News Corporation (NWSA)
August 08, 2013 11:00 am ET
Reed Nolte – Senior Vice President of Investor Relations
Keith Rupert Murdoch – Co-Founder, Executive Chairman, Chief Executive Officer, Chairman of Media & Entertainment Arm and Chief Executive of Media & Entertainment Arm
Chase Carey – President, Chief Operating Officer, Director, President of the Media & Entertainment Arm and Chief Operating Officer of the Media & Entertainment Arm
James N. Gianopulos – Director
Dana Walden – Co-Chairman and Co-President
Gary Newman – Co-Chairman and Co-President
Peter Rice – Chairman of Fox Networks Group and Chief Executive Officer of Fox Networks Group
Jack Abernethy – Chief Executive Officer of Fox Television Stations, Inc.
Eric Shanks – Co-President and Co-Chief Operating Officer
Randy Freer – Former President
Greg Clayman – Head of Ipad Newspaper
John Landgraf – President and General Manager
Hernan Lopez – Chief Executive Officer and President
Uday Shankar – Chief Executive Officer
James Rupert Murdoch – Deputy Chief Operating Officer, Director, Chairman of News International and Chief Executive Officer News International
John P. Nallen – Chief Financial Officer and Senior Executive Vice President
Laura A. Martin – Needham & Company, LLC, Research Division
Benjamin Swinburne – Morgan Stanley, Research Division
Jessica Reif Cohen – BofA Merrill Lynch, Research Division
Barton E. Crockett – Lazard Capital Markets LLC, Research Division
Anthony J. DiClemente – Barclays Capital, Research Division
Alan S. Gould – Evercore Partners Inc., Research Division
Richard Greenfield – BTIG, LLC, Research Division
David Bank – RBC Capital Markets, LLC, Research Division
Adam Alexander – Goldman Sachs Group Inc., Research Division
Todd Juenger – Sanford C. Bernstein & Co., LLC., Research Division
Good morning. I’m Reed Nolte, Head of Investor Relations. And I’m very pleased to welcome you all to the first Twenty-First Century Fox Investor Conference. As you can see from a rather ambitious agenda, we have a great lineup of company executives for you to hear from and interact with today.
First, we’ll have opening remarks from Chairman and Chief Executive Officer, Rupert Murdoch. He will be followed by our President and Chief Operating Officer, Chase Carey, who will share with you an overview of many of our plans and goals for building shareholder value over the next several years. The bulk of our day will be for you to hear from the leadership of our major operating units, starting with our content businesses and shifting to our channels businesses, and followed up with a review of our DTH businesses by Deputy Chief Operating Officer, James Murdoch, early this afternoon. Following his presentations, John Nallen, our Chief Financial Officer, will give you a financial overview of the company, which, in many ways, will tie together much of what you will hear today.
Also note that we have 2 Q&A sessions, a brief one, midmorning, following the domestic business presentations and a longer session before our conference concludes, which we say, if on track, should be a little before 2:00 this afternoon.
Before we get started, I’ll show you the Safe Harbor Statement. It’s also available on our website. Well, I’m not going to read the whole statement here. Please note that today’s presentation may include certain forward-looking information with respect to Twenty-First Century Fox’s business and strategy. Actual results could differ materially from what is said. Twenty-First Century Fox’s SEC filings identify risks and uncertainties that could cause actual results to differ.
I would also note our use in this presentation of segment operating income before depreciation and amortization, or EBITDA, as we refer to it. A reconciliation is available in our earnings release for the year ended June 30, 2013.
Now with that out of the way, it is my pleasure to introduce our Chairman and Chief Executive Officer, Rupert Murdoch.
Keith Rupert Murdoch
Well, good morning, everybody, and thank you very much for joining us here on this studio allotted this morning. I know many of you have traveled across the country to be here. And I believe this will be a day to remember, a day we will spend providing you with direct insight into our businesses and our growth plans, a day where we will show you why there is no better media investment than Twenty-First Century Fox.
From Fox, having a new start as a distinct public company, the desire and identity, with it’s own strategy, it’s own growth and capital plan, allows us to intensify our focus and drive overall shareholder value.
Over the next few hours, you will hear directly from the leadership team that runs our businesses day to day, the team that I think is the best in the industry. Well, we’ll share with you our track record and our growth plan, including the new opportunities we are pursuing, our new national sports and entertainment channels in the United States and the development of sports channels across the breadth of India, integration of new hit content to add to our libraries, to name just a few. And with all these exciting plans, it’s important for you to appreciate my own expectations of Twenty-First Century Fox.
We have great prospects ahead borne out of our enhanced ability to focus on and pursue strategic priorities and opportunities that will drive us to new heights and deliver even more value to our shareholders. I’m confident that we will capitalize on the financial and operational flexibility we now have, but continuing our approach to be nimble and decisive in this rapidly increasing global industry. And we intend to make disciplined, innovative investments within the framework of an efficient capital structure. My hope is that after today, you will walk away with our shared sense of excitement about the future.
I’m not giving what it looking backwards, but when I think of where we started in 1985, Twenty-First Century Fox was a $300 million studio without many films, and I take pride now on how far we have come and the value we’ve created over the last 30 years.
In fact, I’m reminded that this very soundstage has brought such memorable films as The Seven Year Itch and Young Pranker’s Son [ph] were shot. And when we made such TV shows as NYPD Blue and House, other successes would follow the studio. Once they were viewed, at the time, as risky ventures, but ultimately ones that created great value.
Putting the FOX Network on the map in the ’80s, a merger which created BSkyB in the early ’90s, the creation of FOX News and a bet on a movie called Titanic. As Jim Cameron recently said, we’re not easy for him to pitch $100 million movie about a Romeo and Juliet love story on a sinking boat. Well, everyone knew how the story ended. Well, in fact, Jim Gianopulos, I think, is still afraid to tell me how much that movie cost. All he will say is less than EBITDA, and that’s an understatement. And if Jack would show you, we’ll come back to it.
Anyway, the truth is that we’re a company that takes risks, but they are informed strategic risks, and then our track record over the years speaks for itself. Now we’re on the course of taking our successes to an even better level. The new company is made up of a world-class portfolio of assets. We are the global media company everyone else wants to imitate. We’re the company that attracts the greatest talent because we have made — we have more fun doing what we do than anyone else.
As our agenda progresses today, our top executives will share with you the strengths, strategies and growth plans of each of our businesses. During the last 5 years, this team successfully drove our businesses forward in the midst of the biggest recession in more than half a century. Over the last 3 years and beyond, the same team will accelerate Twenty-First Century Fox to even greater achievements.
Not that we don’t face our share of critics, some say it’s not likely we can do today what we did before. Well, many of you know that sequels can be far more lucrative than the original. And the truth is that opportunities are better today than they were yesterday. And tomorrow, they’ll be better than they are today. We live in a world where each year, millions of people are lifted out of poverty. And thanks to free enterprise and information revolution, all borders and obstacles are obsolete. And we have a great and growing global middle class who hunger for quality news and entertainment.
The advances in technology that have helped fuel the rise of this middle class also enabled us to deliver our stories and content to more people than ever before. And what is it even 5 years ago, we could not have imagined, and at a price more and more people can afford.
Just imagine, there’ll be 1 billion new smartphones sold this year alone, all with fabulous screens and even bigger brands. And this will shake up the standard assumptions for how we do things. Our challenge at Twenty-First Century Fox is to get there before everyone else. It’s a question of attitude, and it’s an attitude of innovation, unbridled curiosity and the get-it-done approach that I have demanded this company for 50 years now. And I don’t intend to let that culture change.
The big advances today came from new models that helped us deliver what our customers want, when they want it, whoever they are and at a fair price. Let me be absolutely clear, content is still king. In this fragmented world, mediocre content has limited to no value because people will find something they really care on another channel, on another device or another medium. The value of hit content is going to continue to increase exponentially, and then as valuable content is going to be that, which is truly unique.
We earned unique iconic content from our vast movie library, to The Simpsons, Modern Family, Master Chef, you name it, and they are watched all over the world. And if you look at our prolific success in developing new hit shows like Homeland, American Horror Story and The Americans, we are fueling a new renaissance in cable television, creating programs with the quality and depth that was once reserved for the movies. That’s the power and the value of our creative flexibility.
Let me note that in this increasingly flat world, a good story knows no border. Every year, billions of people tune in to our channels across the world for news and entertainment, watch our featured films, download our television shows and follow our sports forecast. We appeal to people of every age group who ride across the old boundaries of race, creed, color and nationality.
We recently released a film that exemplifies the worldwide appeal of our content. You may have seen it, Life of Pi, the story written by a Canadian author, brought to life by a Taiwanese-born director, Ang Lee, about an Indian boy who drifted in the Pacific Ocean with a tiger named Richard Parker. The film was very high-risk, but the healthy — but the beauty of the story, it’s underlying sort of spirituality and the profoundly gorgeous visual effects found a global audience, not to mention 4 Oscars for our studio.
We’ve never been broken. We know that growth outside the U.S. will exceed that in the U.S. And we have the unique position of leadership to build on in the international markets. Our growth plan capitalizes on those strengths. Throughout the day, you will see that we are an organization of thoughtful risk-takers. Our greatest successes have come into businesses we have built, not acquired, and that is our preference for allocating capital to grow this company. And it’s a growth plan you will hear about today that will underpin how we deploy our balance sheet and how we migrate to a more efficient capital structure, something that Chase will explain on shortly, I think with some specially juicy details.
Twenty-First Century Fox touches people every day and inspires. I’m proud of the establishment of the all-new News Corporation — the achievements, rather, and I’m truly excited about the opportunities ahead for Twenty-First Century Fox.
So now, it’s my pleasure to introduce our President and Chief Operating Officer, Chase Carey. Of course, for most of you here today, Chase needs no introduction. We’re all well aware that Chase, his history with this company goes about 25 years, had been instrumental in many of the bold initiatives that have made our company what it is today. Never want to be satisfied with prior successes, Chase continues to drive the business forward, setting the stage for tremendous growth to come, capitalizing on the opportunities I’ve touched on a moment ago. Then I think on a more personal note, I’d like to say that Chase had been an invaluable, trusted adviser and friend to me for decades. Suffice it to say, I aptly, in no doubt, the next several years, ascertain to bring all of the successes Chase and the team will describe for you over the remainder of the day.
So now, let me turn things over to Chase. Thank you very much.
Thank you, Rupert, and welcome, and thanks to all of you for joining us. While you may not be too happy having your summer interrupted for a trip to L.A., we are very appreciative for this opportunity to share our plans and goals for Twenty-First Century Fox.
It’s an exciting time for us because we believe we are uniquely positioned among our peers to transform our business and take it to an entirely new level of revenue growth and profitability over the next 3 years. This growth will be driven by maintaining and building on the momentum in our existing core businesses; adding new dimensions to these core businesses to leverage our strengths and ensure continued long-term growth in revenue, profits and cash flow; leveraging our content and platforms across the globe to capitalize on the attractive fundamental trends these international markets provide; capitalizing on the focus and alignment from the split of News Corporation to streamline and coordinate our operations to enhance efficiency and execution; and tailoring our balance sheet and cash flow from operations to maximize shareholder returns, while also pursuing disciplined investments to further strengthen long-term growth.
Picking up on several of the comments Rupert just made, the strategic pillars we will rely on to achieve these goals begins with content, more specifically, hit content. Unique hit content and brands will be the sweet spot in the media world of tomorrow. All the existing and emerging platforms and devices are going to demand products. However, not content is equal. There’ll be winners and losers. Fragmentation and new technologies will make mediocre content in channels and commodity. The winners will be those with the strongest and most unique brands and content.
The second pillar is scale. If hit content is the key to success, then hit content at scale, coupled with the most powerful distribution network in the world, is the formula that will bring us to even greater heights. It’s our goal to make sure that we have a broad and deep mix of great, must-have content for every distributor and more importantly, for every customer, that every new digital device and platform needs our content. We recognize the world will be more competitive, and those with whom we do business may be larger. Nonetheless, we believe great content and brands at scale hold the winning hand.
Our third pillar is global leadership. While we are enthusiastic about the future of our businesses here in the U.S., we’re even more excited about the potential to expand our franchises outside the U.S. That growth will be partially fueled by the fact that international markets are still in early growth stage, even in developed markets. More importantly, we have a position of leadership in both our channels and platforms and are adding dynamic new dimensions to that leadership position around the world, particularly in the critical sports area.
Fourth, we intend to be a company with long-term sustainable growth and cash flow. Building this long-term growth will require investments that impact short-term profits, but we will ensure we can absorb these investments while maintaining solid near-term growth, a balanced long- and short-term story.
Our ultimate goal is to build shareholder — maximize shareholder value. One of the cornerstones to building that value is to prioritize building businesses over buying them. We recognize building businesses is hard work and incurs early-stage losses and typically involves more risk and volatility, but we believe the rewards are more than ample justification. We have a proven track record of success in building businesses and believe it is critical we continue to take advantage of the leverage and strength of our current businesses to build new ones.
Finally, we want to be an organization that distinguishes itself the sense of energy, excitement and entrepreneurial spirit. It’s always been a part of our DNA, and we need to not only maintain that but build on it. People have always viewed our culture as unique, and that has been an important differentiating strength. For a company that is agile and decisive, an organization that is flat and streamlined, that pushes responsibility down to executives, this enables us to be opportunistic and ahead of others, as we have been in building our international channels. In a digital world where change and volatility are increasing is important — more important than ever to be a leader, not a follower. This unique culture enables us to attract the best management and talent because it provides them opportunities to grow and take on new challenges.
Today, we plan to provide insights into the businesses we’ve built, where they’re going and the management that leads them. As an introduction to those presentations, I want to summarize the financial targets we’ve set for ourselves over the next 3 years. Our targets obviously reflect a set of market assumptions, which we believe are realistic, and execution targets we judged achievable, although we don’t have a crystal ball and reality rarely follows the script. Nonetheless, we decided it is important to provide new visibility to our plans. The targets I will discuss are real. They are the ones against which senior management will be measured and compensated. The bottom line is that we wouldn’t give you a target if we didn’t expect to hit it.
Our 3-year plan has a fiscal 2016 EBITDA target of $9 billion plus, a low-teens annual growth rate over 2013. That target does assume eventual majority control and consolidation of the YES Network, but assumes no other new businesses beyond those we have today I’ve already announced.
The earnings growth would be lower in the next 2 years, high single to low double-digit in fiscal 2014 as we launch U.S. sports and entertainment networks, as well as Asian sports networks. These channels are an example of trading some short-term growth for sustainable long-term growth, building, not buying new businesses, leveraging our existing assets and creating shareholder value. We will invest $400 million to $500 million in aggregate over the next 2 years building these networks. We anticipate them to become profitable at 2016 as costs flatten out, while revenues continue to grow. And we expect them to generate $400 million to $500 million in annual profits in 5 years, with a continued strong growth from there.
Turning back to our $9 billion plus EBITDA target in 2016, the presentations to follow will provide insight into the factors that will drive growth in individual businesses, so I’ll just comment on a few highlights upfront. To start, this growth will be topline-driven. We expect revenue growth during the next 3 years in the high single digits. That doesn’t mean we don’t focus on costs and efficiencies, we do. Through high operating leverage attributable, through a high proportion of fixed costs, our margins will rise a bit. However, we need to continue to invest in our content and brands to build on our leadership and make our franchises even stronger, resisting the temptation to melt the profits and sacrifice our leadership. Content is a growth business. Premium content is just going to get more valuable, so our first priority has to be keeping the content brand strong.
The channels group will continue to be the engine that drives Twenty-First Century Fox, with 3-year average growth in line with the company’s low-teen annual EBITDA growth rate, not surprising since this group represents about 2/3 of our overall profits. Affiliate revenue will be the foundation for this growth, with solid low-teen annual growth during the next 3 years.
New competitors like Google, Intel, Sony and Apple could further energize the market through increased competition for content and new services for consumers, although our plans don’t reflect these developments. There’s also upside from emerging forces like mobile platform demand and targeted advertising. The international channels will lead the channels group in growth, as advertising and affiliate revenues will benefit from both our leadership position and continued overall subscriber growth in the broader market. We expect Fox International Channels, or FIC as we call it, to pass $1 billion in profits in fiscal 2015 in spite of $100 million plus in headwinds due to the strengthening dollar.
At STAR, we expect India’s economy to grow modestly, but anticipate forces like mandated digitization to continue to drive subscription television. We will build on our leadership position in entertainment while we add the sports dimension to our business.
Our India story is longer term, but important. STAR will generate over $0.5 billion in annual profits in 5 years and cross $1 billion a few years later. While our international channels will have the highest growth in this segment, the foundation for our continued growth is our U.S. channels group, which represents almost half of our company-wide profits and will generate solid low double-digit annual growth for the next 3 years. We plan on achieving these results in a flat subscriber market, as modest household growth offsets marginal growth in cord-cutters, or more specifically, cord nevers, and the low-growth economy. We’ve assumed affiliate revenues that we believe are conservative, given the terms of our recent renewals and the unique strength of our channels.
FOX News is a juggernaut with a passionate following that defines the phrase, must-have channel, and FOX News is really coming into its own as a strong, dynamic and profitable sister channel.
FX has left general entertainment networks like USA and TNT behind, with the most compelling mix of drama and comedy in TV. It is a basic channel that competes with HBO and Showtime for the best entertainment in television, and with the addition of FXX and FXM, it’s poised to out a whole new dimension.
Our combination of sports properties in a world where sports is king positions these channels for exciting growth, particularly as FS 1 builds over the next few years.
National Geographic is one of the world’s great brands and, frankly, an opportunity waiting to happen for us. Our new management team has ejected fresh energy and momentum in the last year, and a target for this group of channels is Discovery and A&E.
On the cost side of our cable business, almost all our sports rights are now under long-term contracts that extend beyond these 3 years. Additionally, our plans reflect an increase in investment in entertainment programming, driven by the launch of the FXX channel.
Next, let me touch on our television business, networking stations, where we look for low- to mid-teens EBITDA growth fueled by retransmission. This business is the most under — misunderstood in our industry for the so-called experts dwelling on declining ratings and other pressures. Broadcast is not a business in decline. It is, in fact, the most powerful force in the dynamic and growing business we call cable television. Our network is at the top of the food chain in the ecosystem called cable programming. The biggest events and the most important local content reside in broadcast. And as this business transitions to a dual-revenue business, it has an increasingly exciting future. Our network defines must-have content.
During the coming year, we will be investing more in entertainment content to ensure the next generation of hits and our sports costs will increase during the next few years. However, we can more than absorb those investments through the unique importance of our content to advertisers and subscribers.
We will also further strengthen our business by breaking the outdated rulebook for prime time television and pursuing improvements in measurement, taking more control over viewership, through initiatives like TV Everywhere, and continued expansion in social media.
We’re not in denial about the challenges of fragmentation and expect these initiatives and investments to enable us to simply stabilize advertising at a low growth rate for the next 3 years. The transforming event is retransmission, which still represents a fraction of its competitive value.
The other leg to our television business is our station group, where industry-leading efficiency, unique strength in local news and leadership in local sales, provide a solid area of growth and profitability. Together, our network and stations are well underway to a level of profitability that reflects their importance in the market.
Turning to our film and television production businesses. These operations have a track record of success that puts them at the top of the industry for the last 10 years. The executives you will hear from today are the ones who’ve delivered those results. Success in this business begins and ends with management. You need executives that can attract the right talent, while exercising the right discipline that can build the best marketing and distribution organization to maximize our profits and further strengthen our hand. And you need a team that has the expertise to leverage the value of a deep library enhanced by a steady flow of new compelling product. We have just that team.
Our film business has a great slate of films looking forward, and TCF TV will begin this new broadcast season in familiar territory as the industry leader in terms of new and returning series on the air. Our expectations for these businesses are modest, low-single-digit revenue and EBITDA growth to 2016. It’s a reflection of the uncertainties of the content business, not the quality of our business.
We also assume only nominal growth in the home entertainment arena, although there are signs that digital distribution could be a bigger force. We have a Netflix agreement in place through 2016. We’ve not assumed aggressive new entrants in this dynamic digital distribution space, although that seems possible, if not probable, as well.
The final segment to touch on is DBS, which really means Italy and Germany, because the U.K. and India are not consolidated results. James Murdoch will address BSkyB when he talks about DBS in the afternoon, and Uday Shankar will cover Tata Sky.
Focusing on Italy and Germany, these businesses are expected to experience pretty dynamic growth over the next 3 years, at least doubling EBITDA from where they are in 2013. In Germany, this growth will be topline-driven. SKY is continuing to build momentum and demand for quality subscription television, as German audience have proven their appetite for premium pay-TV offerings. Most key content is locked for the next few years, and many exciting enhancements like Sky Go are just being launched.
