Softbank’s Investments: Chaos or Clarity?

Estia Ryan

My first phone in middle school was a pastel blue solar hybrid flip phone made by Softbank. That was in 2009, when the Japanese technology company’s stock price wavered around a mere 2,000 yen.

From 2016, prices have shot upwards, peaking at 10,295 yen in October 2017 and stabilising at 8,485 yen after the recent January market correction. Of course, the entire technology industry has been doing extremely well. The outlook for technology companies published by Deloitte is that the future is in ‘buy build partner’ M&A models, so that companies can catch and cover trends such as ‘cloud, cognitive computing, and data analytics’. This is exactly what Softbank has been doing, well ahead of the curve.

Softbank’s ‘Vision Fund’ has dedicated $93 billion to investing in external technologies. The Fund aims to raise a further $7 billion to reach a total of $100 billion in raised capital. CEO Masayoshi Son wishes the Fund to ‘take 20-40% stakes in the companies in which we invest’, fostering an ‘organic relationship’ with company founders. These include artificial intelligence, robotics, and driverless cars. But these three target areas are by no means the entirety of Softbank’s recent investments. The graphic below shows how the Fund’s investments so far – and the results are impressive.



Evidently these acquisitions have benefitted both operating income and net sales, increasing 23% and 3.5% respectively. Softbank explains these jumps in part by Vision Fund, as shown in the 2017 Q3 financials (along with the Delta Fund, though this is significantly smaller with only $6 billion in capital).

These investments aren’t only benefitting Softbank itself. Until now tech companies arguably needed to be part of the ‘unicorn club’ to be considered successful. The unicorn club refers to a billion-dollar valuation stamp mark. The Vision Fund now allows small startups to raise capital faster and more aggressively. Fanatics used the Fund to raise $1 billion and is now valued at $4.5 billion.

Softbank’s global vision is conscious that international investment is key, as it looks towards Europe and Asia to seal more deals. This gives Softbank incredible breadth over the industry, but it also helps cement Softbank within sub industries, notably in the ride hailing business. Grab, an Uber competitor in Southeast Asia, raised $2 billion in 2017 from Softbank. Didi, another competitor in Europe, raised $5 billion. Didi in turn invested in in the Brazilian ‘99’ ridesharing company.

But Softbank’s competitors, and the industry as a whole, are doubting the company’s recent investments. Softbank has been accused of artificially pushing up valuations, causing disturbances within the sector. Competitors note that startups should raise funds themselves in order to be successful instead of relying on giants to prop them up. There are fears around how Softbank vets investment opportunities – with $100 billion, are they recklessly throwing money at small firms?

Softbank’s strategy is clear: invest in companies which have potential but may not have enough capital to pass the ‘unicorn’ threshold. Moving forward, Softbank should insure that the Vision Fund’s capital is being spent wisely and frugally in a market that is more competitive than ever. Only time (and financials) will tell if Masayoshi Son’s innovative idea will pay off – for Softbank, and for the technology sector.


Social Media Junkies

Estia Ryan

Social media – we all take part in it, some way or another. Whether it’s the recurring ‘ping’ from Messenger, Snapchat, or Instagram, the social-validation feedback loop is ruining productivity and attention spans. 50% of parents and 70% of teenagers feel urged to respond to these notifications immediately.

Social media executives themselves are secretive about their own use. The Twitter CFO sends under two tweets a month. Mark Zuckerberg, Facebook CEO, is not as frugal with his own social media use, but has 12 moderators on his personal page and a ‘handful’ of staff carefully crafting pictures, comments, posts.

Sean Parker, co-founder of Facebook, believes that social media ‘exploits human vulnerability’. The same company’s former VP for user growth, Chamath Palihapitiya, criticised his own company for creating ‘tools that are ripping apart the social fabric of how society works’.

Social media companies have responded to these ‘addiction’ claims by encouraging users to use more, like more, share more. The cure to online loneliness is being online longer.

This instant gratification is affecting our attention span. Microsoft Canada conducted an experiment in early 2000 to see how long the average person could pay attention. Back then attention spans were just over 12 seconds long. Fast forward to 2013 and this number has almost dropped by half, to 8 seconds.

