blog Market Intelligence /marketintelligence/en/news-insights/blog/disney-fox-deal-what-will-the-department-of-justice-think content
BY CONTINUING TO USE THIS SITE, YOU ARE AGREEING TO OUR USE OF COOKIES. REVIEW OUR
PRIVACY & COOKIE NOTICE

Login to Market Intelligence Platform

New User / Forgot Password


Looking for more?

Contact Us

Request a Demo

You're one step closer to unlocking our suite of comprehensive and robust tools.

Fill out the form so we can connect you to the right person.

  • First Name*
  • Last Name*
  • Business Email *
  • Phone *
  • Company Name *
  • City *

* Required

In this list
Technology, Media & Telecom

Disney-Fox deal: What will the Department of Justice think?

‘Death by Amazon’…Don't Believe the Hype

Street Talk Podcast

Street Talk Episode 23 - As More Banks Reach for Yield, Advisers Urge Caution

National Broadband Initiatives Crucial To Asia-Pacific Broadband Market Success

Electric Vehicle Infrastructure: U.S. Utilities Getting Charged Up, but Are Regulators Plugged in to the Concept?


Disney-Fox deal: What will the Department of Justice think?

Highlights

The following post comes from Kagan, a research group within S&P Global Market Intelligence.

To learn more about our TMT (Technology, Media & Telecommunications) products and/or research, please request a demo.

Dec. 26 2017 — There has been such a frenzy of media coverage focused on the acquisition of a significant amount of 21st Century Fox Inc. assets by the Walt Disney Co. (finally announced on December 14), but few have focused on the long, arduous journey ahead, as the two companies attempt to convince the government that the combination is a good thing. Although remarks from President Donald Trump have been favorable to the deal, it will be hard to reconcile the Department of Justice nixing the acquisition of Time Warner Inc.'s Turner by AT&T Inc. while approving the acquisition of some of the crown jewels of the media industry by the Walt Disney Co.

There are four areas that we believe the government will focus on:

The Walt Disney Co.'s share of content will be immense. Looking just at U.S. box office (the combined company will also have a huge share of TV productions, plus a huge film & TV library), Disney had a 26.6% share of the domestic box office in 2016, while Fox released films that garnered 13.5% of the box office that year. The only two studios that came close were Time Warner at 16.9% and NBCUniversal Media LLC at 13.6%.

The DOJ is likely to frown upon a company which, on a good year, has 40% of the domestic box office compared to 52% for all of the other major studios combined. There are two reasons for this.

First, exhibitors are having a tough time with the box office weakness, and their cash flow margins are precariously thin. Disney's dominance at the box office will give them further leverage to increase the split of the box office (known as rentals) that it receives from exhibitors, which will only further erode theater margins. "Disney is becoming the Wal-Mart of Hollywood: huge and dominant," Barton Crockett, media analyst at B. Riley FBR, told Bloomberg Businessweek following the deal's announcement. "That's going to have a big influence up and down the supply chain."

Second, Walt Disney has already signaled that they want to keep their content exclusive to them during the post-theatrical release window for their two new OTT streaming platforms, announcing in August that their deal with Netflix would not be renewed. Since there will be no open bidding process for this content, the DOJ could raise issues around this, causing Disney to have significant pricing power over consumers, with what some believe is must-have content. Disney executives have announced that their Disney-branded OTT service will debut with a price-point significantly below Netflix Inc. (their other sports streaming service will be dubbed ESPN Plus). Over time, however, as more content is added, the price will likely go up.#learnMoreAboutLink("sector-intelligence")Disney has revealed that it will have four to five movies per year that will be exclusive to the OTT platform, while airing the Disney, Pixar, Marvel, and Star Wars films after they play in theaters. There will also be exclusive TV series based on the Marvel and Pixar libraries, as well as a "High School Musical" series.

We think the DOJ will focus on the concentration of sports rights. Although in theory ESPN (U.S.) and the regionals don't compete, the rising cost of sports rights is concerning to multichannel operators and consumers, and it has been the driving force behind cord cutting and cord shaving.

Walt Disney will likely argue that sports rights are not an issue as the RSNs aren't bidding against ESPN for national sports rights. That's because they are broken down into tiers, where the national networks like ESPN and FS1 bid on the first- and second-tier rights. These are the nationally televised games, and usually the top bidder gets the first pick of the most competitive and nationally relevant games that week.

