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A month after it sued to block AT&T’s purchase of Time Warner, President Trump’s Justice Department may have to start scrutinizing another big media deal: Disney is widely expected to acquire the majority of 21st Century Fox.
In some respects, a potential Disney-Fox deal would pose more antitrust problems than a combination of AT&T and Time Warner, CNN’s parent company.
A Disney-Fox merger would pair last year’s largest movie studio by box office sales (Disney) with the third-largest (Fox), as tracked by comScore. It would bring together Disney’s Marvel superhero movies, which have included all of Marvel’s big-money characters except the X-Men, with Fox’s X-Men franchise.
The deal would also combine Disney’s cable channels ESPN, Freeform and the Disney Channel with Fox’s FX, National Geographic, and Star India. (Fox News, Fox Sports and Fox’s broadcast network likely won’t be part of the deal, according to numerous news reports.)
Combining all those channels and film franchises could create problems for consumers. The Justice Department will consider to what extent the new company could dominate the market, using its increased leverage to force cable companies and distributors to pay higher rates to carry Disney and Fox content.
For example, could the combined company negotiate with Comcast by upping the price for FX, threatening to pull ESPN off the air if Comcast refuses to pay the higher rate? Those are the scenarios regulators will be investigating.
“Combining two entities with major content assets in TV and film would typically raise a high level of concern from an antitrust perspective,” said Jonathan Barnett, a professor of media antitrust law at USC Gould Law School.
These kind of so-called horizontal mergers between competitors tend to generate even more scrutiny than the “vertical” mergers like the AT&T-Time Warner deal, in which one company adds a new line of business by buying another, but — at least in theory — doesn’t get rid of any competition. And the Trump Justice Department signaled that it won’t be an antitrust pushover: It shocked the business world when it sued to block AT&T’s Time Warner acquisition.
Regulators will pay particularly close attention to Disney and Fox’s rationale for their deal once it’s announced. Disney has been rumored to be in the market for another giant content maker to protect itself against Netflix and other streaming competitors. That might not pass regulatory muster in the new antitrust era.
The Justice Department has recently indicated that it is particularly sour on “defensive mergers,” meant to stave off competition. Just in the past two years, antitrust regulators blocked mergers between Staples and OfficeDepot, Haliburton and Baker Hughes, Aetna and Humana and Anthem and Cigna — all of which claimed they needed to combine due to difficult market conditions.
Yet each deal is unique, and there are several reasons why the Justice Department could allow Disney to buy Fox.
For example, with the notable exception of superhero films, the two movie studios actually produce different types of content. Disney’s movies are typically geared towards children. Fox has a successful but far less prolific animation studio, and its primary focus is action-adventure movies and adult comedies.
Similarly, Disney’s cable channels revolve around sports and family entertainment. Fox’s lineup centers around comedy, intrigue and education. Regulators could see the company’s assets as complementary, rather than competitive.
And the Justice Department could even view one major part of the deal as positive for the media industry: the companies’ combined stake in Hulu.
Currently, Disney and Fox each own 30% of Hulu, which is a third-place but budding streaming player in a market dominated by Netflix and Amazon. By combining, Disney would take a majority stake in Hulu and could turn it into the go-to place to watch Star Wars, X-Men, Disney Princesses and Kung Fu Panda.
That could put pressure on Netflix and Amazon to lower their prices. But making Disney and Fox content exclusive to Hulu could also make customers have to pay for multiple services to view all their favorite movies and shows. Regulators would examine that too.
“By making Hulu more robust, the Justice Department could view the deal as pro-competitive” Barnett said. “Then again, that’s not necessarily beneficial to consumers.”
Without a conclusion to the AT&T and Time Warner case, it’s difficult to fully grasp how regulators would react to a Disney-Fox deal.
It would seem prudent for Disney and Fox to wait for the court’s decision on AT&T and Time Warner’s merger. A Justice Department win could empower the regulator to crack down more heavily on media mergers, giving Disney doubt about its likelihood of success in gaining approval.
Yet by announcing the deal now, the AT&T-Time Warner court case could be concluded before the Justice Department even has a chance to weigh in on Disney-Fox. Waiting until after the decision could delay the deal by six months to a year.
In the rapidly changing media landscape, time is of the essence.
CNNMoney (New York) First published December 7, 2017: 2:39 PM ET
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