This social-validation feedback loop is fundamental to Facebook’s success, which prides itself on keeping users engaged on the platform longer than other social media websites. Whereas Whatsapp and Twitter make ‘read receipts’ optional (confirmation that you have read someone’s message), Messenger offers no such luxury. The result is that people feel forced to reply instantly, with The Guardian calling it ‘emotionally manipulative’.

Salesforce CEO Marc Benioff has gone as far as saying that Facebook should be ‘regulated like the cigarette industry’ – a strong claim from a powerful influencer.

Facebook wrote a short statement in December 2017 on their Newsroom Blog, explaining their take on healthy social media engagement. The key takeaways were that ‘passively consuming information’ is harmful, while ‘actively interacting with people’ is beneficial. The post concludes that Facebook will change ‘news feed’ structures (reducing low-quality content), introducing ‘snooze’ (hiding pages or persons for 30 days), and developing suicide prevention tools to help users in distress.

But to what extent can Facebook afford to uproot its business model? Keeping users strapped into the site means substantial advertising revenue and effective self-promotion. The company would have to radically change tack if it is serious about addressing problematic use.

‘The Truth about Tech’ campaign was launched by old Facebook and Google employees, who are worried about the mental health impacts of excessive technology. Common Sense and the Center for Human Technology have pumped $7 million into the campaign which aims to educate students and children in 55,000 public schools about responsible use of social media.

For now these negative effects haven’t affected stock prices and wide public perception. But a drastic social media rethink is long overdue. We need to change the way we use platforms, engage with more meaningful content and ditching passive surfing. But of course this can’t be done solely from the consumer side. Silicon Valley executives must make practical and tangible changes, for the sake of our mental health.

The digital Gold Standard?

Richard Holland

Amongst the backdrop of Bitcoin and cryptocurrencies, a London-based FinTech company has teamed up with Lloyds Banking Group and MasterCard to bring the world’s oldest currency back into the digital age: gold.

In November 2017, Glint launched its multi-currency account, app and card that allows customers to use gold to buy goods and services, settle debts and send money to their friends and family.

The way the app works is as follows: once you have successfully created an account, you will then be able to top up your account with Pound Sterling. You can then either chose to leave your money in Sterling, or convert it into gold at 0.5% above the spot price and have it stored in allocated accounts within secure vaults in Zurich (for which you are charged a flat fee for this privilege). When it comes to using your card to pay for items, it works in the same way as any other MasterCard would, but you can choose which ‘wallet’, either the currency or gold, you would like to spend from. Glint automatically converts the gold into the desired currency in real time to provide a frictionless method of using gold to purchase items.

The company was co-founded by Jason Cozens and Ben Davies who have become increasingly disenchanted with our current monetary system. Since the Pound was untethered from the Gold Standard in 1931, the value of a £10 note now solely relies upon its widespread acceptance in society as a medium of exchange. Yet if a shopkeeper one day refused to accept your £10 note, your money would become worthless as you would not be able to trade it for anything. When the UK was part of the Gold Standard, you could have exchanged your £10 at the bank for its equivalent in gold, a physical asset with which to trade. Nowadays, money has no inherent value and it is in fact a social construct that humanity, either sub-consciously or consciously, has chosen to live by.

The benefit of Glint, as Jason Cozens the CEO reasons, is “gold can’t be wiped out, devalued or corrupted” which is in contrast to our current monetary system. They believe that central banks have been able to print money at will to fund overspending that has led to the global economy staggering from an ever-bigger boom to an ever-bigger bust and Davies, the COO and co-founder, believes that people are starting to realise that something is fundamentally wrong with our monetary system.

The focal point of Glint’s advantage over cryptocurrencies is that it has a tangible backing in the form of gold which bitcoin does not. Davies also believes that bitcoin is of little use as a currency – with extremely high volatility, lengthy transaction times and steep fees, it is nearly impossible to use as a means of exchange. Yet gold is renowned as being a hedge against stock market volatility and with access to the spot price of gold being readily available, the transaction times with Glint should be momentary at worst.

