UC Davis's Hemant K. Bhargava, the University of Missouri's Randall D. Smith and Ian Whittaker of Liberum discuss Comcast's bid to buy U.K. satellite TV operator Sky.

Comcast recently made a surprise $31 billion bid to acquire Sky, a major satellite TV operator based in the U.K. In doing so, the world’s largest media conglomerate stepped into the neatly sewn merger plans of two other global entertainment behemoths — 21st Century Fox and Disney. Months before, Fox had agreed to sell most of its assets to Disney, including a 39% stake in Sky, for $52.4 billion plus debt. Now with Comcast suddenly in the picture, the outcome of their agreement is unclear.

“They are trying to throw a monkey wrench into the Disney-Fox deal,” said Wharton emeritus professor of business economics and public policy Gerald Faulhaber, who is a former chief economist at the Federal Communications Commission, which overseas U.S. telecom, broadcast, cable and satellite TV. “This will put the Disney deal on ice.” Wall Street didn’t like the development. Since Comcast’s bid was announced, shares of all three have fallen sharply. As of March 5, Comcast is down 7%, Fox has lost 6% and Disney has dropped by 5.8%.

On February 27, Comcast offered to buy Sky for 12.50 pounds per share in cash. The U.S. Cable giant would accept no less than a 50% stake plus one share and up to 100% of Sky. Meanwhile, Fox itself put a bid months before to buy the rest of Sky it didn’t own for 10.75 pounds per share in cash, or nearly $15 billion, while it was simultaneously selling most of its assets including its 39% Sky stake to Disney.

But in January, U.K. regulators said the Fox-Sky deal was not in the public interest since there will be media concentration in the hands of Fox founder Rupert Murdoch. The Murdochs own several U.K. papers — The Sun, The Times and The Sunday Times. James Murdoch, son of Fox Chairman Rupert Murdoch, is the chairman of Sky. According to the BBC, a third of the people in the U.K. get content from TV, websites, radio and papers controlled by the family. The British government will make a final ruling on whether or not to allow the deal to go through after May 1.

The deal isn’t exactly popular. “There have been a number of calls by politicians from the opposition to block this bid. It would lead to too much concentration of news within the Murdoch family,” said Ian Whittaker, head of European media research at Liberum Capital on the Knowledge at Wharton show on SiriusXM channel 111. In particular, the Murdoch’s right-leaning newspapers are anathema to some groups. ”The Murdoch family is a bit of a bete noire [disliked thing] to people on the left of U.K. politics,” he said.

Comcast saw an opening. “A confluence of events has occurred as we all know with Sky and with Fox,” said Comcast CEO Brian Roberts in a conference call with analysts on February 27, the day it made the surprise bid. “It dovetailed with our own curiosity and appreciation of Sky.” Indeed, a Comcast bid would be less controversial, said Kevin Werbach, Wharton professor of legal studies and business ethics who used to work at the FCC. “The U.K. competition regulators may prefer Comcast, which doesn’t have as much of a footprint in Europe, over further empowering Rupert Murdoch’s companies.”

“This will put the Disney deal on ice.”–Gerald Faulhaber

Roberts made a business case for Sky. “Comcast and Sky are the perfect fit,” he said. “We’re both strong leaders in creating and distributing content. Our strong market positions are complementary.” Comcast is the largest U.S. cable and broadband operator, with 29 million customers. Sky, with 23 million subscribers, is the biggest pay TV operator in the U.K., Ireland and Italy, and third in Germany. Comcast would double its subscriber count if it gets Sky and add to its international operations, which currently are fairly small. “Europe is obviously a highly attractive market,” Roberts said. “This acquisition will create a leading platform for growth.”

Comcast Plus Sky

Comcast operates mainly in the U.S. as the nation’s largest cable and broadband operator. It owns NBCUniversal, encompassing the NBC network and TV stations, Universal Pictures and Focus Pictures, a stake in Hulu and the Universal Studios theme parks. It owns animation studios Dreamworks and Illumination, which is behind such hits as Despicable Me. It runs several cable networks including USA, E!, Telemundo, the Golf Channel and regional sports networks. Comcast has the rights to air the Olympics through 2032. It also just started offering mobile phone service.

Sky, like Comcast, is both a content creator and distributor. It has rights to the English Premier League and operates Sky Sports, which is “the ESPN of Europe,” Mike White, former CEO of DirecTV, said recently on CNBC. He said Sky spends $4 billion on content every year, half on originals, half on sports. Unlike U.S. satellite TV companies, which are losing customers, Sky also provides wired broadband service.

But here’s one thing that Comcast could learn from Sky: How to run an online video service like Netflix. Sky has its own version called Now TV, which is in several countries. Comcast has struggled to gain traction over its own “over-the-top” service — so called because the service rides on top of a broadband pipe provided by another company. It recently canned Seeso, which is a comedy show subscription service. Currently, it is testing a reality TV subscription service called Hayu abroad. Meanwhile, Netflix has 118 million subscribers globally — and it’s growing.

