The Elimination of the Paramount Consent Decrees and What It Represents for the Film Industry
Posted on Mar 25, 2020In November 2019, the Department of Justice (DOJ) filed a motion in federal court to unwind 70-year-old consent decrees entered in the aftermath of the Supreme Court’s decision in United States v. Paramount Pictures, Inc.[1] The decrees ensured that the major studios divested from the movie theaters they owned and refrained from other anti-competitive practices common within the industry.[2] According to Makan Delrahim, the head of the DOJ’s Antitrust Division, the decrees were antiquated and therefore “no longer serve the public interest . . . and no longer meet consumer interests.”[3] This announcement provides us the opportunity to reflect on the origins of the decrees, what they meant for the film industry, and what they say about the competitive landscape of the modern entertainment industry.
The Paramount LitigationParamount was a reaction to the “old studio system” in which the “Hollywood studios controlled pretty much every aspect of the film industry.”[4] In particular, the major studios owned theaters that would exclusively show their own films,[5] while also “work[ing] with each other to control how movies were shown in independent theaters” to ensure that they could charge higher prices and limit the ability of independent producers to exhibit their films.[6] One practice that earned the DOJ’s ire was block booking—when “studios forced [independent] theaters to buy films as a group well in advance, and often without seeing them.”[7] This led independent producers like Walt Disney, Charlie Chaplin, David O. Selznick, and Orson Welles to lobby the DOJ to bring an antitrust case against the studios.[8] In the resultant suit, a New York district judge banned block booking but allowed studios to maintain control over their own theater chains, causing both sides to appeal the decision directly to the Supreme Court.[9]
On appeal, “the [C]ourt killed the block booking system, and recommended the breakup of the studio-theater monopolies” in a landmark 7-1 decision written by Justice Douglas.[10] The case resulted in the studios entering into consent decrees—“settlement[s] between a private party and the government . . . entered as a court order and . . . enforce[d] by the court”[11]—with the DOJ. The decrees required the studios to divest from their movie theaters, and banned certain vertical agreements, such as block booking and “the entering into one license that covered an entire theater circuit (known as circuit dealing).”[12] This marked the end of the old studio system and allowed independent producers to book their films with theater chains. Subsequent trends in the industry, namely the rise of the blockbuster film, led to “the current [movie theater] system, in which multiplexes mostly show major releases and smaller studios rely on independent theaters.”[13]
The Rise of Streaming and Changes in Competition in the Modern Entertainment IndustryThe old theater cartels no longer exist, but the separation between film production and exhibition following Paramount has broken down because of the proliferation of streaming services in the past decade. The rise of Netflix as an independent film producer allowed it to exert significant control over the exhibition of its films. Netflix usually directly releases films onto its streaming platform without a theatrical release and tends to limit which films will be shown in theaters, prioritizing potential Oscar-contenders.[14] While Netflix has dominated streaming over the past decade, it is gearing up for much more competition. Disney recently launched Disney+ and in the process, ended a distribution deal with Netflix for all of Disney’s films released between 2016 and 2018.[15] Disney also owns a majority stake in Hulu and has bundled it with Disney+.[16] Time Warner (owner of Warner Bros.) and NBCUniversal have taken similar actions to reacquire the streaming rights of their own films and shows by launching their own streaming services, HBOMax and Peacock respectively, later this year.[17] Meanwhile, the recently recombined ViacomCBS (which owns Paramounts) is “considering creating a service with advertisements that will combine CBS All Access with Viacom assets.”[18] This means that, with the exception of Sony, all the major studios will have a platform where they can directly show their films. As a result, studios could become less reliant on theaters to show their films than ever before and instead stream their films directly to consumers much like Netflix has done.
