No mousy deal: Murdoch’s Fox remains clever as ever in the deal with Disney

The Disney-Fox tie-up is smart because it deftly sidesteps the basic regulatory concerns.

A brief sequence in a 1998 episode of The Simpsons showed 20th Century Fox – the US cinema studio owned by Rupert Murdoch – being taken over by Disney, the quintessential American media company. Last month’s announcement about Disney acquiring the movie and TV properties of Murdoch’s 21st Century Fox demonstrated the enviable record of The Simpsons in predicting landmark events. The reportage on the deal has been mostly anxious and alarmist (and occasionally) optimistic, with much focus on the future of entertainment.

However, not enough credit has been given to the fact that this deal, now awaiting regulatory approval, is unusual but smart.

It is unusual because so far, major deals in the US media have involved content-producing majors, themselves a product of mergers between erstwhile TV and cinema giants, coming together with broadcasting or carriage majors. In the last decade, we saw NBCUniversal merging with the cable giant Comcast and the venerable Time Warner announcing its acquisition by the grand old telecommunication company, AT&T.

Contrasting such vertical accumulation, the Disney-Fox deal involves two content majors (though Fox also has stakes in key distribution companies in Europe and India). Fox is giving up their movies and TV production studios, cable channels including National Geographic as well as its existing stake in European satellite broadcaster Sky and India’s STAR broadcast network. But it retains Fox News, the Fox broadcast network, Fox Sports, Fox Business and regional TV stations in the US. In other words, the Disney-Fox case is a horizontal merger.

Precisely because of this, it is likely to arouse close regulatory attention because horizontal accumulation, which reduces the number of market players, directly impacts competition. Even in the free-market United States of America, such deals are subject to a series of evidence-based regulatory approvals, taking anywhere between 10 to 15 months. For instance, approval of the last mega-acquisition in the US media business – Time Warner by AT&T – that was announced in October 2016 is still pending.

Regulatory scrutiny particularly looks into risks of market power emerging from such mega megers and acquisitions, since these directly impact citizens, competitors, and the public exchequer.

Wily as ever

The Disney-Fox deal is smart because it deftly sidesteps the basic regulatory concerns.

The immediate anxiety arises because one of the Big Six studios of Hollywood is effectively being gobbled up by another. No doubt this will enhance market power in the cinema business. The combined Disney-Fox entity could account for almost 40% of the box offices in the US and the United Kingdom – one reason why this deal will be scrutinised by regulators in both countries. However, if the US government is to block this deal, it will have to unequivocally demonstrate a gamut of realistic threats arising from such prospective market concentration.

Unlike the cinema business, which is largely subjected to ex-post regulation in the US (based on results and not forecasts) the TV and cable businesses are replete with ex-ante regulation. Anti-competitive protocols are strong in the TV business, courtesy the Federal Communications Commission – the country’s primary authority for regulating interstate and international communications by radio, television, wire, satellite and cable – which lays out that no company can own more than one of the major broadcast networks (Disney owns ABC while Murdoch has Fox News). By not selling its US broadcast assets like Fox News and Fox Sports to Disney, Fox has neatly sidestepped expressly palpable objections by the Federal Communications Commission.

In hiving off its cinema as well as TV production studios to Disney, Fox puts the onus on the deal’s likely critics to impeccably demonstrate any possible adverse impact on the business milieu and on public interest. The US government and media advocacy groups will have to convincingly show the enlarged movie-making assets of Disney being a threat to competition in the cinema industry. Even more arduous to prove will be the rise in overall media concentration as a result of Disney controlling a wide corpus of non-news content across cinema and TV.

In the UK, which has stronger cross-media ownership protocols than USA and where Murdoch has more newspapers, the Fox CEO seeks to pacify regulators by parceling out Fox’s share in Sky to Disney. Doing so will help Murdoch show his primary media assets are limited to newspapers, thus puncturing arguments of owning key assets across media sectors.

No timid retreat

The deal is smart beyond deft regulatory management. Far from being a timid retreat by Fox, it suggests a timely and tactical reorientation.

First, this deal allows Murdoch to focus on his core passion: news. In the Disney-Fox deal, the (predominantly American) TV news properties were retained by Murdoch’s company, and rightly so, because despite the globally fragile health of the news business over the last decade, Fox News was the undivided Fox’s biggest profit-driver. Along with Fox Sports, it is estimated to contribute to 76% revenues of the properties left out of the Disney deal.

Second, these properties are set to be combined with NewsCorp, the predominantly print media division of Murdoch’s global empire. This suggests he has chosen to retain and synergise assets that bring revenues and political influence in all conditions, shedding those yielding profit under oligopolist conditions. With such synergies, a more lean Murdoch looks to be preparing for another avatar in the global news business.

Third, combining a company twice its sixe gives Fox shareholders, which include the Murdoch family, a roughly 25% stake in the enlarged Disney. The Murdoch family trust is expected to become one of the largest shareholders (around 5%) in what will be the biggest and most globalised entertainment media conglomerate. It may be hard to visualise, but the fox has neatly ensconced itself in the belly of the mouse.

Vibodh Parthasarathi teaches media policy/business and is currently researching the Indian Media Economy.

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