In Italy, our platform is strong from a competitive and quality perspective, but it is operating in a very difficult economic environment. Through improved intermediate-term results, we need to reduce annual cost by $200 million plus. With a number of program agreements expiring in the next 12 to 24 months, we’re confident we can achieve this goal while maintaining modest revenue growth without any improvement in the economy.
Before returning to our balance sheet, let me address a few top-of-mind topics in our industry. First, the risk of à la carte are unbundling, let’s start with the easy part. À la carte is a fantasy. Consumers actually want to bundle, they just want a different bundle. The reality is that any new bundle would create other issues, like higher costs for individual channels. Actually, today’s bundle is a great consumer proposition. We do not believe it will materially change in the short to medium term. With so many agreements tied to the bundle, the discussion around this issue is about negotiating leverage and headlines, not real change.
Our goal has been to navigate these agreements and reach deals without noisy headlines and our track record over recent years speaks for itself and I think, do evolve long-term and there will be winners and losers. The companies with the strongest and broadest mix of key content and brands will come out on top.
Second, does the increasing cost to the bundle lead to cord cutting? Again, the reality is that this content is such a fundamental part of daily life that people will give up food and the roof over their head before they give up TV. The real question is whether consumers have a better alternative. And let me be clear, Netflix is a channel, not an alternative. YouTube is not a replacement and they’re already overhauling recent efforts in branded content. There isn’t an alternative today or even on the horizon. The U.S. is a mature market, but we see no meaningful evidence of cord cutting today, subscribers were essentially flat the last 12 months.
The one legitimate issue is the 20-year old cordnapper[ph]. It remains to be seen what happens as this generation ages, but what is clear is that this is an issue that will play out over the next 10 plus years, not the next 3. Additionally, we will continue to participate in the over the top market with our investment in Hulu, an investment we recently decided to maintain and with our partners, committed to significant further investment.
However, the increasing cost of the bundle will create pressures. First, we heard channels will and should get squeezed. Consumers have more than enough choice so the priority has shifted to quality, not quantity. We want every one of our channels to strive, to stand on its own two feet. We would rather have a bouquet of great channels that acres the mediocre ones making the same profit. Furthermore, the margin on video for the distributors will continue to get squeezed by strong content. Distributors need the content to drive their overall business. The industry would be better off if they used their existing strengths to build new revenue streams from areas like on demand, targeted advertising and other new services.
Pricing power with the consumer will also be helped by enhancements to the customer experience like initiatives such as TV Everywhere. Third issue, rising sports costs and the impact on prices. There’s a reason sports cost a lot. It’s the most important content on television, period. This is the content that drives new technologies, defies manipulation and advertisers crave.
Let me quote a Senior Executive from Time Warner Cable, probably the loudest critic of sports cost. “The role sports is playing in television today is more important than ever because it’s the one thing that’s not replaceable.” Who has paid the highest prices for sports contest in recent years? MVPD. Look at what has happened to DISH’s business where it doesn’t carry key RSNs like YES. It is not just 1/4 or 1/3 of customers that care about sports, 3/4 of the top 100 events in TV last year were sports. It is the content that binds a community, that people talk about during the day. In an increasingly fragmented world, sports is the one strand that ties us all together. It is also important that our unique scale in sports gives us unique leverage. We’re not one sport or one regional network, we represent a combination of regional, national and global sports that touch almost every home.
Finally, let me give you a dose of reality about our sports business. During the last 4 years, our average RSN rate is up less than $1 a month in aggregate. One believes that, that $1 is breaking the back of the $150 a month triple play bundle than they’re smoking something. As is frequently the case, much of the noise around this issue is nothing more than public posturing.
Final issue I want to touch on is Aereo. I’ll not say too much due to litigation, but I want to be clear that the issue here is piracy. Aereo itself is little more than a gimmick and I’m not sure it’s going anywhere. Aereo and other like efforts will not impact our business in the near-term, but they’re stealing our content. If we let one do it, then others will follow. We needed to do a revenue business to be viable. Our preferred path is to have our rights protected through legal or regulatory means. If not, we will pursue business solutions longer-term. While business solutions are not a preference, it is interesting to note that many of those business solutions could materially increase the profitability and value of our business.
Having spoken to our operations, let me close by addressing our balance sheet. We had a chance to discuss key principles with our new board after preliminary guidance from key entities like the rating agencies. I’ll highlight some of the important points we agreed upon at this time, and John Nallen will address these issues a little bit more later. First, we want to be a solid investment-grade company, roughly around our current rating with an appropriate level of leverage, which means gross leverage of 2.5x to 3x.
Second, we want to have enough cash in our balance sheet, that flexibility to be opportunistic and move quickly, which means $2 billion to $3 billion.
Because we are generating significant cash from operations, this number will obviously ebb and flow. Finally, excess cash in the balance sheet and from operations will be used to invest in our businesses and to return to shareholders. We view ourselves as a strategically complete company so we expect investments to be ones that fit into our current business footprint, that leverage our existing operations and generate attractive returns. We recognize that our balance sheet today is overly liquid. Consequently, our Board is authorized a new $4 billion buyback, which will replace the stub remaining as of today from our existing buyback claim. We aim to complete this buyback in the next 12 months. Our Board is also authorized an increase in our annual dividend from $0.17 to $0.25 on a prospective basis. We recognize that when you add the cash flow from the coming year to our existing balance sheet, we will have moved closer to the targets I discussed, but still a material way s away. We expect additional buybacks and dividend considerations to be part of our longer-range plans. However, we believe it is appropriate to make those specific decisions as we get closer to that date and time. Our goal today is to give you visibility to our current thinking. It’s equally important for you to recognize that, that thinking is based on what we know today and specific future decisions will always be subject to changes in the larger world, in our competitive arena or opportunistic actions. We believe tying ourselves to a rigid set of long-term rules and an increasingly volatile and changing world and industry would limit our ability to deliver results. At the end of the day, we trust you will believe in our ability to make intelligent decisions that will build shareholder value.
I appreciate your time, and I’ll be back with the Q&A sessions coming up later. But, at this point, I’m going to turn it over to Jim Gianopulos, the Chairman and CEO of 20th Century Fox film.
James N. Gianopulos
Thank you, Chase. Good morning. As you heard in Rupert and Chase’s opening remarks, we believe that premium content has increasing value and even greater opportunity for modernization in today’s media landscape, driven by the globalization of markets and expanding digital platforms. Because every device, programming, service and business model is ultimately content-driven, Twentieth Century Fox has an enviable position as one of the world’s premier creators and distributors of filmed entertainment. And although we don’t disclose results for the movie studio independently, our performance is outstanding. And today, I want to share with you some benchmarks that compare our film business to our competitors. In 3 of the past 4 calendar year, we had the best EBITDA margin and the highest profitability. We’ve shown great consistency and have been profitable in every consecutive quarter for over 10 years, not easy in the movie business. And as you can see in this chart, over the past 4 calendar years, 20th Century Fox’s EBITDA margin percentages are among the highest, among all major studios, consistently the highest. Our strong financial performance and outlook are driven by 6 key strategic components: a focused multi-audience production strategy with strong franchise performance and a dominant presence in animation; strong risk management through production and marketing cost-containment and access to beneficial third party financing; maintaining the industry’s leading international organization; leveraging our distribution infrastructure and scale through third party relationships; exploiting growth opportunity in digital distribution across home entertainment and television windows and in all media; and employing technology to reduce our supply chain and releasing cost across our businesses.
I’ll expand a little bit on each of these starting with our production strategy. We operate 5 production labels, each with the distinct creative strategies, spanning all audience films in every genre, specialty films and local content. Our approach ensures that we align the target market and revenue potential for each film to its production and marketing cost, while providing access to a wide and diverse audience base. The main division, Twentieth Century Fox, makes films with broad appeal. They include successful tent-poles like Avatar, Prometheus, Rise of the Planet of the Apes, Wolverine. We also generated enormous returns on modestly budgeted films such as Taken 2 last fall and The Heat, just this summer.
Fox 2000 generally pursues literally driven properties such as Walk the Line, The Devil Wears Prada, Marley and Me, our Percy Jackson franchise, with the second installment released very successfully just yesterday. And of course, as Rupert mentioned, our most recent triumph is the critical and financial success, Life of Pi. We turned over $600 million in the Worldwide Box Office and 4 Academy Awards, more than any other film this year. But it is the support that we have from Rupert and Chase to take creative risks like that, that makes a film like that possible. So we truly benefit from that opportunity.
One of the most popular and lucrative global genres as we all know is CG animation. And our own FOX animation, which includes Blue Sky Studios, creates successful films in the genre. But now thanks to our recent partnership with DreamWorks animation, we have the power of the 2 of the 3 most successful studios in animation, making us a dominant force on par with Disney.
These 3 divisions produce our most globally recognizable films and have created some of the most enduring franchises in movie history, properties like X-Men and Planet of the Apes, and Aliens, Ice Age, Night at the Museum, Alvin and the Chipmunks, it goes on. These films have generated billions of dollars in Box Office and ancillary revenues and they also provide us with low risk opportunities for future installments.
And our franchises also provide enormous value beyond film distributions, such as our 9-figure agreement with Disney to launch Avatar themed parks, worlds across their parks worldwide. And a Cirque du Soleil-like Ice Age touring show, digital tie-ins like our mobile app for Angry Birds Rio, which was downloaded over 250 million times. 250 million people have too much time on their hands. And our recently announced partnership to develop the first international 20th Century Fox theme park in Malaysia, featuring attractions based on a number of our most recognized film franchises. And there are other ongoing discussions with several partners in China and other parts of the world for similar parks and locations.
In addition to our success with all audience mainstream films, we also play a dominant role in the specialty film market with Fox Searchlight, producing and acquiring films, which don’t fit the main studio paradigm. These movies typically give great talent to create a freedom to make bold films, but within a financially disciplined model, usually in the $10 million to $20 million range, providing the chance for substantial profits when a film breaks out. Some of Searchlight’s key successes include The Descendants, The Best Exotic Marigold Hotel and of course, Slumdog Millionaire, which generated over $375 million in Worldwide Box Office and won 8 Academy awards.
In addition to Hollywood movies, international audiences also enjoy local films, with familiar images and language and cultural resonance and they’re achieving a growing market share. We ceased on this opportunity, and 4 years ago, we launched Fox International Productions to make films aimed primarily at local audiences. And since its launch, Fox International Productions has generated over $0.5 billion in worldwide Box Office and we’ve created local hits in significant markets such as India, China, Japan and Germany. And obviously, you know well, the movie business isn’t without substantial risks, and that’s why each of these 5 divisions follow the same rigorous process to greenlight movies. Our economic analysis considers the merits of each project based on input from all parts of the studio, from production and marketing and every distribution channel. And we exercise great discipline to control production and marketing costs. In addition, we recently closed a multiyea r agreement with slate financing partner, TSG, continuing our relationship with the former principal of Dune Capital Management. This deal validates the confidence our investors have in our continued success while providing downside protection across our entire slate.
So taking together these 3 key elements of our risk management approach contribute our industry-leading margins and consistent financial performance on a year-to-year basis.
Now, as you’ll hear throughout the day, there is no media company with a greater strategic focus on international growth than Twenty-First Century Fox and that’s certainly very apparent at the film studio. As you can see, just 10 years ago, the domestic and international theatrical markets were about equal. But today, the International Box Office is more than twice domestic. So to take full opportunity and advantage of this opportunity, we’ve built a world-class international organization covering over 100 markets and with few exceptions we’re present in every corner of the world. The performance of our international theatrical organization leads the industry, evidenced by our ratio of International Box Office to Domestic Box Office and a number of other significant milestones. So pardon me if I brag a little. We’ve ranked #1 by International Box Office in 3 of the past 4 years; we we’re the only studio to cross the $2 billion International Box Office mark in 6 calendar ye ars; we’ve released the top 2 animated films of all time internationally; and this performance is consistent around the world. In 2012, we have the top market share in China of any U.S. studio, generating more than the #2 and #3 major studios combined.
In Latin America, we’ve been the #1 distributor for 8 of the last 9 years. And finally, we’ve grossed over $1 billion in Europe for 4 consecutive years. Our success in capitalizing on international growth supports our investment in the big tent-pole films that drive our profit. There’s huge demand for major event movies from international audiences, driven by the established talent and spectacular visual effects and cinematic scale that only global studios like Fox can deliver. Our confidence in the strength of our international organization provides the ability to greenlight and reap substantial profits from movies like Life of Pi and Ice Age and Avatar, each of which has earned far more in international markets than in the U.S. We haven’t discovered the potential of the international markets recently. Our current success is the culmination of over 20 years of focus on this opportunity, driven by the global perspective in capabilities of our parent and sister companies an d the opportunities remain significant for the future. Even though moviegoing per person has increased dramatically in the developing markets, with few exceptions, the per capita attendance in most of the road is still a fraction of the U.S. There’s also a great potential in the expansion of the ancillary markets overseas. As these territories expand into digital business models, we’re aggressively exploiting the opportunity to increase access to our content, especially through the digital and mobile platforms that young consumers in these developing markets favor most. Another advantage of our excellence in distribution that we’ve attracted a number world class content providers seeking to access the strength of Fox’s global capabilities.
In addition to DreamWorks animation, we’ve established a number of distribution relationships with partners including MGM, New Regency, Lionsgate, Relativity, Walden Media among others. And these deals have allowed us to offset a significant portion of our overhead with hundreds of billions of dollars in fees that we’ve earned on third party product over the years. And they also enhance our ability to continually upgrade our distribution capabilities in all markets and provide significant scale advantages in lowering purchasing costs and improving retail placement and promotion in the marketplace. Our distribution strength also enables us to maximize our library profitability. In fact, library product generates approximately 70% of our annual growth profit, providing both stability and growth potential. In the home entertainment market, a significant driver of our profit, we’re taking full advantage of emerging business models to shift consumers to higher margin forms of c onsumption, both in library and new release products.
As a key element of this strategy, last year, we pioneered a new offering called digital HD. It gives consumers the ability to own a movie in high definition 2 to 3 weeks before the physical disc release, play it on any of their devices, store it in the cloud and all for a price lower than DVD. The results have been extremely encouraging. Our digital transactions are up over 200% year-over-year, which means the consumers are discovering the value of digital ownership. And our digital HD releases are outperforming comparable titles by a significant margin, both in terms of a number of transactions and Box Office conversion. The strong growth in digital consumption is a significant positive for our business and in fact, for industry overall. Consumer spending for the combined U.S. physical and digital home entertainment market was up in calendar 2012, with the trend continuing into this year.
Our television distribution business is another important contributor to our ancillary revenues, and also provides new digital growth opportunities. We have over 100 multiyear output and volume deals throughout the world, adding to the long-term stability of our revenue base, including synergies with sister companies such as Sky and STAR and FX and our other channels. The launch of new over the top SVOD services continues to provide us with more licensing opportunities and we’re also leveraging demand for additional rights, whether on-demand, HD or mobile, to improve our negotiating positions and get more value for our content. As a result, our performance is consistent and strong with Fox television distribution achieving its third consecutive record year and doubling its revenue since 2004. Digital technology is not only a source of revenue growth, it also allows us to be more efficient in our supply chain. We’re seeing significant cost savings as we transition from prin ts and tapes to file-based delivery of our content with the potential to reduce our cost by tens of millions and potentially, hundreds of millions of dollars over future years. Those are the core elements of our strategy, which of course, we’re continuously reviewing and optimizing.
I’d like to show you where we see that strategy taking the business. And again, while we don’t provide specific financial guidance at this film studio level, I’ll cover some of the key factors that will drive our performance over the next 3 years. And as you’ll hear later from John Nallen, we are confident of consistent, highly-profitable results. We believe that the combination of our strategy, favorable industry dynamics and our excellent slate positions 20th Century Fox for continued strong results through fiscal 2016 and substantial growth potential from that point forward with future installments of Ice Age, Avatar and other potential new franchises and films.
With respect to our slate, we’ll see great strength in animation, a consistently profitable genre, with one Blue Sky film annually plus our DreamWorks animation releases. In terms of industry trends, we expect continued growth in international theatrical markets from increased ticket prices and admission and infrastructure growth and market access. And we’re also projecting 10% to 15% growth in digital distribution in Blu-ray between fiscal 2014 and fiscal 2016, which will continue to offset the decline in DVD.
And in television distribution, we expect continued steady contribution from worldwide pay and free TV markets. With these factors providing a solid underpinning to our business model, we’re poised to capitalize on an outstanding upcoming slate of films and I’m really excited to share some of the highlights with you now. The movies we have on deck and in the pipeline will keep us at the top of the creative game through fiscal 2014 and beyond and include many pre-awareness properties and new installments of key franchises.
For the remainder of 2014, we have Ridley Scott’s The Counselor, with a stellar cast that includes Brad Pitt, Michael Fassbender, Penelope Cruz, Cameron Diaz and Javier Bardem, followed in November by The Book Thief, based on the novel that’s been on the New York Times bestseller list for over 6 years. In December, we have The Monuments Men, directed by and starring George Clooney, who assembled a fantastic cast that includes Matt Damon, Kate Blanchett, Bill Murray and John Goodman. Also in December, Walking With Dinosaurs in 3D, and Ben Stiller’s contemporary reimagining of The Secret Life of Walter Mitty. It’s a wonderful film, a comedic adventure that combines emotional and thought-provoking storytelling with groundbreaking visuals. In January, we have a low-budget thriller Devil’s Due, followed in February by The Maze Runner, a dystopian adventure based on a series of best-selling young adult books that we hope will be the start of another great franchise.
In the Spring, we have Peabody and Sherman from DreamWorks animation, and then the highly anticipated Blue Sky 3D animated sequel, Rio 2. It will be followed by The Other Woman, a broad comedy starring Cameron Diaz, Lesley Mann and Kate Upton. And then we’ll kick off the summer moviegoing season with X-Men: Days of Future Past, which will bring together 2 successful key X-Men franchises in one movie, and long-awaited animated sequel to How to Train Your Dragon, will follow shortly thereafter.
In going into fiscal ’15 and beyond, there are many more big titles that we we’re very excited about: Dawn of the Planet of the Apes, the next installment in our relaunch franchise, a new Fantastic 4 movie, a sequel to the blockbuster Independence Day, Peregrine’s Home for Peculiars, which is based on another best-selling book. We got talking to Tim Burton to come direct that and Kingsmen, which is adapted from the popular Secret Service graphic novels. It’s not the Secret Service you think, it’s something very special. And then a Blue Sky animated 3D film based on the beloved Peanuts characters, which we were very proud to have the support of the Schultz family in allowing us to make that film. Then Exodus, a biblical epic directed by Ridley Scott. I can’t tell you who the star is, but you’ll recognize him and new chapters in our Night at the Museum and Alvin and the Chipmunks franchises. And of course, Jim Cameron is finalizing the scripts and yes, that was plural for th e continuation of the saga that began with the highest grossing film in history, Avatar. And the growing breadth and scale of Jim’s magnificent fantasy world will come to life through 3 films scheduled for release each Christmas, each holiday season December 2016, ’17 and ’18. We’re confident these major cinematic events will amaze and enthrall audiences around the world and certainly, add to our profitability.
So to sum up, our consistent financial results stem from a well-conceived plan and strong execution. The focused production strategy with strong franchise performance and a dominant presence in animation, a disciplined approach to risk management, industry-leading international performance, the ability to leverage our distribution scale through third party relationships, growth opportunities in digital international and franchise management and an efficient organization with a bottom line focus. I’m confident that these advantages will serve us well as we build our business into the future. And I think you’ll share my enthusiasm, let me just take a quick look at some of our upcoming films. But let me first mention that several of these films, particularly including X-Men and Planet of the Apes, are still shooting as we speak. So you’re not only getting a very early peak but I ask you to be aware in understanding that a very few effects have been done yet, but I think you’l l enjoy it anyway. So have a look at this.
Good morning, and thank you for the opportunity to talk to you about 20th Century Fox Television. As Jim did in presenting the film studio, we hope to provide you with some insight into the approach and strategies, which have helped the TV studio become home to many of the best shows on television, making us both an industry leader and a consistently strong financial performer.
In the long history of this studio, there has never been a better time to create and own timeless breakthrough series. People are consuming more television programming on more platforms than ever before. Distributors around the world are demanding more premium scripted content to service them and the studios that can create the most compelling content and best capitalize on new windows of distribution will reap the greatest financial rewards. Twentieth Century Fox Television is best positioned to take advantage of the opportunities in this new era. And this morning, we’ll show you why. We’ll take you through our structure, our slate and our roster or creators who are responsible for the industry’s best and most valuable properties. We’ll highlight some of the financial results we’ve delivered and we’ll illustrate our plans for continued growth and profitability.
