Disney-Fox Transaction

Disney-Fox Transaction

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January 19, 2018
Disney-Fox Transaction
On December 14, 2017, the Walt Disney Company
Consumer and Industry Trends
(Disney) and 21st Century Fox Inc. (Fox) announced that
Both the television and movie industries are in the midst of
they have entered into an agreement under which Disney
structural changes driven by a combination of competitive
will acquire Fox for $66.1 billion. The price includes $52.4
pressures, technological developments, and consumer
billion for Fox’s stock and the assumption of $13.7 billion
preferences.
of debt. Prior to the transaction, Fox will spin off certain
assets into a new company.
Television Viewing
Changes in the way consumers watch television are
After the transaction, Fox shareholders will own about 25%
profoundly affecting the television industry. Table 1
of Disney’s stock. According to press reports, the family of
illustrates this trend. Growing numbers of households have
Fox’s current co-executive chairman, Rupert Murdoch, will
dropped their cable or satellite services (known as
own about 5% of Disney’s stock. Mr. Murdoch’s son,
multichannel video programming distributors, or MVPDs)
Lachlan, is also co-executive chairman of Fox, and his son,
or have chosen not to subscribe in the first place. Instead,
James, is the chief executive officer.
many are subscribing to online services that provide video
programming via the Internet. Even after the cost of
In the event federal regulators block the transaction, Disney
separately purchasing broadband service, these alternatives,
has agreed to pay Fox a $2.5 billion breakup fee. If either
such as Hulu, Netflix, Amazon Prime Video, Sling TV, and
party pulls out of the transaction for nonregulatory reasons,
DIRECTV NOW, can be less expensive for some viewers
it will owe the other $1.52 billion.
than MVPD services.
The Companies
Table 1. Television Distribution Sources
Disney is a diversified international family entertainment
for Consumers
and media enterprise. It owns and operates the ABC
(% of U.S. television households)
broadcast television network, broadcast radio networks,
eight broadcast television stations, and four radio stations.

2014
2015
2016
2017
In addition, Disney owns and operates cable networks such
Broadcast only
10%
11%
12%
13%
as ESPN and the Disney Channel; television studios; and
movie studios. It has a 30% share of the Hulu online
Cable/satellite
88%
86%
85%
82%
subscription video-on-demand service. The company also
owns a record label (Walt Disney Records), produces live
Broadband only
2%
3%
4%
5%
stage plays, operates theme parks, and licenses Disney’s
Total TV
115.5
116.4
116.4
118.4
visual and literary properties.
households
mil ion
mil ion
mil ion
mil ion
Fox has several business units that compete with Disney.
Source: CRS analysis of data from the Nielsen Company.
Fox owns and operates the FOX and MyNetwork broadcast
Note: A “Broadband only” household has at least one operable
television networks, as well as 28 broadcast television
TV/monitor that receives video exclusively via a broadband Internet
stations. In addition, Fox owns and operates cable networks
connection instead of traditional means.
including FOX News and Fox Business Network; 15
regional sports networks plus national sports networks Fox
Consequently, MVPDs have lost subscribers. As subscriber
Sports 1, Fox Sports 2, and the Big Ten Network; FX, and
numbers fall, cable networks such as Disney’s ESPN and
National Geographic. Fox also owns television and movie
Fox’s FX struggle to maintain their revenue from the
studios and a 30% share of Hulu. Its other interests include
MVPDs, which generally pay the networks on a per-
39% of the Sky subscription television service in Europe
subscriber basis to carry their programming. According to
and 50% of the Endemol Shine Group, a global television
the research firm the Nielsen Company, the number of U.S.
production company.
homes receiving ESPN dropped from 100 million in 2010
to 87 million in 2017. As fewer people watch the networks,
Under the agreement, Fox will sell its television and movie
the networks also lose revenue from advertisers, which pay
studios, several of its cable networks (including FX,
them based on the number of viewers. Between the third
National Geographic, and the regional sports networks),
quarters of 2016 and 2017, the operating income of
and its Hulu stake to Disney. Fox will spin off its broadcast
Disney’s cable networks declined 23%.
television networks and stations, its cable news networks,
and national sports networks into a new publicly traded
Studio Revenue
corporation.
Likewise, over the last 10 years, U.S. consumers have
substituted online subscription video services, particularly
those that offer programming on an on-demand basis, for
the rental and purchase of Blu-ray and digital video discs.
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Disney-Fox Transaction
These services provide television and movie studios with
could use its control over additional cable networks, in
large upfront payments for the rights to distribute movies
combination with its own online distribution services, as
and television programs. However, as Figure 1 illustrates,
leverage to obtain higher fees from MVPDs or third-party
the movie studios’ revenue growth from digital licensing
online video services. Likewise, Disney might have the
has not offset the loss in revenue from home video.
incentive and ability to withhold its content altogether and
distribute it exclusively through its own streaming services.
Figure 1. Movie Studio Revenue Sources
Disney’s potential market power might drive MVPDs and
online distributors to increase prices.
Movie Distribution
Research firm S&P Global estimates that in 2016, Disney’s
and Fox’s movie studios’ combined share of U.S. box
office revenues was about 40%. Only two other major
studios had domestic box office revenue shares above 10%
during the last three years: Time Warner and
NBCUniversal. After taking ownership of Fox’s studio,
Disney might be able to insist on a larger share of cinemas’
box-office revenue from its films, or negotiate other
favorable terms and conditions. This could potentially lead

