Dec 13, 2017

Disney's $60 billion deal for Fox comes with lots of questions

Illustration: Rebecca Zisser / Axios

The Walt Disney Co. is expected to announce within the next few days that it will buy the entertainment assets of 21st Century Fox for roughly $60 billion. Included would be Fox's movie studio and television networks like FX and Nat Geo TV.

Why it matters: The deal would give Disney the scale to take on Netflix, but first it will need to convince regulators that it doesn't pose the same sort of monopoly risk as AT&T's proposed purchase of Time Warner.

Strange timing

The Department of Justice recently sued to block a merger between AT&T and Time Warner, with no final decision expected until the end of April at the earliest. There had been some speculation — including from AT&T CEO Randall Stephenson — that the DOJ's action would put Disney's talks with 21st Century Fox on ice. Big mergers are disruptive to a business, and even more so when regulatory approval is in doubt.

The "We're different" argument:

Disney and Fox will argue that their proposed merger has more differences than similarities to AT&T/Time Warner. Key will be Disney and Fox's relative lack of direct-to-consumer distribution capabilities (i.e., they don't have anything like AT&T's DirecTV).

  • Disney wouldn't own any actual pipes, meaning it wouldn't be able to offer free data when consumers use a certain service (aka "zero rate").
  • This argument could become easier to make if the FCC repeals net neutrality rules on Thursday, as expected, thus further empowering telecom giants like AT&T.
The "We can't compete with Netflix" argument

Disney will argue that today's content environment is the most competitive it's ever been, with networks losing market power to tech companies that are dropping billions on original programming. And regulators will have heard it before, because AT&T is making a similar case.

  • Disney and Fox each own 30% of entertainment streaming service Hulu, meaning that a tie-up would give Disney a majority stake. It is certainly a distribution capability, but their thinking looks like this: Hulu < DirecTV + HBO Go.
  • Complicating matters is that Disney has announced plans to build out its own subscription streaming service in 2019. The goal is to scale that service to compete with Netflix, but it also would potentially compete with Hulu.
Across the pond

For Disney, this deal is about competing with Netflix. The motives are a bit less clear for 21st Century Fox, a family-run business that doesn't have the same short-term financial pressures as some other companies.

21st Century Fox is in the process of buying majority ownership of Sky TV, a U.K. based broadcast network, in which Fox already has a minority stake. The U.K.'s competition regulators are currently weighing whether the Murdochs are "fit and proper" to manage the acquisition.

  • Sources suggest that Fox still thinks the Sky TV deal will go through, with or without Disney, despite how long the process has taken.
  • For Disney, Sky would provide greater international reach and yet another over-the-top streaming service.

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