Our studio is structured to foster ideas and innovation and minimize bureaucracy. We’re divided into 3 independently operated labels, 20th Century Fox Television, Fox TV Studios and FOX 21. In addition, we have a sister division based in London, Shine. Each houses its own executive team, identifies its own creative talent and provides a unique creative filter to content development. Twentieth Century Fox TV is focused largely on creating and owning programming on the 4 major broadcast networks, while Fox TV Studios and FOX 21 are focused on cable, which we targeted a number of years ago as an area for tremendous growth. 5 years ago, these 3 labels were producing 27 series for 10 networks. The majority for broadcast, the rest for Basic Cable.
It was a solid and profitable slate, but looking ahead, we saw an opportunity for growth, diversification and increased profitability. Today we have a roster of 43 original series on 16 different networks across broadcast, basic cable, pay cable, and Netflix with the recent delivery of Arrested Development, and we’ll be the first producer of an original series to Tribunes’ rebranded WGN. That’s more programming on more platforms than at any time in our company’s history.
In the U.S., on the 4 major broadcast networks, we are the market leaders. And in cable, we’ve achieved enormous growth in the past few years, and we are now the market leaders there as well. Our slate is highly acclaimed, routinely receiving more Emmy recognition than any of our studio competitors. That’s not simply a badge of honor but a reflection of our strategy to create known premium content that is distinctive and high-quality. And most importantly, that’s slate includes many of televisions most popular and most valuable brands. As you can see, we own big broadcast hits, including the decade’s most award-winning comedy, Modern Family. The long-running favorite, How I Met Your Mother, and the global music phenomenon, Glee. We enjoy a 100% market share of what is arguably TV’s most lucrative genre, broadcasting animation. On basic cable we built a successful portfolio of hit dramas, while our first foray into premium cable is TV’s most honored drama, Homeland. And we have brands so timeless that years after their initial runs, we’re able to bring them back. Most recently we achieved that with Arrested Development, and next up, 24, an event series that is already exciting fans around the globe and advertisers hungry for our patina property that offers meaningful brand integrations and delivers a confident affluent audience.
Clearly we’re not a “one size fits all” studio. Our slate highly diverse. We are neither dependent upon the strength of, nor susceptible to the weaknesses of any one show, network or platform. What we are is a studio that’s committed to developing and managing the largest slate of what we like to call undeniable content, programming and brands such as these, that stand out from the crowd and engender the passion of consumers who will follow them from platform to platform year after year. It’s the type of content distributors value and it’s what drives our industry-leading Twenty-First Century Fox pipeline. Every decision we make, which creators to invest in, which idea to pursue, what networks to take our show to and how to manage their exploitation is motivated by our desire to feed the pipeline with shows that are distinctive.
And that’s why we place so much value on our unique position in the marketplace. We’re the only studio that is aligned with major broadcasting cable networks, FOX and FX, but is also a prolific supplier to third-party networks. That’s a major point of distinction that gives us a significant competitive advantage. On the one hand, we have the benefit of strong sister networks that help us launch and exploit important assets. In fact, 4 of our 5 most profitable series ever have been on Fox. And the company’s most profitable cable series ever, Sons of Anarchy, is on FX. But just as importantly, by aggressively programming third-party networks, we get access to more network real estate which simply means greater opportunities for us to succeed. That strategy paid off for us in the previous decade with such long-running, profitable hits such as The Practice and Dharma and Greg on ABC and Buffy the Vampire Slayer and Angel on The WB. And it’s paying off even more today. Our ABC hit, Modern Family, is on track to be $1 billion asset for us. Our CBS hit, How I Met Your Mother, is not too far behind, and our USA hits, Burn Notice and White Collar, will earn us hundreds of millions in profits. These may run on third-party networks, but we enjoy all the benefits of ownership.
And there’s one more critical advantage to being an open supplier: it makes us magnets for many of the top show creators in the industry. Why? Because they know that at our studio they’ll the freedom to think purely about the most original creative ideas, and they’ll have the support of the studio regardless of which platform is the right home for those ideas. Ryan Murphy is a prime example of a top creator who has benefited from this approach. 6 years ago, Ryan joined our studio from Warner Bros., where he felt boxed in creatively. Since then, he’s developed 3 very different projects for 3 very different networks: Glee for FOX, American Horror Story for FX, and the new HBO pilot, Open. It’s an edgy drama about an open marriage. Open is a provocative creative concept in an innovative business arrangement. It’s HBO’s first TV series deal with a third-party supplier.
Ryan is exactly the kind of creator we attract and succeed with at TCFTV. At our company he can develop for broadcast, basic cable, pay cable and more. And we can command far more lucrative deals from networks like HBO for access to talent like him. And then he can flourish creatively, knowing he has the support of a studio that can turn his sometimes out-of-the-box ideas into successful businesses.
Take Glee, a serialized soap set in a high school that boasts elaborate musical numbers based on American pop music. When we first announced that project, the response across the industry was unanimous: Musicals don’t work on TV. It’s too expensive. It won’t repeat. And the high school setting will keep it too narrow and niche. But to us, it meant the opportunity to support a big original idea and take a shot at the global TV and music phenomenon. And thanks to Ryan’s vision and Twenty-First Century Fox marketing and distribution strength, that potential was reached.
Take a look at the business of Glee. Internationally, Glee is a powerhouse. In fact, we have clients around the world clamoring to create their own versions. In syndication, in SVOD, we developed an unconventional back-end strategy, selling cable to Oxygen, local stations — broadcast to local stations, and SVOD rights to both Netflix and Amazon in premium deals that generated nearly $1.5 million per episode. In music, we’ve sold more than 50 million songs and 13 million albums, with more songs on the Billboard Top 100 than any other musical act ever, yes, more than Elvis, more than Beatles. We launched a live stage business with a sold-out arena concert tour in 2011, and now a live stage musical is in the works. And we have 2 more seasons of the show ordered by FOX. When you identify the right creator and support a big creative vision, you get a show like Glee, which is exactly the kind of property that our studio excels in exploiting.
We would say the same about Modern Family, a breakout comedy developed by Steve Levitan and Chris Lloyd at a time when the rest of the industry had declared the family sitcom dead; and 24 and Arrested Development, developed by Imagine’s Brian Geiser and Ron Howard, which reinvented the serialized drama and the adult comedy, respectively. All 4 of these mega producers have worked at other studios but achieved their greatest success in the environment we have created at 20th Century Fox Television. And likewise, we have proven to be a studio that can successfully develop homegrown time and enable them to reach their greatest potential.
The Hollywood Reporter recently called him “the billion-dollar brain,” but this was Seth McFarlane 15 years ago, when he was just another nerdy 25-year-old shopping around his animated short. It was a raw piece of material that we bought because we felt that it and Seth had promise. But Seth had no experience creating a TV show, so we nurtured him and surrounded him with experienced talent to help him realize his vision. That’s how we got Family Guy, the biggest animated hit since The Simpsons, and grew Seth into one of the biggest brands in television with his fourth series, Dads, premiering this fall on FOX. And as you can see, all that successes suited him well.
Howard Gordon is our ultimate example of homegrown talent. We’ve been in business with him for nearly 2 decades. He started on The X-Files, where he rose from producer to executive producer, and he followed that with 24, which he ran for many years. We then decided to make a major investment in Howard, turning him into a production company and allowing him to expand his slate. The net results: he is now one of the most prolific and sought-after creators in television, and we have more premium content in our pipeline. Howard co-created Homeland, one of the best shows we’ve ever produced. His new series Legends, is at TNT, and his next 2 projects are the Drama Tyrant and FX, and a highly anticipated new season of 24 for FOX. So that’s 2 dramas on Fox-owned networks and 2 at outside networks. Howard is a perfect illustration of how we nurture talent and why we’re committed to our strategy as open suppliers.
Maintaining a strong creative roster like this certainly doesn’t come cheap, nor does supporting that creative excellence for which these shows are recognized. That’s why we’re aggressive in managing our costs. When it comes to making deals with talent, we’ll happily step up and invest in the people we believe in. But we won’t make stupid deals. Talk to any agent in town, and they’ll tell you with more than a small degree of frustration that we’re not afraid to walk away from deals if we don’t think they make financial sense. And when it comes to production, we are aggressive in managing costs.
On the comedy side, there’s no better example than Modern Family. During that show’s first 4 seasons, we produced episodes for an average $400,000 less than comparable single-camera comedies, including the show we follow on ABC, the Middle. Do the math. That’s roughly $40 million in savings on Modern Family alone.
And on the drama side, we are aggressive about filming in tax-advantaged states or Canada, which allow us to produce top-quality series for less. In fact, nearly 80% of our drama roster is shot outside of California. That represents annual savings of $85 million. So our unique and aggressive approach to development and production is a clear differentiator for our studio. As is, our approach to monetization.
Our mantra to our creators has always been: you give us a big, bold series and we’ll figure out the best way to monetize it. We take each show and identify its greatest opportunities. Sometimes that leads to a traditional syndication property like Modern Family or How I Met Your Mother, a consumer products juggernaut like The Simpsons, a DVD heavyweight like Sons of anarchy our Family guy, an international hit like Bones or 24, or a digital success like Homeland. But the takeaway is always clear. We find ways to monetize shows that are distinctive and engender passion in viewers. As you can see, in 6 key distribution platforms, 5 different franchises are our #1 performers. So let’s take a closer look at distribution, starting with the more established 2 businesses, international and syndication.
Internationally, we’re a top supplier in a very competitive marketplace. Among U.S. distributors, the studio has consistently had the #1 or #2 largest portfolio of new and returning series across free TV, premium pay-TV and SVOD platforms. Show such as Glee, 24 and Bones are at the very upper range of revenues generated by U.S. shows overseas. And The Simpsons, our most successful international series ever, is the most popular series worldwide, broadcast somewhere in the world, every minute of the day, 365 days a year. The strength of our shows has enabled us to enter into lucrative volume deals in most key markets. And we recently renewed important long-term free TV deals in both Germany and France. These allow us to produce dramas for both broadcast and cable virtually risk-free, as the revenues from international are both significant and immediate.
As the international licensees continue to reward owners of premium programming, largely dramas, domestic syndication and cable remain lucrative, particularly for owners of top live-action comedies and animations. We leveraged How I Met Your Mother’s success as a top comedy on CBS by licensing it to 3 different cable networks and syndicating it with 99% U.S. coverage. Our next big launch is Modern Family, which premieres this fall on USA and local stations. Between license fees and barter on stations and cable, we anticipate revenues north of $5 million per episode in its first cycle. And from there, the pipeline will continue to grow. Raising Hope enters syndication in fall ’14. And then in fall ’15, we will premiere the breakout ensemble comedy, New Girl, and Last Man standing starting, one of the biggest names in off-net, Tim Allen.
Among our animation highlights, Family Guy, has already been licensed to cable for 3 cycles with each cycle bringing in higher license fees. We anticipate a lucrative third cycle of broadcast indication, which we sold for a launch in fall ’15.
And as to The Simpsons, there’s still an enormous opportunity for us to unlock more value as it is not yet been sold in cable, second cycle broadcast or SVOD, and that’s likely to change in 2014. In syndication and cable, animation lives forever. Like the characters themselves, these shows never age.
Sales of current series may get the attention, but our premium library will rewards us year-after-year. We recently licensed our Emmy-winning animated comedy, King of The Hill, to Turner in a 5-year deal in excess of $100 million that takes us through fiscal year ’18. M*A*S*H is among the most iconic titles in the history of our medium. It’s an evergreen title for us that we’ve licensed continually for nearly 35 years and still contributes on average about $20 million a year to our bottom line. So with such titles as these — the X-Files, Buffy the Vampire Slayer, and 24, not to mention our popular current series when they eventually end their original runs, we have every expectation of sizable library profits for many years to come.
Now, let’s turn to home entertainment. TV DVD spending has reversed the downward trend and has stabilized in the past 2 years, driven by highly serialized cable programming, a genre we succeed in with such shows as Homeland and our company’s #1 selling title, Sons of Anarchy, which generates revenues upwards of $3 million per episode. The big growth opportunity, of course, has been in digital, and for our studio, those revenues have more than compensated for the downturn in DVD. Studio digital revenues have grown sixfold in the last 3 years, driven primarily by SVOD, EST and more recently, mobile gaming initiatives.
The Simpsons Tapped Out game app has in roughly 12 months generated over $25 million in royalties to the studio and increases everyday. Given its success, we’re already in discussions on a follow-up game, and we recently closed the deal for Family Guy, landing a multimillion guarantee that is our biggest to date.
Digital is now a critical piece of our distribution strategy. The SVOD license fees for certain titles, particularly serialized hours, such as Glee and Sons of Anarchy, can exceed $1 million per episode. We now have more than 50 current libraries — current and library series licensed to Netflix and Amazon, and expect to continue to find lucrative opportunities in this area.
EST has also proven to be valuable. This business has more than doubled for us over the past 3 years, driven primarily by our strong serialized cable dramas, Homeland, Sons of Anarchy and American Horror Story. And it’s now a meaningful piece of the home entertainment pie.
All of these digital revenues didn’t even exist until recently and now are generating roughly $500,000 million annually to the studio. that said while we are an industry leader, a top SVOD player and a mobile pioneer with The Simpsons, our digital strategy has been and will remain judicious and disciplined, and we will continue to grow that business by capitalizing on all the new opportunities ahead.
This studio is on a growth trajectory, and the future is very promising, to say the least. The last 3 years have been the most profitable in TCFTV history, and we expect to continue that trend this year. Between the long-term SVOD and syndication deals that extend for years on such veteran hits like Modern Family, How I Met Your Mother, Bones, Sons of Anarchy and Family Guy, to, say, nothing of younger assets like New Girl, Homeland, Last Man Standing and American Horror Story, the future revenue opportunities for the studio remains strong.
And as for new programming, having the best roster of talent and the most acclaimed slate of hit series in the business continues to make us the industry’s most sought-after studio supplier. This upcoming season, we have 16 new series across the 4 major broadcast networks and 5 different cable networks. Our pipeline is strong, and we are focused on capitalizing on the opportunities afforded to us by the demands from consumers and distributors for more premium scripted content. There has never been a better time to be in the scripted TV business.
Thank you for your time and for letting us share our business with you.
And now, to give you an overview of our global channels business, it’s our pleasure to introduce the Chairman and CEO of the FOX Networks Group, Peter Rice.
Thank you, Gary. Thank you, Dana. Good morning, and thank you for coming to Los Angeles to share in the launch of Twenty-First Century Fox. I have the great pleasure of introducing our worldwide channels business to you today on behalf of my colleagues at the Fox Network Group, and also on behalf of ours sister companies, Fox News and STAR India. You will hear directly from each of our network’s leaders today.
First, I would like to kick off with an overview of our channels business, why we are organized as we are, what advantages this affords us and what we are planning for the future. It seems especially appropriate you are joining us here on the lot because the FOX lot is one of the original creative dream factories, and Twenty-First Century Fox is at its heart a creative company.
As Rupert mentioned, in this very soundstage, Marilyn Monroe shot The Seven Year Itch, and we are surrounded by the ghosts of our creative legacy, which inspires us every day to create and distribute through our channels the world’s best entertainment news and sports. It was on this lot that our worldwide channels group was born with Rupert’s creation of the Fox Broadcasting Company in 1986. It has been an incredible journey and story of growth ever since.
I love working at Fox because it is a creative company. Now there are lots of creative companies. But what makes Fox unique is our adventurous and fearless corporate culture. It’s a culture that encourages and demands that we seize opportunities and that we grow new businesses. And our channels group is an amazing example of what we have built through internal adventure, or as Chase put it so well this morning, our long-standing habit of breaking the outdated rulebook. A fourth television network, that can’t be done. Yet we did it. A cable news network to rival and ultimately surpassed CNN, that will never happen. Yet it did happen. A satellite-TV platform, that will never work. Yet it did work. And now, a 24-hour sports network to compete with ESPN. Good luck with that. Well, thanks, because in 9 days, we’re launching it. And our competitive strength is derived from our world-class hit content, combined with a second-to-none global branded distribution platform.
We have competitors. There are several other worldwide channels groups but none with our scale, power and reach.
Let’s look at one concrete example. In the United States, on any given day, more people watch Fox’s channels than any other media companies. And this slide only includes national networks. It doesn’t include our regional sports networks, which would increase our margin of victory substantially.
And of course, beyond America’s borders, our premium content is distributed by our portfolio of globally recognized brands. In our most recent analysis, we have well over 2 billion paid subscriptions from nearly 400 channels in 200 countries, and they generate close to $16 billion in total revenue. And in this most recent fiscal year, these businesses posted a 16% jump in EBITDA.
We have been growing swiftly, launching new channels almost every year for 2 decades. And through this rapid expansion, we accumulated a large number of disparate brands that serve a broad array of niche interests. This is a good strategy when video was delivered exclusively via linear television. It is less effective now in our fragmenting TV universe, where almost any interest can be served over the Internet or via apps. So in order to achieve scale, we’ve chosen to consolidate our channel portfolio around our strongest brands: FOX, Fox News, FOX Sports, FX, National Geographic and STAR. These are the key brand components of our channels group. I’ll comment on why we’ve made this decision, but first, a few words about each of them.
Fox Broadcasting is our flagship broadcast network. It is our highest-rated channel. It commands our highest ad rates and provides the most powerful distribution. Fox has bold, brash content, where our biggest entertainment and sports properties live. It’s the home of the Super Bowl, the World Series, the Daytona 500. It’s where fans come to watch their favorite shows like American Idol, the Simpsons, Family Guy, New Girl, Glee, X Factor and the following. The network serves as the greatest springboard for new brands in our television arsenal, supported by the best managed portfolio of owned and operated television stations, who were critical in our establishment of a second revenue stream with retransmission fees.
In cable, Fox News, led by the incomparable Roger Ailes, has been the most watched news channel for over a decade. Available in nearly 100 million homes, it is the most profitable news channel in history. It has one of the strongest brands in the United States and commands respect from multiple levels.
Our FX brand is transforming into a 3-network suite with the coming launch of the brand’s slightly younger, more anarchic sibling, FXX, in September. FX is already a top 5 rated cable network, synonymous with creative innovation and excellence, a fact recognized by the industry when they were awarded 17 Emmy nominations for American Horror Story, the most of any show this year.
FOX Sports has shaped the sports television landscape for 20 years through the creation of inventive, boundary-pushing and flat-out fun sports productions. And our regional sports networks, in 22 regions, reach an audience of over 75 million fans in their home markets. This localizes our brand and plays a large part in overall sports profitability.
And on August 17, we launch Fox Sports 1, our new national 24-hour-a-day sports network, and we couldn’t be more excited about it. FOX Sports has a significant global footprint. In the past 18 months, we’ve launched 36 sports channels. By January, FOX Sports will be in 185 million homes worldwide, making it the most widely distributed global sports brand.
Another worldwide brand, the National Geographic Channel. This takes one of the world’s most recognized names and turns it into a suite of great television channels. It is our most widely distributed channel and is evolving with smart, fun, character-driven series and event specials that both respect and expand the brand. The results speak for themselves as National Geographic has just completed a record ratings year.
The Fox International Channels extend the reach of our core brands nobody. FIC has built 300 channels in almost 200 countries from scratch. Today, FIC’s 62 offices are managed by talented local executives who know their markets best. And this successful decentralized structure is one of the key reasons why FIC is targeting $1 billion in profits by fiscal 2015.
And finally, at STAR. Uday and his team, they entered a complicated marketplace and they’ve built market share leader by a healthy margin. STAR commands a 22% market share, which is truly astonishing in a country with 1 billion consumers and 8 languages. And STAR is investing significantly to transform the Indian sports marketplace.
So why did we consolidate around these brands? Well, there are a few reasons. One, these are all proven highly respected brands. They already resonate with viewers, advertisers and distributors. Two, in a world of limitless choice, these brands enable consumers to find us. Three, these brands allow us to unlock the power of cross-promotion. And four, by consolidating, we are creating big, powerful launching platforms for our content that cuts through the clutter and they matter to consumers.
So how do we best leverage this? The answer is investing even more in hit content. Because in today’s world, mediocrity is not an option. To thrive, you need to own and provide must-see, must-have sports, entertainment and news content. That’s why we’ve locked in long-term local and national contracts with the best sports teams and leagues. And why? We prioritize partnering with our own internal graded forces, maximizing overall profitability for Twenty-First Century Fox. We’ve become a global leader in content creation, aggregation, distribution and ultimately, monetization. We do so on our linear platforms and across a wide variety of new and evolving digital extensions, including our partnership with Hulu, and through TV Everywhere, which has the potential to become a truly formidable force because it can provide our paying subscribers a wonderful and rich experience wherever they consume our content.
So to conclude, our entertainment, news and sports television businesses continue to grow both domestically, and internationally, at a rapid rate. Our strategy is to consolidate our massive global scale around our core brands and through these brands deliver compelling and engaging content. We’ve worked hard to build our advantage. Now, we’re making sure to keep it.