Glint will certainly have its critics, but to date the FinTech company has raised £6.1 million with significant backing from Bray Capital and other high profile individual investors. In 2018, they plan to launch the app for Android users as it is currently only available on the iOS platform, as well as adding a wider range of currencies to the ‘wallet’ too. Glint may still be in its infancy, but it is certainly a company worth watching.

Macron’s Blooming Tech

Estia Ryan

‘Choose France’ was Macron’s memorable slogan at the World Economic Forum last week. ‘GAFAs’, the French name for FANGS, are looking to invest significantly in artificial intelligence with France making headway in becoming Europe’s next startup hub. It isn’t only the Web Giants that are responding to Macron’s policies; startups in Station F too are thriving in a welcoming and stimulating environment.

GAFAs investment often grab the headlines in France. Google for example plans to open a new AI center in the country, boosting its staff to a grand total of 700 – a 50% increase. It also proposes to open ‘Google Training Rubs’ in Rennes and other locations, in hopes to teach online and digital literacy skills to 100,000 a year.

Facebook too is positioning itself to take advantage of a revitalised French economy. Pledging 10 million euros to develop its own AI center, it will double its AI scientist workforce within the next five years. It’s pushing to take on 40 PhD candidates as part of this expansion, up from 10 previously.

It’s not only the multinational tech corporations that are interested in France. Macron’s Station F is providing a platform, or ‘Le Campus’, for global startups. Le Campus was created so that France could ‘think and move like a startup’, according to Macron. It houses around 1,000 startups, making it the biggest startup hub in the world.

Station F was paid for by multi-billionaire Xavier Niel, owner of Le Monde newspaper and founder of Iliad, the French telecommunications company. Niel invested 250 million euros of his own money into the incubator. He is one of the biggest technology and telecommunications heads in France, with an estimated 9 billion euro net worth. This has earned him the nickname of the ‘French Steve Jobs’.

SAP, the German software company, is investing 150 million euros a year into the incubator, for R&D. It also aims to prop up 50 new startups. This is part of a larger French investment trend with SAP, which will pump 2 billion euros into France over the next five years.

Why are these giants suddenly betting so highly on France? A few obvious answers spring to mind – notably Brexit, Trump, and Macron’s liberalisation plans. Brexit has created a start-up hub vacuum, which Station F can fill. Many English start-ups are moving to the capital, such as ‘Once’ or ‘Innovico’. France has picked up the trend and adapted efficiently and effectively.

Trump’s ascent to power has left a different sort of vacuum: innovators and young people are looking for a new ‘bearer’ of the liberal flame. Macron not only offers a fertile ground for startups, but also for hope and dynamism that has been lost in the US. The German leader has also come under fire for being inflexible and traditional. The French president instead offers vitality, being just 40 years old and famously an ex-investment banker.

Macron’s planned tax cuts are also laying foundations for a healthy tech ecosystem. He plans to introduce a flat tax rate of 30% on capital gains and dividends for startups, down from 45%.

There are other, more subtle reasons for a surging interest in the French economy.  France has always had a deep commitment to STEM subjects, with its excellent ‘Grandes Ecoles’. These are similar to Russell Group universities in the UK, although they have more competitive entry requirements. L’Ecole Polytechnic for example is one of the leading science universities in Europe, above UCL in STEM rankings.

Macron’s predecessor Francois Hollande had introduced visas for startup entrepreneurs long before Station F or tax cuts were in the works. This is part of a bigger French work culture which prioritises employees over bosses. The strength of labour unions in the country cannot be overstated.

Brexit, Trump, tax cuts, education, and culture are all hinting that France could be the next Silicon valley. Macron can prop himself up, along with the French tech economy, as the new home for startup hopefuls and GAFA success stories. In the technology business, all roads lead to France.

Australian Anti-Competitive Regulators Eye Tech Giants

Estia Ryan

Google and Facebook have been under scrutiny by Australia’s competition regulators. The Australian Competition and Consumer Commission (ACCC) is currently analysing whether Google and Facebook have been abusing their influence online. Other media companies have seen a significant drop in advertising revenue, but is this due to anti-competitive practices?

