Copyright, Antitrust, and Disney's Monopoly

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Last week I wrote about the case for breaking up Disney. Today I’m going to discuss how Disney uses copyright law to monopolize markets, and why the political problem here is not about the length of copyright terms, but the relationship between antitrust and copyright.

Here’s Bob Iger, the emperor of Disney.

The picture is from Josh Hallett.

Backstory on Disney

Disney is a copyright empire. That is, its entire business runs on the clause in the Constitution that gives temporary monopolies to artists and creators to profit from the work they create. This license is called a copyright (and the protection of a branded product, like is called a trademark). The reason you can’t make and sell Mickey Mouse TV shows and movies is because the government has granted Disney the exclusive license to do that. You can use Shakespeare characters, but nothing created by Walt Disney. (Yes, you can do things like satire under what’s called fair use, but we won’t get into that because it’s complex and not important for the purposes of this piece.)

A limited copyright makes sense, because it enables artists to profit from their work, and thus creates a viable path for artists and financiers to come together and make and sell art. The terms of such licensing matters, of course. A seven year license enables one form of market structure, an infinite length enables a different one. And then there are terms, like mandatory licensing to all comers, or exclusive licensing, fee structures, and so forth. Copyright gets very complex, and is a set of negotiated deals among artists, studios, distributors, and the public. Today, copyright licensing is at a bit of an extreme, with copyrights lasting for the life of the author plus an additional 70 years, after which it goes into the public domain.

There’s a vibrant debate over how long copyrights should last. But I am less interested in the problem of the length of copyright, which is well-trod territory, than the use of copyright monopolies to leverage monopolies over distribution. Because that is one area that the Supreme Court took care of when it abolished the studio system in 1948. And it’s something we don’t talk about a lot, even though it is the key fulcrum Disney is using to recreate a much more autocratic creative industry. In many ways, Disney is seeking to return to the original way Hollywood did business, before the government forced open and creative markets for content.

So let’s go back to early Hollywood, and examine how the industry organized itself. Hollywood filmmaking began around 1910. Like many new industries, there was ample competition among producers and theater owners, much as you saw with the initial creation of apps right after Apple opened the app store, or the explosion of websites in the 1990s. After World War One, the industry settled into the concentrated structure, with major studios organizing production and financing of films.

Until 1948, Hollywood studio bosses had extreme amounts of control, managing virtually every aspect of filmmaking, from the careers of directors and actors to the newspapers that reported on gossip. This era was known as the studio system, and the Coen brothers made a delightful film, Hail, Caesar!, which paints a rosy picture of power and culture in it. The studio system was based on tight alliances or outright ownership between theater chains and producers of movies. Five major studios, and a few minor ones, basically had control of all distribution of film.

The studio system was borne of politics; In the 1920s, as the industry grew, the Republicans chose lax antitrust enforcement as a policy. As one business consultant later put it, “practically, under the Harding, Coolidge, and Hoover administrations, industry enjoyed, to all intents and purposes, a moratorium from the Sherman Act.” There were more personal connections as well. Herbert Hoover, for instance, was a friend of MGM’s Louis B. Mayer, the most powerful studio boss of the time, and Mayer helped introduce showbiz glamor to GOP political conventions.

In the 1920s, the industry vertically integrated, which meant that theater owners did what they were told by the studio bosses, and so did everyone else. There was a loose cartel of studios who battled over power, but cooperated to control the industry. Such contests were common in the roaring 1920s, with the disdain public officials showed for democracy and competition. My favorite quote is from W. E. Humphrey, the Republican who ran the Federal Trade Commission in the 1920s. He proudly announced when he was taking it over from Democrats that the FTC that the commission would no longer serve as a “publicity bureau to spread socialist propaganda.”

Starting in the 1930s, the New Dealers took over. In the late 1930s, the antitrust division got more aggressive, until in 1948 the Supreme Court allowed the DOJ to break up the studio system with an important precedent on vertical integration. I wrote about this dynamic in July. The antitrust division created a *market* with decentralized distribution, and the Federal Communications Commission then ported it to television in 1970 with a separate regulatory decision.