I’ll step aside to let our senior executives take the floor. Their management has taken us to these levels of success and will guide us to levels beyond. I’d like to introduce my colleague and the Chairman of Entertainment for Fox Broadcasting, Kevin Reilly, who will kick things off with a short video. Thank you.
Thanks. It’s great to see everyone here today. I’m fortunate enough to see oversee entertainment for our flagship network, Fox Broadcasting, America’s top rated network for 8 of the past 10 seasons. In 25 years in our broadcast — unbelievably vibrant platform, still the biggest launchpad for entertainment brands worldwide and a valuable contributor to Twenty-First Century Fox’s bottom line. Yet, as you all well know, today’s dynamic marketplace presents many challenges, most of which are not unique to network television, but because we’re the most mature business, we’re often on the front lines of many of these issues.
So I want to talk to you today about how we’re thriving in the marketplace and some other ways that we’re addressing the changes and challenges. While watching TV today may mean something quite different than it did even 5 years ago, it’s clear that viewers’ love affair with TV is alive and well. The latest from the Nielsen cross-platform report shows that on average, TV viewing has grown now at 157 hours and 32 minutes per individual per month. That’s up from nearly 2 hours from a year ago.
Broadcast is still firmly at the top of the food chain. As cable has continued to evolve, we’ve seen the expansion of the number of original hours and high-quality hours on networks like FX, having significant cultural impact. Cable’s chipped away at broadcast market share. And with new players like Netflix making inroads with original programming, there’s perceptual pressure on broadcast as well.
Knit shows on other networks are often declared hits, while much higher-rated shows on broadcast often get tagged as middling survivors or failures. We have to put the relative impact of these competitors into perspective. First, it’s impossible to even assess the real impact of original programming on Netflix because they don’t report their actual viewership.
My experience and gut says those numbers will look very anemic when measured against either broadcast or cable ratings. And to put cable on perspective, there were 1,050 original ad-supported programs on cable this year. And of the 1,050 programs, only 4 made it into the top 50 programs. The fact is, no other platform delivers the consistency of scale, use, influential demos and breadth of quality with original programming across the week, across the year, the way FOX does.
Let’s talk for a minute what sets FOX apart. Later on, Randy and Erik will take you through the breadth of our sports business, which is a critical contributor of audience and value to FBC. On the entertainment side, in terms of scale, we’ve got top shows across the week and across every genre. Last season, we launched the #1 network drama, The Following, a gripping thriller starring Kevin Bacon, which was also the top new series of the season. We’ve got the #1 new comedy in The Mindy Project, a smart upscale show with a young audience that was a must-have for top advertisers in this year’s upfront. We have 4 of the top 10 comedies in 18 to 49, 6 of the top 10 shows amongst 18 to 34. And American Idol is still a top 5 show 12 years in.
If you drill into the composition of our audience, this is where we carve out our unique identity. Family Guy, NFL, American Idol, The Following, New Girl, Glee. These brands and these stars attract the next generation of media-savvy viewers that we have at our core. We’ve got the youngest audience in the Big 4 networks. Everyone talks about that young, hard-to-reach audience and the television isn’t part of their world anymore. Well, we have them and in a higher concentration than any competitor. We’ve led amongst teens for 13 consecutive years, and with adults 18 to 34 for 11 seasons in a row, in fact, by a 38% margin this past season. This means FOX offers impact with a younger segment of broader demos that others just can’t and don’t reach.
Brand is the one that we associated with influencers, and that’s what we deliver. In addition to brands dominant with young adults, we’ve got dominant brands with young men, dominant brands with young women, some of the most upscale shows on television, shows that capture all the buzz and are in magazine covers and in the blogosphere.
And we dominate in the social space. And we all know that measurement and understanding of social is still evolving. But we also know that it indicates a deeper level of engagement and that engagement has value. According to Bluefin Labs, FOX is the #1 social TV network across broadcasting cable, dominant by a nearly 2:1 margin over any other network. Our social standing is not an accident, it’s 2 parts buzzworthy programs that are conversation lightning rods and 1 part highly effective social marketing.
All of the above adds impact and value for our advertisers. And current research is proving, that not already points are created equal. TiVo recently analyzed their set-top box data and consumer purchase records and found that schedules with more than half their money in broadcast averaged 3x the ROI than those that favored cable than other alternatives. MediaVest recently determined that 3 of their top clients got a better ROI from broadcast primetime, despite higher ad rates. So our entertainment lineup come, along with top-tier sports, including the NFL and the Super Bowl, MLB and World Series, NASCAR and the Daytona 500, College Football and the UFC, continues to deliver high-value product for our advertisers.
Looking at retrans. According to recent industry research, TV stations’ retrans revenue will grow 63% from $3 billion to $4.9 billion in 2016, driven largely by network entertainment and sport content. And with our competitive strength, retrans will continue to be a growing segment of our revenue stream. The lifeblood of our network is our content. And we’ve got at least 3x more original programming in primetime than every top-tier cable network. In addition, at FOX, we’re actively pushing to were some changes in basic process in order to reframe our business in a more contemporary way and to maximize our value.
Our strategy is to throw out some of the old rule book, broaden our portfolio, launching a variety of new assets with innovative scheduling across the week, 12 months of the year. And let me break that down for you, the few key places where we’re implementing this.
First, let’s talk about measuring hits. We get out of bed every morning with the belief that striking gold is possible. It’s still the most amazing thing to me that with the right idea and alchemy and a dash of serendipity, millions of people decide overnight that you’ve got the next great thing. TV is and always will be a hit-driven bsns, that’s a given. But the new challenge is how do we define and measure a hit in today’s landscape?
Here’s a look at the live same-day ratings of our top 5 scripted shows. These are the numbers that then get reported everyone morning, and this is the narrow view by which most perceive our market share and impact. But if you lay in a cume DVR lift over 7 days, these ratings start to change dramatically. Some of our competitors might not have been as worried about the following, looking at the 2.6 same-day rating, until they saw the 65% lift we were getting over 7 days, making it the highest-rated network drama of the season.
But that’s not the full picture. If you look at the impact on total audience cumed across all platforms, many of ours shows seen significant gains. The following averaged 11.8 million total viewers in Nielsen’s official measurement. But adding in all platforms, it rolled up to 16.3 million viewers. With New Girl, 33% of its viewership happens outside traditional TV; 8% on VOD, which is a growing segment; and 25% on Hulu and FOX.com. And it’s even more dramatic with a show like Family Guy, where 37% of that show’s viewing is happening outside the traditional linear platform. And these slides only reflect a 30-day viewing window.
We’re beginning to see a considerably longer tale as consumers adapt behaviors. An interesting side note that kind of blows my mind is that if you quantify the total cumed views come on our shows over the full season, you get some staggering numbers. New Girl tallied 185 million views; The Following, 283 million; American Idol, 560 million views. I sometimes read that nobody’s watching broadcast TV anymore, but that’s a boatload of nobodies.
So it’s also interesting to look at the windows in which viewers are consuming our shows. While the vast majority of viewing happens on TV within the first 3 days, we’re finding that with VOD consumption, viewing is consistently proportioned over the 30-day window, yet we only get credit for the 3-day portion of that viewing in which we carry the same ad load. That policy is arbitrary by their own admission and we’re pushing to get a change. In addition, we’re deploying services like dynamic ad insertion to capture the value on days 8 through 30.
But the extension of our reach beyond the linear channel is a good thing. The rapid adoption of new platforms a new habits of consumption like ketchup and binge viewing and social TV is all an expression of the connection to and value of television in viewers’ lives. These various points of distribution roll up to redefine what a contemporary network is today. A viewer is a viewer is a viewer on any screen, anytime, and we’ll continue to improve our ability to measure them comprehensively and maximize our value wherever people watch.
Next, we’re shedding the past and breaking out of the traditional seasons and patterns of TV development and programming. Traditionally, the network business model amortized our programming costs via repeats played over the course of the year. We’d heavy up in the spring and summer, which created fallow times of the year.
Now, with so many viewing options available, repeats in our network window are the main cause of depressed viewership. Conversely, we see that viewers like to catch up on other platforms like streaming and VOD. So we’re pushing to monetize our repeats on these platforms, which also creates a better experience to enter and catch up on missed shows.
This season, we’ll be within striking distance of one of our primary goals, virtually year-round original programming. We’re using our financial strengths to create new opportunities and stronger ratings with premium original programming across the year. In fact, the series we’ve ordered for this coming season represent the biggest investment in programming and marketing in the history of our network. We plan to invest approximately $150 million more this year, primarily driven by our acquisition and support of new series. Our programming spend includes a sizable lift in development, which will increase by more than 10% and a marketing investment that will grow by more than 25%. This is aimed squarely at minimizing those gaps on our offerings and growing market share. In advertising, advertisers are embracing the effort.
Third, we’re getting off the seasons and cycles. Historically, the broadcast network operated in a 35-week season from September to May, constructed about — around consumers’ lifestyle and some advertising patterns. Accordingly, the networks have been completely in lock step in our development and launch cycles. All pilots were produced in a condensed window and the majority of the series premiered in a glut. Well, last I checked, there were 52 weeks in a year, and those kind of cycles no longer align with the way people watch television.
We’ve been chipping away at this for some time, but starting this year, we’re instituting a year-round schedule in which our programming and marketing will look like this. This will keep a more steady pulse of exciting, making our marketing efforts more focused and utilizing all of our real estate. By getting out of the one-size-fits-all business, we can deploy series opportunistically. Cables benefited from shorter order patterns, as we did this past seasoned with The Following on a 15-episode cycle. And next season, we’ll be doing this with our 2 new dramas, Sleepy Hollow and Rake. This allows us to give fans a more focused, uninterrupted run of the shows they love.
We’ve also added a new event series franchise to the mix. This event series are closed in at 10- to 12-part events with some of the biggest names in Hollywood in front and behind of the camera. We’ve just started this and we’re off to an unbelievable kickoff. We announced 2 big ones at the upfront this May that created excitement, our 24 reboot, Live Another Day, which will premiere this spring and play through the summer; and Wayward Pines, and epic thriller directed by M. Night Shyamalan and starring Matt Dillon and Terrence Howard, which will premiere in the summer and bridge in to the fall. We just announced Broadchurch, an American agitation of the ITV series that broke out in the U.K. last year and is produced through our sister company Shine.
The final point I want to touch on is innovation, experimenting in ancillary businesses that are small today, but may hold the key to our future. Over the last few years, Fox Broadcasting has been venturing into new businesses and is growing new competencies that didn’t even exist until recently.
Two efforts worth noting. Only a few years ago, our digital effort was not much more than the oversight of a basic 1.0 website. Now, we provide a full slate of digital sales, social and distribution products, including FOX NOW. FOX NOW is our cross-platform viewing experience on all major digital platforms, iPad, iPhone, Android, Xbox Xbox, Roku and Samsung TVs. The app provides millions of viewers with shareable content and sync with the shows they’re watching on TV, engages them in social activity and gives them the ability to watch episodes on demand and will soon include a live feed of our FOX entertainment programs.
Another effort in the digital content arena is a fully owned subsidiary that we built from scratch a little over a year ago called Animation Domination High-Def. Building on our 25-year monopoly in primetime animation, this is a digital animation studio staffed by 100 young and viciously creative people right in the heart of Hollywood. We’ve been posting shorts online for months. And our first on-air series to successfully premiered a few weeks ago, on Saturdays and late-night, and we’re forging unique partnerships with several major brands to create original custom content for them. This year, we’re going to be building out on that studio by adding new studios in both the drama and reality genres.
Again, this year, we’re going to grow our market share with increased investment in content. We’re going to push for better measurement, schedule and program our product in ways that break out of the traditional TV process, and innovate with the ways we develop and distribute our shows. All of us at FOX are energized. We love broadcast TV, we believe in the future of broadcast TV and we’re excited to be in a unique position to redefine what it means to be a broadcast network in the 21st century.
Thanks very much. Appreciate your time. Thank you. I’d know like to introduce Jack Abernethy, CEO of FOX Television Stations.
Good morning. FOX Television Station reaches 37% of the U.S. broadcast market, with stations in 9 of the top 10 markets. In total, we have 18 FOX stations and 10 MyNet stations. And including our sub-channels, we have a total of 73 channels. We are the largest producer of broadcast news in the country with over 800 hours of news produced weekly.
Thanks to the success of the FOX Network, we have a big reach. Despite the fact that our stations only cover 37% of the country, we have a larger reach than the big national entertainment cable channels. Our ability to deliver these large audiences, combined with premier programming, provides us with leverage in our retransmission consent negotiations.
We believe that to succeed in linear TV, we must be the #1 channel for day-in-day big event sports and entertainment like American Idol and NFL, and new programming. When we are not covering big events, we should be the channel that provides fresh, timely and enjoyable programming, including local news, innovative first run and great syndicated product.
In order to accomplish this, we have identified the following 3 strategies. We must expand and evolve news, we must invest in a product and aggressively manage our cost structure. In order for more day-in-day programming, we are expanding news. Over the last several years, we have aggressively expanded our news programming in many of our markets. Local news is very scalable. Additional hours could be added at minimal cost.
The financial success enjoyed over the last 40 years in local news broadcasts has unfortunately made the news business incredibly resistant to change and innovation and stagnant in style and form. This is not the case here at FOX. We are retiring the typical anchorman and replacing him with multiskilled personalities and journalists.
Technology has provided new opportunities for us to be more competitive in breaking news than ever before. And we are using existing devices like iPads and smartphones to shoot, edit and transmit stories more cheaply and increase our coverage in using Wi-Fi.
Another area of changes is the use of social media. Over the last several months, Twitter has involved from being primarily a promotional tool to being an newsgathering tool. This means that if news consumers are watching 2 screens at once, our goal is to be the primary source on both. We have a huge effort to use the creative power and scale of our stations and institute weekly boot camp style training sessions to share practices and best practices and tactics.
Finally, it is much easier to start from scratch at times and waiting to evolve, and it’s a great way that creates something disruptive. And so in July, we launched a new show called Chasing New Jersey on WWR in New York, with a replay in Philadelphia. It replaces a traditional newscast, uses new uses technology in a fast-paced, cost-effective environment that can best be described as TMZ for local news. We are located in Trenton, the state capital, and we are fortunate to be focusing on New Jersey at a great time with Chris Christie and Cory Booker in the national spotlight.
As you can see from a typical lineup, the FOX station relies more heavily on local and syndicated programming than our competitors, which makes running a FOX station more interesting and more challenging. We broadcast twice as much news in syndicated programming and sell at least 50% more inventory than our competitors. As a result, the FOX model is more profitable than CBS and NBC stations and I believe we are ahead of ABC as well.
In addition to our news investments and the power of the FOX Network, we have aggressively acquired a syndicated product, including Modern Family, The Big Bang Theory and of course, The Simpsons. We’re strategically using this product across multiple stations in our duopoly markets and it is driving market share increases for us.
Another benefit of our programming strategies is that more than 2/3 of the product on our air comes from Twenty-First Century Fox companies, with our local news leading the way. The ability to go into retrans dollars also makes acquisitions attractive. We continue to look for opportunities to buy underperforming stations that are accretive. Perfect example is purchase of a duopoly in Charlotte this year. We brought as CW MyNet duopoly and immediately to flipped CW station to become a FOX affiliate. This investment will pay for itself in less than 2 years as a result of our ability to operate highly successful stations and the bottom line impact of retrans.
Our station group is particularly lean. During the financial crisis, we’ve made tremendous strides to reline our cost structure. We’re using technology and persistence to lower our production cost as we transition from an analog to a digital world. Successful implementation of these and other cost reduction initiatives has enabled us to reduce on average 50 jobs per station or 900 in total, for an annuity savings of $220 million a year. Some of these projects require a longer lead time, involving the creation of centralized systems. But all of our savings initiatives were accomplished in less than 3 years.
As we look out the next 3 years, we have confidence that our strategies will enable us to build market share while prudently managing our cost base. The autos and telecom categories continue to be strong. The balance of the categories are mixed, reflecting the uncertain economy. However, the current local base advertising market is stronger than it was last quarter. Furthermore, the Super Bowl broadcast on FOX this year has enabled us to secure significant bookings with our key clients than many of our markets. We have confidence in the efforts assessed [ph] by Kevin to turn around the FOX Network and we are poised to capitalize on both ratings and market growth in the future.
Thank you. And now, I’d like to throw it back to Reed.
Thank you, Jack. Now, we’d like to take a short 10-minute break. Please help yourself to some refreshments located at the back, which is outside the soundstage. To keep us on schedule, we appreciate you’d be back here by 10:15. You don’t want to be late because next up are the heads of our FOX Sports Networks. Thank you.
Hello, again. Could everybody please sit down? We do have a long agenda today and we’d like to try to get back to schedule, if we can. Now, I’m very pleased to introduce the Presidents of FOX Sports Media Group, Randy Freer and Eric Shanks.
Welcome back from the break, everybody. Thank you for that huge round of applause for us. I’m Eric Shanks, and the tall guy is Randy Freer and this is the sports part of the presentation today. You’re actually visiting us on our 20-year anniversary at FOX Sports. We premiered back in August of 1994 when John Madden said that we should just be called FOX Sports. I know, John’s not the funniest guy in the world. Over the last 20 years, we’ve grown just a bit, so we wanted to show you what FOX Sports is today.
Thank you. FOX Sports has enjoyed an incredibly successful first 20 years, starting with the — are there [ph] crazy comments after we cemented our first NFL contract, and through disciplined investing, added Major League Baseball, NASCAR, College Football, as well as stints with the NHL and the BCS. We broadcast many of America’s premier sporting events, including 6 Super Bowls, 15 World Series and 10 Daytona 500s. We did not simply broadcast these events. We provided innovations like the FOX Box, the 1st and Ten line, the glowing puck , not always our best, and our new 4K HD technology. If imitation is the best form of flattery, our competitors can’t stop thanking us.
As we were building our national broadcast network, we were also creating what has turned into one of the most successful businesses in cable. Beginning in 1996, FOX Sports began building what would become the leading provider of local sports television. Our portfolio of regional sports networks has grown substantially over the past decade as a sports viewing has become more tribal. Different than our national networks, our local RSNs have a distinct local flavor with close ties to their communities.
If imitation is the best form of flattery, our competitors can’t stop thanking us. As we were building our national broadcast network, we were also creating what has turned into one of the most successful businesses in cable.
Beginning in 1996, Fox Sports began building what would become the leading provider of local sports television. Our portfolio of regional sports networks has grown substantially over the past decade as sports viewing has become more tribal. Different than our national networks, our local RSNs have a distinct local flavor with close ties to their communities. And we didn’t stop at the regional level. Fox Sports also added nationally distributed sports enthusiast networks, including the SPEED channel, FOX Soccer, the Big Ten Network, FUEL TV and FOX College Sports.
Over the last 20 years, Fox Sports has been a major player, shaping the sports industry with its reputation for Fox attitude, innovation and strong relationships with leagues, teams, advertisers, athletes, conferences and yes, investors. Okay? In fact, the Big Ten Network is the leading example of how to best partner with a college conference. To create a sustaining business while providing brand awareness and financial benefit to our partners in the Big Ten. With our capability of delivering quality must-have live events on the local, regional and national levels with best-in-class production, Fox Sports has become the leader in sports television worldwide.
Here in the U.S., Fox Sports has been busy acquiring top-tier national rights packages or extending our existing deals to further cement our portfolio. We now have long-term deals in place with the NFL, Major League Baseball, NASCAR, UFC, the FIFA World Cup and multiple college conferences including the new Big East.
And on the local side of our business, team deals extend well into the future and include major franchises in the U.S., from the New York Yankees to the Miami Heat, to here in LA, the Kings, Clippers and Angels.
Some people may ask, “Why does sports matter?” Does it have an impact and is it worth the investment? Well, we absolutely think it’s worth it. Let’s take a look at some examples of the tremendous value of the sports marketplace. In the fourth quarter of 2012, 88% of the entire U.S. population watched sporting events on national television. And unbelievably, 55% of all TV-related Twitter activity was about sports. As we all know, NFL games have now become the most-watched programming in the U.S. And as a result, the pay TV business has thrived because people are hooked on sports.
Taking an even longer term view from a consumer perspective, the last 20 years has seen a major shift in people’s appetite for live sports programming. In 1992, sports on broadcast television made up just 19 of the top 100 programs. Fast forward to 2012, live sports represents 75, 75% of the top 100 telecasts on TV.
Last year, 97% of sports programming was watched live, while viewing of live entertainment program has dropped to 75%. The value of premier sports programming has significantly increased, even more in an era of viewer fragmentation as it aggregates large, live audiences. As a result, network sports continue to drive, reach an efficiency for the advertising community better than any other product on television. We’re currently actually experiencing some of that benefit as our Super Bowl advertising sales are progressing quite well.
