Last week reports emerged that the Department of Justice plans to investigate the recently formed Disney, Fox and Warner Bros. Discovery sports streaming joint venture on antitrust grounds, once terms are finalized. New Street Research analyst Blair Levin in a Tuesday note to investors acknowledged an antitrust investigation poses a material risk until resolved, but said the firm is skeptical the DoJ will block or materially change the venture.
Bloomberg, citing sources familiar with the process, reported regulators plan to look at terms of the JV once it's finalized, over concerns it could harm consumers, media rivals and sports leagues themselves. The JV plans to debut a direct-to-consumer streaming app this fall that would combine assets and include sports rights (on a non-exclusive basis) from the companies, including all linear networks from ESPN, the ESPN+ streaming service, Fox linear sports networks, as well as Big Ten Network, TNT, TBS and TruTV, within one experience.
In a February 20 note to investors, New Street Research analysts said this reportedly covers about 55% of sports rights, based on the cost of acquisition – or would be an app that includes every major sports channel minus CBS, NBC and Amazon (CBS-owner Paramount and Comcast’s NBCUniversal were notably not part of the initial JV announcement).
While an investigation wasn’t certain, the firm isn’t surprised by the news. NSR noted multiple interests in the sports video ecosystem have reportedly asked the DoJ to investigate, so the department signaling it would wasn’t unexpected.
Industry trade organization ACA Connects and sports-focused virtual MVPD Fubo are two entities that put out statements following the JV formation news, each suggesting the move could be anticompetitive. The JV with its planned sports streaming app that includes programming currently only found on traditional linear TV, could pose risks both for pay TV providers already dealing with linear declines, including smaller and independent operators represented by ACA, as well as competitive challenges to Fubo with its sports-focused live streaming TV lineup.
At the time of this writing, Fubo on Tuesday afternoon just announced filing an antitrust lawsuit against Disney, Fox and WBD, alleging a “years-long campaign to block” Fubo’s streaming business, resulting in harm to its business and consumers. Fubo alleges the forthcoming sports streaming JV “steals Fubo’s playbook and is the latest example of this campaign.”
Since the Bloomberg report cited intention for a DoJ investigation once terms are final, NSR suggested in its earlier note Tuesday that it also gives parties involved in the JV that have worries over antitrust consequences more negotiating leverage to reach terms that might alleviate concerns before the need for an actual government intervention.
“We think a key point will be to maintain incentives to bid against each other for sports rights and that the app remain a non-exclusive home for the sports programming,” wrote the analyst.
NSR thinks a DoJ investigation can provide a forum for other players to share their assertions on what harm it might cause, but the firm doesn’t expect the government to dash the JV’s plans.
Levin wrote, “we are skeptical that the DoJ will ultimately conclude that the new app creates harm to competition” and doubtful it will block or materially change the joint venture. That is in part because sports leagues - which had reportedly been spurned and not too happy with news of the app after supposedly being left out of discussions of the JV ahead of time - “are themselves monopolists who benefit from exemptions to the antitrust law.”
‘Sports Antitrust Paradox’
In unpacking considerations of a DoJ investigation, NSR cited the “Sports Antitrust Paradox” (a phrase they noted is in homage to two pivotal antitrust law writings), where the firm doesn’t see the DoJ using its antitrust tools to help sports leagues that, by some definitions, are monopolies themselves. It’s also in an environment where the formation of the combined app is, in part, a response to the decline in traditional linear television alongside increased migration to streaming and continued rising costs for sports rights.
One of the key challenges to the deal, according to NSR, is that the JV reduces options for sports leagues to sell their rights.
“While this may be true, the stated intention of the deal and economics of the deal may make it so that members of the JV still compete in buying rights, as they all continue to have their own brands and distribution options,” wrote Levin.
Disney, for example, has said it will have linear networks, continue to offer a standalone ESPN+ app, and still plans to introduce a flagship ESPN direct-to-consumer streaming option in 2025.
According to Levin, one question the DoJ is likely to investigate is whether the JV entities’ incentives to continue to bid against each other for rights have been materially reduced. However, while the allegations might be true, fewer options for selling sports rights might not materially impact the leagues, the analyst continued.
“So, the joint venture and investigation involve a ‘sports antitrust paradox’ in which the legal question involves what are the limits in parties combining forces to address the higher costs inherent in negotiating with sports leagues enjoying a monopoly position?” wrote Levin. For example, the NFL is the only entity selling rights to U.S. professional football, the firm stated.
In support of its skepticism that the DoJ will won’t block or materially change the JV, NSR pointed to the importance of product and geographic market definitions. It doesn’t see 2018 as a precedent, when Disney was seeking to acquire assets of 21st Century Fox and the DoJ forced Disney’s divestiture of 22 Fox-owned regional sports networks to alleviate antitrust and harms to competition concerns related to the cable sports programming MVPD market. But NSR noted that under the new JV, there isn’t a single owner of the sports rights, as they remain independent but marketed as a combined app, on a non-exclusive basis. The 2018 precedent also might not stand, according to NSR, as cord cutting trends and more streaming players vying for major rights have meant changes in the sports programming and video market.
“In addition, as the app is not the exclusive distributor of any of the programming, we think it may prove difficult to establish an antitrust harm,” wrote Levin. In addition to NSR thinking it would be unusual or ironic for the DoJ to use antitrust law to the benefit sports leagues enjoying monopolistic positions themselves, “it would also be odd to use its tools to undercut a JV that is competing for sports rights” against tech giants Google, Amazon and Apple (which are entities NSR noted the DoJ and FTC has or will sue on grounds they use monopoly power illegally).
Lastly, NSR pointed out that nearly all of the U.S. population has access to a large amount of sports programming for free via over-the-air (OTA) broadcast.
“The fact that the percentage who watch it that way is declining does not take away from fact that it is available and provides something of a competitive check on prices rising too high for alternative platforms,” wrote Levin.
And before an investigation is complete, NSR thinks there are likely to be events that affect the outcome, including: non-participating entities taking steps to increase leverage in negotiations, such as Comcast and Paramount’s reported discussions to combine Peacock and Paramount+ through a partnership or JV, a scenario where the firm does see antitrust issues but thinks the DoJ’s stance to one JV could signal or restrain its approach to the other; as well as impacts stemming from potential personnel changes from the 2024 presidential election outcome.