The Department of Justice appears to have changed its mind again about the risks of media mergers.
After being brutally trounced in an ill-conceived lawsuit to block the merger of AT&T and Time Warner, the Department’s Antitrust Division has now approved Disney’s $71 billion plan to acquire the assets of 21st Century Fox.
Fox shareholders will vote on Disney’s offer on July 27th, while a competing offer from Comcast awaits its own review by regulators.
In the failed attempt to block the Time Warner deal, some antitrust observers saw an expansive rewrite of the government’s view of potential consumer harms, in video content if not in all industries.
But the quick approval of the Fox deal, which should have raised at least one eyebrow under longstanding antitrust precedents and the Department’s own merger review guidelines, now suggests precisely the opposite.
What’s going on? Is the DoJ simply licking its wounds after losing the Time Warner case? Or was that intervention an outlier, motivated by something other than a decision to return to the economics-free “big is bad” days of 19th century trustbusting?
Or is the Department, consistent with a Republican administration, in fact relaxing rather than tightening antitrust enforcement, as quick approval of the Disney deal suggests?
Something doesn’t fit. And we may not find the missing pieces for a very long time.
But let's take a look at what we do know about the two cases.
The Time Warner deal combined a content producer (Time Warner) with a content distributor (AT&T), in what is known as a vertical merger. Disney’s acquisition of Fox, however, is largely a horizontal deal, taking out Disney’s major competitor in the media production business.
Disney and Fox, #1 and #2 respectively, will account for nearly half of box office revenue this year and about 30 percent of scripted TV programming. (In one key week last December, while the government was reviewing the deal, Disney and Fox captured over $250 million, or 90%, of theater revenue.)
According to the Department’s guidelines and nearly forty years of antitrust precedent, vertical deals pose little threat of consumer harm.
But horizontal deals, especially mergers of competitors who together dominate a relevant marker, are considered much more problematic. They are usually subject to more skeptical review by regulators, with more conditions attached to approval, if at all.
Yet in these two cases, we have the opposite result. And while the Department spent two years (and millions of dollars) trying to block the Time Warner deal, it took only six months to approve Disney’s takeover of Fox.
The DoJ’s novel legal theory in the AT&T case is especially puzzling in light of the Disney approval. The government argued that if AT&T were allowed to merge with Time Warner, it might use its ownership of nationwide satellite network DirecTV as leverage to force other Pay TV distributors to pay more for Time Warner channels.
That includes traditional providers, including cable, fiber, satellite-based services, as well as fast-growing and largely unregulated Internet streaming services from Netflix, YouTube, Hulu, Amazon, and others.
Indeed, regulators argued, AT&T might refuse--despite longstanding regulations that prohibit traditional Pay TV providers from doing so--to license some of that content to anyone other than its own network, a strategy that economists refer to as “foreclosure.”
In effect, the government argued that vertical integration of content and distribution would give AT&T the power to disproportionately raise prices—exactly the theory that frames the review of horizontal mergers.
Which makes it all the odder that the Disney deal, a classic horizontal merger, was approved with minimal conditions—simply that Disney sell off Fox’s regional sports networks.
What about the rest?
The proposed settlement and the Department’s press release announcing it make absolutely no mention of the studios, content licensing, gaming or merchandising—where Disney also dominates.
Nor does it mention emerging and largely unregulated outlets for the combined company’s vast vault of intellectual property, including direct-to-consumer content based on the company’s expanding library of licensed characters from Disney, Marvel, Pixar, and Lucas.
Combined with Fox properties including The Simpsons, Family Guy and the X-Men, Disney will gain substantially over its already leading position.
The settlement also said nothing about the fact that Disney will acquire a controlling interest in Hulu, one of the fast-growing subscription-based networks for both content production and distribution.
Why should that matter? For one thing, last year Disney announced that it would launch its own streaming service. It then withdrew key Disney properties from Netflix, saying they would be available exclusively over the still-unnamed new service.
With control of Hulu, Disney would have a head-start on both the technology and subscriber base needed to achieve its strategy.
Which is to say, the company is already engaging in precisely the kind of foreclosure behavior that the government said AT&T/Time Warner might find tempting.
The government sued to block one deal on the mere (and ultimately unproven) speculation of such behavior, yet ignored direct evidence of it in another.
Will Disney actually use its expanded dominance in video content, product licensing, and its strategy of excluding other distributors from at least some of its products in ways that will raise prices for consumers?
That’s the kind of analysis the DoJ’s horizontal review guidelines require it to perform before approving any deal.
But on those key points, the Department was silent.
Stranger still, those shrieking the loudest for expanding antitrust in response to accelerating technology disruption have likewise said…nothing.
To be clear, I’m not suggesting that the Disney-Fox deal shouldn’t have been approved. But since the government won’t reveal its analysis beyond the proposed settlement, there’s no way to know how, if at all, the DoJ factored these key issues into its relatively quick decision to approve the transaction.
The seeming incoherence in the DoJ’s approach to the two mergers, in any case, has left many skeptical of the Department’s motives.
In an editorial last week, for example, The New York Times’s questioned whether the White House’s overt hostility to CNN and affection for Fox played a starring role in the otherwise incongruous decisions by chief antitrust regulator Makan Delrahim to reject one deal while approving the other.
As the editors put it, “Mr. Delrahim told The Times in the fall, ‘All enforcement decisions will be based on the facts and the law. Not on politics.’” But, the paper concluded, “It is becoming harder and harder to believe that.”
At the very least, it’s becoming harder to find some other explanation.
