Disney to Buy Fox. Was The Repeal of Net Neutrality A Factor?
You’re reading the Benton Foundation’s Weekly Round-up, a recap of the biggest (or most overlooked) telecommunications stories of the week. The round-up is delivered via e-mail each Friday.
Round-Up for the Week of December 18-22, 2017
On the same day the Federal Communications Commission voted to repeal its 2015 network neutrality rules, the Walt Disney Company announced a deal to buy most of 21st Century Fox. The all-stock transaction is valued at roughly $52.4 billion. If approved, Disney would go from being “a juggernaut to being a megajuggernaut.” Disney hopes the acquisition of Fox’s sports and entertainment content will give it new market power in the growing online distribution market (streaming services). The FCC’s move is not unrelated. The repeal of net neutrality empowers internet service providers; a Disney colossus will have the heft to negotiate favorable terms with any broadband carrier. But how will the Department of Justice view the deal?
What Disney Gets
Broadly speaking, Disney will get most of 21st Century Fox’s entertainment assets, some of its sports assets, and some of its international assets. Notably, it will not be getting Fox’s news assets, the Fox broadcast TV network, nor its large cable sports network, Fox Sports 1 (FS1).
- TV Production. Disney is buying:
- Fox television studio, which has 36 series in production including “The Simpsons,” “Homeland,” “This Is Us,” and “Modern Family”
FX and National Geographic cable networks
Film: Now Disney will own:
More superheroes: Disney bought Marvel for $4 billion in 2009. The deal with Fox brings optioned characters, including X-Men, the Fantastic Four, and the edgy Deadpool, back into the Marvel fold.
Star Wars: Lucasfilm, which created the popular "Star Wars" films, has belonged to Disney since 2012. Now, Disney can add the distribution rights to the first film, “Episode IV — A New Hope,” in perpetuity.
Additional Franchises: Disney adds "Avatar," which has four sequels in production as of April, the "Ice Age" animated series, and the rebooted "Planet of the Apes."
To augment ESPN, Disney is adding 21st Century Fox’s 22 regional cable networks dedicated to sports, including the YES Network, which carries New York Yankees games. In many areas, Fox sports channels hold exclusive rights to show local college and professional games including Major League Baseball, the National Basketball Association, and the National Hockey League.
Notably, the deal does not include Fox Sports 1 (FS1). Some have speculated this may be due to antitrust issues (more on that later).
A Bigger International Presence
- Disney is already a global behemoth, with major operations in Europe, Japan, and China. But the company gets a lopsided amount of its profit from North America. The deal would help balance Disney internationally by adding:
Fox's nearly 40% stake in Sky, the largest media company in Europe;
Fox's majority ownership in the National Geographic cable channel, which reaches hundreds of millions of homes overseas; and
Fox's subsidiary, Star India, a sizable Indian media company.
Not included in the acquisition are Fox News and the Fox broadcast TV network. 21st Century Fox owner Rupert Murdoch said he would spin those businesses (along with FS1, the 20th Century Fox lot in Century City, and a handful of other properties) into a newly-listed company. [Murdoch also still controls his newspaper-focused company, News Corporation, which has holdings that include The Wall Street Journal.]
Disney’s Immediate Plan: A New Streaming Era
Disney hopes 21st Century Fox’s content will supercharge its plans to introduce two Netflix-style streaming services. Disney’s first major streaming effort, ESPN Plus, will arrive in Spring 2018. A second and still unnamed offering -- built around the company’s Disney, Marvel, Lucasfilm, and Pixar brands -- will roll out late next year.
Key to Disney’s plans is the Hulu streaming service currently controlled by Disney-ABC Television Group, 21st Century Fox, and Comcast/NBC Universal, each owning a 30 percent share. Disney is buying Fox’s stake in Hulu, resulting in majority control. (Time Warner, which may be acquired by AT&T, has a 10 percent stake in Hulu.)
21st Century Fox, like most of Hollywood, has struggled to keep pace with the changing way younger audiences view content — on internet-connected devices. Some analysts interpreted Murdoch’s sudden willingness to sell as him reading the writing on the wall: The business climate is going to become tougher for old-line Hollywood.
With this deal and the wealth of movies, TV shows, and sports programming it provides, Disney will now have the muscle to challenge Netflix, Apple TV, Amazon Prime Video, Google’s YouTube, and Facebook in the fast-growing realm of online video.
“The acquisition, which would make Disney a colossus unlike anything Hollywood has ever seen, is the biggest counterattack from a traditional media company against the tech giants that have aggressively moved into the entertainment business,” the New York Times reported.
Robert Iger, Disney’s chief executive and chairman, said, “This will allow us to greatly accelerate our direct-to-consumer strategy, which is our highest priority.”
How Net Neutrality Factors In
"Two big earthquakes shook the media industry [December 14]," wrote Aaron Back in the Wall Street Journal. "They are not directly connected but will combine to reshape the industry’s landscape."
Rolling back net neutrality should favor the cable and wireless companies that distribute content over the internet and could hurt the movie and TV studios that produce the content. Mergers offer companies on both sides of the debate ways to improve their position. One is vertical combinations such as the proposed AT&T-Time Warner deal, or the earlier merger of Comcast and NBCUniversal. In theory, distributors could prioritize the content they create over rivals’ material. The other option is a horizontal deal between content providers, like Thursday’s Fox-Disney deal. Getting bigger as Disney is doing gives the content creators improved leverage to negotiate favorable distribution terms with [internet service providers].
Already a powerhouse, Disney apparently felt the need to grow even bigger in order to counterbalance ISP's increased gatekeeper power. Disney's streaming services "need a free, unimpeded Internet to make sure everyone can watch," writes Hiawatha Bray in the Boston Globe.
A "fundamental reordering of the entertainment industry" is coming, the WSJ's Back writes, with increased pressure on smaller studios to merge and improve their own leverage.
The Disney-Fox deal unfolds as the Justice Department challenges AT&T’s $85.4 billion acquisition of Time Warner. In its lawsuit seeking to block the merger, the Justice Department warned that a merged AT&T-Time Warner would be in a position to force competing cable companies, such as Comcast, “to pay hundreds of millions of dollars more per year for Time Warner’s networks.”
An even clearer case of reduced competition can be made about Disney-Fox because it’s both a merger of direct competitors (deal would reduce the number of Hollywood studios to five from six) — a so-called horizontal merger, which typically get close scrutiny — and has some of the same vertical elements that has caused the Justice Department to try to block the AT&T-Time Warner merger. Disney CEO Bob Iger acknowledged that antitrust regulators would heavily scrutinize Disney’s purchase, but expressed confidence about winning approval. “If [the regulators] look at it from a consumer point of view,” Iger said, “they should quickly conclude that the aim of this combination is to create more high-quality product for consumers around the world and to deliver it in more innovative, more compelling ways.”
Given ESPN’s dominance of cable sports, there are serious antitrust issues about the purchase of Fox’s regional sports networks. In terms of revenue, Disney-owned ESPN is so dominant that the acquisition of another cable sports provider, even Fox’s relatively small regional sports networks, will trigger antitrust review. “From a horizontal perspective, sports is the main issue,” said Scott Hemphill, a law professor and antitrust expert at New York University School of Law.
So does the DOJ's handling of AT&T/Time Warner give us insight into what's ahead for Disney/Fox?
Larry Downes, an antitrust expert and a fellow at the Georgetown McDonough School of Business, said, “The government’s theory in Time Warner very much applies to Fox and Disney.”
Vertical mergers like that of AT&T and Time Warner used to be approved almost routinely, albeit often with conditions. No longer. “We’re in a topsy-turvy antitrust world,” Downes said. He doesn’t see how the Justice Department would distinguish between the two deals, should it approve the Fox-Disney transaction.
President Trump Sings a Different Tune
On the same day that the deal was announced, President Donald Trump called to congratulate Rupert Murdoch. White House spokeswoman Sarah Huckabee Sanders said, “The President spoke with Rupert Murdoch earlier today, congratulated him on the deal and thinks that, to use one of the president's favorite words, that this could be a great thing for jobs. And he certainly looks forward to and is hoping to see a lot more of those created."
The idea that the deal may be a "great thing for jobs" is unsubstantiated. Analysts claimed the merger could result in hundreds of layoffs for Fox employees in the coming years because the companies have many overlapping departments and Disney would look to wring savings. “The layoffs will happen, in all likelihood,” said Gene Del Vecchio, a marketing professor and entertainment industry expert at the USC Marshall School of Business. “They're apt to be large. When you combine Disney with Fox, you get tremendous synergy.”
President Trump’s message to Murdoch is also much different than what AT&T received in its attempt to acquire Time Warner (and CNN). I wrote back in November in Is AT&T/Time Warner a Bad Deal? Or Getting a Bad Deal? that candidate Donald Trump called the AT&T-Time Warner deal "an example of the power structure I'm fighting," and a deal he would not approve in his administration, because, "it's too much concentration of power in the hands of too few." When the DOJ announced its intention to block the deal, there were rumors that President Trump’s disdain for CNN may have played a role.
But Rupert Murdoch is one of President Trump's "closest allies and advisers", according to the New York Times. “I hesitate to make any predictions about Trump and what he’ll do,” said Christopher Sagers, an antitrust professor at Cleveland-Marshall College of Law. “But there’s a long tradition that the White House shouldn’t get involved in these decisions.” He said he was “reluctant to believe” that Trump's DOJ antitrust chief Makan Delrahim would allow politics or President Trump’s friendship with Murdoch to influence his decision. “But maybe I’m being naïve.”
If the government, “doesn’t challenge this, it will look very weird,” said Georgetown's Downes. “But I’m not sure appearances matter to this administration.”
The Trump policy era has been marked with inconsistencies. This was on display last month with the different policy approaches shown by the DOJ and the FCC. Klint Finley in Wired wrote:
First, the Department of Justice sued to block AT&T's proposed $85 billion acquisition of Time Warner. The next day, the Federal Communications Commission unveiled a proposal to loosen the limits on the number of television and radio stations a broadcast company can own, the latest in a series of moves that pave the way for Sinclair Broadcasting's proposed $3.9 billion acquisition of Tribune Company. The same week, the FCC unveiled its plan to overturn net-neutrality rules that ban broadband providers, including AT&T, from blocking or discriminating against legal content. In other words, even as one government agency looks to constrain the growth of AT&T, the nation's largest pay-TV company and one of its largest internet providers, another is working to unshackle broadcast and telecom companies from rules its staff says are burdensome.
While the DOJ’s Delrahim reflects President Trump’s populist promises to reign in corporations, FCC Chairman Ajit Pai reflects Trump’s campaign pledge to reduce regulations on business. This inconsistency makes it hard to guess how the Administration will approach the Disney-Fox deal.
Whatever the Trump Administration decides, you can be sure to follow all the progress in Headlines.
Net Neutrality News
- House Communications Subcommittee Chairman Blackburn (R-TN) Introduces Net Neutrality Legislation (Variety)
- Sen Markey (D-MA) Leads Resolution to Restore FCC’s Net Neutrality Rules (US Senate)
- Sens. Moran, Manchin Call for Bipartisan Legislative Solution to Protect Free and Open Internet, Promote Rural Broadband Access (US Senate)
- Chairman Pai: Net neutrality supporters 'proven wrong' day after repeal (The Hill)
- Internal FCC Report Shows Republican Net Neutrality Narrative Is False (Vice)
- After net neutrality, brace for Internet 'fast lanes' (Associated Press)
- The next front in the net neutrality war: Feds versus the states (Vox)
- What Can Cities and States Do About Net Neutrality? (CityLab)
- To Save the Internet We Need To Own the Networks (Huffington Post)
- Critics of Chairman Pai's Sec. 706 Broadband Deployment Review Create #MobileOnly Challenge (Broadcasting&Cable)
Weekend Reads (resist tl;dr)
- Koch Brothers Are Cities' New Obstacle to Building Broadband (Wired)
- Poisoning The Well: The View Of Sinclair Broadcast Group From Flint (Huffington Post)
- Sharing the News in a Polarized Congress (Pew Research Center)
- Comcast to be “unleashed” on rivals when NBC merger conditions expire (ars technica)
- How Puerto Rico is Rebuilding Its Network Three Months After Maria (nextgov)
ICYMI from Benton
- Digital Inclusion and Equity: Why Now, John Horrigan