The remaining third-tier rights are available to the regional sports networks, which get the exclusive in-market broadcasts based on a specific team's TV territory, which is determined by the league. These rights are negotiated between the RSN and the local teams themselves. The national rights are negotiated by the national networks and the leagues.

The majority of a team's games are available in-market on the RSN, with the exception of any exclusive nationally televised game.

There is an argument that the national networks compete with RSNs for viewers, as most local fans want to watch/cheer for their local teams. The reason RSN sports rights are so valuable is that they own exclusive in-market rights. So in any given market across the nation, most local fans will prefer to watch the RSN over a national telecast of other teams.

The Fox Regional Sports networks' market share of affiliate fees is huge at 49%, with Comcast Corp. being the No. 2 player.

The DOJ could argue that the RSNs paired with ESPN would give the Walt Disney Co. significant leverage with multichannel operators, which would allow them to significantly increase prices to distributors, and, in turn, increase prices for consumers. As the graphics below show, ESPN and the Fox RSNs together would account for 30% of all affiliate fees for basic cable networks and RSNs, and a massive 58% of affiliate fees for basic cable sports networks and RSNs.

The DOJ will likely focus on Walt Disney becoming the majority owner of Hulu LLC, a major growth engine in both OTT in the U.S. and VSP with its still-in-trial Hulu Live offering. Although the partnership agreement related to Hulu has not been made public, there have been numerous leaks in the press about the partners requiring unanimous consent of the three 30% shareholders — Comcast/NBC Universal, Walt Disney, and 21st Century Fox (Time Warner Turner holds a 10% equity stake) — for major strategy decisions.

Rich Greenfield (co-head of research, managing director and media and technology analyst at BTIG LLC's research division) wrote in December that many investors believe Disney wants to buy Comcast's 30% stake and fold Hulu into its streaming service. However, it's extremely unlikely Comcast would sell its interest in Hulu, as this would only hurt Comcast's video business if Hulu were exclusively available only as part of a Disney bundle.

In addition, Greenfield wrote that he believes that this refusal will ultimately result in Walt Disney selling its stake in Hulu to Comcast/NBCUniversal.

Many of these issues could be resolved by Walt Disney entering into a consent decree with the government with various concessions, as Comcast did in 2011 to get approval of its purchase of a majority stake, which later became full ownership, in NBCUniversal. The biggest sticking point is likely to be one of the same stumbling blocks in getting government approval of AT&T's acquisition of Time Warner Turner, with the government claiming that AT&T could make a large portion of its content exclusive to AT&T, or alternatively pricing it so high that competitors don't believe it would be economically feasible to carry the channels or license the content. This same issue could be raised in the Disney-Fox transaction.

Stay ahead of breaking news. Our focus is on TMT.
Request Demo

Credit Analysis
‘Death by Amazon’…Don't Believe the Hype

Highlights

Written by Camilla Yanushevsky, with analysis contributions from Melissa Doscher, Senior Manager, Risk Services, and Jim Elder, Director, Risk Services

Is Amazon unstoppable? And if so, what is Amazon’s next target?

May. 23 2018 — From an online bookseller that launched in 1995 to a high-tech conglomerate with global reach, Amazon.com Inc. has a bullseye on every market it touches. Today, Amazon is a retailer, hardware developer, cloud services provider, content streaming service, clothing designer, and, more recently, a home security company with its announcement to purchase Ring Inc. on February 27, 2018.

The company has rallied 37% this year, crushing Wall Street expectations for its first quarter earnings, posting $1.6 billion in profit and prompting nearly two dozen firms to up their price targets on the e-commerce giant. A few of those newly minted price targets place the company north of the $1 trillion threshold.1

Not surprisingly, the market is questioning — is Amazon unstoppable? And if so, what is Amazon’s next target?

How do Amazon’s acquisitions stack up?

Amazon, along with its subsidiaries, has made 96 merger and acquisition transactions since its 1995 launch, the largest being its acquisition of Whole Foods Market Inc. for approximately $13.7 billion, announced on June 16, 2017.

