The Great Intermission: Hollywood and the Coronavirus
What does it mean when Amazon is being rumored to buy AMC Theaters?
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Today I’m going to write about what might happen to Hollywood in the wake of the rumors that Amazon might buy AMC Theaters. I also have brief snippets on the Google-related backstory behind Facebook buying Giphy, Microsoft trying to acquire power in the cybersecurity market, China threatening large American corporations (Boeing, Apple, Qualcomm), and Taiwan Semiconductor choosing to locate an advanced chip foundry in the United States.
First some housekeeping. I was on Rising with Saagar Enjeti and Krystal Ball to talk about Facebook’s Supreme Court and the silly Democratic coronavirus bill. You can watch that here. Also, I was on the Handheld Travel podcast to discuss monopolies.
Amazon Buying AMC Theaters? Last weekend, the Daily Mail reported on rumors that Amazon is in talks to buy AMC Theaters, the largest movie chain theater in the world, with over 8,000 screens in the United States alone. Last year, Trump Department of Justice Antitrust chief Makan Delrahim paved the way for such an acquisition by unilaterally rescinding an important consent decree that structures the film industry, a 1948 resolution to long-standing antitrust claims against movie studios called the Paramount decrees.
The Paramount decrees basically impose a structural separation in the film exhibition business, making it hard for movie studios to buy or control theater chains or distribution. As I’ve written, prior to these decrees, Hollywood was structured in what was known as the Studio System, in which a small number of vertically integrated studio chiefs essentially decided what artists could make and what Americans could watch, through either direct ownership of theaters or the use of must-have blockbuster content to control theaters. The decrees broke apart this system, and created an open market for film, leading to a creative explosion and more freedom for artists, most notably the “New Hollywood” of the 1960s.
The stated reason Delrahim is ending this decree is that he thinks technology makes it irrelevant. Online streaming introduces a new competitive channel, so who cares if studios can buy theaters? Rescinding the Paramount decrees opened the door to speculation Amazon, or perhaps Disney, would be buying a movie chain. Before the pandemic, independent theaters protested the attempt to rescind the decree, writing in a brief that “if the Paramount decrees continue to be respected, the entry of behemoths like Amazon into the exhibition business would more likely be on terms that deterred Amazon from abusing its market power either to favor its own cinemas with its content or to punish fairly competing exhibitors.”
This is not to say the existing setup, even before the pandemic, was a healthy open market. It wasn’t. Since the 1990s, there has been a massive roll-up of the movie exhibition business into a few poorly managed and highly indebted movie chains, one of them being AMC. The AMC theater experience was bad, with overpriced food, inflexible scheduling, and a bland corporatized feel. Movies have increasingly needed to launch on thousands of screens at once, leading to the dominance of Marvel movies.
AMC Theaters itself is loaded up with $5 billion debt and owned by public shareholders, the Chinese conglomerate the Wanda Group and private equity firm Silver Lake Partners. With the pandemic shutting down its business, AMC stock is worth around $500 million total. The corporation was able to issue some bonds recently in the Fed-supported bond market, as well as cut its workforce and avoid rent payments. It has enough cash to stay alive until after Thanksgiving.
Proponents of Amazon buying AMC Theaters have stars in their eyes at the possibility of the integration between Amazon and the chain. They surmise Amazon could make magic, doing special events for Prime members, using the theaters as retail pickup points, upgrading the food, and organizing eSports events with its Twitch service. They also imagine Disney might do something similar if it bought a chain, turning a theater a chain into a mix of Disney event space, theatrical release venue, and Disney store.
Much of the value here is what AMC Theaters offers as a channel for content. My favorite analyst of the industry is the Entertainment Industry Strategy Guy, and he notes that a TV channel’s ability to launch buzzy new shows is a meaningful way to understand its power. And in terms of market share, Netflix, despite its heavy presence in streaming, basically has the same power for its original content as a broadcast channel. Amazon is even weaker, it’s basically just a cable channel, despite the billions spent on original content. The purchase of a movie theater chain immediately changes this dynamic, and elevates Amazon into a major studio, able to launch buzzy shows and movies far more easily.
