What shareholders should consider: Litigation, succession, talent

What the Ailes troubles could mean for 21st Century Fox’s business — a primer for shareholders
Barry Ritholtz
WaPo, September 11, 2016



Roger Ailes, as the story goes, landed a media consulting gig with the Richard Nixon presidential campaign and is credited in “ The Selling of the President ” with helping land him in the White House. Ailes was not offered a job in the administration, and he went on to build a lucrative trade in shaping political opinion.

This summer Ailes’s career at Fox News Channel collapsed amid accusations of sexual harassment by female employees.

Last week, Fox’s parent, 21st Century Fox, agreed to pay $20 million to former anchor Gretchen Carlson to settle a suit claiming sexual harassment by Ailes.

Gabriel Sherman, an editor at New York magazine, has done the most to propel the Ailes story. (He is also the author of a tell-all on Ailes, “ The Loudest Voice in the Room .”)

In his story in the magazine last week, “The Revenge of Roger’s Angels,” Sherman quotes a “prominent Republican” as telling him that it was “Ailes’s well-known reputation for awful behavior toward women.”

Fox News settled for $20 million after former Fox News anchor Gretchen Carlson filed a sexual harassment lawsuit against former Fox News chief Roger Ailes. (Slaven Vlasic/Getty Images)
Rupert Murdoch hired Ailes in 1996 as the Australian-born media mogul was trying to go after Ted Turner’s then-dominant CNN. They launched Fox News, which emerged as a wildly successful and even more wildly profitable franchise. By 2002, Fox passed CNN in the ratings, and never looked back. (To build on his American media empire, Murdoch bought the Wall Street Journal in 2007.) According to Sherman, Fox News “generates more than $1 billion annually, which accounts for 20 percent of 21st Century Fox’s profits.”

With so much else coming clear, a material question remains: How does the fall of Ailes, so instrumental in turning Fox News into a media behemoth and a profit powerhouse, affect 21st Century Fox going forward?

Several areas could affect shareholders. Let’s consider each:

Shareholder litigation: One of the more shocking allegations that appeared in Sherman’s reporting in August was the lack of oversight on how Ailes spent money and that Ailes allocated a portion of Fox’s budget “to hire consultants, political operatives and private detectives who reported only to him, according to a senior Fox source.” This, if true, would be in addition to the millions of dollars to settle Ailes-related sexual harassment charges, and raises significant questions.
Among them: Where were the accountants? How could shareholder dollars be spent in such a way that it escaped notice in the annual audit? If Sherman’s allegations prove to be true, this would suggest people at Fox knew but did nothing. No wonder shareholder law firm Scott & Scott announced in a news release an investigation into Fox to “determine whether Fox’s Officers and Directors have breached their fiduciary duties.”

21st Century Fox declined to comment on the fund. It cited the following statement: “Within hours of the first public complaint raising an issue at Fox News, we commenced an investigation, and less than two weeks after that investigation began, the Chairman and CEO of Fox News departed.”

At the time, Ailes’ attorney Susan Estrich said, “These allegations are totally false.”

21st Century Fox shareholders should be much more concerned about Trump TV than CNN. These shareholders should be rooting for a Donald Trump presidency, as it would mean Fox News could get back to business as usual. (Mark Wallheiser/Getty Images)
Broadcast lineup: Lots of rumors here that might be of concern to shareholders. Bill O’Reilly, the foundation of the Fox prime-time lineup, is talking openly about retirement. Greta Van Susteren suddenly up and left last week. And Megyn Kelly, arguably Fox’s biggest up-and-coming star, has reportedly been exploring her options. It’s quite possible that the “most powerful brand in news” might look very different in a year, and likely, less powerful — and profitable.

And then there is Donald Trump. The network pivoted away from and then toward the Republican presidential nominee. Following the first GOP primary debate, Trump supporters — who count themselves as traditional Fox viewers — were furious at the network for their rough treatment of the candidate. But the most recent pivot, back toward Trump, has alienated a second group of Fox viewers. As The Washington Post reported last week, “in the Age of Trump, Fox is drawing disapproving, even scathing, critiques from an unlikely source: conservatives.”

Succession planning: As loathsome as Ailes may have been, his skill set and profitability will be difficult to replace. With him gone, Murdoch’s sons, James and Lachlan, are the next likely heads of the business. But they seem to lack his instincts, experience and perhaps most importantly, his politics. That might have an impact on how loyal viewers remain to the network, affecting ratings and the bottom line.

Demographics: As Frank Rich famously observed a few years ago in New York magazine, Fox News is graying fast. It is losing younger viewers at a faster rate than its competitors. With a median viewer age of 68, according to Nielsen data through mid-January (compared with 60 for MSNBC and CNN, and 62 to 64 for the broadcast networks), “Fox is in essence a [politically conservative] retirement community,” Rich wrote, whose viewers are much older than its competitors.
Fox’s viewers skew older, whiter, more ideological, less educated and have (slightly) lower income than its competitors. Beyond the shake-up, the demographic trend is not Fox’s friend. This does not bode well for future ratings battles.

Competition: The departure of Ailes gives Fox nemesis CNN a chance to close the ratings gap. As of April, CNN actually beat Fox News in prime time over five of the prior eight months. While some have blamed the “network’s embrace of Trumpism” (his candidacy and political doctrines), shareholders should be concerned about a shift of its long-loyal and traditional supporters away from the network and (gasp) back to CNN. Fox, it appears, may be in danger of losing its mojo.

Ironically, this should not be shareholders’ biggest concern. That would be the post-election launch of Trump News. An entirely plausible speculation among media watchers is that the endgame of Trump’s unlikely presidential bid all along has been to leverage the billions of dollars in free exposure as a branding exercise. The latest pivot in the fight with Fox could well be to become a competitor — a media mogul in his own right.

Vanity Fair noted “every election has its own breakout media star. . . . The breakout media star of 2016 is, inarguably, Donald Trump, who has masterfully — and horrifyingly — demonstrated an aptitude for manipulating the news cycle, gaining billions of dollars worth of free airtime, and dominating coverage on every screen.”
This seems plausible. The 2012 election certainly helped extend the Trump brand, and much of his fortune seems to have accrued since then. Post 2012 saw a spate of Trump-related licensing deals, some of which (Trump U!) have led to current electoral woes. Assuming polls prove true and he loses, the 2016 election could easily lead to the launch of — what else? — Trump TV.

Trump understands media as well if not better than just about anyone. Indeed, the way Trump is spending campaign money — Virginia? — suggests he is much more interested in campaigning to the media players than to voters in swing states.
Don’t underestimate how angry the Republican nominee is at Murdoch and company. Trump nurses grudges and sleights that most people would forget. Suing Murdoch (unlike the 3,500 or so other litigations USA Today reported that Trump is party to) would not accomplish anything. But becoming a media mogul gives him a genuine entrée into a potentially billion-dollar business, and a ton of street cred. What better way to repay the insults of the Murdoch clan than taking down Fox News?

21st Century Fox shareholders should be much more concerned about Trump TV than CNN. These shareholders should be rooting for a Trump presidency, as it would mean Fox News could get back to business as usual. A Trump loss, blamed in part on Murdoch’s network, could have negative ramifications for the media conglomerate.


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