Late yesterday, Fox retracted its $80 billion proposed acquisition of Time Warner. The combination of a recalcitrant Time Warner, falling Fox stock price and need to significantly sweeten the deal all clearly deterred Rupert Murdoch from further pursuit.

From my perspective, this is a good outcome for Fox. Why? Because the deal was mainly premised on certain key assumptions about the pay-TV business that, in reality, are unlikely to play out as Fox hopes. It was dubious that Fox was ready to pay $80 billion for Time Warner and not even gain any entry to new growth markets, but that was basically the case.

While there was admittedly a rationale for the deal in terms of giving the combined Fox-TW a stronger hand negotiating with the coming distribution behemoths of Comcast/Time Warner Cable and AT&T/DirecTV the problem with doubling down on cable TV networks is that pay-TV is a fully saturated business in the U.S., with penetration almost sure to fall in the coming years due to cord-cutting and cord-nevering. While Fox/TW might have been able to squeeze higher fees from operators, these would have been offset by a shrinking subscriber base.

Worse, part of Fox's strategy focused on sports - trying to gain access to Turner's sports rights (e.g. NBA, MLB, etc.) to help Fox build a bona fide competitor to ESPN. However, this would only bid up sports rights further, leading Fox to make ever-riskier and more expensive deals. Fox would have inevitably sought to pass its higher costs along to pay-TV operators (who would then try to pass their costs on to all of their subscribers, including non sports fans).

But the pay-TV business is already groaning under the weight of these expensive sports deals. Many in the media and sports business want to believe that sports rights and the fees TV networks can charge pay-TV operators can grow to the sky (the NBA - and its star players - are currently at the top of this list, with the league hoping to double its TV fees in the next renewal cycle). But reality will eventually prevail. Economically-challenged and entertainment-only viewers will continue opting out of pay-TV in increasing numbers as the monthly cost soars.

Within the pay-TV industry, there's a steadily growing backlash against escalating sports-related fees.  Exhibit A is the absurdly expensive deal Time Warner Cable struck to create a new LA Dodgers sports network, which has been rejected by nearly every pay-TV operator in the LA region. Fans have been deprived the ability to watch Dodgers' games and the FCC and lawmakers are now calling for the stuation to be arbitrated.

Elsewhere, some analysts liked the potential of Fox to better monetize HBO, the crown jewel of the Time Warner empire. But aside from more aggressively licensing shows to Amazon and other OTT providers, as it has already begun to do, Fox was unlikely to change HBO's trajectory unless it was willing to cross the Rubicon and untether HBO from its pay-TV partners.

While there's talk of broader international expansion of HBO through direct-to-consumer offers, the early evidence of where HBO has competed against Netflix for OTT subscribers is not encouraging for HBO. With Netflix going all-out for international growth, the competition for OTT subscribers will only get stiffer. Truth be told, HBO is in a "gilded cage," locked into a highly profitable (if slow-growing) traditional business partnership with pay-TV operators that it is loath to disrupt (ditto for Fox).

Rather than doubling down on the existing world order, Murdoch and Fox would be far smarter to carve off a portion of the $80 billion they were ready to spend on Time Warner and instead invest aggressively in online and mobile video content and monetization opportunities, as many other media companies already are (e.g. Disney-Maker Studios, Comcast-FreeWheel, AT&T/Chernin-Fullscreen/Crunchyroll/etc, RTL-SpotXchange, others.)

All of these companies recognize the world is changing fast. They're not abandoning core businesses that are still profitable (and will be for years to come), but they're diversifying and laying down bets for a vastly different world that's already taking shape.

Aside from its TV Everywhere implementations, Fox has done little to position itself for changing viewer behaviors and expectations in the online/mobile video era. My advice to Fox and Murdoch is to put Time Warner in the rear view mirror and use this as a wake-up moment to sharpen their focus on the future. Rather than wagering heavily that the pay-TV ecosystem as we know it will continue to grow and thrive, Fox would be wiser to look 5-10 years down the road and strategically invest now in companies that are likely to be the leaders of still-emerging video ecosystem.