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Today I’m going to write about the Google-Looker merger, as well as the proposed end of the legal structure underpinning Hollywood movie distribution. The movie industry is structured by an antitrust deal cut between the DOJ and studios in 1948 known as the Paramount Consent Decrees, a deal that essentially separated film production and distribution. Trump DOJ chief Makan Delrahim just announced he’s going to ask a court to get rid of this deal. This matters, and I’ll be explaining how.

First, some housekeeping.

• I was interviewed by On the Media about Bill Gates and how he made his money. I was on the last fifteen minutes, but the whole show was very good.

• I have a half drafted issue of BIG on what I call ‘little shitty software monopolies’ like bank management software, nonprofit management software, and so forth. If you have examples, send them my way. And I’m going to be getting back to the “Bob’s” and Office Space fairly soon.

• Thanks for the comments on my book Goliath. Keep sending them so I know what you find useful.

• I was on the Rising with Krystal Ball and Saagar Enjeti yesterday to talk about antitrust, Obama, and the middle class. You can watch that below.

And now…

Google/Looker, Or Enforcement Versus Bragging

Yesterday, Trump DOJ Antitrust Division chief Makan Delrahim gave a speech lauding aggressive enforcement against big tech. He’s been giving speeches like this for quite some time. Here’s a sample snippet.

Over the past several years, we have overcome the mindset that somehow digital markets could not or should not be policed by antitrust law. Many cautioned against antitrust enforcement by arguing that monopoly rents in high-tech markets are fleeting, because the markets move so quickly and because barriers to entry are almost always low.

In recent years, the conversation among antitrust practitioners has evolved, in line with the growing public perception that digital platforms that enjoy durable network effects may be acting anticompetitively.

Delrahim takes credit for “overcoming a mindset'“ of inaction, which I find odd. “Overcoming a mindset” is not the same thing as a track record of action. Delrahim speaks as if he’s accomplished great things. Has he?

The short answer is no. Under Delrahim, DOJ cleared the obviously illegal Sprint-T-Mobile merger, approved an equally illegal Disney-Fox merger, and has sought to shape the law in ways that are favorable to big tech through his friend of the court brief program.

More significantly, last week, the DOJ quietly cleared the Google $2.6 billion purchase of Looker, which is one of Google’s largest acquisitions ever. There are arguments for why clearing this merger isn’t a big deal, since the merger looks to have more to do with Google beefing up its cloud division than getting more power over advertising or search. But still, this is the acquisition of a big data company by Google, so who knows what or how Google will use the corporation it is buying? Also, why is the DOJ encouraging a Godzilla versus Mothra dynamic in the cloud sector? Shouldn’t we want lots of decentralizing as the sector is forming, rather than a few giants like Amazon vs Microsoft vs Google?

At any rate, the DOJ last month said it was taking a closer look at this acquisition, and then a few weeks later clears it. This whole episode is just classic Delrahim. Speechifying and bragging in public, helping big tech quietly when he thinks no one is paying attention. I’ve written about Delrahim’s emptiness before, but I still find this level of braggadocio about strong enforcement bizarre. Rhetoric without a track record to match is empty and induces cynicism.

The End of the Paramount Consent Decrees?

Delrahim took a more high profile and significant action in that same speech yesterday, when he said he would petition the court to end the 1948 Paramount Consent Decrees settlement. It will take a few years to eliminate these rules, but both eliminating them and signaling that the DOJ wants to eliminate them signals that the DOJ has accepted the massive consolidation in the streaming world, and wants that same kind of consolidation applied to the already concentrated movie exhibition industry.

So what are these decrees and why do they matter? The Paramount Consent Decrees were designed to separate movie production and distribution by barring a variety of practices in the industry and forcing the divestiture of theater chain ownership by studios. They are the result of decades of battles between and among studios, chains, and antitrust enforcers from the 1920s to the 1940s.

Prior to the decrees, five major Hollywood studios and a few more minor ones owned and controlled theater chains. While the major ones directly owned only 17.35% of the theaters in the country, they actually controlled 90% of the significant movie houses nation-wide. After the decrees, the studios sold off their theaters, and there was an open market where independent theaters could choose to exhibit movies without being under the control of the studio who made that movie.

The most important part of the decree was to bar ‘block booking,’ which was a practice that meant forcing theaters to accept a slate of movies from a studio in order to have access to the studio’s most popular films, or ‘must-have’ content. Today that would be requiring a theater to carry a bad Disney movie in return for getting access to the latest Avengers release. Other practices barred included clearances, which means granting geographic exclusives to certain theaters or chains, and circuit dealing, which is a technique theater chains have used to prevent rival theaters from fairly competing.

The premise behind the 1948 case was that vertical integration, or the control of an entire supply chain, is dangerous. This threat still exists today. Small theater businesses or small chains are the ones who are threatened by this decree. Small chains on average charge lower prices than big ones, they tend to serve small towns and small markets that wouldn’t ordinarily get big chains, they host community events like children’s showings, classic movie showings and film festivals, and they serve as a check against giant movie chains.

So what will happen if this decree is repeated? The big studios and theater chains will wipe everyone else out.

