By Dimitri Hasandras
October 9, 2018 at 5:00 am ET
Makan Delrahim of the Department of Justice’s Antitrust Division recently announced that the DOJ is revisiting the famous Paramount consent decrees – the settlement agreements between the major movie studios and Justice Department – and evaluating whether they need revision or termination.
This is a very positive development. The Paramount decrees have shackled movie studios for decades and have only served to hurt moviegoer experiences while increasing ticket prices. Nevertheless, some analysts argue that these consent decrees should be maintained because they serve a similar purpose as the Broadcast Music Inc. (BMI) and American Society of Composers, Authors and Publishers (ASCAP) consent decrees that control the music licensing industry, ensuring an end to anti-competitive behavior and creating fairer pricing for small businesses.
This is an interesting and appealing argument that merits some discussion. I’ll explain my opposing position shortly, but first, let’s recount a little history about the Paramount consent decrees.
In the Golden Age of Hollywood (approximately early 1930s to early 1950s), five major studios (MGM, Warner Bros., RKO, Paramount, and 20th Century Fox) controlled most of the industry. Each operated as its own miniature universe, and even owned, or had exclusive agreements with, movie theaters. This allowed the movie theaters to maintain consistent production volume and secure showings for smaller-budget pictures, but conversely, made it hard for independent theaters to survive.
In the early 1940s, the government came to view this vertical integration as a restraint of trade, and pursued litigation that culminated into the Paramount consent decrees, which came into effect in 1948. Under the terms of the decrees, movie studios were required to divest themselves of movie theaters and were banned from block-booking (booking a theater’s entire schedule for a whole year).
As a result, studios had to slow down their production schedule and make more blockbusters that were more likely to secure showings with theaters. In turn, this also resulted in higher ticket prices because studios had to recoup their operating costs from fewer movies.
The vertical integration that the Paramount decrees were designed to stop is in fact a natural and efficient outcome. We are even witnessing this phenomenon recurring today. With the rise of massive shared movie universes, such as the Marvel Cinematic Universe, studios like Disney are planning to provide their own streaming services, effectively bypassing theaters altogether. A large vertically integrated studio structure is just more conducive to the production of consistent quality movies. Netflix Inc., Amazon.com Inc., and Hulu LLC have also achieved a similar content production to viewer integration.
The fact is, no matter how many wrenches antitrust regulators through into the works, the Hollywood machine will still find ways to assume its most efficient form – as large vertically integrated studios. And there is nothing wrong with that.
In my view, this stands in stark contrast to the purpose and effects of the ASCAP and BMI consent decrees in the music licensing industry. The problem that these decrees were designed to tackle was not vertical integration, but collusion and price fixing. These are two very different practices.
Price fixing has a direct negative effect on consumers, whereas vertical integration does not. Furthermore, unlike movie studios, ASCAP and BMI are not the content producers. They are merely middlemen between the composers and the consumer, who, due to their great market power, were able to collude and artificially inflate market prices of public performance licenses on small businesses.
To this day, ASCAP and BMI are, as evident through the recent paying of a $1.75 million settlement to the Justice Department, still ostensibly looking for ways to exploit songwriters and raise prices on businesses.
On the contrary, even during the Golden Age of Hollywood, studios were not colluding or inflating ticket prices. Competition was strong, volume was high and arguably, quality was higher (it is likely no coincidence that a disproportionate number of the greatest movies of all time were a product of Golden Age Hollywood.)
What we can take away from this is that when revisiting these consent decrees, the primary consideration should be a very simple one – can the market be competitive without the restrictions imposed by the consent decree?
For most of the 1,300 legacy antitrust judgments on the books, the answer will most likely be yes, with just a few exceptions for situations where the holding of government-granted products – such as music copyrights – in conjunction with the natural structure of the market, can lead to the accumulation and abuse of market power by a small number of entities.
Here’s hoping that the Justice Department is wise enough to see the difference.
Dimitri Hasandras is an attorney specializing in communications and antitrust law and a freelance author.
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