What Net neutrality has to do with the Fox-Disney deal and Netflix

By purchasing Fox, Disney will be able to flesh out its Internet service with thousands of Fox titles, making it far more attractive to video buffs.Drew Angerer/Getty Images

In Washington, the Federal Communications Commission Wednesday afternoon set aside Obama-era regulations aimed at ensuring “Net neutrality.” Meanwhile, in Los Angeles, Walt Disney Co. announced a $52.4 billion acquisition of most of the legendary Hollywood studio 21st Century Fox. And in November, the Department of Justice sued to block the $85 billion megamerger between telecom giant AT&T Inc. and TV and movie titan Time Warner Inc.

How are these three events connected? Right through the Internet. Disney and Fox plan a big push into streaming video, and they need a free, unimpeded Internet to make sure everyone can watch their programs. But the FCC’s retreat from Net neutrality could enable AT&T to set up Internet toll booths and charge hundreds of millions of dollars to distribute video from rival firms.

Why is Disney buying Fox?

One of the biggest motivations behind Disney’s deal is its plan to become a major provider of video entertainment on the Internet. Right now, Disney’s products are mostly distributed in movie theaters and over broadcast and cable TV. But movie ticket sales have been stagnant for years and plummeted in 2017. Americans, especially young millennials, are watching less traditional TV. Instead, the growth is online, as millions do their viewing through streaming services over the Internet, such as Netflix, Amazon, and Hulu.

Over the next year, Disney will launch two subscription streaming services, one connected to its ESPN sports network and another that will specialize in TV shows and movies from the Disney library, as well as original material. By purchasing Fox, Disney will be able to flesh out its Internet service with thousands of Fox titles, making it far more attractive to video buffs.

But reruns are not enough. Rival Netflix has transformed the industry by spending billions of dollars on new TV shows like “The Crown” and “House of Cards.” Owning Fox, which makes popular TV series such as “The Simpsons,” “Family Guy,” “Modern Family,” and “Homeland,” will help Disney crank out lots of new material for its Internet service.

Why do the Feds object to AT&T owning Time Warner?

AT&T is one of the nation’s biggest providers of cable TV, satellite, and Internet service. Time Warner produces many of cable’s most popular networks, including CNN and HBO. In its lawsuit seeking to block the merger, the Justice Department warned that a merged AT&T-Time Warner would be in a position to force competing cable companies, such as Comcast Corp., “to pay hundreds of millions of dollars more per year for Time Warner’s networks.”

Won’t Justice also try to block the Disney-Fox deal?

Perhaps. Indeed, it’s the kind of merger that is more likely to face a challenge. That’s because Disney and Fox are in the same business — producing TV shows and movies. Merging them would lead to reduced competition in the entertainment industry, and that might well set off alarm bells.

By contrast, AT&T and Time Warner are in different businesses. Also, in 2011 the Justice Department approved a similar deal between Comcast and movie maker NBC Universal. That’s why some were surprised when the Justice Department intervened against AT&T-Time Warner, and why many believe that the federal courts will ultimately approve the deal.

What has all this to do with the FCC decision to repeal Internet traffic rules?

Remember that Net neutrality is the principle that all traffic on the Internet should be treated exactly alike by the broadband networks that carry the data. Networks such as Comcast Corp. and AT&T Inc. are not supposed to block or slow down traffic of any Internet user, in order to censor information, gain a competitive advantage, or use it as a lever to extract higher payments. Also, network operators are not supposed to practice “paid prioritization,” a policy in which some companies might pay them to have their traffic delivered faster or more efficiently than that of other companies.

On Thursday, the FCC set aside an Obama administration decision to regulate Internet companies like public utilities in order to protect Net neutrality. Critics of the new policy warn that companies like Comcast or AT&T are now free to take steps that could harm Disney’s planned streaming services, which could compete with the in-house content they are also trying to sell to consumers. They might block its Internet streams, degrade its video quality, or demand additional fees to ensure that viewers would be able to watch Disney shows.

Comcast might attempt such interference to make people watch its own video offerings instead of Disney’s. If AT&T acquires Time Warner, it would have a similar incentive to block or throttle Disney content. They could even play rival streaming services off each other, selling off faster bandwidth to the highest bidder, while the loser is stuck in the slow lane.

But FCC chairman Ajit Pai argues that another government agency, the Federal Trade Commission, has the authority to prevent any abuses.

Moreover, there are moves afoot in Congress to wade back into Net neutrality that have attracted some Republicans. Some want the Congress to order the FCC to keep the Obama-era rules, while others favor a completely new law specifically drafted to deal with the issue.