Sports are also a reliable brand builder and product mover for advertisers. They provide a consistent way for advertisers to reach a loyal, passionate, and most importantly, engaged audience with a 13% higher brand recall for our advertisers during sports. Due to the strong demand, yearly price increases for sports programming far outpaced the increase seen for entertainment. And on a national level, Fox Sports reaches 65% of all U.S. men each month, which as you know is the most coveted demo for advertisers.
Simply put, sports is must-have, must-watch live programming and it will continue to be the most important content in the pay TV system and only grow in importance over time.
For our distributors, we believe that it would be challenging to provide a successful high-speed data business without a robust video business that includes the most-watched programming today.
Over the last 4 years, the sports pay TV business has grown 39% to over $30 billion. Let’s examine that fact a little closer. While the sports pay TV business has grown 39%, which is faster than the overall market, it still only represents about 1/3 of the total, almost $90 billion pay TV business. And we all know, it is the core of what’s holding that pay TV business together. We clearly believe there’s room for another top-tier, national sports network.
We believe our portfolio uniquely positions us to seize that opportunity. We are the only sports group that has true scale, the diversity across broadcast national cable, regional cable and international channels. This scale provides strategic benefits across acquisitions, programming and marketing, advertising sales and our digital business sales. The highest profile platform in the Fox Sports portfolio is the broadcast network. As you heard, we still strongly believe in bringing big events to the widest possible audience through the power of broadcast television. And over the next several years, Fox will broadcast 4 of the next 10 Super Bowls, including 2014’s big game in New York. We will air all of the World series and all-star games from now through 2021, the UEFA Champions League Final, Big 12, Pac-12 and Big Ten Football, NFL regular season and playoffs, MLB regular season, World Cup and the Daytona 500. And we’re also thrilled to be able to announce today that star ting in 2015, Fox will be the home of the U.S. Open for the next 12 years through a comprehensive deal with the United States Golf Association.
The broadcast of these events play a critical role in Fox’s retransmission consent negotiations and the successful establishment of a second revenue stream for broadcast network. That revenue was significantly considered in our recent contract renewals with the NFL, Major League Baseball and NASCAR. Our rights portfolio and the broadcast innovations we create with our partners have made Fox Sports the #1 sports network on broadcast television for the last 16 years.
And next up, we have the latest addition to our portfolio, launching in just 9 days. It’s called Fox Sports 1. And we’ve assembled an amazing group of producers, directors and on-air talent, including our hosts for our flagship nightly show called Fox Sports Live. We brought a couple of guys from Canada named Jay Onrait and Dan O’Toole, who usually have a very unique perspective in the world of sports. And just like Mr. Ellis, we have the spared absolutely no expense giving them absolutely everything they need to have a 24/7 credible news operation. Let’s take a look.
So we don’t take ourselves too seriously. Why, you may ask, that we decide that now is the right time to launch our biggest foray into national cable sports? Well, basically the stars aligned. We were able to, through a concentration of recent rights renewals, it gave us an opportunity to restructure our agreements in a manner that deepened and broadened our partnership with leagues and conferences. We also realized that to be competitive in future rights negotiations for premier packages, we needed a fully distributed and highly rated national cable sports channel to be successful. Second, we believe the National Cable Channel will be a platform for many of the digital initiatives that will surface over the next several years.
And lastly, we believe that there is a desire from viewers for a fresh alternative despite the 24/7 coverage from other networks. And quite simply, we think it’s time for sports to be fun again. We’ll bring a fresh burst of energy, toughness and enthusiasm to the sports that fans love.
Now, let’s hit the highlights of Fox Sports 1. It will be available in up to 90 million homes at launch. The channel will air 4,800 hours of live programming, including over 1,700 hours of live events. We’ll have a robust 24/7 news operation that will provide 25% of our programming hours. Our properties include USGA events starting with U.S. Open in June 2015, Major League Baseball regular season and the divisional, and LCS playoff games in October 2014. Fox Sports 1 will also boast 52 college football games from the Pac-12 and Big 12 and over 120 college basketball games, including this March’s Big East Tournament from Madison Square Garden.
We’ll have the NASCAR Sprint Cup and Nationwide Series racing with about half of the Sprint Cup races moving from broadcast to cable. UFC will come to Fox Sports 1 in a big way with a dozen live fight nights and the popular reality competition series, the Ultimate Fighter.
In addition, Fox Sports 1 will have a full complement of world-class international soccer including existing UEFA Champions League rights and the FIFA World Cup starting with 2015 with the Women in Canada to 2022, somewhere. From the outset, Fox Sports 1 will have a companion network, Fox Sports 2, which will be a rebrand of FUELTV. We believe in the value of this approach as it will leverage multiple live events, original and studio programming across both platforms.
We really struggled with the name for Fox Sports 2, that’s why it took us a long time. We’re also investing heavily in our daily studio programming, including our nightly news and opinion highlight show called Fox Sports Live. Also our late afternoon show called Crowd Goes Wild is live from New York every day and we bring Fox NFL Sunday, everyday of the week, with Fox Football Daily. Our original programming will feature unique, contemporary storytelling with our being documentary series, initially featuring Mike Tyson and Mariano Rivera, and an unprecedented behind-the-scenes look at FC Barcelona. And also, new original series like the Pecos League.
Our plans for Fox Sports 1 are economically sound. We have high confidence in our affiliate revenue projections and we know our rights costs well into the future. We have control of our production and programming expenses for live events and our news and originals. In fact, we are running the channel in such a way that nearly 90% of our cost show up on the screen and in the product that we’re delivering to the audience.
Additionally, as we look out on the rights horizon, there are actually limited opportunities to acquire a new product until 2017. By diversifying our content, we’re no longer reliant on any one individual rights deal for the success of Fox Sports 1, allowing us to be disciplined as we look at rights in the future.
Similar to any other startup network, we actually are investing pretty heavily during the first couple of years. With this investment, we are confident we’ll deliver a valuable new asset to the Fox portfolio.
Now, to one of our most successful businesses, the Fox Sports regionals. They are the leader in local sports broadcasting. We have a portfolio of 22 fully distributed, majority-owned regional sports networks covering more than 75 million homes. These networks are the #1 channel in many local markets all summer long. Not just the #1 in cable, but the #1 overall. In fact, many of our regional networks baseball games outrated the Stanley Cup Finals and even some of the NBA Finals games in their home markets.
On the team rights front, we have local rights agreements with 45 of 53 MLB, NBA, NHL teams in the markets with Fox regionals. That covers more than half of all the teams in the U.S., as well as major college conferences. We are disciplined in our rights agreements and we stagger the renewal dates in our markets. The average length of term left in our reduces over 8 years and no material team deal expires within the next 3 years.
In fact, 93% of our team deals our contractual through fiscal year 2016. One of the main benefits of this is business’s predictability with regard to forecasting affiliate revenue and rights fees. Over 80% of our affiliate revenue for the next 2 years is already locked in and more than 50% is secure 3 years out.
We generally keep the length of our distribution agreements under 5 years, and as a result, we have high confidence in our ability to grow the regional business over the next 3 years and into the foreseeable future due to scale, full distribution, predictable rights. And separately, we are looking forward to stepping up our interest in the YES Network, which we believe will be an excellent addition to our portfolio of RSNs.
We’re also enhancing our consumer products and services as we expand the reach of the Fox Sports brand and create new opportunities for economic return. Some of these products include our Fox Sports Digital efforts. Foxsports.com is currently the top 3 sports site with more than 30 million unique visitors each month. Right now, the site is being redesigned and it will be reintroduced to the market as a fully connected companion to Fox Sports 1.
Fox Sports Go is a combination of TV Everywhere and the Daily Sports mobile app launching in August. Go will be broadly accessible to every consumer for scores, highlights and news, while the authenticated customer can get full video services. In fact, Fox Sports Go will offer up to 1,000 live events from our television networks and many games that are not available anywhere else.
Other products under the Fox Sports brand include Fox Deportes, which has quickly become the #1 Spanish sports network among adults, 18 to 49, and it features more live content than any other Spanish network. Fox Sports Radio is a partnership with industry-leader Clear Channel and is the fastest-growing sports radio network in the U.S., now topping over 400 affiliates across the country. And our direct-to-consumer subscription businesses, Scout, Fox Soccer Plus and Fox Soccer 2Go provide exclusive information for the hardcore soccer and college football fans.
Now, later this afternoon, Hernan Lopez is going to speak to you about international expansion about the Fox Sports brand into such markets as Brazil, Asia, Japan, Italy and the Netherlands. Actually, it’s probably easier to tell you which ones he’s not expanding into. With this combination of assets, Fox Sports is well positioned across all platforms, regions and sports to succeed today and into the future.
Fox Sports has the big events to take maximum advantage of the must-have nature of sports content, which will be reflected in the share of these, Paid to us by our distributors. Our strength is derived from the exclusive nature of the content, wrapped around the identity of the Fox Sports brand. Bold, innovative, authentic, tough and of course, fun. In short, we believe the Fox Sports networks are well positioned for the future and poised to deliver sustained growth. Our total revenue was split fairly evenly between local and national businesses. Of that revenue, 60 — over 60% of it comes from affiliate fees, while 37% of it coming from ad sales. At the same time, our expense base is predictable due to the long-term nature of our rights agreements. In fact, nearly 90% of our total expenses are related to rights in production over the next 3 years and beyond.
As we wrap up, there are few points worth stressing again. First, sports is must-have programming and its value is growing. Fox Sports is well positioned in the marketplace with a uniquely strong brand, with a sound financial model, with a short-term distribution agreement against long-term rights deals. Our revenue is diversified against national, local and regional networks, as well as balanced between affiliate and advertising.
Finally, we know there is room for another national cable sports channel as the market is large enough and growing fast enough to support a top-tier player like Fox Sports.
By the way, Randy didn’t just have a spasm. The prompter just completely freaked out.
It was — it could be a spasm though.
We really appreciate your time today. Thank you for keeping the applause to a minimum. Next up, is John Landgraf, the man that we affectionately refer to as the man with 3 brains, to talk to you about the FX suite of networks.
Thank you, Randy and Eric. You guys are a tough, tough act to follow. But even sports can’t dominate our every waking hour, so let’s focus just a few minute on the power of great scripted programming. Today, I have the privilege of telling you a simple, clear, unambiguously positive story. The story of FX’s business from 2002, launching The Shield up to the present day and the exciting new journey our suite of channels will take for the rest of this decade. I want to start today’s presentation with a look at the current state of the FX original programming brand, something we’re very, very proud of.
Thank you. Thank you very much. FX actually created the original programming playbook for basic cable. A strategy now being followed by nearly all of FX’s cable competitors and starting this year by Internet television providers like Netflix, Google+ and Amazon Prime. Fortunately for 21st Century Fox, FX invented this strategy and we’re still well ahead of our many of our imitators. The Shield was the first of its kind. An adult scripted original series on ad supported cable that could match the quality of the very best programs produced by broadcast and premium cable.
Michael Chiklis won an Emmy that year for Best Actor in a Drama Series and the series won the Golden Globe for Best Drama. The first of many, many Emmys, Golden Globes, Pea Bodies, American Film Institute Honors and Television Critics Awards bestowed on FX’s acclaimed original series since that time.
Nip/Tuck and Rescue Me completed FX’s first trifecta of highly rated award-winning original dramas and sparked the first of the channel’s many virtuous cycles of higher ratings followed by increased affiliate fees and ad sales revenues.
Take a look at Slide 1 and you’ll see FX’s unbroken chain of programming excellence and you’ll get a window into why the channel is in such a vastly stronger position than its many competitors that began chasing our strategy more recently. Each of the FX series highlighted in green lasted or is anticipated to last 5 seasons or more. We now layer in AMC as a basis for comparison, because AMC is a highly respected basic cable channel that has successfully imitated FX’s original programming strategy for the past 5 years and also because their stock price has increased 77% year-to-date.
The FX Channel’s business is significantly larger than all 4 of the AMC networks combined in the terms of viewership, total revenue and EBITDA. And note the big difference in terms of how many years FX has had to monetize our programming success and the far greater number of long-running hit series FX has fostered.
Now, take a look at the same programming slide. This time, highlighting in blue, the series in which FX productions or other Fox production entities have ownership. And again, I’ll layer in AMC for comparison. Starting with the launch of It’s Always Sunny In Philadelphia in 2004, FX pioneered the second dimension of our winning original series playbook by founding FX productions and producing the bulk of our own series, we were able to take control of our programming destiny. We also opened up a third revenue stream in content ownership, which has slowed the growth of programming costs even as our volume of original series has rapidly increased.
FX also worked synergistically, and as Gary and Dana told you, very effectively with our many 21st Century Fox district companies that produced great contents such as Twenty-First Century Fox television, FOX21 and Fox Television Studios and Shine.
As you can see, FXP and/or other Fox production entities own the bulk of our FX original series and the FX channels have now become an important driver of content value across a breadth of 21st Century Fox’s businesses including the Fox International Channels as well as the domestic and international distribution segments.
For example, FX recently launched another critically acclaimed hit drama, The Bridge, which was co-produced with Shine America and the Fox International Channels mounted of the largest public television premiere in history for The Bridge the very same week. Or as another example, the FXP original hit comedy, It’s Always Sunny In Philadelphia, will generate about $300 million in gross ancillary revenue through 21st Century Fox’s domestic and international distribution segments.
This ability to control the back end rights to most of our original series has been a financial boom and is one of the keys to the quality and consistency of FX’s programs, but it also creates a key strategic advantage that will be captured as FX now will rollout our nonlinear programming strategy later this year.
Okay. Now take a look at same slide one last time with FX’s successful comedy series highlighted in yellow. Many of FX’s basic cable competitors, such USA, AMC and A&E are still trying to break into the new original comedy business. But FX is the only basic cable channel to mirror HBO and Showtime by programming its own acclaimed hit original comedy as well as drama series. In that context, we’re very, very proud that our FX original comedy series movie, produced by FXP just became the first basic cable show ever nominated for Emmy for outstanding comedy series.
Another pillar of FX’s successes has been our acquired movie strategy. Some time ago, we noticed that our basic competitors were going through a feast or famine cycle due to the spotty availability of hit series, effective syndication series, coming off the broadcast networks. There were some news when there hasn’t been a single A-level drama or comedy launched in broadcast television, which would subsequently be available for basic cable syndication. You can see right now that CBS is going through a period of feast with Big Bang Theory, but the show is beginning to show inevitable signs of decline and their next acquired title, 2 Broke Girls, looks like a much weaker show. Just as CBS’s sister network, TNT is suffering through a famine which there are no A-level off-network acquired dramas now or for the foreseeable future.
So starting a decade ago, FX took a different tack and began building up our library of theatrical movie rights. By this point, we’ve achieved a truly commanding position. Take a look.
FX now controls double the exclusive basic cable rights to blockbuster Hollywood films that is films that are in more than $100 million of the U.S. box office than all of our competitors combined. FX also has exclusive nonlinear streaming rights to this movie strategy. All other competitors whether linear or nonlinear locked out of any access to these movies during the term of FX’s window. So take a title like Avatar. After the film’s premiere window on HBO, FX will get the film exclusively in linear and nonlinear media for 5 years. The first time any of our linear or nonlinear competitors other than HBO can get their hands on the films more than 7 years after its theatrical release. And nonlinear competitors will have to wait 10 years. Some says they’ll form the acquired programming base for all 3 linear FX networks and our nonlinear programming strategy because they can circulate and their cost can be amortized across the suite of FX channels as well as FX now.
That combination of successful, original and acquired programming strategies has driven remarkable growth in FX’s reach and relevancy to American viewers compared to our largest competitors. This slide tells the incredible story of FX’s growth in audience reached. By following the green line from left to right, you can see that before The Shield premiered and the movie strategy began, FX’s reach in the all-important adults 18 to 49 demographic was dwarfed by our 3 largest competitors, CBS, TNT and USA. However, FX’s reach has steadily grown during the past decade while each of our largest competitors has declined. FX’s average monthly reach now exceeds TNT and USA, and has reached virtual parity with CBS. And this chart is actually inclusive of our competitor’s sports properties like Major League Baseball, the NBA, NASCAR and professional wrestling. In fact, if we look only at data from the most recent 12-month period, FX now stands at #1 in adult reach amongst all 103 mea sured basic cable networks.
Now let’s take a look at how this programming success has translated into revenue growth. This slide shows FX’s compound annual growth rate in affiliate and advertising revenue from 2010 through 2016 compared to the exceptionally strong industry norms of basic cable. This outstanding growth has put FX in the enviable position of being able to invest in an aggressive expansion of our business funded entirely out of our own growing revenue stream without holding our substantial growth in EBITDA.
So having given you a sense of where FX is now and how we got here, let me tell you about the business’ exciting future. In less than a month, we’ll launch FXX, which will join FX and FXM to create a suite of 3 channels, all of which support the FX brand. Our nonlinear programming service FX Now will launch 2 months later. These channels will be home to a roster of 25 scripted original series comparable to a broadcast network and nearly all of the programs will be produced and owned by FXP and/or its Twenty-First Century Fox sister companies. This will create a 5-pronged strategy. 3 related linear channels, each subsets to the FX brand and each targeting a different adult demographic, all supporting a nonlinear programming service, FX Now, with programming supplied by a powerful inhouse production studio, FX Productions and our many sister companies, at one of the largest media companies in the world, Twenty-First Century Fox.
The new wave of original programs will continue to drive the ratings growth of FX, as well as the ratings and distribution growth of FXX and FXM. This in turn will drive the next cycles of increased reach and relevancy for the FX brand, which will generate continued growth in affiliate, advertiser and program ownership revenues.
All of this expansion of FX’s great original programming will, of course, also benefit the 21st Century Fox’s various distribution segments, as well as the Fox International channels and the Sky platforms.
FX will remain the flagship channel and will focus on the broadest range of adults between the ages of 18 and 54. With its brand moniker, FX Fearless, it will continue the program award-winning hit dramas and comedies and will soon add limited series, what Kevin calls event series, to its mix. Plans call for FX to support 8 scripted dramas, 4 scripted comedies, a couple of limited series and several 10/90 style original sitcoms per year.
FXX will be FX’s younger, rasher sibling under the moniker, More X. It will zero in on young adults between the ages of 18 and 34. Starting out with several successful comedy series migrated from FX, including It’s Always Sunny in Philadelphia and The League, Legit and Totally Biased with W. Kamau Bell, the new channel will grow to have 8 scripted original comedies and within the next several years, it will begin to support its own original dramas as well.
FXM will be FX’s older sibling, focusing on adults between the ages of 25 and 54. It will program award-winning acquired dramatic films and its own ambitious, prestigious original limited series.
Here, you see the rapid expansion and distribution for FXX and FXM in Nielsen homes over the next several years. We anticipate that FXX will launch in 73 million homes in less than a month and we expect that channel to reach 91 million homes by 2017. In 2012, FXM launched in 41 million homes and it will reach 55 million homes next year. We’re forecasting an increase to over 63 million homes for FXM by 2017.
So linear channels obviously remain important to the television ecosystem, but we also recognize the growing importance of nonlinear television consumption. That’s why FX Now will launch this coming November. FX Now will be an ad supported, fast-forward disabled service, which will be available on the VOD platforms of our cable, satellite and telco partners, as well as their websites, such as xfinity.com and their apps. It will also be available to authentic cable subscribers on Hulu and fxnetworks.com and we will be launching our own best-in-class FX Now app, which will roll out an Android, Samsung, Xbox, iOS, Windows 8 and Roku among others.
Most FX shows will have all current season’s episodes available for the night of air until 1 month after the season finale. The ads will mirror linear broadcast within the C3 window and there will be dynamic ad insertion after C3, starting in 2014. We’ve been waiting a long, long time for the advent of dynamic ad insertion. And it’s going to be a key to our ability to monetize the growing appetite for nonlinear television viewing.
FX Now will have an array of blockbuster movies with exclusive ad supported streaming of 40 to 60 major tiles per month and over 200 unique blockbuster titles per year, primarily authenticated to FXM subscribers. There will also be 5 titles a month for FX subscribers, but we chose to allocate the bulk of our extremely valuable VOD movie rights to FXM to drive value and distribution for our least penetrated channel and we believe this will turbocharge FXM’s growth. FX Now is our answer to competition from subscription VOD, but a major differentiator will be, just as in the case of our linear air, that FX Now will have far more contemporary blockbuster movies than all our rivals combined.
These ambitious plans will take a substantial investment, but in the slide, you can see the projected cost and revenues for the rest of this decade. Even with a major investment in growing our business, revenue and profit will be able to keep pace during the next 3 years due to the enormous momentum FX has generated through its 12 years of programming success.
By 2016, the investment curb will flatten out while revenues will continue to accelerate through the end of the decade. The television business has never been more competitive and any content or distribution business that is content stands still, no matter how successful it is today, it’s going to be quickly left behind. But despite FX’s great run over past 12 years, our appetite for growth has only increased. It’s been a really exciting journey, but as proud as we are of what we’ve accomplished, we are more even bullish about our future. With the support of our leaders at Twenty-First Century Fox, we’re extremely confident that the FX Networks will build on its current position of strength to become one of TVs best and most profitable businesses.
