Events in the beginning of March speak to the importance of the international markets and regulators on the forward trajectory of U.S. media and entertainment companies.
1. Disney/Fox Merger Now Has a Closing Date Having Secured Approval from the Mexican and Brazilian Regulators
While the U.S. Department of Justice showed little concern about the significant concentration of the two studios in dominating the U.S. Box Office, it did have concerns about a concentration of sports networks. Disney and Fox have been actively engaged in managing the sale of the Fox Regional Sports Networks after “New” Fox announced they would not buy them. Sports network concentration in Latin America also became a regulatory hurdle internationally.
For years, ESPN and Fox Sports have been fierce competitors in the Latin American pay TV market. The regulators in Brazil and Mexico raised significant concerns about the competitive threat of a combined Fox Sports and ESPN. In fact, earlier in February, Disney CEO Bob Iger flew to Brazil to work out a deal with Brazil’s antitrust regulator, the Administrative Council for Economic Defense (“CADE”), the Brazilian regulatory authority.
While Iger left Brazil empty-handed, CADE approved the deal on February 27 on the condition that the combined company sell the Fox Sports channel in Brazil along with related sports programming.
Then on March 12th, the Federal Institute of Telecommunications (“IFT”) approved the deal on the same conditions as CADE in Brazil. With Mexico conditional approval granted, Disney and Fox are expecting to finalize their merger on March 20th.
What does this mean going forward?
While Disney had great hopes for the power of a Fox Sports/ESPN combination, the pressing need to close the acquisition Q1 2019 took precedence. The regulatory decisions in both Brazil and Mexico, is also a testimony to the sustainability of the power of the leading broadcasters in both countries. Globo (Brazil) and Televisa (Mexico) had raised significant concerns about the competitive threat of a combined ESPN/Fox Sports in their respective countries.
No buyers have emerged as of yet, but there are powerful players in Latin America that are potential purchasers, including Claro (owned by America Movil, the company controlled by Mexican billionaire Carlos Slim) and AT&T (which owns DirecTV Latin America and the Turner Networks which have significant sports investments in Latin America).
2. Sky and the Studios Reach Agreement with the EU
International represents a large percentage of the overall licensing revenues for the large U.S. entertainment studios, with Europe representing the largest buyer overall for studio content. The standard practice is to license content on a country-by-country basis with access to that content to be “geoblocked” from access in other countries.
In 2015, the EU deemed this practice anti-competitive as it prevented broadcasters and platforms from being able to accept unsolicited requests or “passive sales” for their services outside of their home territories, thereby inhibiting the growth of a “digital single market”.
After a protracted negotiation period, Disney, NBC Universal, Sony Pictures, and Warner Brothers agreed on March 7th have agreed to no longer enforce provisions that prevent a European broadcaster from passively selling their services beyond their home territories.
This agreement will also allow EU citizens to have “portability” of their services while traveling to other countries in Europe. At the same time, Sky agreed that it would not enforce territorial restrictions on platforms from other countries which citizens of the UK or Ireland might choose to subscribe to.
What does this mean going forward?
The largest concerns of the studios were that a digital single market would ultimately harm their international content sales. However, the compromise does not prevent them from licensing content on a country by country basis.
It simply allows European citizens who voluntarily want to subscribe to Sky from other parts of Europe to do so. As the Sky service is largely in English, it is likely a net benefit to UK citizens living on the continent.
Ironically, the EU reached this agreement with the US studios and Sky less than a week before Parliament rejected again Theresa May’s proposal for Brexit. Whether this agreement will hold up going forward is still a question mark. Regardless, on the content the EU is already reviewing studio contracts with Sky’s operations in Italy and Germany as well as Canal Plus in France.
You’ll never talk or think about OTT the same way again.