Here’s a comment by Bow Tie Theaters, one of the few remaining independent theater chains in existence. To give you a sense of history, Bow Tie started in the Nickelodeon era, went through Vaudeville and today runs modern multiplexes. Walt Disney debuted Mickey Mouse in Steamboat Willy at a Bow Tie theater. In 2009, it opened Richmond Virginia’s first new movie theater in forty years, a “themed adaptive reuse of a 19th Century former locomotive assembly plant.” This is a creative modern theater chain with deep roots in the industry.

Here’s what Bow Tie told the DOJ.

Any imposition of block booking would monopolize the limited number of screens a particular theatre displays. This could effectively force a Bow Tie theatre to become captive to a particular studio’s content. For instance, if Paramount were to require that a Bow Tie location display all of its additional films for the right to display a summer blockbuster, it is plausible that at times a specific location would be running Paramount pictures exclusively. Thus, in addition to the concerns surrounding customer choice and cost, the prohibition on block booking is necessary to uphold other aspects of the Decrees and to prevent theatre chains such as Bow Tie from becoming de facto exclusive exhibitors of a particular studio’s content.

Bow Tie would become an adjunct of a studio, a zombie independent chain. Smaller theaters would have it even worse. As one small theater in Wisconsin put it to the DOJ, “The Paramount Decree is important to us because without it, we would cease to exist.”

Killing small theaters is a problematic move for an antitrust enforcer. So why take down this decree? Delrahim has argued that in an era with streaming and high-technology, these decrees don’t matter anymore. Consumers are better off if studios and chains can concentrate power. Here’s what he said.

Since the decrees were entered, however, the movie industry has undergone significant change. Back in the 1930s and 40s, metropolitan areas generally had a single movie theatre with one screen that showed a single movie at a time. Today, not only do our metropolitan areas have many multiplex cinemas showing films from different distributors, but much of our movie-watching is not in theatres at all. Technological advancements, most recently subscription streaming services, have permitted more American consumers to watch movies anywhere they want at any time. 

Competitive pressures have emerged from unexpected sources. For example, some of you might remember the now-defunct Moviepass, which charged consumers one flat price to see an unlimited number of movies in theaters. This business model was flawed, and this led to effective prices so low that some described it as a “great socialist scheme accidentally implemented by very confused capitalists.” Moviepass ultimately exited the market, but nevertheless has affected how some movie theaters are looking at innovation; AMC launched its own monthly flat-free program last year.

What a weird comment from a Republican antitrust enforcer, and yet quite telling. Concentrating power helps usher in socialism, or central planning, but by “confused capitalists.”

Delrahim is echoing the consumer welfare oriented gibberish that corrupted Obama-era antitrust enforcement. He’s pretending there is a robust competition by expanding a proposed market to include all video content watched anywhere by consumers. But theaters operate in different markets than home viewing, even if the video product is similar. People will pay for movie tickets at theaters, and they will also buy video products at home using different pricing terms and with a different screen and cultural experience. As the Writers Guild put it:

The creators of Crazy Rich Asians chose a theatrical release with Warner Brothers over a significantly higher initial monetary offer to distribute the film via Netflix, recognizing that the cultural and social experience of having the first all-Asian film from a major Hollywood studio since 1993 in theaters would not be replicated by having one available on Netflix.

New technology often doesn’t change old markets, but we hear the argument constantly that antitrust enforcement is outdated. People often say ‘oh well antitrust laws were written for steel and railroads, not the internet.’ It’s a silly point for a number of reasons, one of which is that we actually have monopoly problems in steel and railroads. In the case of the movie industry, there’s still a serious problem with block booking, even before the takedown of the Paramount consent decrees. There’s also massive concentration in the industry.

Disney, for instance, after its slew of acquisitions over the last decade, has reduced output and increased its market share. As the WGA puts it, “the ability to increase market share while reducing output is a function of anticompetitive market power over theater owners.” It can demand 65-70% of ticket sales, monopolize “each theater's largest venue, and crowd out other features.” Many of the major studios are “cutting development budgets for new films, or studio research and development”, and focusing on franchise films like Marvel movies. For screenwriters, artists, and film crews, this reduced output means “fewer jobs, lower compensation and less creativity.”

The end of these decrees doesn’t really make sense even on Delrahim’s own terms. Delrahim brought the first case against vertical integration in decades, the AT&T-Time Warner challenge. This was an attack on concentration in the media industry. And now he’s arguing that vertical integration in the media industry is… good? The only plausible explanation is that Delrahim brought the AT&T challenge because he was trying to please Trump, and now he’s getting rid of this consent decree to please some other powerful player or just get himself some headlines.

At any rate, I’m sort of glad Delrahim has done something so stupid and obvious. The exhibition business is already very concentrated. Imperial Disney is doing what it’s doing, and streaming is basically designed under the current public policy framework to become a fight among monopolists over market power. It’s time to have a real conversation about vertical integration in the big media industry. Much as China’s clumsy censorship of the NBA’s Houston Rockets executive made the stakes of our China policy obvious to policymakers, the proposed end of the Paramount Consent Decrees could spark a more open debate among artists in Hollywood about whether they want to have a creative industry anymore, and how political they are willing to get if they decide they actually do.

Thanks for reading. And if you liked this essay, you can sign up here for more issues of BIG, a newsletter on how to restore fair commerce, innovation and democracy. If you want to really understand the secret history of monopoly power, buy my book, Goliath: The 100-Year War Between Monopoly Power and Democracy.

cheers,

Matt Stoller