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VOLUME 5 | NUMBER 1 | SPRING 2018

Circular Integration in the Entertainment Industry:
Good for Business or ‘Over-The-Top’ Antitrust Violations?

Jeremy M. Evans


Jeremy M. Evans-photo
Jeremy M. Evans
Jeremy M. Evans is the Managing Attorney at California Sports Lawyer®, representing entertainment, media, and sports clientele. Evans is an Outreach Captain for the Sports Lawyers Association and is an award-winning attorney and community leader based in Los Angeles. He can be reached at Jeremy@CSLlegal.com.

Major studios and entertainment industry titans have recently bought into the belief that breadth is better than specialization [1] as the industry has shifted to digital and over-the-top (“OTT”) direct-to-consumer platforms. Entertainment and technology shareholders and executives have been surveying the market to see where they could expand their service offerings and where content could be obtained to fulfill the needs of the consumer.[2] Disney is launching its own Netflix-style digital distribution platform after having signaled a removal of their content from the service.[3] Disney subsidiary ESPN is also launching ESPN+ for another way to reach consumers with its sports content. There are numerous rumors of buyouts and mergers involving some of the biggest names in entertainment and technology. While this increase in content and methods to consume it offers advantages to the consumer, these mergers may raise significant anti-trust concerns.

According to U.S. code, an antitrust violation occurs when one engages in anti-competitive practices that discourage competition.[4] In the late 1800s and early 1900s, Congress passed legislation including the Sherman Act, the Federal Trade Commission’s Act (which created the Federal Trade Commission), and later the Clayton Act.[5] Later revisions include the Robinson-Patman Act (1936) and the Hart-Scott-Rodino Antitrust Improvements Act (1976) that comprises antitrust law in America.[6] 

Collusion and owning too much of one industry are business practices that often lead to antitrust litigation with the United States Justice Department. The dilemma with today’s economy is that everyone and everything has become digitized and easily moveable,[7] but the law and regulators have had a tough time catching up with the technology. Mergers and acquisitions are harder to recognize today because technology has not moved this quickly since the Industrial Revolution. [8] We should look to history to analogize what is right and what is wrong when it comes to competition in business.

When President Theodore Roosevelt came into office in 1901, major companies also owned large portions of services that touched the lives of nearly all Americans.[9] The difference between today’s mergers and those of the past is that the companies of the early 1900s were all about steel, oil, and railroads.[10] Industrialists like Morgan, Carnegie, and Vanderbilt have now been replaced with a technological-led economy run by Bezos, Iger, and Hastings. While entertainment and technology companies may not be traditional essential service companies, they might be just as guilty of anti-competitive activity.

Digital and technology companies could be considered present-day essential service companies. For example, it would likely be anti-competitive activity if a major railroad company decided to get into the airline business and entirely own the means of moving goods and people. Similarly, movie theaters are not allowed to be owned by distributors (studios) because it would create a restraint of trade for consumers that would enable price fixing and restrict the flow of content.[11] There is arguably little difference between a content provider teaming up with a cable, mobile, or OTT platform, and a traditional studio owning a movie theater. Content platforms like Netflix, Hulu, and Amazon are the movie theaters of today. Antitrust concerns are further implicated because the content distribution platforms are creating content. As history has shown, the entertainment and technology deals being discussed in the trades may eventually be challenged by the Justice Department. The steel, oil, and railroad companies of the 19th and 20th centuries were acting as monopolies for ten to twenty years before the government decided to break them apart.[12]

Today, traditional content distribution has given way to digital distribution—meaning quicker, faster, and more reliable distribution to more people at all times. Studios, content providers, and distribution platforms are seeing the benefits of working with one another or buying the platform(s) altogether. With technological change happening so quickly, it will likely take some time for the existing and proposed entertainment and technology industry mergers and acquisitions to play out before industry competitors complain or the Justice Department steps in to force change. Since we live in an unprecedented time of business cooperation, companies are looking to integrate multiple platforms under one entity in order to reach consumers directly on a 24/7 basis. The entertainment industry is moving towards circular integration, where the content creator is also the talent representative who distributes via an OTT service they own, as opposed to traditional vertical or horizontal integration relationships, business deals, or mergers.[13]

A straight merger, or a horizontal merger, is typically more problematic than a vertical merger. A horizontal merger is where one competitor directly buys another. A vertical merger occurs when a company acquires another company that operates in a different space. One example of a vertical merger is Google’s 2011 acquisition of Motorola. Google bought Motorola for their hardware business. This is not anti-competitive because Google did not have a hardware business at the time. The three entertainment mergers mentioned here are different, however, because the vertical ones raise more anti-trust concerns than the horizontal one.