movie theaters to raise ticket prices and/or decrease the
Source: CRS analysis of data from Derek Baine and Wade Holden,
availability of films distributed by Disney competitors.
The State of Home Entertainment, S&P Global Market Intelligence.
Note: Categories are domestic (U.S.) unless otherwise noted.
Antitrust Review
The Hart-Scott-Rodino Act requires parties to transactions
One concern of both television and movie studios is that the
of significant size to report them to the federal government
online services serve as gatekeepers; they control
and wait to consummate them while the government
proprietary viewing data and the presentation of the studios’
conducts a review. Accordingly, before this transaction can
content to subscribers. For example, Netflix relies on data it
proceed, either the U.S. Department of Justice or the
gathers about subscribers’ viewing habits to suggest content
Federal Trade Commission will review it to determine
to them, but may not share its data with studios, which have
whether it will substantially reduce competition, as
only a limited idea of how their content performs.
prohibited by Section 7 of the Clayton Antitrust Act, which
primarily governs merger reviews. Following the
Disney Strategy
government’s review, antitrust authorities may allow the
In view of these trends, in August 2017 Disney announced
deal to close as originally proposed. Alternatively, they may
that it would end its distribution agreement with Netflix for
negotiate a consent agreement that includes provisions to
new films, beginning in 2019. Instead, Disney is preparing
maintain competition, or seek to stop the transaction.
to launch its own online video service in late 2019. Disney
also plans to launch an ESPN-branded online video service
Potential FCC Review
with sports content in 2018. If the Disney-Fox transaction is
Pursuant to the Communications Act of 1934, the Federal
consummated, Disney’s online services could also include
Communications Commission (FCC) must determine
content currently controlled by Fox’s studios and by several
whether any license transfers would, on balance, serve the
Fox cable networks.
public interest. If Disney is to acquire Fox’s licenses to
send cable programming signals to and from satellites, then
On the day the companies announced the transaction,
the FCC would review the transaction.
Disney Chairman and CEO Robert A. Iger stated that “we
believe creating a direct-to-consumer relationship is vital to
In addition, if the FCC determines that the Murdoch family
the future of our media businesses and is our highest
would have “cognizable interest” in Disney’s licenses, it
priority.” He added, “Should the multi-channel ecosystem
may review the transaction to determine if the Murdoch
get to the point where it is not as viable as it needs to be,
family’s “control” of Disney broadcast stations would be in
we’d be well positioned to, in effect, flip a switch and
the public interest. FCC rules prohibit common ownership
distribute those programs and those channels directly to
or control of two “top four” broadcast networks such as
consumers through the platforms that we’ve created.”
ABC and Fox, and also prohibit ownership or control of
more than two stations within the same local market. If the
Potential Competitive Impact
Murdoch family is determined to “control” Disney, it would
Disney’s acquisition of Fox’s studios and cable networks
control more than two stations in five local markets.
would likely increase its power in negotiations with content
distributors such as MVPDs, online video distribution
Dana A. Scherer, Specialist in Telecommunications Policy
services, and movie theaters. Government officials
reviewing the transaction are likely to consider whether this
IF10815
would have implications for consumers.
Television Distribution
Disney negotiates the distribution of all of its networks as a
single package. One competition concern is whether Disney
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Disney-Fox Transaction

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