Challenges at Time Warner - an Assessment Study on the Impacts of Acquiring Fox News

Running head: CHALLENGES AT TIME WARNER

Challenges at Time Warner

An Assessment Study on the Impacts of Acquiring Fox News

Abstract

The purpose of this case study was to examine the impact of acquiring Fox News on Time Warner, Inc. The multi-faceted Time Warner merged with AOL in 2001, created a loss in value to both companies. Time Warner has sought after ways to either increase overall revenue through divesting portions of its corporation or acquire new companies to bolster earnings. This paper explores the impact created by the acquisition of Fox News by Time Warner to its news network line-up. The impact of complementaries, creations of anti-trusts, and the actually of a synergy taking place between CNN and Fox News.

Introduction

In January 2000, Time Warner, Inc. (TW) announced its plans to merge with America Online (AOL) and upon completion in 2001, it had become the largest merger in U.S. corporate history. AOL had a pre-merger value of $163 billion and Time Warner had a preannouncement value of $100 billion, in 2001, the value of the combined firm was stated at $165 billion. While many saw an opportunity to create a synergy out of the two media giants, the overall firm saw little success as a combined entity and has since faced several challenges. Michael R. Baye addresses several issues for discussion concerning the merger in his textbook Managerial Economics and Business Strategy, through the usage of hypothetical memos issued within Time Warner. Memo 4 discusses the possible acquisition of Fox News to increase revenues, bolster subscriptions, and expand their international market. The purpose of this paper is to address the specific problems Time Warner faces by acquiring Fox News and to provide strategic moves that best capitalize on Time Warner's current situation.

Methodology

Qualitative and case study research were the primary methods used to obtain information for this case study. Information obtained from the Baye's case study on Time Warner and the Network Earnings spreadsheet within the Managerial Economics and Business Strategy textbook were analyzed to identify problems with the proposed Fox News acquisition. Economic analysis of the relevant market, likelihood of the proposed CNN and Fox News merger's approval, and the probability of a successful synergy between CNN and Fox news were evaluated.

Economic Analysis

Cable News Network (CNN) is a division of the Turner Broadcast System (TBS) owned by Time Warner. Launched in 1980, CNN was one of the first broadcast news networks to successful introduce the idea of 24 hour news coverage. Although many doubted the idea of a 24 hours news network According to Nielsen ratings, CNN is ranked as the U.S.'s number one cable news network, but is surpassed by Fox News in ranks of its long-term viewers through its' Nielsen Points ratings. In 2003, CNN had an estimated 87.3 million subscribers, monthly revenues of $820,000 and a 34.9 percent margin of revenue. Fox News had an estimated 83.6 million subscribers, monthly revenues of $410,000 and a 44.9 percent margin of revenue.

CNN ranks number one overall in news networks for monthly revenue, bringing in nearly double the earnings when compared to Fox News. It is clearly a strong division within TW to grow the company's profits. CNN grosses the highest monthly revenues of the eight cable news networks, nearly doubling the profits of its second largest competitor CNBC (Baye, 2005). The first step in addressing the idea for TW to acquire Fox News is to explore the issue of the complements that applies between Fox News and CNN. TW must then examine the prospect of the actually merger taking place under the Department of Justices regulations on mergers. Finally, TW must look at the realistic possibilities of synergies between CNN and Fox News actually taking place.

Complementary Services

Goods or services that are complements arise when the increase in the price of one good leads to a decrease in the consumption of another good (Baye, 2005). If TW were to acquire Fox News and place it into the TW cable programming line up, it would create direct competition between the two news networks; CNN and Fox News already compete with one another for viewer ship. TW would be adding a news network to its cable line up that it had not previously provided its customers. TW cable customers that were CNN viewers may switch to viewing Fox News, causing CNN to lose revenue.

Although TW would gain the revenue back earned from a loss in CNN viewers to those gained through Fox News viewers, overall the net gain and loss would cancel out. Instead, TW would gain the production costs and sales, general and administrative costs associated with producing Fox News. TW would have to have suitable reason that by acquiring Fox News that it would increase its overall cable subscribers. By acquiring Fox News, TW would be directly creating a complementary for CNN to compete with which is not an overall beneficial move for TW to make.

Merger Issues

When examine the prospect of acquiring Fox News, TW must first examine the concentration ratio of the market and the pre and post merger Herfindahl-Hirschman indexes (HHI) of TW to ensure that the merger would not violate current anti-trust laws (Baye, 2005). The concentration ratio measures the output produced by the largest firms within an industry to the output of the overall industry (Baye, 2005). Using the data provided in the Managerial Economics and Business Strategy textbook, it is determined that the four largest news networks are CNN, CNBC, Fox News and MSNBC. The four firm concentration ratio calculates to 0.755, meaning that the network news industry is very concentrated.

The Herfindahl-Hirschman index (HHI) is another measure