It is estimated that Google and Facebook hold 84% of global ad revenue, something the ACCC is keen to dismantle if it finds that there is foul play involved. ACCC chairman Rod Sims made it clear that this was in the interest of ‘consumers, media content creators, and advertisers’. Anti-competition caused by monopolies can stunt innovation and growth, but an article in the Financial Times notes that market dominance isn’t applicable to the likes of Google and Facebook.

Instead, the giants are imposing high prices and barrier to entry. The ACCC will inquire into how low prices in one area can lead to monopoly profits in another.

The authorities are not simply singling out Google and Facebook – this investigation is part of a wider media clampdown. The ACCC explicitly stated that it will analyse ‘search engines, social media platforms, and other digital content platforms’. The sector has failed globally to deliver attractive profits in 2017, which in part prompted the regulators’ attention. The ACCC claim that they are not going after the Silicon Valley companies, but are carrying out routine checks on the industry.

The ACCC should however take special measures when dealing with Google and Facebook. Google holds 95% of the search market in Australia. Facebook meanwhile has 15 million active users, or 60% of the population.

The preliminary report is expected to be published next year.

Uber Data Breach Scandal

Olivia Warwick

Uber revealed last Tuesday that it paid a $100,000 ransom to hackers in an attempt to cover up a data breach that impacted 57 million accounts in October last year. Uber said they had identified the hackers and ensured they had destroyed the stolen data.

The names, emails, and phone numbers of millions of customers and drivers, and the licence plates of 600,000 drivers were taken. Financial information such as credit cards and social security number were not accessed. Uber is offering free credit monitoring for drivers, and fraud monitoring for those customers affected.

Former CEO Mr Kalanick discovered the breach in November 2016, a month after it happened. The company took immediate steps to secure the data, shutting down unauthorised access and strengthening its security controls. It did not, however, report the breaches to the authorities. After Mr Khosrowshahi, newly appointed CEO, learned of the cover-up he ordered an investigation. Chief Security Officer Joe Sullivan and Craig Clark, the deputy, have been fired for their part in the cover-up. Uber has hired cyber security expert and former general counsel of the National Security Agency, Matt Olsen, to advise the company.

Uber disclosed the breach ahead of a tender offer from SoftBank as it could influence the decision of investors. Mr Khosrowshahi has spent weeks negotiating with SoftBank in an investment deal upward of $10 billion. It is unclear whether SoftBank may use this disclosure in negotiations.

The scale of the breach, though not as extreme as the recent Yahoo and Equifax disclosures, raises questions as to who else knew about the cover up, and who else was involved. A spokesperson for Uber declined to reveal who authorised the $100,000 ransom payment.

This adds to the string of scandals and legal troubles Uber faces. A prominent revelation in March 2017 was that Uber had secretly designed and used software called ‘Greyball’ to evade the sting operation of city officials who were attempting to catch Uber drivers that violated local regulations. Bloomberg reported this most recent data breach cover-up is an additional challenge for Mr Khosrowshah, who has been trying to bring stability to the firm in his first three months of the role. Mr Khosrowshah has inherited multiple federal investigations into the company’s programmes aimed at regulators and competition, in addition to violations of the Foreign Corrupt Practices Act. Additionally, Uber is currently in a heated legal dispute with Alphabet (Google’s parent company) who accuse Uber of stealing trade secrets on self-driving cars. Uber denies the allegations. Uber is also still recovering from a legal dispute with a female engineer over the neglect of complaints of harassment and sexism towards her and other women.

Currently valued at $68 billion, the company has developed a reputation for pushing the limits of the law in their aim of being the market leader in the ride-hailing market.

Tesla production slump — Can they stay afloat?

Olivia Warwick

The electric car maker Tesla has hit snags in its attempt to become a mass market player through production of affordable Model 3 automobiles. Quarterly results released 1st November showed a rise in post-tax losses by 67% to $671m. Tesla’s shares fell by 6.8% on the 2nd November partly due to US government tax changes that reduce incentives for electric car buyers; a significant blow to the appeal of affordable electric cars including the Model 3. Other contributing events add to the struggles Tesla are facing. Holdups are partly caused by the company themselves, with bottlenecks in the production line causing serious delays to their short-term targets, resulting in only 260 Model 3s being produced out of the 1,500 target from the last quarter. This has led the company to push back its target of making 5,000 Model 3’s a week by three months. Tesla has so far produced 250,000 cars in its 14 years, and aims to make 1m cars by 2020.

