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Disney-Fox Deal Lands at Uncertain Time for Antitrust Enforcement

Disney-Fox Deal Lands at Uncertain Time for Antitrust Enforcement

Thursday, 14 December 2017 08:39 AM

The rationale behind The Walt Disney Co.'s acquisition of Fox's major content assets is that it's necessary to bulk up in the new landscape, where competition is coming not just from Hollywood rivals but Silicon Valley.

Yet in the eyes of some antitrust lawyers and analysts, it'd be foolish to think that the government's approval of the deal is a slam dunk. At the very least, the two companies are in for a fair degree of legal and political scrutiny.

That's largely because of the Justice Department's lawsuit to block AT&T's proposed merger with Time Warner, the massive, $85 billion media merger that initially was thought to be somewhat of a sure thing when it came to securing the government's green light.

Instead, the DOJ's Antitrust Division under newly installed Trump appointee Makan Delrahim claims that the transaction would give AT&T the ability to withhold and jack up prices for Time Warner's must-have cable channels, and that costs eventually would be passed along to consumers. AT&T and Time Warner dismiss those concerns, and see the DOJ's actions as diverting from years of precedent when it comes to so-called "vertical" mergers.

By contrast, the Disney-Fox transaction is a "horizontal" one.

That is the type that usually raises red flags among antitrust officials, as it overtly removes competition from the marketplace. Not only that, but it is unprecedented in the modern history of Hollywood: The number of major studios will go from six to five.

Despite that immediate impression, the companies are likely to defend the deal as far different from AT&T-Time Warner, creating scale in the content space that is becoming ever-more competitive with dramatic investments from the likes of Netflix and Amazon. The Justice Department's concern over AT&T-Time Warner centers on the control that the company would have over large distribution channels, one source involved in the deal notes, while the Fox-Disney transaction is about content aggregation.

The timeline for regulatory approval is being estimated at 12 to 18 months.

Some analysts have warned of potential regulatory concerns in recent days.

Richard Greenfield, the BTIG Research analyst who has been a Disney critic, wrote in a note earlier this week that the combined Disney and Fox assets would have a 39% theatrical market share. That figure, though, does tend to fluctuate from year to year.

"Disney is already using its box office muscle to bully movie domestic exhibitors, extracting financial terms far beyond their studio peers ... Adding Fox, which controls portions of the Marvel universe ("X-Men," "Deadpool") and the "Avatar" franchise, would enable Disney to gain unprecedented market power," he wrote.

He also said there would be regulatory concerns over Disney control of ESPN along with regional sports networks, combined with its other cable and broadcast holdings.

"Imagine the local market power Disney would command in a market such as New York," he wrote. "Disney would control the ABC affiliate that has the NBA finals and the Oscars, the YES Network, and ESPN/ESPN2, etc."

And while Disney lacks the vast distribution network of an AT&T, a wireless provider and owner of DirecTV, it would own a controlling stake in an emerging streaming giant, Hulu.

Michael Nathanson, another research analyst, wrote in a note earlier this week that "the big questions would probably be around the combination of the studios and the combined girth in sports affiliate fees."

He also cited Disney's potential share of cable network fees and retransmission consent revenue -- 42% by combining Disney's cable channels, Fox's cable networks and ABC-owned stations.

The counterargument is that, as much of a change for showbiz as the merger is, it would still leave plenty of rivals on the field. This is not reducing the marketplace to just three giants, as was the case when the Justice Department gave the go ahead to the merger of American Airlines with USAir.

Mark Ostrau, chair of the antitrust and trade regulation group at Fenwick & West, said the Trump administration's concerns in the AT&T-Time Warner transaction had to do with "content providers and content gateways (e.g., cable or satellite operators)," while it "appears to be more sanguine about combinations involving different content assets." He said that is "likely in part due to the expansion of sources of content, including the rise of online or OTT suppliers like Netflix and Amazon creating their own content."

In fact, analysts expect that Disney will emphasize the fact that its purchase of Fox's content assets will enable it to build a rival to Netflix as the future heads toward online streaming. In other words, it is enhancing the competitive landscape, not shrinking it.

It also may avoid the scrutiny of the FCC, as the transaction does not include the Fox network or Fox's television stations. Current media ownership rules prohibit the merger of any two out of the four major broadcast networks, and bar any one company from owning stations that reach more than 39% of the country.

In any case, there is also a political side of the equation. Expect a degree of scrutiny on Capitol Hill, particularly from Democrats. In outlining a new strategy to woo the middle class, they called for stricter antitrust enforcement, even when it comes to media mergers. There will be plenty of questions of how the Justice Department reviews this merger compared to AT&T-Time Warner, particularly since 21st Century Fox executive chairman Rupert Murdoch reportedly converses with Trump.

The House and Senate judiciary committees have oversight over antitrust issues, and even though they are not involved in giving transactions the green light, they may very well conduct hearings given the size of this merger. That usually means that the CEOs of the respective companies are put under the spotlight, in what is a free-for-all for lawmakers to raise a host of concerns.

Finally, there is timing. Past mega-mergers have taken up to a year, and the wild card this time around is the pending AT&T-Time Warner trial. Last week, a federal judge set a trial date of March 19, and a decision is not expected until April or May, at the earliest. If that litigation proceeds, the outcome will likely give some indiction of how media mergers will be viewed in the future. Fox and Disney will be watching with interest, while insisting that their transaction is far different.

© 2018 Thomson/Reuters. All rights reserved.

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In the eyes of some antitrust lawyers and analysts, it'd be foolish to think that the government's approval of the Disney-Fox deal is a slam dunk. At the very least, the two companies are in for a fair degree of legal and political scrutiny.
disney, fox, antitrust, enforcement
Thursday, 14 December 2017 08:39 AM
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