AMC will cost roughly $5-7B, and that’s an easy lift for Amazon financially, though not for a Disney whose critical theme park division is shut down. But while there’s obvious logic for Amazon and Disney to buy theater chains, I don’t think they have to make a purchase right now. The contours of the pandemic are not clear, so an acquisition would be taking a multi-billion dollar guess on when and whether we will be going out to movies again. Waiting lets potential buyers understand the value proposition more clearly. Moreover, while the debt offering helped, AMC’s debt and equity holders have a weaker bargaining position every day the pandemic goes on and keeps customers out of theaters. Time is on the side of the buyers.
The possible counter-argument here is antitrust enforcement. Any purchase of a theater by a studio would allow them to block competitors from doing theatrical releases, and put huge amounts of pressure on other theater chains; it would be virtually impossible to negotiate with Disney to get their latest movies if they have their own theatrical distribution channel. If Disney/Amazon thinks Biden will win and take a harder edged approach to merger policy, they might try to get this purchase in under the wire.
Regardless, the question of consolidation in entertainment is now front and center, and there’s no avoiding it. Before the Amazon-AMC rumor started, telecom and media analyst Michael Nathanson came out with a report titled “Say Goodbye to Hollywood” on what Hollywood will look like after the crisis. These kinds of reports are supposed to gin up mergers and acquisitions activity, and help the investment banking and management consulting worlds figure out how to structure industries. The Amazon-AMC merger rumor is just such activity.
Nathanson, whose firm has its roots in the management consulting and investment banking world, assumes the policy choices will continue to enable consolidation. He then applies the pro-concentration frame to the pandemic. The number of movie theaters will decline due to social distancing needs, and that the “top streaming platforms — Netflix, Amazon and Disney — will emerge with the lion's share of scripted content creation."
The other studios, he argues, which include Sony, Paramount, Universal, MGM, and Lionsgate, will “likely need to consolidate to increase selling clout and accelerate cost savings.” He analogizes this dynamic to what “occurred in the recorded music industry over time as six once-mighty global recorded music companies merged into three healthier ones.” The potential acquisition of a theater chain would accelerate this consolidation.
To be clear, cost savings is code for crushing the wages of the artists and workers in the industry. And which movies are likely to prevail after this is all said and done? “It is the small- to medium-sized budget movies that we worry about,” he wrotes. “We have already seen the share of movies that generate under $100 million at the domestic box office fall from 52 percent in 2010 to 39 percent in 2019, and we expect this trend to accelerate further. Mid-budget, non-tentpoles will not be worth the cost and expense of traditional theatrical distribution." These are precisely the kinds of movies that are most likely to be unique to American culture, comedies, as well as the kinds of movies that could be critical of the Chinese government because they don’t need to break into that market.
Now, the possibility of Amazon or Disney running theater chains can sound tantalizing. Who doesn’t want better food in a theater and a more interesting experience? The thing is, a conversation in which people eagerly drool at the prospect of Amazon or Disney theaters is one in which they artificially bound their thinking to assume only monopolistic corporations can provide a good product. There is no actual reason AMC couldn’t vastly improve its own theaters, either with their own innovations or through contract with Disney or Amazon on eSports or Disney Stores. It is possible to have well-managed businesses without selling to monopolies.
In fact, some theaters do this on their own, they just don’t get noticed because they are small and below the radar. Independent theaters are just such an experience. These kinds of theaters often do interesting community events, even during the pandemic. Take The Coolidge Corner Theatre in Boston. It has “a virtual screening room, with some drawing hundreds of people in the opening week. It has also been able to expand its virtual seminars, in which a film expert gathers to lead a discussion on a certain film or filmmaker. Typically, capacity for those discussions, held in one of the Coolidge’s 45-seat theaters, was limited. But with Zoom, the Coolidge welcomed hundreds of paying guests last month, from as far away as Peru.”
