The Disney-Fox Deal Has Friends in High Places

The Disney-Fox Deal Has Friends in High Places


Even though antitrust decisions are supposed to be independent of political influence, Mr. Trump didn’t hesitate to weigh in when the deal was announced. “I know that 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,” the White House press secretary Sarah Huckabee Sanders told reporters.

“It looks bad to me,” said Christopher L. Sagers, an antitrust professor at Cleveland-Marshall College of Law.

Larry Downes, an antitrust expert and a fellow at the Georgetown McDonough School of Business, agreed. “The government’s theory in Time Warner very much applies to Fox and Disney,” he said. If the government “doesn’t challenge this, it will look very weird,” he added. “But I’m not sure appearances matter to this administration.”

The Disney-Fox deal is shaping up as another litmus test for President Trump’s new antitrust enforcement chief, Makan Delrahim, who is already under fire for taking AT&T and Time Warner to court. Mr. Delrahim has said repeatedly that antitrust decisions are independent from political interference.

“I have never been instructed by the White House on this or any other transaction under review by the antitrust division,” he said of the AT&T case.

That’s unlikely to stop speculation about his division’s handling of the latest blockbuster. Antitrust experts told me that in many ways the Disney-Fox deal raises even more antitrust questions than does the combination of AT&T and Time Warner. That’s because it’s both a merger of direct competitors — a so-called horizontal merger, which typically get close scrutiny — and has some of the same vertical elements that caused the Justice Department to try to block the AT&T-Time Warner merger.

Whether a combination of the Fox film and television studios with Disney’s entertainment arm would raise red flags under Justice Department guidelines depends on how the government defines the market. The deal would reduce the number of Hollywood studios to five from six. Last year, Disney’s studio accounted for 26.4 percent of the domestic theatrical box office, the largest share, and Fox was third, with 12.9 percent. Although the combined studios would have had close to 40 percent of the market in 2016, that’s typically not enough to run afoul of the department’s merger guidelines, Mr. Sagers pointed out, unless the government decides to define the market differently.

If the market is as narrow as films about superheroes, and Disney gains control of Fox’s “X-Men” franchise, that would almost surely trigger concerns.

Photo

Randall Stephenson, left, the AT&T chairman, and Jeffrey Bewkes, Time Warner chairman and chief executive, at a Senate Judiciary subcommittee hearing on the proposed merger of their companies, which the government is trying to block.

Credit
Evan Vucci/Associated Press

There are more serious antitrust issues about Fox’s regional sports networks, given ESPN’s dominance of cable sports. If that market is measured by cable sports revenue, the Disney-owned ESPN is so dominant that nearly any acquisition of another cable sports provider, even Fox’s relatively small regional networks, would 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.

If the Justice Department really wanted to be aggressive, it might also invoke the words of former Supreme Court Justice Hugo Black, who wrote in a landmark opinion, “The widest possible dissemination of information from diverse and antagonistic sources is essential to the welfare of the public.”

Under terms of the proposed deal, Fox shareholders would own about 25 percent of Disney in an all-stock transaction. Given the concentrated market for cable news, a combination of Fox News and Disney’s ABC would most likely not have passed antitrust muster. But depending on how much influence the Murdochs are able to exert at Disney, the family might achieve much the same objective, perhaps with a board seat, or, as some have speculated, if James Murdoch joins Disney as an executive and even becomes a potential successor to the Disney chief executive, Robert Iger.

Such speculation may not be all that far-fetched. “Reports suggest that James Murdoch is apparently in line for a senior management role within Disney as part of the deal,” said Doug Creutz, senior media and entertainment analyst for Cowen & Co. in a note to clients Thursday.

Mr. Iger said during a conference call Thursday that James Murdoch’s future role, if any, hasn’t been decided.

Mr. Hemphill, the law professor and antitrust expert, pointed to an emerging antitrust doctrine called common ownership, which looks beyond the formality of separate companies to examine who actually exerts control.

All those concerns are based on traditional antitrust review standards. But since the case against AT&T and Time Warner was filed, those standards have been anything but traditional.

Vertical mergers like that of AT&T and Time Warner — AT&T buys content from Time Warner, but doesn’t compete directly with it — used to be approved almost routinely, albeit often with conditions. No longer. “We’re in a topsy-turvy antitrust world,” Mr. Downes said.

One of the government’s concerns in its effort to block the AT&T deal, according to its complaint, is the risk that AT&T would withhold Time Warner content from rivals like Netflix, thus hurting consumers.

But Disney, as it prepares to start its own direct-to-consumer Netflix rival, is already withholding some content, and has said it would withhold much more as existing agreements expire. It will almost surely pull 21st Century Fox content, like “X Men,” the planned “Avatar” sequels and TV shows like “The Simpsons” and “The Americans,” and offer them on its own service.

Mr. Downes said he doesn’t see how the Justice Department would distinguish between the two deals, should it approve the Fox-Disney transaction.

How Mr. Delrahim and the antitrust division handle the Fox-Disney review remains to be seen, of course. But whatever he decides, the shadow of Mr. Murdoch will loom large.

“I hesitate to make any predictions about Trump and what he’ll do,” Mr. Sagers said. “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 Mr. Delrahim would allow politics or Mr. Trump’s friendship with Mr. Murdoch to influence his decision — “but maybe I’m being naïve.”



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