The Disney-Fox deal provides a good blueprint for modern companies to avoid the anti-competitive traps that befell the steel, oil and railroad businesses. Disney and Fox were wise to split entertainment, sports and news properties instead of attempting a straight merger. A straight merger would raise anti-competitive issues because Fox would cease to exist[14] but the way they structured their deal avoids that problem. Disney got Fox Studios and Fox’s 30% share in Hulu while Fox kept its sports and news services. [15] If Fox had ceased to exist there would be less competition within the industry, which raises anti-trust concerns. This horizontal merger is likely why it received a warmer reception from the justice department than the vertical mergers of AT&T-Time Warner and Viacom-CBS.[16] 

In the horizontal merger, Disney-Fox, Fox would still be in business after the deal was completed and neither company would occupy the same industry. Disney bought the rights to the Marvel properties in order to create future theatrical content as well as content for its proposed OTT distribution platform. This is an attempt to compete with streaming services like Netflix and Amazon. Fox sold its film and television content and used that money to compete in the live sports and news broadcasting space. They recently purchased Thursday Night Football games for 5 years at $3.8 billion starting in 2018. [17]

However, with AT&T-Time Warner and Viacom-CBS there would be less consumer choice and less competition because it would bring together multiple stages of content production, cable and OTT distribution, and contractual control of talent. [18] This would result in super-sized companies that seek to control one industry through the purchase of other companies. If approved by the Justice Department, AT&T-Time Warner would be a company that controls content, news, sports, talent, entertainment, and OTT properties. CBS-Viacom would not look much different. As Lew Wasserman learned years ago, when you own the content, you own the town, and eventually, the government takes notice.[19] 

Whether any, all, or none of the rumored deals and mergers are completed will be seen in the coming months and years. One thing is certain: content providers are becoming a lot smaller in terms of control, but far more expansive in terms of reach. If the Justice Department uses antitrust law to challenge the changing industry, the primary concern for the courts will be whether a company is growing to serve consumers or growing to protect itself from the competition. 

 


[1] Nora Dunn, Is It Better to Specialize or Generalize? WISEBREAD, (Nov. 27, 2009), http://www.wisebread.com/is-it-better-to-specialize-or-generalize.

[2] See generally Jon Lafayette, Moonves Says CBS Has Over 5M Over-the-Top Subscribers, (Feb. 15, 2018), http://www.broadcastingcable.com/news/currency/moonves-says-cbs-has-over-5m-over-top-subscribers/171852 Georg Szalai, Hollywood Earnings Season Trends: Direct-to-Consumer, Cord-Cutting and More, THE HOLLYWOOD REPORTER, (Aug. 16, 2017), https://www.hollywoodreporter.com/news/hollywood-earnings-season-trends-direct-consumer-cord-cutting-more-1029151 Christopher A. H. Vollmer, 2016 Entertainment & Media Industry Trends, STRATEGY&, (2016), https://www.strategyand.pwc.com/trends/2016-entertainment-media-industry-trends.

[3] See Dade Hayes, Iger Says Disney’s OTT Service Will Spend Less On Volume” Than Netflix Due To Strong Brands, DEADLINE, (Feb. 6, 2018), http://deadline.com/2018/02/iger-disney-netflix-ott-spend-less-on-volume-strong-brands-1202279758/; Dawn C. Chmielewski and Dade Hayes, How Disney’s Streaming Dreams And Nightmares Over Silicon Valley Invasion Drove Fox Deal, DEADLINE, (Dec. 14, 2017), http://deadline.com/2017/12/disney-fox-deal-ott-dreams-silicon-valley-nightmares-1202226469/.