Similarly, the Somerville Theater does “weekly “pop up,” selling popcorn, soda, and candy at the theater every Saturday.” These small theaters, having avoided the corporate bland route of AMC-sameness, create value as community centers. We’ve made a political choice to support, at least temporarily, both models. AMC is drawing on Fed support in the bond market; some of these community theaters are using the Paycheck Protection Program to stay alive.
Implicit in the possibility of movie theaters as community centers is the need for the government to ensure these theaters can get access to financing and movies from studios. In other words, letting Disney or Amazon buy out a hollow AMC is probably a bad idea. And finding a way to expand independent theaters and open markets in content is what policymakers should be doing during this pandemic intermission. “We could come back stronger than before,” said one independent theater official. “We just have to make it through this intermission.”
Facebook Swallowing Giphy: Facebook reportedly is trying to buy GIF plug-in search engine Giphy and integrated it into Instagram, for $400 million. In 2016, its valuation was $600 million. What happened? In a word, Google. Google saw that Giphy had created a space for a universal plug-in-type tool for gifs. So in 2018, it bought a rival named Tenor, and the next year integrated a gif library into its dominant search engine, destroying the business model of Giphy. A year later, Giphy limps into the arms of Facebook.
Google used a similar predatory strategy to mesh wifi router Eero. Eero identified a space and built out a product line. Google saw that, released what seemed to be a below cost version of the same product, and killed Eero. Amazon then acquired a limping Eero.
The net effect here is, as a contact put it, “censorship through nudges. On one hand it’s hard to cry censorship because hey, you can still just make your own gifs. But on the other hand nobody is going to do that because it takes 3 more seconds. So FB gets to gate-keep this library (no more Alex Jones gifs) and then by extension exert this unseen influence on communications in all the other apps that license the giphy library. The centralized internet sucks.”
Microsoft Swallowing the Security Vendor Market? BIG reader Michael Wojcik has a fascinating discussion of Microsoft’s use of bundling to take over the lucrative cybersecurity market. “Microsoft’s offerings really don’t need to be better than security solutions from other vendors,” he wrote. “Microsoft’s advantage is that they embed security offerings within their Microsoft O365 E5 suite (and other add-ons).” The company even has a site where you can see Microsoft’s targets.
Now, what Microsoft is doing could be illegal, but they would argue otherwise. And there is a tension between ‘tying’ which is an antitrust violation, and ‘integration’ which is simply creating a better product by putting two existing products together into one. One way to start making this distinction is to look at the market power of the entity doing the tying. By that metric, Microsoft needs more scrutiny. The corporation often goes unnoticed as a monopolist, largely because its President Brad Smith is a deft political player, but the corporation is still there, eating up markets.
The Muni Bond Market: UBS noticed the municipal bond market is in trouble. It is a very concentrated market in terms of dealers.
China Readies Attack on Apple, Qualcomm, Cisco, and Boeing: Well this is interesting, from a China state newspaper. The Trump administration’s cutoff of American inputs to Huawei is prompting threatened anti-monopoly investigations into large U.S. corporations, as well as cutoffs of purchases of Boeing. As China watcher Bill Bishop puts it, “Not even pretending there is rule of law.”
Trump Industrial Policy Push Pays Off: Taiwan Semiconductor is building a $12 billion semiconductor manufacturing plant in Arizona, at the urging of Trump administration officials. This plant will create the most advanced chips in the world, what are called 5-nanometer chips. The semiconductor industry is split into design and manufacture, with design companies hiring fabs to create specialized chips. While the U.S. has great capacity on design, critical manufacturing capacity is mostly in Taiwan, China, and South Korea.
Intel is a major player in semiconductors, though it designs and makes its own chips. I suspect that Intel, once a jewel of engineering, is not particularly well-managed, since its chips have repeatedly shown to have serious security vulnerabilities. The Obama administration had an antitrust suit against Intel, but of course, that didn’t really go anywhere. At any rate, Taiwan Semiconductor choosing to build a fab in the United States is a major move for re-shoring productive capacity.
Thanks for reading. If you see examples of market power in this pandemic, let me know.