Problems include workers manually operating robots that should be automated, multiple cost overruns, in addition to delays from suppliers due to last minute changes to design specifications. Further difficulties in sequencing parts once they arrive at the plant has led to unfinished cars at the end of the production line. Expert automotive manufacturers describe the operational problems Tesla are facing as ‘basic’, that come from the fixation on speed, in both product development and the manufacturing process.

Regarding production bottlenecks, delays in Tesla’s Nevada battery factory are to blame, where workers build battery packs by hand instead of using the automated systems installed, a situation Elon Musk has described as being “really inefficient”. Nevada is not the only plant experiencing difficulties with manual operation. Witnesses of the production process in the Fremont assembly plant in California have observed the newly-installed Kuka robots (designed to increase speed of production) being manually operated. One visitor, who inspects car plants across the globe, claimed they had “never seen so much manual labour on a line”.

Another potential weakness is Tesla’s supply chain. In at least one instance, Tesla has made alterations to crucial components mid-production which has meant re-starting the process, causing a ripple effect of hold-ups down the production line. These late alterations may well have resulted from Tesla skipping a manufacturing prototyping stage. When questioned on automation, a Tesla spokesperson said that the production line contained both manual and automated elements and that there are no fundamental issues with the supply chain nor production of Model 3s, adding that they have always anticipated time taken to fine-tune the production line and that they are confident in addressing the current bottleneck issues within a timely manner.

Having a high level of automation is part of the company’s efforts to streamline production. Elon Musk highlighted the aerodynamics of robotic arms as an area for increased efficiency. He thinks “speed is the ultimate weapon when it comes to innovation or production”. It is not unusual for Tesla to take unconventional approaches in the interest of saving time, for instance in the shipment of incomplete vehicles to Tesla-owned dealers, who finished assembly before delivering the vehicles to customers. This practice, though an unorthodox process, does not break with regulation. It does however encourage questioning of the adequacy of vehicle checks and calibration before being delivered to customers, particularly at higher volumes of production.

As aforementioned, Tesla is also facing problems with its ‘sequencing’ of components (matching up parts with their intended vehicles once they arrive on site as fast as possible). Tesla’s inefficient sequencing has led to the pile up of components coming into the factory to be stored, along with incomplete cars coming off the line. Analysts have calculated that Tesla’s ‘work in progress’ (costs tied up in unused goods and materials) is 14% of its total sales; significantly higher than other more established carmakers, such as BMW (2%) and VW (4%).

There is now a greater risk that some of the nearly 500,000 waiting customers with $1,000 deposits will withdraw their deposits and choose a different car manufacturer after those who have reserved Model 3 cars received emails this week informing them that their orders would be delayed.

The largest technology M&A in history: stranded?

Jim Lee

Singaporean-American semi-conductor giant Broadcom offered Qualcomm, a Silicon Valley semi-conductor giant, a $105 billion acquisition deal, involving a 28% premium on Qualcomm’s closing price. Although potentially the largest ever technology acquisition, both Qualcomm’s investors and its board declined Broadcom’s offer. Behind this potentially historical deal there are various problems, and possible conflict between two technology colossuses.

Broadcom is ranked fourth in terms of market cap in the semi-conductor industry, and Qualcomm third. The acquisition of Qualcomm will grow Broadcom’s market share to third, allow it to expand its operations in hi-tech industries, such as connected cars. Qualcomm may equally benefit from its acquisition, as the arrival of new leadership may assist in its ongoing lawsuits, which have caused a fall in their share price.

Broadcom has capitalised on what Qualcomm’s investors believe is an undervalued share price; these shareholders are unwilling to consider an offer under $80 per share. Additionally, investors are concerned that the deal could fall foul of an antitrust regulation. In response, Broadcom is considering sweetening their offer to over $80 per share to meet the investors’ demands. Since M&A through Qualcomm’s board seems unlikely, Broadcom is preparing for a hostile takeover battle by persuading investors to sell their shares, and asking for their support. Broadcom could convince the shareholders to nominate friendly directors to Qualcomm’s board, and deal-friendly shareholders could vote in the shareholder meeting on March 6th. Due to Qualcomm’s shareholder-friendly organisation, Qualcomm would be vulnerable in such a takeover battle.