Figure 1: Amazon's largest acquisitions ($M) from January 1, 2008 – April 27, 2018

Figure 2: Amazon’s M&A activity by industry (%)

To compare the disruptive impact of innovation in the various sectors that Amazon has entered, we looked at Amazon’s 10 largest deals announced since January 1, 2008 and examined industry and company-level probability of default (PD) changes using our PD Market Signal Model, a structural model that calculates the likelihood of a company defaulting on its debt or entering bankruptcy protection over a one-to-five year horizon.

Among these 10 major acquisitions, Amazon’s announcement to purchase food retailer Whole Foods Market Inc. on June 16, 2017 was the most disruptive, with the food retail sub-sector PD increasing from 3.73% on June 15, 2017 to 4.85% on June 23, 2017, or by about 30%. We attribute the PD escalation to the sheer size of the transaction, more than 10x the size of any of its past transactions, as well as the saturation within the food retail sub-sector.

But is the Amazon hype overblown?

With the exception of the Whole Foods purchase, our PD Market Signal model shows Amazon may not be the ‘Death Star’ it is hyped up to be. Seven of Amazon’s 10 largest acquisitions –Annapurna Labs Ltd. (Semiconductors), Souq.com FZ-LLC (Internet and direct marketing retail), Elemental Technologies LLC (Application software), Ring Inc. (Consumer electronics), Zappos.com Inc. (Internet and direct marketing retail), Twitch Interactive Inc. (Internet software and services), and Audible Inc. (Internet software and services)had a positive impact on the short-term market perceived quality of the target industry, with the magnitude of PD changes significantly greater for Amazon’s more recent acquisitions Annapurna Labs Ltd. (01/22/2015), Souq.com FZ-LLC (03/28/2017), and Elemental Technologies LLC (09/03/2015).

By contrast, only slight PD changes were observed for acquisitions during Amazon’s earlier years – Zappos.com Inc. (07/22/2009), Twitch Interactive Inc. (08/25/2014), and Audible Inc. (01/30/2008) when the market perception of the “Amazon Effect” was less in full flight.

In the case of Amazon’s most recent announcement to buy Ring Inc. for $992.8 million, we attribute the positive impact – the median PD for the consumer electronics sub-sector decreased 13.76% from 9.45% on February 26, 2018 to 8.15% on March 6, 2018 – to the lack of a ‘surprise factor.’ Amazon had previously invested in Ring through the Alexa Fund, which exclusively provides funding to Alexa-enabled devices.

Figure 3: One-week median U.S. Industry Market Signal Probability of Default change following Amazon’s acquisition announcement: January 1, 2008 – April 27, 2018

On a company-level, the “Amazon Effect” is more obvious. For example, significant escalations in PD were observed for both small- and large-cap companies in the peer groups of the acquired companies. Small-cap WOD Retail Solutions Inc.’s one-year PD increased from 0.12% on August 24, 2014 to 1.81% on September 1, 2014 (1,409.73% change) following Amazon’s announcement to acquire live streaming video platform company Twitch Interactive Inc. Similarly, Alphabet Inc.’s PD rose 170.75% from .03% on January 29, 2008 to .08% on February 6, 2008, following Amazon’s decision to buy Audible Inc., one of the world’s largest audio entertainment and information providers, on January 30, 2008.

Figure 4: Amazon’s target peer group: Largest changes in One-Week Market Signal Probability of Default following acquisition announcement, January 1, 2008 – April 27, 2018

What is Amazon’s next battleground?

While Amazon’s plans with Ring have yet to be disclosed, the deal certainly gives Amazon a leg up on Google and Apple in the smart home market, which many market participants expect to be Amazon’s next battleground. Ring already supports Amazon’s virtual assistant Alexa, which Amazon’s Director of Applied Science and Alexa Machine Learning, Ruhi Sarikaya, recently announced will soon be able to track memory and context.2

Ring, alongside Alexa can be leveraged with the smart lock system, Amazon Key, to facilitate the safe delivery of Amazon products in home. In just a few years, the trifecta Ring-Key-Alexa integration could lead to a completely new home landscape from security, to deliveries, and even lifestyle. Intelligent personal assistants, smart keys and video doorbells could be as ubiquitous as television sets.

While the immediate impact of the Ring acquisition might have had a positive impact on the sub-sector’s PD, this move might provide a glimpse into how disruptive Jeff Bezos’ longer-term strategy might be. With its smart doorbells and security cameras, Ring literally opens the door for Amazon to start selling services, not just goods. Is the market letting a giant through the front door?

