and many parts ambition. If a media company ever wanted to completely change a technology culture, selling the existing group and starting anew is an approach guaranteed to do just that.
In the press release Paul Cheesbrough, CTO and President of Digital for FOX, states “Our extended partnership with AWS will strategically underpin our video and data workflows with a world class, adaptable, reliable, and scalable set of platforms that will extend and evolve to power our business well into the future.” Cheesbrough continues with “Across our facilities, we’re enabling our organization to create a platform that will respond to real-time data that enables us to deliver the best programming.”
The remark on real-time data is interesting. AWS SageMaker is mentioned in the press release. The stated use is to enhance live video streams and enable real-time data capabilities. This relates to another mention in FOX’s 10K filing, which titles risk factor number one, “The Company must respond to changes in consumer behavior as a result of new technologies in order to remain competitive.” It then continues,
“The Company’s failure to protect and exploit the value of its content, while responding to and developing new technology and business models to take advantage of advancements in technology and the latest consumer preferences, could have a significant adverse effect on the Company’s businesses, asset values and results of operations.”
(Our returning to the filings is deliberate. Press releases offer rhetoric; Media executives rarely discuss technology investments when communicating with the financial community. However, the regulatory filings provide satisfactory statements highlighting the critical dependencies within media companies on technology infrastructure.)
As mentioned several times during the AWS re:Invent conference this week, one cannot separate technology decisions from business model decisions. The greenfield broadcast center build is at the same time an opportunity to realign cost structures. “On the cost side of our business, the spin of Fox afforded us the opportunity to start as a restructured company” said Lachlan Murdoch during FOX’s investor day in May.
Measuring progress on the corporate restructuring returns to those ‘almost-metrics’ mentioned in the press release – adaptable, reliable, scalable, responsive, data-driven, transformative, and innovative – that reside in the untraveled territories between broadcast engineering departments and financial professionals.
While mentioned in the context of a stock buyback, Lachlan Murdoch offered the following perspective on FOX’s approach to deploying capital during the Company’s Q1 2020 conference call. “We remain committed to deploying capital in a disciplined manner to maximize shareholder value through a balanced approach of organic investment, accretive M&A and return of capital to our stockholders. We will not follow a prescribed formula of deployment. Instead, we will be opportunistic and invest capital where we feel the company can achieve the greatest return on investment.”
Riffing on the above, if new technologies are needed to remain competitive, then this may have the greatest return on investment of all.
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