[4] Federal Trade Commission, The Antitrust Laws, https://www.ftc.gov/tips-advice/competition-guidance/guide-antitrust-laws/antitrust-laws.

[5] Federal Trade Commission, supra note 4.

[6] Federal Trade Commision, supra note 4.

[7] Maureen K. Ohlhausen, Acting Chairman, U.S. Federal Trade Commission, Antitrust Enforcement in the Digital Age: Remarks Before the Global Antitrust Enforcement Symposium, Georgetown University, (Sept. 12, 2017), https://www.ftc.gov/system/files/documents/public_statements/1253163/georgetown_mko_9-11-17.pdf.

[8] Emily Huang, Industrial revolution vs. Technological revolution, FEDERAL TRADE COMMISSION, (Feb, 4, 2018), https://prezi.com/gbcvwbvjqzj-/industrial-revolution-vs-technological-revolution/.

[9] Theodore Roosevelt Center at Dickinson State University, The Sherman Anti-Trust Act of 1890, http://www.theodorerooseveltcenter.org/Learn-About-TR/TR-Encyclopedia/Capitalism-and-Labor/The-Sherman-Act.aspx.

[10] FTC Fact Sheet: Antitrust Laws: A Brief History, FEDERAL TRADE COMMISSION, https://www.consumer.ftc.gov/sites/default/files/games/off-site/youarehere/pages/pdf/FTC-Competition_Antitrust-Laws.pdf.

[11] United States v. Paramount Pictures, Inc., 334 U.S. 131, 149-151 (1948). (The court held that there was a “restraint of trade by means of arrangements under which many theaters are owned jointly by two or more exhibitor defendants, [and] its requirement that the exhibitor defendants terminate such joint ownership of theaters, and its injunction against future acquisitions of such interests”).

[12] Theodore Roosevelt Center at Dickinson State University, The Sherman Anti-Trust Act of 1890, http://www.theodorerooseveltcenter.org/Learn-About-TR/TR-Encyclopedia/Capitalism-and-Labor/The-Sherman-Act.aspx

[13] Evan Tarver, What is the difference between horizontal integration and vertical integration?, INVESTOPEDIA, (Jan. 10, 2018), https://www.investopedia.com/ask/answers/051315/what-difference-between-horizontal-integration-and-vertical-integration.asp.

[14] Competitive Effects, FEDERAL TRADE COMMISSION, (last visited April 2018), https://www.ftc.gov/tips-advice/competition-guidance/guide-antitrust-laws/mergers/competitive-effects. [“The law bars mergers when the effect ‘may be substantially to lessen competition or to tend to create a monopoly.’”]

[15] Anousha Sakoui, Disney Buys Fox Assets in $52 Billion Split of Murdoch Realm, BLOOMBERG, (Dec. 14, 2017), https://www.bloomberg.com/news/articles/2017-12-14/disney-buys-fox-assets-in-52-billion-breakup-of-murdoch-empire; Paul Bond and Georg Szalai, Will Disney Eventually Split in Two Post-Fox Merger?, THE HOLLYWOOD REPORTER, (Dec. 8, 2017), https://www.hollywoodreporter.com/news/will-disney-eventually-split-two-post-fox-merger-1065902.

[16] Anousha Sakoui, supra note 17.

[17] Alexandra Steigrad, Fox, in $3.3B mega-deal, grabs NFL’s ‘Thursday Night Football’, NY POST, (Jan. 31, 2018), https://nypost.com/2018/01/31/fox-to-pay-more-than-3-billion-for-thursday-night-football/.

[18] Evan Tarver, What is the difference between horizontal integration and vertical integration?, INVESTOPEDIA (Jan. 10, 2018), https://www.investopedia.com/ask/answers/051315/what-difference-between-horizontal-integration-and-vertical-integration.asp.

[19] Connie Bruck, The Monopolist, The New Yorker, (Apr. 21, 2003), https://www.newyorker.com/magazine/2003/04/21/the-monopolist.

             
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