Thank you very, very much, for your time today.
Thank you very much, John. As you can tell, we are running a little bit behind schedule. So, I think, at this point, we’re going to hold off on the Q&A until later today. But I promise, there will be ample time for your questions later on. And at this time, it is my pleasure to introduce Hernan Lopez, President and Chief Executive Officer of Fox International Channels. Hernan?
In the next few minutes, I’m going to speak about Fox International Channels or FIC, which operates most of the company’s television channels outside of the U.S. The most notable exception are the STAR India channel run by my colleague, Uday Shankar, who will speak next. Every time the company speaks about international cable, it’s usually aggregating both of our units. But the next few slides will speak to FIC only.
Many of you are familiar with our division, which formally became FIC in 2001. But I wanted to emphasize the scale we’ve achieved and how we stock up against our global peers. From a very small base last year, we have grown to 312 channels in 48 languages, operated out of 62 offices all around world, the largest and most local footprint of any media group.
In fiscal ’13, we brought $2.5 billion in revenue, 2/3 from affiliate fees, 24% from advertising, and the balance from content analysis. Our scale has grown, but most importantly, we have positioned ourselves strategically for the future within the pay television ecosystem in 3 ways: First, we offered platforms the kind of content they value the most because it helps them sell. We started in entertainment and factual, and then we spiraled into sports and lifestyle. Second, we have also expanded up the pricing scale, starting in basic cable and moving into premium. And third, we have evolved from purely acquiring content into content ownership. All the while, we have consistently delivered early growth year after year at a CAGR of 28% in the last 5 or 23% excluding the sports business we acquired.
Among our global peers, FIC is the most profitable within the pay television ecosystem. We believe our business will continue to grow profit growth well into the future and here’s why. First, we have confidence in the pay television sector. The question we ask ourselves every day is, “Will more consumers around world continue to pay increasing amounts for more television choice?” By and large, the answer is yes. Once a household becomes a pay television subscriber, they never want to go back. We have seen this dynamic play throughout the world consistently, at different speeds but always in the same direction. In the last 5 years alone, the erosion of pay television penetration has grown steadily from 37% to 48%. That’s good, but it compares to 85% in the U.S. That’s why we believe that we have great adoption growth ahead of us in Asia, in Europe, in Latin America, in Africa and in the Middle East.
But adoption rate is only part of the story. Obviously, revenue per subscriber yield is another big part. And why does it tend to go up? Put yourselves in the shoes of a platform. They set the prices in order to maximize the profits and so they constantly make their offering to their customers better with more channels, stronger brands, more exclusive first-run content, more TV connections, more HD. As a result, households get used to more and better television and they’re prepared to spend a higher share of their income on it.
Here in the U.S., households spend 1.5% of median income on pay television. Around the world, there’s a wide variation, but the average is about 1/3 less than the U.S. Again, relative to median income, which is smaller outside of the U.S. We call this the affordability gap, which means there is a penetration gap and affordability gap and compounding them. Household formation is stronger outside of the U.S. and incomes are growing faster. So all in all, we have 4 gaps to close compared to the U.S. Closing just the 2 of them, the first 2, will bring the size of the international pay television market place to $300 billion, 3x the size of the U.S. That’s a lot of upside.
The question is, how much of that upside will flow through to branded content owners like FIC? A big part, we believe. And FIC, as a leader, will capture our growing share and here’s why: As we’ve said in previous presentations, FIC combines very strong brands with very strong content. Platforms need both. Some content, the most successful shows, especially those created by Gary and Dana, eventually can become brands onto themselves. But when a nonsubscriber wants to buy pay television for the first time and they call the cable platform or the satellite platform, they don’t ask, do you have this show or do you have that show? They want to know, do you have the Fox Channel, do you have the National Geographic Channel, do you have Fox Sports? This dynamic has turned our sector increasingly into one where scale matters a lot and the leading channel groups can be able to negotiate increasingly better terms.
Around the world, platforms spend about 3 quarters of their earning budgets in the top 6 groups and in nearly every major rated market in the world, FIC’s 1 of those top 6 and often the top supplier to the platforms. We have scale and a leadership position and the addition of sports is bringing our strength to a whole new dimension.
Look at the dynamics in Brazil, our biggest market. In the last 2 years alone, the market subscriber grew from 11 million to 16 million and our own subscribers followed that growth. On the revenue side, the middle chart, the market’s ARPU went from BRL 100 to BRL 105, so there was a 50% growth in subscriber base and on top of it, a 5% increase in ARPU. And FIC’s own share of that ARPU went up by 15%. This was all underpinned by the launch of Fox Sports plus our growth in viewership at our entertainment channels, which isn’t yet fully priced in. These dynamics, by the way, are, to a large extent, decoupled from the economy and GDP growth. In the last 2 years, our local currency revenues in Brazil grew at 26% while the economy was only growing at 2%.
Our strength varies per market, but we tend to be strongest in the markets that are growing the fastest. As a result, on a worldwide basis, in the last 2 years, our unique subs have grown by 20% and our affiliate revenue per subscriber has grown by 35% in dollar terms, reflecting the addition of our sports channels and also higher rates, our entertainment channels, in both cases, outpacing market growth and despite depreciation of the U.S. dollar.
We are confident we can continue this path, and here’s why: First, our entry into sports is just beginning. Over the last 2 years, we have taken Fox Sports internationally from 17 million to 67 million homes. As Peter mentioned today, Fox Sports, when you add our U.S. assets, is on track to becoming the most widely distributed sports brand in the world. But within FIC, we have been very disciplined and opportunistic deciding where to bring sports. We only want to enter those markets where we can command rights that platforms really value.
In every country in the world, we’re leveraging our global scale, but most importantly our local scale, because in every country in the world, be it the U.K., the U.S., Mexico, Japan, the most powerful network groups tend to be those that control both the leading sports assets and the leading entertainment assets. And that’s what FIC is becoming, country by country.
For instance, in the Netherlands, up until last month, we only had our Factual and Lifestyle Channels, but not our core brands, Fox and Fox Sports. Last December, we bought a controlling stake in Eredivisie Media & Marketing, the company set up by the local soccer teams that controls and monetizes all of the media rights in premium, basic and international syndication. And this month, on the back of those rights, we are launching — we have launched Fox Sports in premium and we’re about to launch the Fox Channel in, basic available through all major platforms.
This investment, much like the one in Brazil 18 months ago, is transforming the scale of our business in the market. The second driver of upside comes from brand consolidation, something that Peter has spoken about before. Years ago, we used to talk about more brands. Now we talk about stronger. Our entertainment channels, led by Fox, are growing in viewership on a worldwide basis by double digits. There is synergy between then and our sports channels in markets where we have both each of them stronger.
Next up, our factual segment. We have grown the ratings of the National Geographic Channel for 3 years in a row now. And to round up our portfolio, we’re about to accelerate their global rollout of our female-targeted brand, FOX Life. Here’s one example of how brand consolidation works in practice. Over the last 2 years, we have taken some of our smaller entertainment channels, rebranded them as Fox and put our best shows on it. As a result, we have grown the distribution in the last 2 years by 43%. By this measure, and when you have the Fox Broadcast Network in the U.S., Fox is already the most widely distributed entertainment brand in the world today. And increasingly, the one that viewers cannot do without. All these audience distribution and brand consolidation gains are fueling our third driver of growth, advertising upside.
The research firm, Informa Media, expects that pay television advertising will increase at more than 9% over the next few years because as pay television penetration is surpassing the 50% tipping point, agencies are buying increasingly on client’s pay television from the much bigger broadcasting budgets. We have already seen this dynamic play, our own advertising revenue has grown by nearly 40% in the last 2 years outpacing market growth. Why? Because within the pay television sector, advertisers pay a premium for breakthrough content that can cut through the clutter and deliver big audiences, the kind of content that John was just speaking about at FX. And not only at FIC we offer that kind of content. We’re increasingly an owner of that kind of content. Our fourth driver of upside.
The best example is The Walking Dead, the #1 drama in television of the moment for which FIC controls all international television rights. As I said at the beginning, we have set up our business for long-term growth while delivering results today. Over the last 5 years, which included the double-dip in Europe and a strong appreciation recently of the U.S. dollars, we have grown the topline and maintained margins even after adding the sports businesses which typically have a lower margin. With the growth drivers I just spoke about, you can see why we’re bullish about the next 3 years and the next decade. And I hope that after seeing this presentation, you will agree with the way we describe the FIC business. Simple to understand, difficult to replicate.
In summary, the pay television sector continues to be internationally a growth sector. Branded content owners with scale like FIC will continue to take market share. Within them, FIC is a leader with 4 drivers of top side. Our entry into sports, brand consolidation, advertising upside and increased ownership of breakthrough content.
Thank you very much. And now, let me introduce you to the man that runs a powerhouse, the best example of for a branded content owner in one of the fastest-growing markets in the world, the CEO of STAR India, Uday Shankar.
Hello, and a very good morning to all of you. In 1993, well before most people had awaken to the potential of India, News Corp made a big bet on a country that was just opening itself up to the world. In 20 years since then, Twenty-First Century Fox has built India’s most successful media company. It’s a company whose scale and impact on the media industry is massive. And there has been one reason for our success. At the right times, we have taken big bets and consistently delivered on them. My attempt today will be to explain to you these bets and how they are positioning ourselves to build an even more attractive and successful media company going forward, especially given the challenges in the world economy.
Slowing growth has been true for India as well, but the truth is, India is still growing faster than every other country other than China. And importantly, the underlying drivers behind this growth are impact, demographics, entrepreneurship and domestic consumption. If anything, a new wave of reforms being talked about back home may just be able to add a couple of percentage points to our topline GDP growth every year. And the good news is, that despite the slow down in GDP growth, media continues to grow robustly driven by television, which has been growing at 13% year-on-year in rupee terms. Television is still the only real mass media platform in the country and this is reflected in it’s share of media going up every year. And there is still huge headroom for growth. Time spent on television, it’s still low. Advertising, it’s still small compared to the size of the GDP. Affiliate income has not really kicked into its potential and more than 100 million households are ye t to be reached by cable and satellite.
So there’s merit in the confidence that television in India is the standout opportunity in global media.
Even for an insider though, India is a difficult market to start a business in. I don’t need to tell you that for a global media company, it is almost impossible to build a business overnight in India, particularly one of national scale, given the size and diversity of the country. And yet, 21st Century Fox has done exactly that. I want to show you the magnitude of what we have built in Indian media. We operate an entertainment network that reaches out to more than 500 million people in the country every week. Most of the content on our 32 channels is original, produced in 5 production hubs in 7 different languages and watched in over 100 countries.
And 7 years ago, we took the same bold step to transforming then distribution to Tata Sky, somewhat similar to what we have done in 1993 with STAR in broadcasting. Today, Tata Sky is the most coveted DTH brand in India. Through Tata Sky, we have access to the highest proportion of affluent television households in the country. Through these 2 big players, there’s no question that 21st Century Fox has crafted India’s most successful media company with an unparalleled portfolio brands that are #1 in every market they operate in except one. STAR has been miles ahead of competition for the most of the last 20 years. It has been the leader for more than 12 years now. If Indian media looks substantial and attractive today, it is because we have shaped the market. What we’ve been able to do since 2009 has been a step change in what was already a successful business. In the last 4 years, we have doubled our share of the audience. This, despite the fact that the [indiscernible] saw the most intense competition from every major American media company that decided to take aggressive bets in India. Our massive scale and local viewership has translated into higher advertising incomes and an impressive share of subscription revenues. Few other companies in the world can boast of such a lead in a highly competitive market with so many well-funded players. And our attempt is to continue to build on the premium for the substantial leadership that we deliver in numbers and in the quality of our audiences.
We achieved this because we took big but calculated bets and made them work. It is important to talk about how because it gives context to what we are in the middle of doing now. In the first decade of its existence in India, STAR had operated a network of channels, programs primarily in English. Our first big move in 2000 was to bring all of North India together during prime time to watch original content in Hindi, which is the language of the majority.
By 2007, we owned the core Hindi speaking audience in the country and it was time to go beyond that market, further east, west and south. Regional markets were growing fast and local advertisers flourish by targeting a distinct audience in a limited geography. Conventional wisdom set north Indian businesses struggle to cross the southern barrier.
STAR broke that myth. We made one strategic acquisition in the South and launched new channels in other regions. In each market, we dramatically increased consumption by providing an experience that consumers have longed for. Superior quality, and a dramatic scale up in volume. Almost overnight, we changed the association of full quality with original programming. And in the process, we created India’s first truly national television network.
The other big investment was in content. We transformed the highly disorganized production environment into an ecosystem that today helps us produce 14,000 hours of original content every year. And unlike North America where dramas are weekly, we expanded prime time by creating the daily soap, now the staple of Indian television. Most importantly, we own the creative process and the entire IP behind our content, which is a big advantage as consumption shifts to other platforms. And we made television the primary screen for movies. Today, for blockbuster film, television has become the driver media. 10x more people watch big films on TV than they do in theaters. But no strategy has been as substantial and as rewarding as our efforts to change the game in distribution. Given low per capita income and rigorous price regulation of mass broadcast content, India will remain a low ARPU market for a while. A highly fragmented landscape of cable operators make it difficult for broa dcasters to get a fair share of down collections. Of course, cable in India is notorious for under declaration of subscribers and leakages in collections.
But our effort has been to drive better monetization wherever we can. We forayed into HD to monetize a more affluent viewer segment. Today, we have the highest number of HD channels. This is strategic to drive ARPUs as the pricing of HD content is left to market forces. To support our national platform, we invested in making sure our content was available in the smallest of towns, in the smallest of states. And now, even in rural areas, thanks to DTH. The biggest breakthrough though has been in digitization. We understood the power of digitization in unlocking value for consumers and industry. And we decided to work with our peers in the industry. We helped craft the consensus behind the government mandate to drive the fastest digitalization effort anywhere in the world. 19 million households will go digital in the next 2 years. As we speak, 18 million boxes have already been seated in the top 42 cities. Taken together, this positions us in a promising place to grow our af filiate revenues.
The result of these 3 strategic initiatives is for you to see. We have grown at a satisfying 27% CAGR in dollar terms from 2009 to 2013. This was despite a significant depreciation of the rupee during this period. We have surpassed TV industry growth by more than double. No media company in India comes anywhere close to this performance.
And the story is the same with Tata Sky. In the last 7 years since it was launched, it has become the best DTH brand in India with access to best content, including all of sports. What is being built at Tata Sky is a premium business that beats the market on ARPUs, subscriber acquisition and monetization.
Tata Sky is also driving the HD transformation in India. Today, the Tata Sky model is what every cable MSO and DTH operator wants to emulate.
Which begs the question, what’s next? Despite the slowing economic growth in the topline, the forecast for the media industry is looking good. Subscription revenues will get a boost from mandated digitalization, advertiser spends will be driven by growth in regional markets and television consumption is likely to go up. So the big question for us has been, how do we exploit the environment and make sure that we continue to outperform on leadership and value?
We are focusing our efforts on 3 big moves in the next 3 to 5 years. Each of these strategies can unlock substantial value for the business. First one is advertising monetization. With 22% market share, we already have as big a network share as is realistic. And therefore, driving up east is a key focus area for us. We have come so far by creating a pan-Indian network of advertisers, now, we are set to drill deeper. We aim to double our advertiser base, launch technology at local targeting of ads for the first time in India and push for better audience measurement systems for the industry.
The second one is to go local further. We have created India’s only real national platform. The opportunity now for us is to deliver segmented audiences to brands that are seeking to target specific audiences and specific geographies. In this case, digitization is a huge help for us. We will look to segment the Hindi audience in North India, and we will be aggressive about taking sports in regional languages to regional markets.
And third is sports. As Chase mentioned earlier, growing the sports market in India is one of the biggest bets the company is taking in sports worldwide. The reason for us to invest in sports is much the same as in other markets. It will be a big driver of subscription revenues, especially in a world where digital cable rollout will be fast. It will bring in an affluent male audience that will help complement the core female audiences that we already own through our entertainment businesses.
And we are doing this thoughtfully and in a manner that leverages every lesson we’ve learned in India in the last 20 years. Clearly, this is a country that has one very big sport, that is cricket. But we see an opportunity to make cricket even bigger than it is today. Just like we reinvented prime time on entertainment, we believe that there’s a huge opportunity to increase the time spent on cricket by dramatically improving the quality of production and by bringing cricket to new audiences, especially the large markets that do not speak English and Hindi. But our sports business will not be built on cricket alone. Our consumer research has convinced us that India can support at scale at least 1 or 2 more sports. So we will work to grow soccer, a game that already has a deep following in urban India. And we will bet on seeding and nurturing a few domestic leaves. Unlike any other media company in India, Star is aggressively working towards building a digital business using sports as a beachhead. Our special focus is on mobile, which is driving Internet consumption in India. We are working with a regulator to create the right framework for monetizing our rights.
Seen together, sports is going to be a big bet for us and one that can dramatically change the fortunes of our already very successful Indian business. Of course, like in all markets, sports is compelling only when there is a compelling portfolio of rights. Our advantage is that we already have scaled where we are the leading sports broadcaster in the country. Clearly, as you all well know, the challenges of building a sports business is that it will mean a meaningful commitment in investing in rights, and we intend to invest aggressively to retain the advantage that we have. This investment cycle will go on for a few more years. But beyond that, we’ll be looking for a big step — step-up in returns. That, then, is our approach. We have created India’s largest media company by building an entertainment business that has left its competitors far, far behind. And we are using sports to bring in a whole new set of audiences that will fuel further growth.
The real power of our direction is that we have the opportunity to build one of India’s — one of the word’s largest media brands that brings under one umbrella 700 million viewers every week. Our objective is simple: to create India’s most indispensable destination. Thank you.
Thank you very much, Uday. That concludes our morning presentations. I would now like to give you the opportunity to grab some lunch. Just pick up one of the boxed lunches at the back of the room rack so just behind the soundstage and be back here within 20 minutes, at which time Neil Cavuto, from Fox Business and Fox News, will have a fireside chat with his boss, Roger Ellis. Thank you.
Okay, okay. okay. Everybody, get settled, please. All right, thank you. Now it is my pleasure to introduce Roger Ellis, Chairman and CEO, Fox News, and Chairman, Fox Television Stations; and also, Neil Cavuto, Senior Vice President, Anchor and Managing Editor for both Fox News Channel and Fox Business Network.
Thank you very much. I had a couple of people say, “Well, no pressure for you, Neil, interviewing your boss.” So sure, the interview doesn’t go well. Not only do I not have a job, I don’t have a ride back to New York. Well, welcome, everybody, and thank you, Roger for…
You know, they put us at lunch, so the schedule was for us to go ahead and they would be outside.
Exactly. Want to address some rumors right off the top that are burning up some blogs. One, it’s getting attention on Drudge and others as we speak is that you’ve changed the primetime lineup for the first time in 10 years. Megyn Kelly is going to 9:00, all sorts of stuff. What’s the deal?
Well, generally, I don’t confirm or deny any rumors. That’s a rumor at the moment. However, Megyn has earned a better time period. She’ll be in our primetime lineup. But I must quickly say that all of our stars will be back. We have new deals with Hannity and Greta and Shep. Shep and I have been working quietly on something we’ll roll out probably in mid-September about how news is presented. I think it’s kind of done in an old-fashioned way, and I think we have a better way of working on it. So Shep, who is, in my view, the premiere newsman in the country, everybody wanted to hire him, he agreed to stay with us. And I think you’ll see some changes that are good. I think Greta is on her time period. Ever since she’s been there, she kind of put Anderson Cooper away. She’s a great interviewer, tireless worker. And Hannity is a brand that many of our viewers love and want to see. And he’s also, as you know, probably the nicest guy in the building, other than you, of course. B ut Hannity is a strong brand. The difference between Hannity and everybody else, MSNBC, he’s a conservative, but he has — he has — he’s on — he has liberals on every night, from Al Sharpton to whoever, to argue with. If you watch the other channels, they’ll never book a conservative to argue with. So his is a much better program and it’s reflected in his raves because he’s fearless. So we have a great roster of talent. I am making a few minor changes. But let me just say that since Fox News Channel came on, MSNBC and CNN have changed either their primetime lineup of shows or their primetime talent 64 times. I think maybe I have changed it 5 or 6. So you have to choose well on the first place and have the guts to stay with people who can do the job. And that’s what I try to do.
So it sounds to me like O’Reilly’s gone?