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 a book to hunker down with while sheltering in place, read my book, Goliath: The 100-Year War Between Monopoly Power and Democracy.
P.S. Another reader responded to the last comment on the University of Pittsburgh Medical Center monopolization story, though with a very different point of view. This one gets into the incredibly baroque market structure of American health care, which is largely oriented around bargaining power.
Hey good afternoon, I have really enjoyed reading your newsletters and have shared many of them with friends and family. I wanted to comment on the reader email regarding UPMC included at the bottom of the Grubhub newsletter May 13th.
The email neglected to include the reasoning behind the UPMC Highmark dispute. For years Highmark was the dominant insurance provider in the Pittsburgh/Western PA market. This gave them significant pricing power and the ability to pay under market rates for medical services. National Payers (Aetna, United, etc) did not have a material presence in the market due to Highmarks stronghold. UPMC continually negotiated for market rates for medical services, to which Highmark continually declined. Thus, UPMC started an insurance arm to compete with Highmark, and Highmark purchased Allegheny General Healthcare System to compete on Medical services. This kicked off a nasty dispute with each threatening to end access to the others medical services for their insurance consumers. From a business perspective, this is no different than Aetna buying CVS (buying customers), or manufacturers buying raw material producers. Not saying it is right or wrong, just that these moves are inline with overall business trends.
The increase in insurance competition benefited consumers as pricing dropped and allowed national payers to come into the market as an additional option for consumers. Summer 2019 UPMC and Highmark came to a final hour agreement, with Highmark agreeing to pay market rates and UPMC accepting most Highmark insurance vehicles. The ONE insurance vehicle that is excluded, the emailer points out, is unique in that Highmark negotiated the ability to offer a specific insurance vehicle that cost less than other insurance vehicles, but the consumer could only use Allegheny General Health System facilities. Highmark essentially eats cost to steer patients to their facilities, much like the Microsoft Teams and Google Video examples above. UPMC may have a similar product specific to UPMC, I am not sure, but the Highmark specific insurance vehicle was made well known and advertised in the market.
The easiest way to fix this dynamic is to simply impose Medicare prices for all health care providers. Then there are no more fights to acquire market power, because competition simply occurs around quality of service.
To expand on what @Manqueman was saying, my thought was much the same, but for somewhat different reason. First, I take issue with the valuation. The idea that Amazon (or anybody for that matter) would pay ANYTHING for AMC Theaters is dreamland. AMC Theatres only has one asset: retail space. In this current world, retail space is woefully overbuilt and abundant. AMC has the double whammy of controlling that space in dead areas around dead retail malls. Second point, stemming from the first, is that you can only exert monopoly control where you can gain a choke hold on supply, demand or distribution. A collection of physical theater space with no IP library offers none of these. If Amazon wants to be a theater company, they could build better spaces in better locations for much less money than the valuation floated here. For that matter, so could anyone else. Now if Amazon would acquire a large chunk of the film distribution companies and control content distribution (something that would be fairly easy and lucrative for them to do) that would be a bigger problem. They could do what they are doing in the publishing arena by owning their own publishing company and promoting those books above offerings from anyone else through their choke hold on book distribution. There are estimates that Amazon controls half of physical book sales and nearly 90% of ebook distribution. That's the kind of business Amazon wants to be in.
The bigger problem with this issue is something Mr. Stoller points out somewhat back-handedly; the fact that a rumored $5 -7B purchase price would be an "easy lift" for Amazon. That much buying power is the real scary part. Any company that has that kind of financial clout can buy anything it wants at any time it wants -- distribution chains, manufacturing sectors in consolidated industries, and governments are all for sale at that price range. And though I don't want government control, how does the free market get back on a more competitive footing against people who can literally buy all of the regulations controlling their competitors?
Re: healthcare, I’m unclear on how eliminating pricing of services as a point of potential competition is meant to help prevent monopolies from forming. Granted both cost and quality are fairly opaque to patients, but things like boutique healthcare or lower volume, high-quality, high-cost options certainly exist in some places in the US, and are usually independent of major players in the space.