Week In Review: Sinclair/Tribune Falls Apart, Disney Wins America

1. Sinclair/Tribune Falls Apart

The biggest surprise of Merger Season 2018 came last week when FCC Commissioner Ajit Pai seemingly put the brakes on Sinclair’s purchase of Tribune, a deal everyone in the industry thought was a slam dunk.

Why It Matters

Sinclair is the nation’s largest owner of local TV stations (they own 192) and while Tribune only owns 42, their stations are in major markets like NYC, Chicago and Los Angeles. The resulting merger would have put Sinclair well over the 39% limit on how many local broadcast stations any one company can own. (The FCC did this back in the day to prevent any single company from dominating American media the way, I don’t know, Google and Facebook now do. That’s why local broadcasting stations aren’t all owned by the Big Four networks. Because they can’t.)

So in order to pave the way and make things easier for to-the-right-of-Fox Sinclair, Chairman Pai reinstated an old ruling that said that UHF stations only count for half of VHF stations when totaling up how many stations a single company owns. Which brought the total number of stations Sinclair would own down from 59% to 38%

For those of you born any time after say 1975, a UHF station was one that was at Channel 14 or higher on a TV dial. That meant the station was on a separate dial (2 to 13, the VHF stations, were on the main dial) and even with really good rabbit ears, those UHF stations were hard to pull in. (My friends and I used to watch Spanish language wrestling on Channel 47 back in the day, and we’d choose to see who had the unenviable task of being the one to hold the antenna and move it around so the station would come in … just barely. Seriously old school.)

So given that most TV is received via cable these days, the Obama-era FCC had done away with that asterisk only to see Pai roll it back, no believable explanation ever given as to justification.

He then did away with some rulings around how many media outlets a single company could own in a given market, also allegedly to help Sinclair. To the point where it was revealed that the FCC's inspector general had opened an investigation into whether Pai was showing favoritism to Sinclair and its expansion plans.

So what happened?

Pai felt that Sinclair was taking advantage of him. Bigly, as the President might say.

Stating that he had “serious concerns” about the $3.9 billion deal, Pai and the FCC voted 4-0 to send the case to an administrative law judge, aka Purgatory, where the deal is sure to die. (That’s what happened to Comcast’s proposed takeover of Time Warner Cable.)

Elaborating on that, Pai stated that “The evidence we've received suggests that certain station divestitures that have been proposed to the FCC would allow Sinclair to control those stations in practice, even if not in name, in violation of the law.”

Ouch.

Those stations are WGN in Chicago, Tribune’s flagship station, which was being sold to a group headed by a businessman who was close with Sinclair’s executive chairman, along with two stations in Texas. To illustrate how these deals, called “sidecar deals” work, in the WGN deal, Sinclair would get $60 million in the sale, but would then continue to sell advertising and provide programming for WGN's new owners. For which they'd get 30% of WGN’s revenue.

30 percent. No wonder Pai was pissed.

Sinclair offered to redo the deals, but it doesn’t look like that will matter and unless there’s a major reversal—unlikely given the amount of negative publicity that Pai and Sinclair have received this past week—it’s a goner.

What You Need To Do About It

Don’t mess with Chairman Pai.

Don’t count your chickens before they hatch.

And don’t get greedy.

Otherwise, not much to do here but sit back and marvel over all the various machinations and the overall complexity of America’s local broadcast ecosystem.

2. Disney Wins America

Meanwhile, the deal whose outcome has been occupying much of the media came to half a conclusion this week when Comcast announced it was pulling out of the race to win Fox’s US assets and would concentrate on winning satellite provider Sky instead.

Why It Matters

Disney is winning a lot less than most people seem to realize. They’re getting all of Fox’s cable networks, the award-winning FX being the big prize there, and Twentieth Century Fox film and TV studios, two big production houses. But Fox is keeping the Fox Broadcasting Company (the main network), Fox Sports, all the RSNs, and Fox News.

So Disney is mostly paying to dominate the production game, which, given the vast amount of production going on right now, especially via the FAANG Gang, is not a bad game to be in.

And paying they are: at the start of the battle back in December, Disney was going to pay Fox $52.4 billion. Now they’re down for $71.3 billion, or almost $20 billion more dollars for the exact same assets. 

Nice going Brian Roberts.

The Sky assets, which include satellite broadcast networks and OTT services in Europe and India, are valuable to anyone looking to get into the international game, an important consideration given how broadly Netflix is covering the world, ditto Amazon, Google and (especially) Facebook.

The real prize seems here to be Sky India, where their Hotstar OTT service controls 70% of the market which is projected to grow to $2.4 billion by 2023, with potential to grow even more, given the size of India’s population.

So there’s that.

There’s also the fact that Disney’s board may say “enough” now that they’ve overspent for the US properties and essentially cede Europe to Comcast.

Time will tell.

What You Need To About It

Everyone needs to watch what is going to become of Hulu.

Disney will now own 60% of it, Comcast 30% and AT&T 10%. Most people are thinking that Comcast will sell its 30% to Disney, who can then make Hulu the “adult-oriented” OTT app it’s been wanting to start. But given that there are a whole lot of moving pieces there, we can’t be too sure. Comcast could make Disney’s life difficult if they wanted to be sore losers about it. Unlikely and not in anyone’s interest, but you never know.

Or Disney could launch their own adult app anyway, and keep Hulu as a third asset.

Or they could draw on all those studios they now own and use them to produce original content for Hulu so they can really take on Netflix and Amazon. (Remember that Hulu has way more library content than either, so adding on original content would make it an even more attractive service. And it's ad-supported. Mostly.) 

The other piece to watch is what Disney does with their child-oriented OTT property, when they launch it, what programming they have on it and all that.

Ditto what Fox is planning to do with its broadcast properties and if it will continue to play with Hulu once it’s no longer an owner.

Then there’s what happens with Sky: will Fox step in to try and block Comcast? Will the UK government approve a Comcast deal?

And what will Comcast do with Sky if it succeeds in buying it? Comcast lacked any sort of OTT app the last time we checked, though they seem to be making noises about how you can use Xfinity the service without X1, the set top box, and that may be the key to what their plans are in Europe and Asia.

Stay tuned.