Would you like to learn more about the credit risk solutions and sector data used in this article's analysis? Request more details

1 McDonald, L. (2018, May 08). Why Amazon could be the next black swan for the market.

2 Making Alexa More Friction Free (April 25, 2018). Retrieved April 27, 2018.

Beyond Amazon, Alibaba Leads Disruptive Innovation In Race To $1 Trillion Valuation

Learn More

Listen: Street Talk Episode 23 - As More Banks Reach for Yield, Advisers Urge Caution

More banks are reaching further out the yield curve in their loan portfolios to meet customer demands but, increasingly, advisers believe institutions need to proceed with caution. In the episode, experts from PIMCO, Sandler O’Neill, Chatham Financial and PrecisionLender discuss rate risk and how banks focused on funding will ultimately prove the winners.

Street Talk is a podcast hosted by S&P Global Market Intelligence.

Follow on SoundCloud and iTunes.

No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor's Financial Services LLC or its affiliates (collectively, S&P).


Technology, Media & Telecommunications
National Broadband Initiatives Crucial To Asia-Pacific Broadband Market Success

Highlights

The following post comes from Kagan, a research group within S&P Global Market Intelligence.

To learn more about our TMT (Technology, Media & Telecommunications) products and/or research, please request a demo.

May. 17 2018 — This year's Broadband Forum Asia, held in Bangkok, Thailand, April 24-25, focused on ways to accelerate the growth of fixed broadband markets in developing countries. Looking at the success of advanced fixed broadband markets in the Asia-Pacific region, executives agreed that government participation is crucial to success.

In 2013, the Chinese government launched the Broadband China initiative with an investment of $323 billion and a target of full nationwide broadband coverage by 2020. The government has focused on accelerating fiber deployments, driving fiber's share of broadband households from 21.6% in 2013 to 84.2% in 2017. China has also become the world's largest fixed-line broadband market with an estimated 348.5 million subscribing households at year-end 2017.

Similarly, Vietnam's broadband initiative aimed at driving economic growth through fiber deployments accelerated fiber's share of broadband households from 47.4% in 2015 to 77.5% in 2017. Although the country's broadband penetration rate remains relatively low, Vietnam is one of the fastest growing fixed broadband markets in the Asia-Pacific region. Le Trung, deputy director of the infrastructure development center at FPT Telecom, said Vietnam is on the right track in terms of migration from asymmetric DSL, or ADSL, to gigabit passive optical networks, or GPONs. Trung further explained that FPT is positive about achieving 10 Gbps PON connections in the future after reducing its CapEx and operating expenses through advanced technology, including the use of software-defined networking optical line termination, or SDN OLT.

Broadband and fiber penetration by market in 2008 (%)Broadband and fiber penetration by market in 2017 (%)

Harin S. Grewal, cluster director of networks and technology for Singapore's Info-communications Media Development Authority, or IMDA, noted that the government provides grants of up to S$750 million (US$569 million) and S$250 million (US$190 million), respectively, to network companies (responsible for passive infrastructure including wirelines and ducts) and operating companies (responsible for active infrastructure including switches and routers), both for a license period of 25 years. In return, operators are obliged to meet fiber rollout and adoption targets under this initiative, called the Next Generation National Broadband Network, or NGNBN.

As of April, 13 operating companies are funded by NGNBN in Singapore while the number of retail fixed broadband service providers has increased to 28 from three when the program was launched in 2010. With the entry of more operators, Singaporean broadband subscribers enjoy competitive services and pricing with an average revenue per user of $25.33 and affordability index of 0.3% based on the market's 2017 per capita gross national income purchasing power parity.

Speed is another important indicator of the success of a broadband market. The Singaporean government requires new operators to reach a minimum of 100 Mbps peak downstream bandwidth and 50 Mbps peak upstream bandwidth per end-user connection by its launch; they are also expected to improve with downlink bandwidths exceeding 1 Gbps in the future.

Singapore achieved nationwide fiber coverage in mid-2013 and fiber is being deployed in new buildings. Hong Kong, on the other hand, struggles to extend fiber coverage to remote locations such as villages and outlying islands. Government plans to subsidize operators for expanding fiber coverage to about 380 villages is expected to drive marginal growth of the broadband market.