Despite Qualcomm leadership’s rejection and investors’ disagreements, Broadcom is displaying its confidence. Broadcom’s hopes are pinned on the potential synergy of both firms’ technologies, and as many of Qualcomm’s investors are fatigued by prolonged lawsuits in Asia and the United States it looks to convince them of the acquisition’s merits. While Qualcomm expressed confidence in its ability to resolve its problems in the near future, some investors have run out of patience, and worry that Qualcomm will recover, but too slowly. Their opinion is that new leadership will bring faster and better solutions. It is likely that such investors would support the deal once Broadcom decides to offer $80 per share, and Broadcom is looking to do so.

The overall circumstance is in favour of Broadcom. However, there are not any solutions for potential antitrust regulation. European regulators are already condemning this acquisition attempt, and US regulators are also not pleased to have Singaporean Broadcom attempting to acquisition American Qualcomm, though Broadcom having US headquarters acts in its favour. As regulatory uncertainty was one of the main reasons to decline the deal, if Broadcom does not come up with a suggestion for antitrust regulation, it may compromise Broadcom’s takeover, should it be successful. It seems a happy ending for history’s largest technology acquisitions is not yet to come.

Smart(er) Personalised Marketing

Estia Ryan

Pop up ads have been around for quite some time now, but only now are they becoming more enticing. Welcome to the age of smart personalised marketing, where ads and services are tailored to suit your online identity.

One Canadian startup, Vidyard, is at the forefront of personalised marketing. It creates individual video advertisements with your name green-screened onto posters or billboards. It has helped the likes of Lenovo and LinkedIn strategically target prospective customers.

Vidyard offers marketing, sales, secure comms, and support solutions programs. It brands itself as a ‘new generation’ video platform, ready to push marketing a step further.

So how successful is Vidyard? Their GoVideo launch, an accessible and free way of creating content, provided company League with a 3x increased response rate. Another company, Terminus, saw a 40% increase in their ad’s open rate, a 37% increase in click-through rate, and a 3x increase in the reply rate. Terminus is part of the account-based marketing sector. Both League and Terminus have shown how Vidyard is changing the landscape for marketing. But how does Vidyard help other sectors perform?

Vidyard has also worked with the education sector to boost performance. Two such examples are University of Waterloo and Boston University (BU). Waterloo’s personalised video email campaign to attract future students had a 71% clickthrough to operator (CTOR) rate. This helped the Marketing and Recruitment team blast their enrolment quota, topping 137% of applicants relative to their quota.

BU could also do with revised marketing. It was failing to make alumni donate sufficiently during fundraising campaigns. So Vidyard helped the university devise three prongs to their new strategy –  direct messaging, data-driven personalisation, and video. The glammed-up video had a 49% open rate, or double the average in the education sector. An impressive $22,000 in gifts were directly attributed to the personalised video campaign.

Another heavyweight tech company, Spotify, has also mastered the art of personalisation. Whether it’s Discover Weekly, Your Time Capsule, or Summer Rewind, Spotify now styles playlists to your tastes. These playlists use an algorithm to determine which songs you’ll be interested in based on which songs you’ve listened to. When Discover Weekly first launched, a weekly 2-hour playlist full of suggested tracks, 40 of the 100 million Spotify users used the playlist. Your Time Capsule guestimates which songs you would’ve listened to in your teenage years (if you’re past that stage in life) and compiles them neatly into an easily digested playlist. Your Summer Rewind features songs you’ve listened to on Spotify during the warmer months. The result? A deeply intimate music service that connects you with your older and future self.

Amazon too has upped it personalisation game. It gives you the choice of your own personalisation settings through Gifts & Wish Lists. You’re able to ‘help Amazon help you’ through various other tweaks such as to ‘improve your recommendations’ and even edit ‘Amazon advertising preferences’. Amazon keeps track of your browsing history too, helpful for future product suggestions.