[This market structure harkens] back to bitter battles in the 1930s and 1940s between New Deal antitrust attorneys and studio heads, which culminated in the Paramount Consent Decrees of 1948 and the end of the autocratic so-called ‘Studio System.’ These decrees forced studios to sell their theaters, and prevented them from engaging in tying and bundling practices to force theater owners to take their films. New Hollywood, with youthful countercultural stars like Jack Nicholson, emerged in the 1960s to totally revamp the industry, and global culture. In 1985, weird popular movies like Back to the Future were still taking advantage of this relatively open market structure.

A similar decentralized structure existed in the television industry, which was broken apart in 1970 by Richard Nixon’s FCC with financial syndication rules (‘Fin-syn’). These rules blocked TV networks from distributing their own content in prime time, opening the market for TV content to third party producers who would take more creative risks. The Cosby ShowSeinfeldThe Mary Tyler Moore Show, and All in the Family were some of the results of this policy choice to open up the TV market.

Both the Paramount Consent Decrees and the Fin-syn rules were designed to break creative industries into a three-tiered structure: production, distribution, and retailing. Producers were prohibited from vertically integrating into the traditional distribution business. That way, there are fewer conflicts of interest in the content business; producers had to create high quality work, and if they didn’t, distributors could choose to sell someone else’s art. Policy removed power as the mechanism of competition, and emphasized art.

Disney already controls theater chains through agreements it negotiates based on raw muscle and market share. Disney’s strategy, especially with its new streaming service Disney Plus, is to recreate the system the Paramount Consent decrees took apart, but to add into it a combination of TV, movies, and theme parks, and to do it globally. Netflix, Disney, AT&T, Amazon, Comcast and perhaps a few others will try to ‘win’ the streaming wars' with various pricing games to subscribers, which is really a battle not over creating good content but over winning market power, much like the 1920s. In fact Netflix only started making original content because its executives realized the industry would vertically integrate, and it wouldn’t be able to license content from would-be competitors.

All of this brings me back to copyright. The way to win a streaming war is to own ‘must-have’ content, which means owning the exclusive license over copyrighted work which is very popular, and then to bundle that ‘must-have’ content with other content into a vertically integrated streaming service. In other words, the goal is to use a state-sanctioned monopoly of copyright to build market power in a separate market, that of streaming subscriptions. The Supreme Court in 1948 held that doing something very similar was illegal. The court discussed block-booking, which was the practice of forcing theater chains to exhibit less popular movies in return for giving them access 'to ‘must-have’ content like Gone with the Wind.

To simplify, block-booking was the 1940s equivalent of bundling a streaming service with exclusive content. The court noted that using must-have content in this way "adds to the monopoly of a single copyrighted picture that of another copyrighted picture which must be taken and exhibited in order to secure the first." The court went on to argue that using copyright in this way violated antitrust prohibitions on tying.

I’m not an expert on modern copyright law, so I’m not going to pretend to understand whether the massive numbers of exceptions and rights delineated in terms of streaming allow for such bundling today. The FCC has rules on content licensing, which makes the legal framework even more complex. In some ways, it’s an academic question, because we don’t enforce the law against powerful actors. But it’s fairly obvious that a long length of copyright terms, which artists tend to support, is not the same thing as the use of copyright to build power in adjacent markets.

Copyright law is supposed to protect artists and creators, but it is now being subverted to let financiers like Disney control and manipulate them. That’s what it means when copyright protections for artists are used to build power in the streaming services that the new Hollywood studios are using to cage the people who make their content, and prevent them from going directly to their audience in open markets.

The solution is relatively simple, which is an end to vertical integration, plus mandatory licensing of content from those institutions that have substantial amounts of market power. Then the distributors will focus on creating the best services they can create and the producers will focus on creating the best content they can create, and a market will match the two in the middle. The financiers and middlemen will have little power, and audiences and creators can connect, or not, as they choose.

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