The Disney-Fox Deal Has Friends in High Places
Posted December 14, 2017 4:39 p.m. EST
Rupert Murdoch, the media mogul who is executive chairman of Twenty-First Century Fox, is one of President Donald Trump’s closest allies and advisers. Fox News has been the president’s most reliable media champion. Murdoch and the president have each publicly described the other as “my good friend.”
Trump is also an avowed opponent of big media mergers. “It’s too much concentration of power,” he said of AT&T’s proposed acquisition of Time Warner. The government sued to block that deal on antitrust grounds.
So what level of antitrust scrutiny will the Walt Disney Co.'s just-announced deal to purchase much of Twenty-First Century Fox receive, and will the government try to block that megadeal, too?
Because AT&T and Time Warner are not direct competitors, and the suit was such a break with Justice Department tradition, it gave rise to speculation that the real motive was to punish CNN, the Time Warner-owned Trump punching bag.
The $52.4 billion Disney-Fox deal, in which Disney is acquiring Fox’s venerable movie studio and the bulk of its other entertainment assets, poses the opposite problem: Twenty-First Century Fox is controlled by the Murdoch family.
Even though antitrust decisions are supposed to be independent of political influence, Trump did not hesitate to weigh in as soon as 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 Sanders Huckabee, told reporters.
“It looks bad to me,” said Christopher 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 Trump’s new antitrust enforcement chief, Makan Delrahim, who is already under fire for taking AT&T and Time Warner to court. 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 this week 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 horizontal merger, which typically gets 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, 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.
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 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.
Iger said during a conference call Thursday that James Murdoch’s future role, if any, hasn’t been decided.
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,” Downes said.
One of the government’s main 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 rival distributors such as Netflix, thus hurting consumers.
But Disney, as it prepares to start its own direct-to-consumer Netflix rival, is already withholding some of its content, and has said it would withhold much more as existing agreements expire. It will almost surely pull Twenty-First 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.
Downes said he doesn’t see how the Justice Department would distinguish between the two deals, should it approve the Fox-Disney transaction.
How Delrahim and the antitrust division handle the Fox-Disney review remains to be seen, of course. But whatever he decides, the shadow of Murdoch will loom large.
“I hesitate to make any predictions about Trump and what he’ll do,” Sagers said. “But there’s a long tradition that the White House shouldn’t get involved in these decisions.”
He said he’s “reluctant to believe” that Delrahim would allow political considerations or Trump’s friendship with Murdoch to influence his decision — “but maybe I’m being naive.”