By Ronald Grover
(Reuters) – Rupert Murdoch's plan to buy Time Warner would assist the Twenty-First Century Fox chairman make larger inroads in China, a fast-growing market that media moguls are finding complex to crack.
Time Warner's board rejected Murdoch's $80 billion offer, yet the Fox chairman is expected to continue the chase.
p> A deal would create a giant with more than $37 billion a year in revenues in the United States & Canada. It would moreover nearly double the revenues Fox generates from the emerging media markets in Latin America & Asia/Pacific.
"He sees 3 billion new consumers coming into the market & a rising middle class in China & India, & mobile devices & strong demand for content," said Mario Gabelli, the CEO of GAMCO Investors, in an interview with Reuters Insider, "He's going to be able to create Netflixes of his own."
Gabelli owns shares of both Fox & Time Warner.
Last year, Fox generated 42 percent of its revenue outside the United States & Canada. The company's Asian revenues, including those in Japan & China, grew by 40 percent, to $2.1 billion, over two years.
Time Warner's collection of cable channels would compliment Fox's programming in key territories.
In Latin America, where Fox faces off against large local players, Time Warner's Turner unit operates Chilevision, a large broadcaster in Chile, & moreover shows its TNT entertainment channel, Cartoon Network & locally tailored regional channels such as the kids channel Tooncast.
Turner offers three well-regarded channels in India, POGO, Cartoonito & Toonami, which could assist Murdoch's Indian programming behemoth Star India, which broadcasts 44 channels in seven languages.
HBO would likely be Fox's huge draw in foreign markets. The pay channel, with a history of hit programs such as "The Sopranos," has around 84 million subscribers outside the United States, beaming its shows into more than 70 countries, & sells programming from HBO & Cinemax into 150 countries.
In China, with Time Warner in the fold, Murdoch would be able to focus more squarely on profiting from what movies & TV shows the government allows.
In January, he sold Fox's 47 percent stake in Star China TV, which owns three 24-hour Mandarin channels, & in October sold off Fox's remaining stake in Chinese TV company Phoenix Satellite Television. These move come in the face of restrictions on foreign ownership of China media assets.
"Murdoch is not unique. The Chinese government says, 'We cannot let these people control our media,'" said William Yu, an economist at UCLA's Anderson School of Management, who focuses on emerging Asian economies.
A Fox spokesman had no comment. In recent earnings calls & conferences, Fox President Chase Carey has stressed the company's strategy of selling off assets it couldn't own.
"Long term, I still think that you ultimately want to either own & operate or monetize," he said at a UBS media conference in December.
Doug Young, a professor at Fudan University Journalism School, cautioned against overestimating the potential in China. "Taking two studios & combining, youâ€™ll obtain a company with twice as many growth prospects in China, yet in terms of either having many assets in China, itâ€™s just a market for licensing & selling," he said.
Still, the China potential is alluring. Consulting & audit firm EY estimates revenue from China's media & entertainment industry will reach $138 billion by 2015, from $59 billion in 2010. The country already has embraced streaming video & EY sees advertising revenue jumping.
Its mobile web users, the most in the world, are expected to hit 750 million by 2017, according to data from China-based consultancy iResearch.
Currently, China limits to 34 the total number of movies foreign companies can import. China's box office last year grew 27 percent, to $3.6 billion, second only to the $10.9 billion million U.S. market.
"Transformers: Age of Extinction," a movie distributed by Viacom's Paramount studio, has so far sold more tickets in China than the United States.
With its muscular films such as the "Harry Potter" & "Lord of the Rings" fantasy franchises, Time Warner's Warner Brothers studio gets frequent quota approval.
"China is a tremendous market & we've all wanted to be there for years," said former Viacom president Frank Biondi, one of the first U.S. media executives to visit the country. "But for all the upside, there's the obvious downside that the government controls everything – what gets put into movie theaters, what's put on TV."
A merger would allow Murdoch to use the Warner Brothers studio to claim more quota slots. In 2013, seven Warner Brothers films were granted a release in Chinese theaters, & six for Fox, according to Box Office Mojo.
Fox's Hollywood studio last year produced 14 movies, to Warner Brothers' 25 films. Fox has moreover agreed to co-produce five Chinese language films with Chinese studio Bona Film Group.
Warner's movies generated $155.9 million from three of its films that ranked in China's top 20 last year, including "Gravity" & "Man of Steel." Fox's three films in the top 20, including "The Wolverine," generated $80 million, according to Box Office Mojo.
A few of Time Warner's Cartoon Network shows appear on the state-owned China Central Television, & its HBO pay channel provides a five-hour block of programming as well. HBO's offering included a censored version of its fantasy hit "Game of Thrones".
"It's a huge opportunity," said former Paramount President Sid Ganis, whose Jiaflix company advises movie companies in China, "and media companies are only now beginning to figure the market out."
(Additional reporting by Malathi Nayak, Denny Thomas & Paul Carsten; Editing by Peter Henderson)
Arts & EntertainmentMediaTime WarnerRupert MurdochChina