Fox Looking To 'Utopia' To Jump Start Its Television Segment

Aug.25.14 | About: Twenty-First Century (FOXA)

Summary

Fox has an increasing sense of urgency to replace its fading American Idol.

Its new reality series 'Utopia' is a big step towards reinvigorating its TV segment.

If it is a hit, there will be a significant secondary revenue stream from those wanting to watch every detail of the series when they want.

The inability for Twenty-First Century Fox (NASDAQ:FOXA) to replace its former powerhouse American Idol has weighed on the overall performance of the company, and in particular on its television segment.

In that unit EBITDA in the fourth quarter was $145 million, plummeting from the $213 million in EBITDA produced in the fourth quarter of 2013. The company stated in its latest earnings report that the drop in EBITDA was primarily from the shrinking audience and ad revenue related to the fading American Idol.

When talking about replacing American Idol, I don't mean necessarily at the level it was at when it reached its heights, but I mean with something that is strong enough to surpass its existing performance with potential to grow.

To that end, when its new reality series 'Utopia' is examined, it appears Fox is going all out to give it the best chance to gain legs and make a long-term run.

Source: StockCharts.com Click to enlarge

What Utopia Is

Utopia, which is scheduled to launch on September 7 with a three-night premiere, is a reality TV series set in Santa Clarita, California, where participants are challenged to build a version of their own miniature society on a five-acre piece of land. A total of fifteen people will be part of the experiment. The goal is for the series to extend for an entire year.

After the three-day premiere, the series will air two times a week for about a month. That seems to be an attempt to get people hooked on the show in the early stages.

Afterwards viewers will have access to a live streaming service, which they can pay a fee to watch at any time. For those just wanting to occasionally watch the series live, they can do that free for 20 minutes daily. Unlimited live access requires a $4.99 monthly payment.

If it takes off it is a great strategy, as it immediately establishes a couple of stream of revenue, with the likelihood a large number will be willing to pay the $4.99 to gain access to the series at any time. This is obvious water cooler stuff, and few will want to be caught not knowing what is happening if the show does become a must-see series.

A total of 129 robotic cameras will film somewhere in the area of 288 hours of action or inaction -whatever it may be - per day.

If it underperforms, the $4.99 won't be too relevant, and the advertising revenue would be less than expected.

There is no doubt in my mind that Fox is going all out here to produce a huge hit. That may be why it has been very quiet on the marketing side until now.

Marketing Utopia

At this point in time internal Fox tracking suggests the awareness of the series is tracking higher than normal at this point in time before the premiere of a series, with the levels of those expecting to watch the show also coming in above normal levels.

One of the steps the company took to boost awareness of the show even more, was to bring in a group of journalists to the site of Utopia in order to poke around and get a feel for the environment the project was located in, as well as its size. From there further coverage, word of mouth and social networks should provide even more buzz.

According to the company, it didn't want to go too far or quick with marketing the series until it had sequestered the participants in a way it would ensure they wouldn't come in contact with one another until they actually entered Utopia.

I believe another reason is it was meant to be seen as a secret place, but one that had just enough known about it to attract enough attention to get people talking. As we all know, when there is the belief it is a secret being discovered, it even gets more legs. That also appears to be part of the marketing strategy of Fox. It will definitely be going on all cylinders with marketing now that the contestants are where they want them to be and the premiere is just a couple of weeks away.

Another fascinating tactic is the contestants are going to move into the area on August 29, where live-streaming of the event will begin on UtopiaTV.com. If it takes off digitally, a lot of buzz will give the broadcast premiere an excellent shot at putting up some big numbers; numbers that could be sustainable if it resonates with viewers.

I think the marketing strategy is brilliant, and if people really like it, this is going to be a huge catalyst for Fox. Its TV unit really needs it to turn its fortunes around.

What if Utopia Doesn't Work?

There is no disclosure on the costs associated with setting up Utopia, but they are reputed to be substantial. If it is a failure, it'll be easy to discover in the next earnings report when the segments are broken down. Even if it isn't a failure, it's likely it'll take time to recoup the costs. Since Rupert Murdoch is known for patience, this shouldn't be a problem, although investors will need to know this series is built with the long time horizon in mind.

If it does fail it'll obviously take a hit, but there are actually some promising new shows this fall that have a chance at success. Among those are Empire, Gracepoint, Red Band Society and Gotham. Of those I think Gotham has a real chance at doing well. But then I tend to like that type of show, so it's not necessarily the winner I think it could be. It does look like it could attract an audience though. We'll see in the near future how these new series perform.

I like that there are some good new tries in the company. While it knows it needs a big reality TV series hit, it also knows it must bring other series into the pipeline to offset the success or failure of the others.

Nothing could replace Utopia if it's a failure, but there's a decent chance one or two of the other new series will do well, and that could at least give the TV segment more legs and hopefully more ad revenue.

Conclusion

Utopia was developed by John de Mol, the creator of 'Big Brother' as well as the Dutch version of Utopia, which had done very well. Overseeing the project is Simon Andreae, who was hired in November 2013 as executive VP of alternative programming at the network. This is his first big project, and has been given all the resources needed to make it a success.

The hope is this is something that will surpass the success of Big Brother and be the foundation of the television segment of Fox. It's unlikely the company would put it that way, but I have no doubt this is a swing at a home run for the network.

I like Fox over the next several years, primarily because I believe it is undervalued, and also because the release of the powerhouse film franchise Avatar isn't too far away, and they are set for three releases, starting with a probable December 2016 release.

This is an article about one piece of the puzzle for Twenty-First Century Fox, and it's one that has been underperforming the past. With its other strengths, if it gets its television segment to produce some long-term hits, and if Utopia becomes a giant success, it looks like Fox will drive up its share price to levels all shareholders will be happy with. To me, even as it is, I consider it a buy. When adding these other parts and the possibility of some hit shows in 2014 through 2015, which I don't believe have been baked into the price, this is a stock that is poised to take off.

If Utopia fails, it will pull back in the short term, but Avatar almost guarantees it will soar over the three-year period it is released. This is one of the more compelling entertainment companies on my radar. It's definitely worth a much closer look.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.