(Bloomberg) -- AT&T Inc. is already testing just how tough antitrust enforcers in Washington are going to be on media deals that combine content and distribution. Comcast Corp. could be next to challenge their limits.
The cable giant’s possible bid for 21st Century Fox Inc. assets would need approval from a Justice Department that has raised the bar for such deals, known as vertical tie-ups. That stance led to the government’s lawsuit to stop AT&T’s acquisition of Time Warner Inc. in November.
The AT&T case is set to be decided by a federal judge in Washington next month following a six-week antitrust trial. While Comcast may be banking on an AT&T victory, that won’t ensure approval for an acquisition of Fox’s entertainment businesses, according to antitrust lawyers.
“Even if AT&T wins the trial, the spotlight is not off,” said Henry Su, an antitrust lawyer at Constantine Cannon LLP in Washington and a former Federal Trade Commission lawyer. “If anything, if AT&T-Time Warner is allowed, there will be greater scrutiny of Comcast and Fox because there will be even more concentration of content between the two distributors.”
Comcast’s potential all-cash offer would pit the cable company against Walt Disney Co., which has a $52 billion agreement to buy Fox’s film and TV studios, as well as the U.K.’s Sky Plc and cable channels including FX. Fox told investors last month that it had rejected a higher offer from a bidder widely believed to be Comcast because of greater regulatory risk.
Each of the deal possibilities presents antitrust risks. A combination of Disney and Fox would create a film studio with a market share of about 35 percent, according to Box Office Mojo data based on 2017 box office ticket sales in the U.S. and Canada. Comcast, which owns Universal Studios, would have a smaller market share of about 28 percent from acquiring Fox.
Comcast’s purchase of Fox assets would also combine regional sports channels of the two companies, while the Disney deal would unite ESPN with Fox’s regional sports. Fox Sports isn’t part of the Disney agreement.
“The regional sports networks will be an issue, and I expect they’d have to divest the networks in their six overlapping markets,” said Mary Ann Halford, senior adviser for media and entertainment at OC&C Strategy Consultants.
Representatives for the Justice Department and for Comcast declined to comment. As there is no broadcast license at stake, the Federal Communications Commission doesn’t need to review a potential deal.
The more significant risk for Comcast will likely stem from combining its distribution network with programming. Comcast is the biggest U.S. cable-TV operator and provides broadband service to about 26 million customers.
When it bought NBCUniversal in 2011, antitrust enforcers at the Justice Department were worried Comcast could use its control over NBC programming to thwart competition from online rivals such as Netflix Inc. Although the government approved the NBC deal, it put conditions on Comcast’s conduct aimed at ensuring competitors got access to NBC content.
Adding Fox programming including regional sports to the company would raise similar concerns inside the Justice Department, according to Jennifer Rie, an antitrust analyst at Bloomberg Intelligence in New York. In the AT&T trial, the Justice Department noted that Comcast had “demonstrated a willingness to play hardball” with NBC content to benefit Comcast’s pay-TV business.
The question is how the Justice Department will try to soften any competitive harm resulting from a Fox deal. Vertical deals, like a combination of Comcast and Fox, have typically been fixed with conditions on how the combined company can conduct business.
The Justice Department’s antitrust chief, Makan Delrahim, has rejected that approach, arguing it forces the department to act as a regulator tasked with monitoring a company’s compliance. Instead, competition problems should be resolved with asset sales, he contends. That was a demand AT&T refused when it was seeking approval for the Time Warner deal, triggering the government’s lawsuit.
Comcast is willing to consider divestitures to win antitrust approval, said a person familiar with the matter who asked not to be identified discussing non-public information.
Philadelphia-based Comcast also intends to downplay any concerns about its control over a wide swath of broadband service in the U.S. by pointing to competition from wireless providers and the move to the next generation of wireless technology known as 5G, the person said.
While Disney has been working with antitrust officials for months already, Comcast is planning to make the case to Fox shareholders that favoring its deal won’t necessarily create significant delays for a transaction, said the person. That’s because Comcast has already submitted documents to the Justice Department that the government requested as part of the Disney-Fox deal, which can be used to review any deal for Fox. The cable provider will argue it would only be about a month behind Disney in the government review.
The outcome of the AT&T lawsuit, set to be decided June 12 by U.S. District Judge Richard Leon, could influence how the Justice Department approaches vertical deals. An AT&T win, even if Leon agrees that vertical deals can be problematic, could give some leverage to Comcast if it makes a formal bid for Fox, according to Rie.
“They’re in a bad position,” Rie said of the Justice Department if the judge sides with AT&T. “They’ve just lost at trial on a very similar deal and the companies know that, and the companies know the Justice Department will be reluctant to go to trial and lose again.”
Comcast is likely to wait until the AT&T ruling before making an official offer, said another person familiar with the matter.
A key difference between a Comcast-Fox combination and AT&T’s deal for Time Warner is that AT&T competes nationally for pay-TV customers through its DirecTV business, while Comcast’s footprint only covers about a third of the U.S. The Justice Department cited AT&T’s national reach to support its claim in the antitrust trial that the company has an incentive to use Time Warner programming to harm pay-TV rivals.
Su, the former FTC lawyer, doesn’t think a loss in the AT&T case will necessarily change the Justice Department’s views on a Comcast-Fox tie-up or chasten Delrahim.
“Makan has been very clear he wants to bring cases and bringing cases means you have to be prepared to win and lose some,” he said.
©2018 Bloomberg L.P.