Global Multichannel is a service of Kagan, a group within S&P Global Market Intelligence's TMT offering.

As of April 25, 2018, US$1 was equivalent to $1.32.


Energy
Electric Vehicle Infrastructure: U.S. Utilities Getting Charged Up, but Are Regulators Plugged in to the Concept?

Highlights

Electric vehicles allow consumers to realize transportation fuel savings and states to meet their emissions-reduction goals, and offer utilities a unique business opportunity. A recent report identifies regulatory initiatives that address the issue.

Until a few years ago, the nation's electric utilities had little direct interest in the automotive industry. While fleet vehicles have always been part of the utilities' infrastructure maintenance and customer service activities, and utilities with auto industry customers have always been impacted by the sector's overall health, few people recognized the full direct impact that electric vehicles, or EVs, could have on the utilities' business prospects until it became clear that EV technologies were viable, and that consumers were willing to begin moving away from vehicles with combustion engines. It is now becoming apparent that EVs could foster significant new demand growth for the electric utility sector after more than a decade of sluggish to negative growth in most parts of the country.

In addition to allowing consumers to realize significant transportation fuel savings and certain states to meet their ambitious emissions-reduction goals, EVs clearly offer the utilities a unique business opportunity. Electric sales for most utilities have been flat for several years due to sluggish economic growth and widespread adoption of conservation initiatives, and EV investments and, more broadly, increased use of electricity to charge EVs could be a boon to many utilities in the years ahead.

While many utilities have indicated interest and plans to pursue opportunities in the EV market, quantifying investments is a challenge due largely to companies not providing a clear delineation of commitments to capital costs, versus expense allocations.

Based on a preliminary analysis of the EV sector, Regulatory Research Associates, an offering of S&P Global Market Intelligence, has discerned certain key trends, as summarized below.

  • In states that have a strong focus on renewable energy development and alternative energy technologies, the backbone charging infrastructure for EVs is more developed than it is in those states that have been reluctant to adopt policies supportive of the industry. For example, California, which has been supportive of the nascent EV sector, leads the nation both in terms of the number of EVs in use and the number of charging stations, and has been a leader in calling for more stringent emissions reductions.
  • A significant issue that utility commissions are grappling with is whether third-party entities that own EV charging stations should be treated like regulated utilities due to the fact that they are essentially resellers of electricity. Utilities in some jurisdictions are interested in investing in charging stations and seeking rate base treatment of their investments, while utilities in other jurisdictions are primarily focused on ensuring that adequate distribution infrastructure is in place to support third-party charging stations and the beneficial impact that EVs are expected to have on electric sales.
  • There is a need to design time-of-use rates to incentivize off-peak EV charging, thereby minimizing adverse effects on the larger distribution grid. In fact, if structured correctly, funneling load to off-peak periods could smooth out demand, creating less dramatic peaks and valleys, thereby allowing the grid to operate more efficiently.
  • Certain regional approaches are being taken to standardize EV policies and infrastructure development. For example, in 2013, the governors of eight states, namely California, Connecticut, Maryland, Massachusetts, New York, Oregon, Rhode Island, and Vermont, established the ZEV Program Implementation Task Force, which is a coordinated approach to support policies to foster the development of EV markets and the required charging infrastructure, and "remove barriers to the retail sale of electricity and hydrogen as transportation fuels and promote competitive plugin electric vehicle charging rates."
  • In October 2017, the governors of Colorado, Idaho, Montana, Nevada, New Mexico, Utah, and Wyoming signed a memorandum of understanding that calls for collaboration to create an "Intermountain West Electric Vehicle Corridor." The agreement calls for promoting EV market development and establishing standards for EV fast-charging corridors across these states.

Although the ZEV Program Implementation Task Force and the agreement to create the Intermountain West Electric Vehicle Corridor are perhaps the most disciplined attempts to date to standardize EV related policies for maximum efficacy, many other jurisdictions are addressing the matter on a case-by-case basis.

For further information concerning key regulatory initiatives, prominent legislation, and noteworthy proceedings addressing generic EV related matters, refer to RRA's Special Report dated May 2, 2018.

Related Content:

Insights Into Rate Case Proceedings And Other Major Regulatory Activity Pending For U.S. Energy Utilities

Learn More
Request a Demo