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A Disney-Fox Deal Would Land at an Uncertain Moment for DOJ Review of Big Media

WASHINGTON — If the Walt Disney Co. reaches a deal to acquire most of the assets of 21st Century Fox, it’s likely that both companies will minimize any antitrust issues, describe how just how necessary the deal is in a fast-changing media universe and point out the many bulked-up new competitors there are in the content universe.

It may all be true, but the Department of Justice’s lawsuit challenging AT&T’s proposed merger with Time Warner has disrupted notions of what will get the green light from antitrust regulators. That’s not to say that a Disney-Fox deal is similar in structure to the AT&T-Time Warner transaction, but there’s a certain hubris now in envisioning any major transaction as a sure thing.

CNBC reported on Tuesday that Disney and Fox are in talks for what “very well may result” in a deal in which Disney buys the film and TV studio, the Fox cable networks, the regional sports networks, the Fox share in Hulu and their ownership of Sky, the European telecom.

What would remain for 21st Century Fox would be the Fox network, the Fox TV stations, Fox News and some of the sports networks. Rupert Murdoch’s apparent desire to keep those assets may be a good thing from a regulatory standpoint, as it takes out of the equation some serious regulatory concerns. FCC rules, for instance, prohibit a merger between any of the four major broadcast networks, meaning there would be a question of whether ABC or Fox is divested.

It’s even possible that the transaction, as has been reported, would avoid FCC scrutiny altogether, just as AT&T and Time Warner managed to do in their transaction.

Yet as they found out, the Justice Department did not buy the idea that just because it is a vertical merger, in which the transaction does not directly eliminate competition, doesn’t mean that there still aren’t antitrust issues. The DOJ, in its complaint, argues that AT&T could withhold or drive up prices for Time Warner’s cable channels from rival distributors, with costs ultimately borne by consumers.

Disney certainly owns a TV network, plenty of prized content and the prized ESPN cable network, but unlike AT&T, it doesn’t have a multichannel distribution platform or its own mobile service. A Disney-Fox combination would put two of Hollywood’s legendary major production studios, each nearing a century in existence, under the same roof. That in and of itself would signal that the traditional movie and TV business is consolidating and changing in dramatic ways.

“This DOJ has shown that it is skeptical even of a vertical merger,” said Gigi Sohn, distinguished fellow at the Georgetown Law Institute for Technology and Public Policy and former counselor to the chairman at the FCC. “I can only imagine that they will push back on a horizontal one as well.”

The argument for such a horizontal merger would be that it is necessary in the face of competition from the massive influx of money coming from Silicon Valley, namely in the form of Apple, Google, Facebook and Netflix, and the drift away from the cable bundle to over-the-top programming services. Disney is developing one of its own.

In a recent research report, Michael Nathanson outlined this changed landscape, but wrote that “the key x-factor with all M&A is awaiting the outcome of the [AT&T-Time Warner] merger and the DOJ. Nonetheless, some deals could be announced so that if AT&T ends up winning its case, the other deals would be ready to close shortly after the ruling.”

Here are other areas of potential challenge.

DOJ: A Disney-Fox combination would certainly raise scrutiny over the power that the combined company would have over content, and past big media mergers have focused on issues like the impact on cable advertising and sports rights. BTIG Research’s Richard Greenfield, who has been a Disney critic, asked in a note on Tuesday, “Would regulators even allow Disney to increase the scale of their dominate film studio? We presume theater owners and an array of film industry guilds would staunchly oppose more consolidation (domestically Fox and Disney represented 40% of box office in 2016 and over 30% so far in 2017).”

When reports surfaced in 2014 that Fox made an offer to buy Time Warner, some analysts said that what would work in its favor with regulators is that even after two fabled studios combined, there still would be three or four significant studio rivals left in the marketplace. The case could be made that since then, the influx of money from Silicon Valley has added new competitive players.

“I think this would not likely raise significant antitrust concerns in the current environment,” Mark Ostrau, chair of the antitrust and trade regulation group at Fenwick & West in Mountain View, Calif., said in an email. “The Administration, while continuing to be concerned with deals involving content providers and content gateways (e.g., cable or satellite operators), appears to be more sanguine about combinations involving different content assets, 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.”

Yet there is also another point of view, especially from those who have been critical of the Justice Department’s case against AT&T-Time Warner.

Larry Downes, project director at the Georgetown Center for Business and Public Policy, said via email that “if the sale includes significant assets considered ‘must have’ for consumers, than Disney may face the same condemnation that the Antitrust Division has now leveled at the AT&T/Time Warner deal.” He says that the DOJ case “makes no economic sense,” but says that “if the Department is going to pursue this radical new theory of antitrust, it will have to be consistent.”

He adds, “Traditional content producers including Disney, Fox, and Time Warner have lost substantial competitive leverage in the wake of disruptive new entertainment products and services from the likes of Amazon, Apple, YouTube, Netflix, SnapChat, Twitch and Vevo. Consumers now have new ways to enjoy even more content on new devices, new networks, and in new formats.

“These deals are the direct response.  In challenging them on vague ‘big is bad’ grounds, the DOJ will cause significant harm to consumers, not save them from it.”

Politics: A merger this size would likely face lawmakers on Capitol Hill, via a hearing before the House and/or Senate Judiciary’s antitrust subcommittees, where CEOs traditionally face lawmakers ready to ask any type of question. This is mainly about political and public reaction, as mergers do not require congressional approval, but there has been an increasing focus among Democrats and even Republicans on the issue of antitrust.

Last summer, Senate Minority Leader Chuck Schumer (D-N.Y.) announced a Democratic agenda that called for tougher antitrust enforcement, including in the media sector, although some in Hollywood groused that there was too little focus on the monopoly that big tech companies have in the marketplace.

More specifically, though, there is the Murdoch factor. He reportedly talks to Trump on a fairly regular basis, and there will be plenty of interest in how the White House would view this transaction, given the president’s disdain for the AT&T-Time Warner merger. In the same way that Capitol Hill critics have raised questions of whether Trump influenced the AT&T-Time Warner review as a way to retaliate against CNN, so too is there likely to be focus on any sign of input on a Fox-Disney deal and whether there has been any favor shown to Murdoch.

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