Yes, he’s finished. That’s it. No, I’m just kidding. Don’t let that out. Let me tell you what I did do with O’Reilly. He was on originally at 6:00, and after a year, we didn’t do well. And I called him in, and he actually said to me later, he said, “I thought I was being called in to be fired.” And I said, “Bill, I think the mistake is mine. I think I have you in the wrong time period, and I’m going to move you to 8:00, which has the most homes using television. Now if you lose, it’s going to be your fault. But up until now, it’s been my fault, but I need to put you on later after people have set their home security systems.” So a joke. But anyway, Bill has been the star and the leader in terms of ratings of cable news, including demo, by the way. So he’s done a great job.
All right. So just to be clear, to wrap this up, you’ve re-signed all the premiere primetime talent. No one’s going anywhere.
No one’s going. No one’s leaving.
But it’s fair to say also the business variety hour with Neil Cavuto is not a go?
Not going to work out. We’re trying to merge that with So You Think You Can Dance.
Very good, very good, but give it time, which would explain why I’m here and not in New York. Let’s talk a little bit about Fox, and whatever you do with Megyn or whatever you do with the primetime lineup, as you said, you rarely touch it. It’s been 10 years since you’ve done anything with it. So any change is going to raise issues. Hey, this is Fox News. I’m going to have to shake things up. We’re here to talk about the demo. What? What’s going on?
I’m a great believer in making changes that need to be made. And I think we’re going to — you’ll see some things, not just in talent, but I think picking premier talent is really one of the things that is essential to winning. But there are other things going on. There’s the use of social media. The digital side of this business is growing. We’re making adaptations to use that more effectively in our news coverage for television. But the pure organization, which is — arguably tips left, came out with a study 2 weeks ago, 3 weeks ago that people still get — the majority of people get their news from television. And of all the people doing television news, Fox came in first. So in a commodity that is news, Fox is a brand, and it is a strong brand and a growing brand. So I feel pretty confident that we’re fine. We’ll make a few adjustments in the fall, but it’s going well.
Now you talk about the adjustments and the demo, and your competitors have been busy, particularly CNN since Jeff Zucker making a number of changes. Are you worried?
No. I saw Jeff coming out of The Breakers in Florida, and I said, “You need to give Wolf Blitzer 2 more hours.” And Wolf is a great journalist and a good friend and a nice guy and so on. I was joking with him, but…
Well, Wolf didn’t laugh at that?
No, Wolf didn’t laugh at that. They had a guy a few years ago that made the walls move. And I said, “I think you need to keep Wolf with his back to camera with the walls moving,” because I frequently say, “Let’s hurry up and get home to watch those walls.” People watch talent, and they like talent and they make choices about talent. And I think that’s the essential part of the business. I think CNN has come up a little in the demo, to be honest with you, in first and second quarter. There was fatigue, news fatigue after the election. Last year was a political year. Our ratings went down a little bit in demo. They’ve come back in second quarter. Everything’s fine. Of the top 15 shows in cable news, 12, I believe, are — we have the top 12 out of 15. And in terms of our position as ad-supported cable, we are always #3 or #4 or #5, depending on whether there’s a big game on ESPN or someplace else in terms of prime time and total day. Both MSNBC and CNN are not in the top 30. So — and that hasn’t changed since the election or this year. So I expect to — I think ratings are down a little bit, but it’s seasonal and happens after every election.
Are business news harder journey than you thought?
Well, Rupert and I talked about this in the beginning. We always thought it was somewhat difficult. We were actually at about the same place Fox News was 5 years in. It’s tougher because, of course, there’s not a lot of extra income around for a lot of people. Middle-class people are not necessarily investing. I think there’s — we’ve been in a recession for a long period of time. People are not checking their portfolios or are they going to the Internet to check. You’ve got to adjust the programming. That said, I was very careful about when we went in, and we have been profitable. We were in the black, I’m not sure, late ’05, I guess, but the bottom line is the Fox Business Channel made money 2 years ago, made money last year or make money — more money next year. And our ratings, while they are slow, we have 20 million fewer subscribers, but our ratings are going up and CNBC’s are going down. So I think we’re in pretty good shape. That’ll — that’s going to work out well . We’ll figure out what to do with your…
This is near and dear to my heart, but you do have the top 5 business shows.
That is true. They’re on Fox News, and the top 5 business shows. Once we figure out what to do with your time period, we’ll be…
We’re still working on that.
Okay. Let’s get a landscape of the future. I mean, you’ve often said, “Once you’re on top, it’s hard to stay on top, like the Super Bowl winner whose greatest challenge is to repeat.” And when you’re #1 for as long as Fox has been, everyone waits for you to trip up or to lose your fastball or for people just to think that, especially newcomers to Fox News, they have arrived after the fight, so they come to third and think they hit a triple. So how do you maintain that intensity? Because the feeling is, well, there’s no way in hell they can maintain that.
Fear, basically, is…
Seems the worst?
No, I think — look, I understood in 2000 that we were going to be the #1 channel. It was clear. We launched in ’96. We had a big fight. By the time we got there, I think we took over CNN prime time in ’01, then we broke even, then we took 24 hours and we stayed in front for 11.5, almost 12 years. And it’s not easy. I remember talking to somebody, when the Pittsburgh Steelers won 4 Super Bowls in a row, and he was an assistant coach, he said, “Man, I’m trying to get these guys to come in and hit that sled, show up on time or whatever.” But we have a lot of young people. We have a very dedicated workforce, very talented, and I tell them, “I don’t get paid to play. I get paid to win.” And so I expect that. And so far, we’ve been able to maintain that. I think the future looks pretty good for Fox News. It’s a very ingrained brand with the American people.
Recently, Jeff Bezos bought the Washington Post for $250 million like Sam Zell on — with difficulties with newspapers like the Tribune Company and Chicago Tribune and The New York Times. And he was on the show to talk about advice for Jeff Bezos. He said, “Jeff doesn’t know what he’s getting into.” And I want to get back to you because he said, “You’ll never know what it’s like to try to deal with prima donnas.” I think he was talking about journalists and that they’re hard to corral. They’re hard to tell what to do, and they’re really hard to explain business, cutting costs, the virtues of business. And he said, “Jeff, really, is in for it.” What do you make of the general insight there and advise you might have for Bezos or anyone else about dealing with prima donnas? Again, present company excepted.
Well, their talent gets a bad rep. They actually — no, they actually — I think one of the reasons we keep talent, we pick good talent, we have consistency. The talent knows I’m on their side. They have to go out there and go up on the screen. They’re going to get the criticism, and half the people love them and half the people hate them. And when they go out in a restaurant, somebody there grabs their hand when they’re trying to eat to get an autograph and start screaming at them that they’re a fool and so on. So I’m pretty protective of talent. I understand that what’s up on that screen is essential to winning and to ratings and everything else. Yes, they can be a pain in the neck, a little babies once in a while like you. But that’s it. Stop that. First of all…
I really didn’t have to come.
I know. Neil…
It’s a long flight…
Neil pointed out to me that it’s today, 17 years ago…
17 years ago today.
I heard him, 17 years ago and I’ve…
I’m sort of like the opening guinea pig.
Well, yes, but…
But you know, that reminds me of something, Roger. I mean, some of the premier talent, you notice I included myself on that, they had been with you from the beginning. Now obviously, you talk about a turnstile of talent. But a lot of your key executives as well has been with you up from the beginning. And the media is notorious for constantly flipping. Now what do you do to maintain that? And how do you sort through the people who should be there a while and knows who should be showing the door?
Look, when you’re dealing with people’s lives, you take your time and you make sure you make the decisions in the first place and then you try to make the decisions when it’s time to move on. Going back to your question about the newspaper business, Rupert’s a premier newspaperman in the history of the world, probably, and media strategist, so he’d be the right guy to answer that question. But look, if you’re good, the — remember that movie, “If you build it, they will come?” I mean, in the end, you have to put something there that they want, that they want to see or read or whatever. We had a hole at 5:00, and 5:00 is a tough time period in television. It’s a transitional time period. People leaving work, people are getting the kids, they’re doing things. It’s a tough time period. And so I’ve put a show up called The Five and picked 5 people for it. Then I called them all in my office and I said, “You’ll know it as The Five, I know it as the 10 because I have a backup fo r each of you if you get out of hand.” And then we’ve put it up about 2 years ago. Today, it gets almost the same demos as Bill O’Reilly, even though the huts — the hut levels are much higher at 8:00 than they are at 5:00. And it’s the second highest-rated show in cable news anywhere. And it appeals to young people, and it’s a big — it’s going to be a big Internet project for us as well. So…
And that’s a phenomenal lead and if you think about it.
Well, it’s — yes, well, yes, it’s true. We had to overcome your lead, but that was the only thing…
Exactly. I’m on at 4:00 p.m. by the way. Anything I can do to…
So one of my jobs is to try to get the best audience flow between shows, and that’s one of the reasons I’m making a few changes right now. But it’s not in — I’m not reacting to CNN or MSNBC because they seem to be — they came out with their lineup the other day. I think CNN did. So I think we need to try to win, that’s all, and put things on — up there that people will watch.
Right. Did you notice in that lineup, though, it could be just more cosmetic, it could be temporary. But I wouldn’t say a concerted effort, but an attempt now for fair and balanced. So in other words, to at least show the conservative side.
They both want to [indiscernible]
So I talked to Sam Zell about this, if journalists are biologically incapable of being fair. Do you agree with that?
No, I don’t. I think there have been some great journalists over time. There are still some today. And occasionally, some rise to the occasion on specific stories. They may not be generally fair or balanced, but they will rise to the occasion. I think there is the obvious current love affair that’s going on. But generally, journalists work hard and earn their place, and a lot of them are put in dangerous places at difficult times. And so I’m pretty protective of journalists as well and reluctant to criticize them because they do a hard job, they really do. I think the fairness — look, they don’t teach civics. They don’t teach history very well. They don’t teach geography. They don’t teach current affairs. So kids are coming out of school without a concept of what the real world looks like. That’s probably a bigger problem than anything else.
Do you get a sense, looking at the landscape, though, let’s say, news coverage, that whether you’re following Benghazi or you’re following the IRS scandal or you’re following the Justice Department spying on reporters scandal, that there’s initial interest on the part of the media to follow as well, but then they let go of it.
No, they all know the trick. The trick is covered for 2 days, say you covered it and keep moving, the only way you’re going to have a story. I mean, Benghazi happened a year ago. Now we stayed on it for 45 days alone. I stayed on it partly because we’ve done a lot of work with the military. I know the Navy SEALs. Those 2 Navy SEALs violated orders, and if they hadn’t, we wouldn’t even have heard of Benghazi. But the real problem with Benghazi, aside from the death of the 4, which was tragic, was that this country’s always had an ethos. The people we send out into the night to risk their lives for our country expect somebody’s going to be behind them and come and get them or at least try to help them. And in the Benghazi instance, the 230-year-old covenant between the military and the commanders was broken. And that, to me, is a much larger story because if there’s some poor guy tonight who’s going to go out in Afghanistan and he says, “Colonel, I think we’re going to take casualties tonight. Are you guys going to be there to backstop me if something bad happens?” You can’t have the commander say, “Well, I don’t know. Let me check with the White House and make sure. Yes, I’m not sure. Maybe we will, maybe we won’t.” That’s not how the military works. And thank God that we have these people who are willing to do this, but they have every right to expect their country to back them up.
So do you take some comfort in knowing a year later, the precautions we are taking, maybe because of Benghazi, maybe because of the uproar over Benghazi, to shut down our embassies across the Middle East out of whatever they go abundance of caution. But that might not have happened had there not been…
No, I don’t think that has much to do with it. To be honest to you, I don’t. My own personal view of it is, I think it was a bit of a wake-up call and we’re learning more about Benghazi every day. We’re having to pull it like teeth, but now we find out 35 CIA agents were on the ground. Well, what the hell were they doing? So I’m just — I’m saying that was a story worth staying on because we didn’t get the story. And our job, and all journalists’ job, what — same thing happened in Abu Ghraib during the Bush administration. I mean, we were faced with looking at photographs that were totally outside the culture of the United States and would do us more damage because some moron in the operation did that. So we cover it. It doesn’t matter what the politics of the situation is. There’s a core reason for covering any story. And if there’s a strong enough reason and it gives the American people insight, then that’s the journalist’s job and I just won’t move off that position. p>
Let’s talk about you in a few minutes we have left here. How long do you want to do this?
Well, I got 3 more — I have certain things. I want to save democracy for the next generation. I want to prove the fat guy I can get to 100. I’m still working. I would like to be on Dancing with the Stars.
Well, Geraldo turned it down. So…
He doesn’t need it. He’s up there shooting pictures of himself at the middle of the night. I’ll tell you about Geraldo, though. There have been a few times in his life when — they joke about Geraldo, but there’ve been a few times, and I’ve been a part of a couple of them, where you get blood on the ground and boots on the ground and a bad situation, and you need somebody who will go in and take a risk even up to Tora Bora in an old helicopter. It blew up the next day and he was on the ground long before CNN ever got there because he went in. So you always count — there are certain people who will rise to the occasion. There are a lot of people who rise to the occasion when there’s no occasion. But what you always need is 1 or 2, who will rise to the occasion when there is an occasion. So…
Well, back to you. You’re not going anywhere, or you are going somewhere?
Naked pictures when you’re drunk is still stupid.
Sorry. Go ahead.
Doesn’t a former congressmen know it. But for you, I mean, you have a couple of more years, 3 more years, whatever it is, you could see that Rupert’s blessings staying beyond?
Well, yes, look, people always ask people like Rupert or me, “Do you have a succession plan?” Of course. No responsible person in the world — I came to their company in ’96. By ’97, I had a succession plan. Now I update it every 6 months or so, and I don’t tell anybody what it is. And I’m not sure anybody will follow if and when I leave. But it’ll be there and they’ll be my recommendations. And I believe FOX News is going to grow, get stronger, have higher ratings. And as we go across all platforms, as Chase talks about frequently is television everywhere or shows everywhere, we’re finding a lot of our people are going to mobile. We’ve had about 14 million downloads off our mobile app. We’re working — we just signed a new deal with FOX — with Sirius — or I don’t know if it’s signed, maybe I shouldn’t say that, but they were working on it yesterday. And we got a higher — we came in at a higher rate than we had before, plus we got — FOX Business will be up on Sirius XM as well. So that deal just got announced, I guess. But now they’re sitting over there saying “Now we haven’t much unravelers.” no, I think as we go across platforms, FOX News is going to grow and get stronger and stronger.
But then I do have a succession plan for whatever that is.
Yes, yes. It’s not you. It’s…
But when you say that you’ve updated it through the years, you’ve — is this constantly changing?
Yes, whenever I get mad at somebody, I take them out.
Oaky. Does it — is it something that Rupert and Chase and… nobody else?
No. They don’t know about it. No. They’re going to get surprised. But…
So it’s someone internal?
Yes. It’s just that no responsible executive — you can get run over by a bus. It doesn’t have to be age. And so you really have to figure — I love FOX News. I understand where it fits in the world, and I want it to continue forever, and I want it to grow and be strong.
But you have no near-term plans?
Well, my near-term plans are to put my competitors out of business completely. So I get up everyday figuring, “This is how we’re going to do this.” And I don’t think about anything else. So, no. And I wouldn’t recommend anybody for the job who didn’t think that way.
Well, bottom line, whoever this person is likes Italian-American anchors is open to keeping them on for the year. All right. The landscape [indiscernible] of the economy — I was hearing from a lot of the prior comments that ad sales are good, the stock, of course, is doing extremely well on this notion that…
That was until we got on stage.
Until we got on stage, yes…
[indiscernible] heading down now. Right.
But do you buy that? That things are picking up, the macro, the…
You mean the economy is getting better?
I don’t know. I mean, I — we have very high unemployment, and I don’t see anything happening to remedy that. And I think that’s particularly greed-ish in minority communities. And I think that’s extremely troubling. Yes, I guess, in a way, things are — I guess, there’s a little science here and there on it. But to be honest with you, this has been the longest recession in history. And we’ve — it’s the longest in history that we’ve had 7.5% reported. And as you know, that’s not work place participation. That number is, what, 64% or something like that?
But how are things at [indiscernible]. Some of the retail sales are off-the-ground, that up something must be happening to be boiling…
There’s a lot of cash around, and I think that rich people are able to spend whatever they want and are spending their cash. But the problems are taxation and regulation ultimately are negative effects on capitalism. They are. Now you — a lot of people hate capitalism, but we sort of like it and we think that — I hate this war on the ridge because every time I needed a job I had to go to a rich guy. Now, I love poor people. They never had a job for me, but I always think the rich contribute and try to help. And this is the most generous nation in the world, and we don’t get credit for it. And it annoys me because — and nobody minds paying taxes. We should pay taxes. But at some point, having a class warfare going on is counterproductive to the long-term interest of the country.
Finally, and we’re out of time here. What do you think of the future of the country?
Country? I’m optimistic because if you go back and read Chernell’s [ph] book on George Washington, you realize that poor guy, he didn’t have any break. He had no army, he had a militia, he couldn’t — he didn’t not have the support of Congress, his own generals are turning on him, half the population still want to support the king and he had no ammunition or food. And he rose to the occasion and set the position for this country and set the presidents for the presidency. And throughout history, whether it was Lincoln or whether it was Eisenhower on D-Day or whatever, people have emerged to try to pull us out of the ditch. We have an enormous tendency to drive ourselves into the ditch, but we have — there’s something in the American spirit that also lifts us out of the ditch at key times in history. So I’m sort of banking on that to some degree. But the world’s changing. And what I always ask people is, “Can you imagine the world today if there was no America? How would th at work out?” Ariel Sharone [ph] said something once to me. I talked to him, and I said, “What do you make of all this anti-American stuff?” And he said, “I don’t worry about it.” He said this, “Every leader in the world only has one phone number in their wallet, and that’s to the White House because you, Americans, show up.” And I thought, “That’s interesting. Interesting observation.” So now I’m optimistic, but mostly because of my study of history. The current events are troubling, but I think the industry that we’re in, communications industry, is the most exciting and expansive industry going. And I think this latest move by News Corporation — and if you look at these executives, I really was, frankly, very irritated by these young, fit executives. I just think it was unnecessary to parade them off — to parade them all up here in front of these people. But if you look at those people, and if you know them on a first name basis, as I do, and this even includes Jim Napo lis, [ph] who’s — No. It even includes him. They are very creative. And Rupert has set up a company here, and Chase has run this thing in a way that everybody talks to everybody else at any time, shares their feelings. There’s a very creative thread throughout this company, and it’s just not the turf war for the — you heard the sports guys trashing me. and they trash me because they have to come to me for help right now because they’re going to launch. And they’re as nervous as I was when I had to launch Fox News, and we had no studios, control rooms, stars, programs or anything else. But we did have an idea, and we knew there was an audience, and we knew how to do it. And these sports guys are good, they will get it done. And the one thing I think about these executives as I see them parade up here is, there is no single quitter in the bunch. There isn’t really a single negative person in the bunch. That’s very, very important to the future or to the growth of a corporati on. If you got a lot of negative people, negative people make positive people sick, physically ill. And you really have to stay away from them. We don’t have that. We trash each other a little bit, but no. It’s anybody who calls for help gets it. And we’ll move heaven and earth and work day and night to get it done. So that’s the ethic of the company that I think people don’t see on financial reports, or don’t see a lot but there’s a good feeling, and it surpasses politics. It surpasses everything. It’s just a bunch of really strong, tough, creative people who will help each other and understand the mission and play team ball. And that’s very important for the future of this country — company and country. Thank you.
Thank you, Roger, very much.
And for the FOX Sports guys, that 17 years go by in a click. That’s it. Thank you.
As time goes by, whether you’re having any fun or not. So might as well have fun.
Thank you very much Roger and Neil. That was great. I enjoyed it. We’re going to take, really, just a 5-minute break. So at 12’30, we’re going to resume. And James Murdock will come up here and talk to all of you about our businesses. See you shortly.
James Rupert Murdoch
Now premium entertainment and sports is at the heart of our content offering. We have exclusive and compelling coverage of top sports events in each one of these football-crazy markets. In the U.K., the English Premier League; in Germany, the Bundesliga; and in Italy, Serie A. We backed this up with, by far, the widest and best selection of international and domestic sports in each market, including exclusive Formula One and the pan-European Football Champions League. Each of the Europeans Skys has have exclusive first-run pay window deals with the major studios, and we supplement this with the best local movies. And we continue to improve the Sky Movies experience. Our On Demand services, available on multiple screens and devices for customers, are second to none. Naturally, we offer a comprehensive line up of third-party premium and basic tier channels. Sky Atlantic screens the best premium cable content from the U.S., often at the same time as the first-run in the U.S. On Sky, Uno, Sky One and Sky Living, we go head-to-head with free-to-air broadcasters, with bold and brash format content.
We’re increasing investment in high-quality original drama and comedy from the critically-acclaimed Romanzo Criminale at Sky Italia to A Young Doctor’s Notebook with Jon Hamm and Daniel Radcliffe to An Idiot Abroad, We’re just seeing incredible success in multiple territories.