On a broader level, the 21st century film industry has been marked by substantial consolidation and a reduction in competition. For example, Disney, already the most profitable studio every year since 2014, acquired 20th Century Fox in 2019.[19] Including Fox’s films, Disney accounted for 38% of industry-wide domestic box office returns and seven of the eight highest grossing films of 2019.[20] The Disney-Fox merger also reduced the studio landscape from six to five major studios (Disney, Sony, Universal, Warner Bros., and Paramount), upending a status quo that has been intact since the 1980s.[21] Meanwhile, Universal and Warner Bros. have been acquired in the last decade by major internet and cable providers (Comcast and AT&T respectively), leading to concerns that they could “charge rival distributors more for [their] content and spur higher prices for consumers.”[22]
Reversal of the Decrees and the Future of Film ExhibitionGiven the industry trend toward consolidation, there are concerns about how the rollback of the decrees will impact theaters going forward. While “[p]er se offenses like price fixing and market allocation are still illegal[,] other horizontal arrangements between competitors or vertical arrangements between companies and their partners are more likely to be upheld today” meaning studios could take more anti-competitive measures in their negotiations with movie theaters as a result of the rollback.[23] This is especially true given the fact that major studios will be able to argue “indie producers have access to Netflix and other alternative distribution markets.”[24] There are concerns that this could effectively lead to a new variant of block booking. The National Association of Theater Owners noted that “[i]f exhibitors were forced to book out the vast majority of their screens on major studio films for most of the year, this would leave little to no room for important films from smaller studios.”[25] While this may not seem like much of a change given that movie theaters generally show more blockbusters as it is, certain smaller studios like A24 and Neon (winner of the 2020 Best Picture for Parasite)[26] have still managed to achieve box offices successes and wide-theatrical release with the screens theaters have available. A24 has been particularly successful, releasing many critically acclaimed and Oscar-nominated films that pushed boundaries and dominated the zeitgeist—a small list includes 2017 Best Picture winner Moonlight, 2018 Oscar nominee Ladybird, and horror films like Midsommar, Hereditary, and Ex-Machina.[27] The reversal of the decree therefore has the potential to reverse these gains by independent studios and further reduce the number of screens they are shown on, since major studios could force theaters to bundle their films as a package deal.[28] This also would give major studios more leverage than they already have over film exhibition. For example, Disney already flexed its muscles when negotiating with theaters ahead of the release of Star Wars: The Last Jedi by setting incredibly onerous terms on theaters in exchange for exhibition rights. According to Marketwatch, “Disney receive[d] about 65% of ticket-sales revenue from the film, a new benchmark for a Hollywood studio. Disney [also required] theaters to show the movie in their largest auditorium for at least four weeks.”[29]
Concerns about studio ownership of theater chains are more far-fetched at the moment given that the studios are more interested in providing direct access to their films and shows via streaming. This, in part, motivated the DOJ’s decision to unwind the decrees, as it noted in a court petition that “[s]uch a conspiracy or cartel is particularly unlikely and improbable today because of the technological and marketplace changes that have transformed the movie industry over the last seventy years.”[30] Thus, the rationale is that given the rise of streaming services, studios have less of an incentive to engage in an anti-competitive conspiracy with regards to movie theaters. However, while these changes in the film industry may make the Paramount decrees somewhat obsolete, that does not mean that anti-competitive practices will not reemerge in the streaming space. For example, once the new streaming services become established and winners and losers are determined, the studios who own the remaining streaming platforms may find it in their best interests to engage in strategic pricing and other activities designed to keep the market stable and reduce competition. The major streaming companies could also freeze out films produced by smaller studios and refuse to show them, or collectively strike a hard bargain to ensure that indie studios are forced to accept below-market rates for licensing their films to the major streaming platforms. This would be especially concerning if the industry moves away from theaters and becomes more reliant on streaming to show movies, giving the major streaming platforms enormous control over which films will be seen by a large audience. Thus, while there will be some impact from the reversal of the Paramount decrees, it is the proliferation of streaming and increasing consolidation that could spell out what the future holds for the competitive landscape of the entertainment industry.
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[1] 334 U.S. 131 (1948); Gene Maddaus, Justice Department Goes to Court to Lift Paramount Consent Decrees, Variety (Nov. 22, 2019 2:56 PM), https://variety.com/2019/biz/news/paramount-doj-consent-decrees-court-filing-1203413811/.
[2] Maddaus, supra note 1.
[3] Gene Maddaus, Justice Department Moves to End Paramount Antitrust Decrees, Variety (Nov. 18, 2019 2:28 PM), https://variety.com/2019/biz/news/paramount-decrees-end-makan-delrahim-1203408484/.
[4] Alexi Horowitz-Ghazi, Why the DOJ is Concerning Itself with the Old Anti-Trust Paramount Consent Decrees, NPR (December 6, 2019, 5:33 PM), https://www.npr.org/2019/12/06/785671243/why-the-doj-is-concerning-itself-with-the-old-anti-trust-paramount-consent-decre.
[5] Id.
[6] Scott Bomboy, The Day the Supreme Court Killed Hollywood’s Studio System, Nat’l Constitution Ctr. (May 4, 2019),https://constitutioncenter.org/blog/the-day-the-supreme-court-killed-hollywoods-studio-system.
[7] Id.
[8] Id.
[9] United States v. Paramount Pictures, 66 F. Supp. 323 (S.D.N.Y. 1946); Bomboy, supra note 6.
[10] Bomboy, supra note 6.
[11]Karen Hoffman Lent & Kenneth Schwartz, The DOJ Moves to Terminate the Paramount Consent Decrees: Is this the End of the Movie Industry as We Know It?, N.Y.L.J. (Dec. 9, 2019, 12:00 PM), https://www.law.com/newyorklawjournal/2019/12/09/the-doj-moves-to-terminate-the-paramount-consent-decrees-is-this-the-end-of-the-movie-industry-as-we-know-it/.
[12] Id.
[13] David Sims, Trump’s Justice Department Wants to Change the Movie Industry, Atlantic (Nov. 20, 2019), https://www.theatlantic.com/entertainment/archive/2019/11/justice-department-movie-industry-paramount-ruling/602311/.
[14] Nicole Sperling, Inside the Debate Between Netflix and Big Theater Chains Over ‘The Irishman’, N.Y. Times (Nov. 1, 2019), https://www.nytimes.com/2019/11/01/business/irishman-netflix-theaters.html.; Dami Lee, Netflix will Release 10 Fall Films in Theaters, Well Ahead of their Streaming Debuts, Verge (Aug. 27, 2019, 5:49pm), https://www.theverge.com/2019/8/27/20835697/netflix-fall-movie-lineup-theatrical-release-steven-soderbergh-laundromat-martin-scorsese-irishman.
[15] Ben Travers, Netflix Deals Mean That Disney Movies Could Come Back in 2026 — Report, IndieWire (Jun 2, 2019, 6:17 pm),https://www.indiewire.com/2019/06/netflix-movies-leaving-for-disney-could-return-1202146618/.
[16] Emily Hein, How to get the Disney Plus Bundle with ESPN+ and the Ad-free Version of Hulu, Bus. Insider (Feb 11, 2020, 10:54 AM), https://www.businessinsider.com/disney-plus-bundle.
[17] Julia Alexander, The Streaming Wars are Finally Beginning, but it’s More of a Polite Quarrel than an All-Out War, Verge (Feb. 6, 2020, 3:57 PM), https://www.theverge.com/2020/2/6/21126156/streaming-wars-disney-plus-netflix-wall-street-subscribers-hbo-max-peacock.
[18] Alex Sherman, ViacomCBS to Launch New Streaming Service Blending CBS All Access with Paramount Films, Viacom Channels, CNBC (Feb. 6 2020, 5:38 PM), https://www.cnbc.com/2020/02/06/viacomcbs-new-streaming-service-to-include-paramount-cbs-all-access.html.
[19] Emily Todd VanDerWerff, Here’s what Disney Owns After the Massive Disney/Fox Merger, Vox (Mar. 20, 2019, 1:10 PM) https://www.vox.com/culture/2019/3/20/18273477/disney-fox-merger-deal-details-marvel-x-men.
[20] Sarah Whitten, Disney Accounted for Nearly 40% of the 2019 US Box Office, CNBC (Dec. 29, 2019, 3:04 PM), https://www.cnbc.com/2019/12/29/disney-accounted-for-nearly-40percent-of-the-2019-us-box-office-data-shows.html.
[21] VanDerWerff, supra note 19.
[22] Sara Salinas, AT&T’s Merger with Time Warner Will Stand, After DOJ Loses its Appeal and Drops the Case, CNBC (Feb. 26, 2019, 4:24 PM), https://www.cnbc.com/2019/02/26/appeals-court-upholds-decision-allowing-att-to-buy-time-warner.html.
[23] Eriq Gardner, The Real Impact of Getting Rid of the Paramount Consent Decrees, Hollywood Rep. (Aug. 16, 2018 6:55am), https://www.hollywoodreporter.com/thr-esq/real-impact-getting-rid-paramount-consent-decrees-1134938.
[24] Id.
[25] Sims, supra note 13.
[26]Brent Lang & Justin Kroll, ‘Parasite’ Oscar Win Leaves Hollywood Desperate to Work With Bong Joon Ho and Neon, Variety (Feb. 14, 2020, 11:33 am), https://variety.com/2020/film/news/parasite-bong-joon-ho-neon-oscars-1203504348/.
[27] Sonia Rao, How the indie studio behind ‘Moonlight,’ ‘Lady Bird’ and ‘Hereditary’ flourished while breaking Hollywood rules, Wash. Post (Aug. 5, 2019, 7:00 a.m.), https://www.washingtonpost.com/ lifestyle/style/how-the-indie-studio-behind-moonlight-lady-bird-and-hereditary-flourished-while-breaking-hollywood-rules/2019/08/01/47094878-a4dc-11e9-bd56-eac6bb02d01d_story.html; Brooks Barnes, The Little Movie Studio That Could, N.Y. Times (Mar. 3, 2018), https://www.nytimes.com/2018/03/ 03/business/media/a24-studio.html.
[28] Sims, supra note 13.
[29] Erich Schwartzel, Disney is Forcing Theaters to Agree to Top-Secret Terms in Order to Show ‘Star Wars’, MarketWatch (Nov. 1, 2017, 9:26 a.m.), https://www.marketwatch.com/story/disney-is-forcing-theaters-to-agree-to-top-secret-terms-in-order-to-show-star-wars-2017-11-01.
[30] Maddaus, supra note 3.