Comcast buying Sky would add growth from overseas since cord-cutting is dampening business domestically. “Growth has been relatively slow here in the U.S. and they need to seek new ground to increase their profitability,” said University of Missouri professor Randall Smith, on the Knowledge at Wharton radio show. Indeed, Comcast lost 151,000 net customers last year compared to a gain of 161,000 in 2016 and a loss of 36,000 in 2015. However, it continues to add broadband customers.

“The U.K. competition regulators may prefer Comcast, which doesn’t have as much of a footprint in Europe, over further empowering Rupert Murdoch’s companies.”–Kevin Werbach

A shift of power in the media industry likely is driving Comcast’s bid, said Hemant Bhargava, professor of technology management at the University of California at Davis, on the Knowledge at Wharton radio show. He said there are three “value flows” in media: creation of content, packaging or bundling of the content, and delivery. Content deliverers like Comcast once held most of the cards — networks had to pay operators for carriage. Today, the positions are reversed. “It’s really about the shift in power and shift in market boundaries and the arrival of all these new competitors [like Netflix] that can challenge Comcast on packaging and bundling,” he said.

A Comcast Tactic?

Still, there’s skepticism that Comcast actually wanted to acquire Sky chiefly on its merits. “There was a question mark whether Comcast is doing this because it really wants Sky or whether it’s using this as some sort of negotiating tactic in terms of potentially” bidding for Fox’s U.S. media assets or some other reason, Whittaker said. Comcast was interested in acquiring some of Fox’s assets last year, but the deal went to Disney. With Fox’s assets, Disney could surge ahead of Comcast to become the largest media conglomerate in the world. Currently, it is second and Fox is sixth, according to the U.S. Commerce Department.

A combined Disney and Fox would make it a powerhouse when negotiating content deals, something Comcast, as a distribution channel, can’t let happen. Cable, satellite and telecom TV providers pay billions of dollars a year to secure rights to content from broadcasting and cable networks, as well as sports teams. “It cannot let Disney and Fox become so powerful that it can be held hostage more often in carriage disputes,” Bhargava said. “That may be part of going after Sky in Europe. It may also mean that it expands into a broader effort to get parts of Fox.”

That’s what Faulhaber thinks: Comcast wants to delay the Fox-Disney deal until it can figure out a way to successfully buy Fox’s U.S. assets. “Otherwise, I don’t think it’s a very sensible deal.” If Comcast wanted more overseas business, he said, it could go after another cable company like Telstra in Australia — a better fit because both are cable providers. However, going after Sky “buys them some time” as they wait and see how AT&T’s lawsuit against the U.S. government pans out, Faulhaber said. The Justice Department blocked AT&T’s purchase of Time Warner on antitrust grounds so the phone company sued. “If AT&T loses, my guess is Comcast will back off” pursuing Fox, he added.

“It’s really about the shift in power and shift in market boundaries and the arrival of all these new competitors [like Netflix] that can challenge Comcast on packaging and bundling.”–Hemant Bhargava

Going after Sky poses little regulatory risk for Comcast. “This would be a cross-border transaction, so it raises significantly fewer regulatory and antitrust issues than a domestic acquisition,” Werbach said. However, he noted that while content historically has been segmented by country, today the same content is often distributed globally. “There could be a claim that a Comcast/Sky combination has more power over content providers, similar to the arguments against AT&T acquiring Time Warner,” he said, adding that even if such a deal doesn’t raise traditional antitrust concerns, it will get “very serious scrutiny.

“The pay TV market has changed dramatically in recent years with the growth of ‘over the top’ services like Netflix. Things look very different than in 2009, when Comcast first proposed to acquire NBCUniversal, a deal that was ultimately approved,” Werbach continued. “A Comcast/Sky merger would be a real test case about whether regulators think the changes in the media marketplace have reduced the power of traditional pay TV operators, or actually enhanced the power of those like Comcast that control a broadband pipe into the home.”

What happens next? Smith said Fox, with Disney’s blessing, could put forward a higher bid for Sky. Since Comcast went public with its interest, Fox and Disney have announced that they are still interested in Sky. Another scenario is that Comcast could use its bid as leverage to force some asset trading among the three. For instance, Hulu currently is jointly owned by Disney, Fox, Comcast and Time Warner. They could eventually work it out that one company will own all of the streaming service. “It would actually be better … for Hulu to be majority-owned by a single firm rather than run in this manner” with many chiefs, Bhargava said. Given Murdoch’s regulatory troubles in the U.K., “it might actually be easier for Comcast to acquire Sky and in that case the trading of other assets might be part of the agreement that works out.”