We offer independent fresh 24-hour news with Sky News in the U.K. and in Italy, with Sky Tg24, with a hard-fought reputation for being first in breaking news.
And the Skys all carry extensive programming from 21st century Fox, featuring brands and services from Fox and National Geographic.
At the end of the day, the business is about putting real value for customers on-screen, and we’re very excited about the lineup that each of the Sky’s assemble for their customers.
Now the second pillar of Sky’s strategy is all about innovation. We’ve driven PVRs and high-definition deeply into the customer base in all 3 European markets. We were the first company to drive mass adoption of these services in each market.
And our Sky Go products is a world-leading, over-the-top service. It provides access to a deep library of movies and services, catch-up content, plus all of our live content. It’s available on tablets, computers, phones and video game consoles. And it’s available connected to the Internet, as well as offline through downloads.
And you can see in only a few short years, the Sky Go tablet product is already used by 5.7 million customers.
Needless to say, customers with PVRs, HD and Sky Go are happier and much less likely to churn.
By way of example, in Italy, a customer with My Sky and Sky Go and our On Demand services is 60% less likely to terminate their service than a standard customer.
The third pillar of Sky’s strategy is customer service. In a business where competition is this intense, great service is a crucial differentiator.
We work hard at providing service, sales, and installation that deliver for customers in a seamless, no-hassle way. And we’re recognized for this through customer perception and industry awards across Europe. And our customer experience scores are well ahead of our competitors.
Now let’s move specifically to BSkyB. BSkyB was the first of these businesses. It was formed in 1990 by the merger of British Satellite Broadcasting and Sky Television. And BSkyB has a string of firsts to its name: The first digital broadcaster in the U.K.;The first to transform soccer into the entertainment super sport that it now is; the first with high-definition services; the first to bring PVRs to the mass market; and the first mobile TV service with Sky Go.
In many ways, BSkyB’s relentless investment in better content, breakthrough technology and customer service has provided the template for all of the SkYS. And as the company’s founding shareholder, we continue to own 39% of BSkyB. And as you can see from the slide, it’s a highly profitable and fast-growing company with impressive cash distributions to shareholders.
BSkyB is a true multi-product company. And under the leadership of CEO Jeremy Derek and the tremendous executive team in Oesterley, in each segment, the company’s company is a leader or challenging for leadership.
TV is obviously at the heart of our offering, and the company continues to grow its customer base even from a position of strong leadership. But Sky is also the second largest provider of broadband and voice services in the U.K.
Already, more than 1/3 of Sky’s customers are triple-play customers, and we feel very good about the velocity of these services.
BSkyB’s investment in content, relentless innovation and great service has generated strong financial results. The company generates more than $1.5 billion of free cash flow per year and growing.
Now we formed Sky Italia in 2003 by merging 2 platforms, Teloqu [ph] and Stream. It’s now a profitable, wholly-owned subsidiary of Twenty-First Century Fox. With close to 5 million subscribers and $55 of ARPU, it’s, by far, the leading pay-TV platform in Italy. It’s been tough in Italy, though, these past 3 years. Italy has had 7 consecutive quarters of negative growth, and household disposable incomes are back to where they were in the 1990s. So it’s a difficult time to persuade customers to sign up to a discretionary TV service, which can cost upwards of $800 per year. But it’s a tribute to the quality of the subscriber base and to the products that our revenues have been essentially static over this period.
If we compare that to the revenues of MEDIASAT, our main competitor in the market, whose revenues have fallen by nearly 20% since 2011.
I’m optimistic about the future of Sky Italia and confident that it will start growing again.
The regulatory constraints, which were imposed upon Sky Italia when it was formed, which prevented us from having exclusivity in key sports events, have now fallen away. For most of its first decade, Sky Italia has been fighting with one hand tied behind its back. But from this season, we’re offering exclusive Formula One on a dedicated channel, and we’ll start offering UEFA Champions League next season. And you can be sure that there’ll be more to come.
Pay-TV in Italy remains under-penetrated by any benchmark.
Under the leadership of Andrea Zappia a long-time Sky Italia employee and a colleague as well as MD of BSkyB’s Customer Group, we’ve continued to invest in product innovation throughout this recession. More than half of our customers have PVRs, and more than 2/3 have HD capability. And more than 1/3 use our Sky Go service.
As I indicated earlier, this makes customers happier and dramatically reduces their propensity to churn. It provides a secure base upon which to build for the future.
But we’re not complacent. We know that we had a big EBITDA shortfall in 2013, as you can see, although a big chunk of that shortfall was due to an expensive contract for the London Olympics. We have detailed and specific plans to take $200 million out of the Sky Italia cost base over the next 2 to 3 years. And as these cost savings take effect, and we see a ramp-up of our customer base, we’ll see rapid margin expansion.
We created Sky Deutschland in 2009 out of the old and struggling Premier business. And we were told that German customers would not pay for quality television. And we’re comfortable with their free-to-air channels
Under the leadership of Brian Sullivan, like Andrea at Sky Italia, former MD of the Customer Group at BSkyB, we’ve proved that great content, relentless technological innovation and great service can be just as popular in Germany as it has been in the U.K. and Italy.
We stepped up our ownership of Sky Deutschland to 55% earlier this year, and we now consolidate its results. The remaining 45% is publicly held and quoted on the DAX.
For the first time, Sky Deutschland, earlier this week, reported a positive EBITDA for the last 12 months, a positive swing of nearly EUR 250 million in 2 years.
And the story behind Sky Deutschland’s growth is straightforward. As we’ve invested for customers, they’ve responded.
We’ve launched Multiroom, Sky 3D and Sky Go, and we’ve pushed HD and PVRs to new levels. And more recently, we launched sky Atlantic to greater claim.
We’ve taken the first step to bring original TV production back to Sky Deutschland with the launch of Sky Sports News HD from a new studio complex at our Munich headquarters.
Now a feature of Sky Deutschland, which is worth highlighting, is that it retails the customers over multiple platforms. It sells on its own satellite platform across several different cable networks and with new deals with Vodafone and Deutche Telekom across third-party, over-the-top and IPTV systems.
To succeed across multiple platforms means competing by having the very best content, but offering consumers platform-independent product innovation. And we’ll see more of this in the future in Germany and other markets.
And we’re starting to see the financial rewards of offering German customers a great product.
A million new customers since launch has translated into 16% annual top line growth. And Sky Deutschland has added nearly $250 million of EBITDA over the past couple of years. There’s every indication that there’s much more to come.
This is proof again one should never overestimate the customer’s satisfaction with the status quo.
We’ve created the largest pan-European TV platform with the Skys, and one of largest TV platforms in the world. And this lets us do things for our customers faster and better.
Over the past couple of years, we’ve launched Sky Go, the leading over-the-top service in the world in all 3 markets. We’ve launched exclusives Sky Sports F1 channels in the U.K. and Italy, and we’ve launched Sky Atlantic, showcasing great American content in the U.K. and Germany. And we can do this because we have scale and because of the Skys can work together and learn from each other.
And our ownership of the Skys has created significant value for Twenty-First Century Fox shareholders. The cumulative total of dividends, share buybacks and free cash flow and stock price appreciation in BSkyB and Sky Deutschland alone has created net value in excess of $8 billion for Twenty-One CF over the past 5 years.
We’re very excited about the prospects for these businesses, about what the Skys can achieve in Europe. We’re bringing compelling, groundbreaking content to customers previously served by sleepy free-to-air monopolies. We’re innovating day-in and day-out for our customers, and we continue to believe that better service, better content and a zeal for change everyday will make these businesses winners today, as well as tomorrow.
Thank you very much, and I’d like to now introduce John Nallen, our Chief Financial Officer, who’ll walk through the financial performance of Twenty-First Century Fox, as well as the financial prospects. Thank you.
John P. Nallen
Thank you, James, and good afternoon, everyone. Let me add my welcome and I think — is the mic on, fellas? Hello. Now we’re on. Good. Thanks. Thanks, James. Good afternoon to everyone. Let me add my welcome and my appreciation to all of you for joining us today. Of course, my role is to focus on our financials, and to bring together and reinforce a lot of what you’ve heard throughout the day. Over the last several hours, you will have seen that at Twenty-First Century Fox, we have a portfolio of integrated and diversified businesses that are well-positioned for growth on a global scale.
Our confidence in our growth plan stems from the leadership position our businesses have today. The increased concentration of more predictable revenue streams, as well as the expected returns from the investments we’re making in the new businesses. You will have also seen that we are set up for strong growth and are well-capitalized. These characteristics provide us a renewed focus on the efficiency of our balance sheet, including returns of capital to shareholders.
Now before I summarize were we’re headed, let me quickly revisit where we’ve been. From 2010 to 2013, the revenues of what is now Twenty-First Century Fox grew at a 5% Compound Annual Growth Rate, and our EBITDA grew at a 13% CAGR, led by our Channels businesses. Additionally, during that period, we returned over $8 billion to shareholders through share repurchases and dividend payments, with over $7 billion of that during the last 2 years.
Now as we look ahead to the next 3 years, we are focused on the near term objective of driving earnings and cash flow to significantly higher levels. We will achieve this through a combination of organic growth and the multi-year impact of the build initiatives that you heard about today. We expect this focus to result in EBITDA levels in fiscal 2016, that will exceed $9 billion, or nearly 50% higher than the level we just reported for fiscal 2013, which results in a CAGR in the low teens, and this growth will be top line driven, as we expect revenues to grow at a high single-digit CAGR from 2013 to 2016.
While my focus is on our 3-year growth plan, I’ll remind you that on Tuesday, we provided a guidance for fiscal 2014 alone, indicating an expected EBITDA growth in the high single to low double-digit range, after taking into account the investments in the channel initiatives you heard about today, and foreign currency impacts. So first, let’s take a look at our revenue profile.
Our revenue base is well diversified, by category and by geography. So for example, looking at our estimate of 2014 revenue more closely, its composition at Twenty-First Century Fox is distinctly different than it was for the old News Corporation. At the old News Corporation, our largest revenue category was advertising, comprising nearly 40% of its larger revenue total. At Twenty-First Century Fox, our largest revenue category, representing 44% of total revenues, will be from the relatively predictable affiliate and subscriber fees that are generated by our global channels and our satellite television businesses. Advertising and content revenues will each comprise around 1/4 of the total.
Now from an ad revenue perspective, that translates into an estimate of about $9 billion of ad revenues, with close to 80% of that from our U.S. operations, led by the FOX Network and the TV stations. By 2016, we expect the concentration of revenues from affiliates and subscriptions will increase to nearly half of our total revenue. From a geographic standpoint, our revenue in 2014 skews to the U.S., with nearly 60% of total revenues generated here. However, international revenue will continue to grow as we expand our businesses. You should note that the European concentration that you see here is influenced by the contributions from SKY Italia and Sky Deutschland.
Our underlying revenue assumptions are realistic. They reflect, first, affiliate fee projections of a low teens CAGR, underpinned by the fact that for each of the next 3 years, we have 90%, 70% and 55% of these revenues already locked in today under existing contracts. For the balance, we’re confident in achieving our planned renewal terms and our subscriber growth levels. Second, our projection of subscription fees in both Italy and Germany appropriately reflect the market conditions and dynamics at these platforms. Third, our advertising assumptions assume a low-single — a low to mid- single-digit CAGR from 2014 to 2016. Growth from ’13 to ’14 will be higher, reflecting the impact of the Super Bowl broadcast and the new channel launches. And fourth, our view is that content revenues will grow at a low single-digit CAGR from 2013 to ’16, reflecting continued healthy global theatrical, home media and syndication markets. That’s the revenue profile.
Now from a profit standpoint, here’s how we plan to generate our EBITDA targets through 2016. As indicated, we expect to achieve an overall EBITDA level in 2016 in excess of $9 billion, representing a low teens CAGR above 2013. It is worth noting that we do not project our EBITDA growth from fiscal ’13 to ’16 to be linear. As you have heard, fiscal ’14 and ’15 are each years in which we will be making investments toward new, long-term growth businesses. This include approximately $400 million to $500 million in total toward the launches of the new channels, with more than half of this occurred — occurring in fiscal ’15 owing to a uniquely busy calendar of cricket events in India. Additionally, we will incrementally invest approximately $150 million during fiscal ’14 to support ratings leadership at the FOX Network. Therefore, our profit level in 2016 steps up when we see these investments rapidly begin to post returns. To more precisely follow our growth trajectory, let’s look at the main drivers of the growth by segment.
Overall, the cable segment represented 2/3 of our totaled EBITDA in the year just ended fiscal ’13, and therefore, this segment’s growth underpins our overall low teens growth targets. The cable segment growth will be led by contractual rate step ups, expansion of our channels, increased pay-TV penetration and continued rating strength at Fox news, FX and STAR. Additionally, in 2016, we will benefit from the return on the channel investments and also from the assumed half-year contribution of the YES Network in December 2015.
Our U.S. channels are the largest component of the cable segment, currently delivering around 75% of the profits, but our international channels will increase their overall percentage share of the total as we head to 2016. This increase reflects their expected higher EBITDA growth rate, even after absorbing some currency headwinds. Our Television segment will approximate $1 billion of EBITDA in fiscal ’14, and will increase at a low mid-teens CAGR from 2013 to ’16. This will be led by growth from retransmission consent revenue. Advertising revenues at our TV stations will grow in line with local market expectations.
The path to 2016 reflects the incremental investments we will make at the network and beginning in fiscal ’15, the step ups in our national sports contracts.
Our Filmed Entertainment segment, comprising our motion picture and TV production businesses, will continue to deliver solid profits. As a group, they will be down a touch in fiscal ’14, principally due to the blockbuster success of Ice Age 4. Now despite the perceived volatility of these hit-driven businesses, we see a consistent low single-digit CAGR for this segment’s EBITDA contribution through 2016, delivered from steady growth in new hit series, monetization of our syndication pipeline and new film releases, without factoring in a new Avatar or Ice Age release.
Our reporting of the satellite-TV segment reflects the results of SKY Italia and Sky Deutschland. 2014 will be a relatively low growth year at this segment, but for different reasons. In Italy, with its high-quality and resilient subscriber base, our focus is on protecting the top line, while we moderate our cost base. In Germany, SKY D has very clear runway to achieve its growth plan on the back of truly exclusive programming, led by the Bundesliga broadcasts that begin tomorrow. And 2014 is the year where SKY D’s growth just begins to take off. By 2016, we are forecasting at least a doubling of the satellite-TV segment’s EBITDA levels over 2013, from improvements at SKY Italia and achieving significant subscriber gains at Sky D.
Now BSkyB is reported as an associate, and therefore it’s not in our EBITDA numbers. However, the strength of the BSkyB’s performance is well known. And from a financial standpoint, it is translated into significant cash returns. SKY has delivered approximately $600 million in cash to us in each of the last 2 years, in the form of dividends and buybacks of our shares.
We are estimating our Other segment, which is primarily our corporate overhead, will run at approximately at a $400 million cost base through 2016, although we are focused on reducing its absolute level.
So our path to our 2016 revenue and EBITDA growth and margin improvement is fairly straightforward as we see it today. Our channels businesses, the combination of our global channels and our U.S. television businesses, which is 80% of total EBITDA today, will lead the growth. Our Film and TV Production businesses will deliver consistent results, and our DTH platforms will become substantially stronger. Now to guide you through some below the EBITDA line items, here’s some information from our plans.
Our depreciation and amortization will approximate $1.1 billion each year through fiscal 2016, with approximately $300 million of this from acquisition-related amortization expenses. We expect our rate on core pretax income in fiscal 2014 to approximate 31%, and we expect that rate to gradually increase to 33% by fiscal 2016. Our minority interest expense will increase from the $230 million we just reported to nearly double that in fiscal 2016, principally from the growth at our cable channel partnerships at Sky D.
Now other key components for forward-looking EPS calculations for Twenty-First Century Fox are both a projection of our key earnings and an estimate of outstanding shares. Our Main equity associates are BSkyB, Hulu, Yes and Tata Sky. However, the principal contributor to our earnings is BSkyB. Given that they are well-followed public company, we would point you to their estimates of net income to determine our proportionate share, and since we are not explicitly forecasting a buyback range beyond what we’ve announced today, you will make reasonable estimates to determine our shares outstanding beyond 2014.
I indicated that Twenty-First Century Fox is in a strong financial position. From a capital standpoint, Fox starts out with a very healthy balance sheet, providing us with significant strategic and financial flexibility. We will start with a cash balance of approximately $6.6 billion, and gross debt of $16.5 billion. The average maturity of this debt is about 20 years. But importantly, we don’t have any material debt repayments in the medium-term. Our average interest rate is 6.5%, and at these debt levels, we expect our interest expense to approximate $1 billion each year through 2016.
Our working capital will build in 2014, both normally, due to the growth that we’re projecting, but also to support the investments that we have presented. As we think about our target cash balance today, we are looking to maintain a balance of approximately $2 billion to $3 billion, recognizing that we will get there gradually. As we move toward a more efficient balance sheet, we will continue to be protective of operating within an investment-grade credit rating. We closed out fiscal 2013 with a leverage ratio of 2.6X on a gross debt-to-EBITDA basis. As we look at it today, we’re targeting our leverage ratio to be in the 2.5X to 3X range on a gross debt-to-EBITDA basis. This ratio is slightly higher than what we indicated 2 years ago, as the old News Corporation. However, the stability and predictability of the Fox businesses provide us the confidence to operate within this investment-grade target range. We’ll be disciplined about how we deploy our balance sheet, while r etaining our culture of pursuing opportunities. So we’ve established clear priorities for using our capital and for creating value. Of course, investing in our own growth. That is providing the capital needed internally to maximize the growth of our existing businesses and develop responses to the changing media landscape.
Acquisitions. We’ve completed a significant number of them over the past few years. ESPN, Star Sports, Yes, Sky D, E&M, TV stations and we look for smart acquisitions going forward, that meet our return requirements. And of course, providing shareholder returns. Our capital return announcements today clearly recognize this priority. We have just announced our plans and timetable around the prospective $4 billion stock repurchase plan. Additionally, we did recommence repurchases immediately after the separation date and we have acquired approximately $340 million of FOXA stock through yesterday. Further, we have now increased our dividend to a $0.25 run rate level, such that the semiannual dividend that we declared will be $0.125. We recognize that the resulting dividend yield is still below several of our peer companies, and below the S&P 500 yield, and we will be mindful of these data points as we assess our dividend rate annually.
We’re committed to making our balance sheet more efficient through this series of capital priorities, balanced by our guidance on target leverage and cash balance levels.
A few other data points from our capital plan. Our plans do not reflect material acquisitions or dispositions, except we have assumed, an increase in our ownership of the YES Network to 80% no later than December of 2015. We’re forecasting capital expenditures of approximately $850 million per year, of which approximately $350 million is for set-top boxes at our 2 consolidated satellite-TV divisions.
Finally, from a total debt perspective, by the end of fiscal 2016, this 3-year plan, factoring in only scheduled repayments and the consolidation of the YES Network debt, our gross debt would be $16.6 billion, approximately the same balance as we have outstanding today. So as I wrap up, it’s important to consider that the growth plan that we have presented to you today is underpinned by a number of key assumptions. They include the assumption that we will have continued growth in our contractual affiliate revenues, that there will be stability in our ad markets, predominantly in the U.S., supported by our ability to continue to generate ratings across all of our channels, that we will continue to have a relatively predictable cost base, led by the secure, long-term sports programming contracts that we have. That we will deliver hit content from our film and TV production units, consistent with our past successes, that we will be successful in launching the new channels, an d rebuilding ratings leadership at the FOX Network. That we will achieve gradual subscriber growth at our DBS platforms and that we will also achieve our objective of a more efficient, but healthy balance sheet. Of course, we don’t have absolute visibility into the outcomes over the next 3 years. But we have a high degree of confidence, that as of today, our assumptions around this checklist are realistic, and that our entire management team is focused to deliver on the plan that we have outlined for you today. We also hope that we’ve delivered on Rupert’s opening comments, to provide you with a thorough day of insights into the new Twenty-First Century Fox. Now Rupert, Chase, James and I will be pleased address your questions, and while we get situated, I’m going to hand it over to Reed to cover some logistical points. Thank you.
Thank you, John. Now we’re going to get set up for our Q&A session. Until then, I just want to make a couple of informational announcements. We do have several shuttle buses that can take you to either the Intercontinental for the high hotels, as well as to LAX airport. If you check your bags, please be sure to pick them up before you get on the bus. The luggage check will be at one of the storefronts on the left as you walk down New York Street, where you walked in earlier today. As noted in our agenda, we do hope to conclude at about 1:45, to make your travel plans, I think, and it looks like we’re going to be right on schedule with that. So just give us 1 moment, and we’ll be ready to go in a second.
Earnings Call Part 2: