Disney/Fox Seen Facing Uncertain DOJ Reception, No FCC Role

Whether DOJ would approve a Disney buy of nonbroadcast Fox assets is unsettled among mergers and acquisitions and other experts we talked to. A key question before regulators will be how to define what New Disney is -- a major player in sports content and movie production, or a much smaller content producer in the growing streaming landscape, they said. Disney and Fox reportedly plan to announce a deal as soon as this week. They didn't comment.

Experts agree the FCC likely wouldn't have a hand in reviewing a deal, apparently being structured so significant FCC licenses don't change hands. AT&T/Time Warner showed the path, in that it was put together in a way to avoid significant license transfers, and structuring a buy of Fox to similarly avoid FCC review would be easier, a former FCC official said.

If the commission wanted, it could have reviewed AT&T/TW via the Clayton Act, which lets the agency step in when common carriers are involved, said Open Society Foundations fellow Gigi Sohn, aide to former Democratic FCC Chairman Tom Wheeler. That doesn't apply to a Disney/Fox, Sohn said, saying at least preliminarily it doesn't appear the agency would have a role -- though hypothetically it could try to review the deal via its dual TV network rules. While not as "massive" a deal as AT&T/TW, Disney/Fox would be a horizontal merger and thus automatically get more skepticism, meaning approval won't come easily, she said.

Disney/Fox could face challenges before DOJ, given the dominance New Disney would have in sports content, with ESPN and Fox's regional sports networks, said a communications lawyer with cable M&A experience. Divestiture of RSNs could make the deal more palatable, the lawyer said.

SVOD

That subscription VOD services like Netflix and Amazon Prime are investing heavily in TV and movie production could mitigate the antitrust concerns, experts said.

DOJ likely will look at those SVOD studios as part of the same market, Sohn said. Four or five years ago, before the rise of such exclusive content, Disney/Fox "might have been a nonstarter," she said. Disney's bid for Fox to beef up its over-the-top play demonstrates growing video competition and negates concerns that could be raised about the horizontal merger, said former Commissioner Robert McDowell, now at Cooley. Disney/Fox would be "primarily a defensive maneuver" in the face of growing OTT competitive threat and "would be given a green light rather easily," he said. McDowell said Disney/Fox could strengthen Hulu as a Netflix competitor, though DOJ also could require some watering down of Disney control of the SVOD service.

Disney/Fox likely would get approval since it's two old-school media companies trying to adapt, and New Disney would contribute to streaming competition, said former Republican FCC Chairman Dennis Patrick. Any notion of undue media consolidation "is silly" given the mushrooming sources of content delivery, Patrick said. Worry about undue concentration among traditional movie studios "is looking in the rear view mirror," he said.

Conventional antitrust wisdom was that horizontal deals raised more red flags than vertical ones, but there's now uncertainty due to the DOJ challenge of AT&T/TW, experts said. The response of the Trump administration's DOJ is "a little bit unpredictable," Patrick said.

The rise of OTT players likely will see the department concluding New Disney wouldn't have significant market power, with the argument that it focus just on market power in traditional distribution channels is increasingly less tenable, said a lawyer with media M&A regulatory experience. DOJ is unlikely to be afraid about sports content consolidation given the weakening position of ESPN, which is losing viewers, and the ability to watch sports on Hulu, the lawyer said.

'Usual Suspects' Objecting?

Aside from the other major movie studios, "all the usual suspects" among content companies likely will raise objections to the deal at Justice, said Peter Csathy, chairman of media investment at advisory firm CreaTV Media. Disney knows it has to play in the OTT world, and the Fox deal would give it not only that content library and a majority stake in Hulu but also more in-house ability to create premium content, he said. New Disney might potentially use Hulu as its direct Netflix challenger, with its forthcoming sports and Disney-branded streaming services (see 1708080065) aimed at sports fans and family content viewers, he said.

A bigger part of New Disney's ability to compete with OTT services might be its existing relationships with major carriers, since any FCC rollback of Title II Communications Act broadband service regulation opens the door to streaming services competing not only on what kind of content they have but also on the quality of the streaming service they provide, said FBN Securities' Robert Routh. Disney's investment in streaming technology company BAMTech also points to it improving its ability to compete in streaming quality, the analyst said. Disney could give equity stakes in its streaming services to ISPs as a guarantee of quality of the streaming service delivery, he said. For other net neutrality news Wednesday: on the debate in Europe (see 1712120001), on state attorneys general (see 1712130051) and on the FCC's draft order (see 1712130053).

The ultimate outcome of a DOJ review of Disney/Fox will depend on how the agency defines the relevant markets, with arguments to be made that New Disney wouldn't be a giant traditional studio but a much smaller player in the larger content/entertainment marketplace, said Jonathan Barnett, director-University of Southern California's Media, Entertainment and Technology Law Program. He said the deal could be argued to be pro-consumer, with a beefed-up Hulu or a stronger Disney entry into OTT introducing competition into a marketplace dominated by Netflix and Amazon Prime.

Disney ”would be crazy not to” buy Fox, Stratechery's Ben Thompson blogged Tuesday. Disney/Fox carries “some minor antitrust concerns’ but likely not enough to kill the deal, Thompson said, adding Disney might have to divest “a cable channel or two” and limit its ability to make Hulu operational decisions. He said the combined Disney/Fox box office sway -- about 40 percent of box office revenue in 2016 -- likely isn't enough to stop the deal.

A breakup fee in the billions wouldn't be surprising, given the high degree of regulatory risk, BTIG's Richard Greenfield wrote investors Wednesday. He said it's possible Disney will "seek to cut 'sweetheart' renewals" with MVPDs to limit their complaints to regulators, with ESPN "robust rate increases" to offset subscriber losses and weak advertising. MVPDs and virtual MVPDs will be some of the most active regulatory opponents, given Comcast animosity toward Disney and AT&T seeking payback for Fox's role in opposing AT&T/TW, he said.