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Christmas came early to Hollywood this year. Last week, the Walt Disney Company announced that it would acquire most of the 21st Century Fox empire for a staggering $52.4 billion. The deal unites two of the “Big 6” film studios, giving Disney a library of lucrative content going back to Hollywood’s Golden Age, several additional cable channels, and international assets.
The House of Mouse has certainly come a long way since Roy Disney’s last-ditch effort to fend off corporate raiders in 1984.
Several analysts have pitched this deal as Disney facing the future by doubling down on the past. But my sense is that this explanation is far too facile. The Fox assets certainly bolster Disney’s core studio and television businesses, which have been under pressure in an era of media disruption. But it also helps the company vault into the new internet-based media world. What follows are some initial thoughts about what this deal means for Disney, for regulators, and for the future of online video distribution.
Strengthening Disney’s core assets
It is, of course, far too early to discuss whether this will be a successful deal. But it is not surprising that the Fox assets were so attractive to Disney. On the moviemaking side, Disney has a fairly strong track record in recent years of acquiring smaller studios and giving them the tools to grow their operations. Under Disney’s ownership, Pixar, Marvel Studios, and Lucasfilm have grown significantly and produced some of the past decade’s most memorable cultural touchstones, such as nurturing the Marvel Cinematic Universe and reinvigorating a stale Star Wars franchise. Although the Fox studio is much bigger, there is significant reason to believe Disney can repeat its past success, particularly given the wide range of intellectual property in the Fox portfolio, the potential for crossover with other Disney-owned characters, and the additional revenue opportunities offered through theme parks and consumer products.
On the television side, the Fox assets give Disney more leverage vis-a-vis cable companies. The advent of cord-cutting has made traditional pay television a more difficult industry, marked by increasing battles between content providers and distributors to divide a stagnant (or potentially shrinking) revenue pool. Adding properties such as FX and National Geographic gives Disney greater scale and more leverage in these negotiations, while adding the Fox Regional Sports Networks may help achieve greater synergies with flagship ESPN, which remains linear television’s most lucrative property but is burdened by long-term content deals signed before the cable market shifted.
The acquisition also helps Disney grow internationally. The Fox assets include several foreign content-delivery vehicles, such as Sky Broadcasting in Britain and Star India. These businesses can help Disney expand beyond the American market that serves as its primary revenue source today.
From this perspective, the Disney/Fox deal fits the classic product life cycle model understood by every M.B.A. candidate. When a product (such as movies or traditional pay television) matures, growth tapers off, and revenue stagnates. Mergers are a classic response to cut costs and achieve greater economies of scale in a bid to remain profitable.
Expanding into over-the-top video distribution
But these traditional synergies may ultimately pale in comparison to the impact on Disney’s over-the-top strategy. Even before exploring the Fox deal, Disney announced in August that it would terminate its exclusive content deal with Netflix and would instead launch two direct-to-consumer streaming services. The first, an ESPN-themed app featuring sports programming, is slated to launch in 2018. The second, featuring the studio’s own fare, will launch in 2019 once the current Disney-Netflix deal expires.
Of course, Disney is far from the only content company to make a direct-to-consumer play in the midst of a disrupted video marketplace. CBS launched its All Access service earlier this year, and HBO Go has been streaming over the internet for over two years. But Disney’s larger library of content, including popular fare such as the Marvel and Star Wars movies, makes it a more viable competitor to industry leader Netflix.
The Fox acquisition boosts Disney’s over-the-top strategy in two ways. First, Fox provides additional content for both services — regional sports programming for the ESPN app and more studio fare for the entertainment app. Second, Disney will acquire majority interest in existing over-the-top competitor Hulu, by adding Fox’s 30 percent ownership interest to its own 30 percent. This gives Disney a potential third avenue to deliver content and a potentially rich source of experience to draw upon when building its new apps.
Of course, a deal this large will face regulatory scrutiny by the Justice Department’s Antitrust Division. Traditionally, antitrust regulators focus on the horizontal effects of the merger — will it increase concentration in ways that might create market power and harm consumers? In the studio space, a combined Disney-Fox enterprise will have somewhere between 30-40 percent of domestic box office revenues. This is not insignificant, but it is likely not high enough to block the merger. At least four other large Hollywood studios remain, plus independents and a growing effort by internet giants such as Netflix and Amazon.
Disney’s over-the-top strategy might also raise concerns about vertical foreclosure. As we’ve noted before, antitrust regulators historically have not been as concerned about vertical effects because the economics literature suggests most vertical combinations are likely to benefit competition. But the Justice Department’s surprising opposition to the AT&T/Time Warner merger suggests that government is more concerned about such combinations today.
Disney has explicitly stated its intent to leverage its sports and entertainment content to launch a new competitor in the online distribution marketplace. One would imagine antitrust officials would welcome this attempt to increase competition among streaming services and give consumers more video distribution options. And Netflix is itself morphing from a distributor of other studios’ content to a vertically integrated distributor of its own home grown content. Nonetheless, lawyers for both entities would be well-advised to watch the AT&T proceeding carefully.
The cable a la carte dream realized?
This ambiguity raises questions about competition policy in a disrupted video marketplace. A decade ago, when the traditional cable bundle was the consumer’s only pay television option, numerous consumer groups pushed for a la carte cable pricing, so consumers could buy individual channels rather than a whole package. In a sense, the over-the-top revolution may make that dream a reality — although the aggregate cost and difficulties with finding particular content may leave consumers longing for the convenience of the traditional cable bundle.
Or maybe not. The point is that the revolution that Netflix wrought is still going. The internet’s disruption of the traditional pay television model has been great for consumers, offering new products at different price points that can stream to new devices and places. Companies are still rearranging the pieces on the media game board, and it’s not yet clear which new combinations will best suit future consumers. In this rapidly changing marketplace, antitrust regulators should be vigilant about anticompetitive abuse but also careful not to intervene in ways that might distort pro-consumer innovation.
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