This strategy delivers. ‘Response to buying suggestions’ generates an increase of 35% in revenue. Four of five UK consumers agree that Amazon is the best at web-personalisation, in a survey conducted by BloomReach. Amazon promises to keep delivering on personalisation – it launched AI technology DSSTNE in 2016. DSSTNE is a deep learning tool that extends “beyond speech and object recognition to other areas such as search and recommendations.”

Vidyard, Spotify, and Amazon’s successes all point to one key truth – personalisation pays. In an online world where brands fight for attentive consumers, making ads and services identity-related increases their likelihood of being noticed. Spotify and Amazon already have the scale to sustain personalisation growth. As for Vidyard, Cisco estimates that IP video traffic “will be 82% of all consumer Internet traffic by 2021.”  Hopping on this video personalisation bandwagon isn’t optional – it’s necessary.


Disney and Fox M&A Whispers

Estia Ryan

Disney and 21st Century Fox have been holding M&A talks behind closed doors. Walt Disney Co (DIS) could be buying shares from the mass media company to increase competition with ever-growing rivals Netflix and Amazon. Moving away from their traditional business model into a digitized, modern company could end Disney’s profit dry spell.

The CEO Bob Iger of DIS agrees that the company needs to reposition itself in a changing media landscape. Walt Disney aims to launch a streaming service next year, so the acquisition of 21st Century Fox (FOXA) could help Iger redefine the classic House of Mouse.

DIS has been particularly struggling in its cable TV business. This is part of a larger cable cost cutting trend in the industry. Q3 operating income dipped 23%, with shares falling from $115 in April to $100 present day.

What’s in this for Disney? For one, it could acquire the Fox studio based in LA. The studio holds 15 different sound stages – rooms designed for film production. They offer everything producers need – from drapery to sound mixing to rental golf carts.

DIS could also gain FX and National Geographic channels. The two could be of immense help when launching content for Disney’s new online streaming platform. FX rivals the likes of HBO and Showtime, which create well known high quality TV shows – Game of Thrones, The Sopranos, or Homeland. National Geographic provides immense scope, being available to 74% of US households. An acquisition focused on premium TV services and market reach could be welcome news for Disney shareholders.

But a possible M&A goes further than production studios and content creation. FOXA has a strong foothold in an international landscape. DIS could get access to the UK, Germany, and Italy. Not only through Fox’s networks but also through FOXA’s 39% ownership of Sky.

Both 21st Century and Walt Disney Co. could use some diversification. One needs to move away from a narrow sports and news focus, and another from family entertainment. Stephen Battaglio from the LA Times notes, “Netflix is coming, Google is coming, and price of entry is going up.” Two media giants coming together is a great way of challenging Netflix’s status quo in the digitized media sector. Of course, Battaglio’s comment doesn’t just refer to streaming services, but to the entirety of the film entertainment sector. Which means that by diversifying, DIS and FOXA will be holistically competitive against other media conglomerates.

The markets have reacted well to these whispers – 21st Century Fox shares jumped 9.9% on Monday. Disney also excited markets, with a 2% share increase at the closing bell. Investors seem to be thrilled at the idea of two multinationals joining at the hip. But is it only good news?

It is uncertain whether 21st Century Fox approached Walt Disney Co, or the other way around. This is crucial information when determining if other companies could bid for FOXA assets – possibly even Netflix itself. Some sources suggest Sky could be another potential bidder. Until more information is revealed, investors are left in the dark.

FOXA also has some questionable units. Broadcast assets including local stations saw a 36% decrease in operating income over the past year. This comes down to increasing sports programming costs and decreasing political-related advertising. So, is it wise for DIS to want to move into the sports broadcasting world? Accurately assessing what people want to consume is going to be pivotal for Disney’s repositioning.

Essentially, it all comes down to this – is an M&A inevitable for Disney? Absolutely. To compete in a direct-to-consumer entertainment business, you can’t simply churn out family media. Bob Iger needs to adapt his strategy and deliver on a new platform. If he can secure FOXA, it may be a step in the right direction. But this will depend on FOXA’s commitment to selling to Walt Disney Co, and the true value of FOXA’s assets.