Should the Studios Be Broken Up?

Should the Studios Be Broken Up?

How Hollywood Skirts Anti-Trust Law

By Micah Long

“There’s no business like show business!” Hollywood is unique among the thousands of industries in this country. It is a place of insider expertise and “in-the-know secrets.” One does not succeed in Hollywood without knowing the right people. As a result of its relational style, Hollywood has had frequent brushes with antitrust law throughout its history. 

The movie industry evolved through three main eras. All three were marked by significant antitrust litigation. The first era began soon after the industry was born. From 1888—when Edison invented one of the first moving picture cameras—to around 1915, a single trust dominated the film industry. The Trust, as it came to be known, controlled the patents to most of the camera technology on the market. The Trust’s market power allowed it to license camera technology to movie producers for exorbitant fees.

The second era of Hollywood began in 1915 and lasted until 1948. During this time, a small number of firms (known as studios) controlled all three stages of production: film production, distribution, and exhibition. However, the studio system ended abruptly with the U.S. Supreme Court’s decision in United States v. Paramount Pictures, Inc., an antitrust case filed in 1938 against the studios for their control of major movie theater chains.

The third era began with the Paramount litigation, which lasted for eleven years and changed the face of the movie industry forever. The Paramount decision culminated in three new legal rules that governed the movie industry: “(i) no direct or indirect intervention in admission price setting by producers and distributors; (ii) no licensing negotiations except on theater-by-theater and movie-by-movie bases; and (iii) no vertical integration between” the Trust and exhibitors. The Court intended these rules to open the market to independent producers and distributors, to allow exhibitors to select which movies they would show, and to remove artificial constraints on ticket pricing. Paramount forced the separation of exhibition from production and distribution, bringing the studio system crashing down with it.

The Paramount decision marked the end of an era. The financial structure of the industry did not change, but forced divestment of studios’ exhibition assets left the studios without a safety net of guaranteed access to box office revenue. The studios may have lost control of movie exhibition with the Paramount decision, but the studios still retain their control over distribution. Since the 1950s, the studios have slowly been rebuilding their control over the movie industry. The studios have been consolidating through periodic waves of mergers that occurred in the 1980s, 1990s, and mid-2000s.

The pace of consolidation has only increased since the turn of the new century. In 1983, 50 companies owned 90 percent of the media consumed by Americans. By 2012, just six companies controlled that 90 percent. The “Big Six,” as the six largest studios are collectively known, is comprised of 20th Century Fox, Warner Bros., Paramount Pictures, Columbia Pictures, Universal Pictures, and Walt Disney Pictures. Disney and Universal alone carried off most of the profits in 2016. Together, Disney and Universal managed to grab 70 percent of total industry profit this year. 

Antitrust law is designed to prevent anticompetitive strategies. The highest level of scrutiny is reserved for mergers of massive corporations that are seeking to join with competitors in the same industry. The Supreme Court created a three-step test for antitrust merger analysis in Brown Shoe Co. v. United States. The Court found that determining whether there has been a violation of antitrust law required (1) defining the relevant market; (2) estimating the merging firms’ strength in the relevant market; and (3) examining industry and transaction-specific factors.

Hollywood has taken advantage of this laxity with animal ferocity. The age of media consolidation is far from over. Just last year, Comcast bought DreamWorks Animation Studio for $3.8 billion, sparking speculation that the entire industry will soon experience another round of large-scale consolidation. Currently, Viacom is hunting for an investor in Paramount Pictures, Lionsgate is looking for a buyer, and a Chinese company, Dalian Wanda, agreed to purchase Legendary Entertainment last year. Before this year is over, even more of the industry is likely to fall under the sway of the studios.

The consolidation of power in the entertainment industry hurts everyone. It hurts the viewers because the studios only make programs that fit the mold. It hurts producers because they are forced to make the content that the studio demands. It hurts actors, whose employment opportunities are severely curtailed by the studios. If an actor clashes with an executive at one network, he could find himself blackballed in that studio’s entire network of subsidiaries. Consolidation hurts everyone except the studios.

Most modern antitrust litigation is concerned with mergers between large competitors. The court and federal regulators pay special attention to horizontal mergers and acquisitions. Section Seven of the Clayton Act prohibits mergers and acquisitions where the effect
“may be substantially to lessen competition, or to tend to create a monopoly.” Yet Hollywood has gotten a free pass from government antitrust prosecutors since the Paramount decision in the 1940s. There have been no serious antitrust challenges to Hollywood studio mergers since the 1950s, even though the deals keep growing larger.

Hollywood should not escape scrutiny simply because it is already consolidated. Existing oligopolies are more dangerous than contemplated ones. It only makes sense to place mergers under special scrutiny if huge corporations have not already been allowed to unlawfully merge in the past. The three-step process applied by the court in Brown Shoe needs to be applied not only to contemplated mergers, but also to existing anticompetitive markets. The Supreme Court should apply the Brown Shoe framework to Hollywood’s existing oligopoly.

If the court were to apply the Brown Shoe framework to the existing Hollywood oligopoly, the Big Six studios would almost certainly be broken up. Recall that the test involved (1) defining the relevant market; (2) estimating the merging firms’ strength in the relevant market; and (3) examining industry- and transaction-specific factors. Under the first step, the relevant market could either be defined as the distribution of movies, the production, distribution, and exhibition of films, or the distribution of media. Regardless of how broadly or how narrowly one defines the relative market, under step two, the studios’ strength in the relevant market is overwhelming. The Big Six own 90 percent of all media in this country and much of the rest of the world. That is not just an overwhelming majority; it is a super majority. This market strength does not need to be estimated because the studios already control 90 percent of the market. Finally, under step three, industry-specific factors do not militate for consolidation. New technology has not democratized entertainment. The all-powerful studios still retain an iron grip on media distribution outlets.

The movie industry is an oligopoly that needs to be broken up. Together, the studios control everything about a movie from the price of set materials and wage rate of actors to the price at the box office and the worldview of the content. Under the Brown Shoe test, the movie industry is a heavily concentrated market with no mitigating industry factors or economic headwinds. The Big Six controls 90 percent of all media consumed in the U.S. and most of the Western world. As the saying goes, “power corrupts, and absolute power corrupts absolutely.”  It is just human nature.

EDITOR’S NOTE: Micah J Long is a J.D. Candidate at Liberty University School of Law (2018). This article was first published by the Liberty Legal Journal in Spring 2017 and is published here with permission.