The Brewing Backlash to Hollywood Consolidation

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0:39That's why Spotify and Accenture are working together to reinvent the rhythm of ad sales. Using automation, analytics, and smarter workflows to simplify campaign delivery and access better data across the business. The result? Less time spent on operations, more time connecting brands with the moments and fandoms that matter most. To learn more, check out Accenture.com slash Spotify. It is Wednesday, November 19th. This sale of Warner Brothers Discovery is pretty much the only thing people in town want to talk about these days. In particular, the possible disappearance of another one of the original Hollywood studios.

1:16If you've ever been in the Warner's lot in Burbank, it's maybe the nicest of all the studios. Got tons of history going back 100 years. Everything from the Clint Eastwood scoring stage to the Friends Fountain. But with the initial bids for the company due on November 20th, three main suitors have emerged so far. Paramount, backed by the Ellison family and their insane wealth. They want to buy all of Warner Discovery. And both Comcast and Netflix are interested in just the studios and streaming side. That's HBO Max, the Warner Studio, and that great studio lot. All three of these potential deals will trigger heavy antitrust review.

1:51And potentially, they'll become political footballs. Last week, the Republican Congressman Daryl Issa, he sent a letter to the U.S. Attorney General and regulators of the FTC and DOJ, the two main antitrust enforcers. Issa argued that Netflix buying Warner Brothers would, quote, diminish incentives to produce new content and major theatrical releases, which, of course, would hurt consumers, he argued. Netflix is generally considered the largest and most powerful streaming platform. So buying a big global platform like HBO Max would eliminate a service and a big buyer of original content. At least that's what the Paramount side is arguing.

2:27The Ellisons seem to have the backing of Donald Trump, which is probably why the Republicans are so focused on Netflix. But there are big issues with Comcast and Paramount, too. Namely, the reduction of five theatrical movie studios down to four and the merger of their streaming services. But what are the alternatives? That's the big question here. Does Hollywood need to consolidate to compete with big tech? I've got Jonathan Cantor on the show to discuss today. He was the assistant U.S. attorney general for the antitrust division at the DOJ under President Biden. He's a big critic of both big tech and the massive corporate mergers that have ruled the day.

3:01He led a suit against ticketmaster parent Live Nation, against Google over its monopolistic practices, and a major case in the book industry that prevented the combination of two big publishers under the theory that it would hurt authors. Very relevant here. So today is Jonathan Cantor, the Warner Brothers antitrust issues, and why maybe it's not a good idea to let Hollywood consolidate to battle big tech. From The Ringer and Puck, I'm Matt Bellany, and this is The Town.

3:31All right, we are here with Jonathan Cantor, the former Assistant Attorney General for Antitrust under the Biden administration, currently distinguished professor at both Washington University and Carnegie Mellon. Welcome. Great to be here. All right. So I know you're sort of slumming it in the entertainment world here, but these These are pretty big antitrust issues that could potentially come up in the acquisition of Warner Brothers Discovery, either all or part of it from one or more suitors. And I want to get into the legal perspective and both the legal and practical perspective on this potential transaction and each of the potential suitors.

4:16As we are taping on Tuesday, we believe the three potential suitors for Warner Brothers Discovery will be Paramount and the Ellison family, which they say they want all of the company. They currently own Paramount. As we know, this would be taking five legacy studios in Hollywood down to four. And then there's Comcast, another studio-owning company that owns Universal and would be doing the same, taking five down to four. And then there is potentially Netflix. Now, Netflix and Comcast, we believe, are going to go after only the studios and streaming side of the company. That's HBO and the Warner Brothers Studio.

4:57they are not going to take the TV channels. I wonder if that makes a difference. But first, could you, just for our listeners who are savvy about the business but may not know the contours of the antitrust regime here, what are the issues that are going to govern this transaction? So there are often two ways to think about it. One is vertical and one is horizontal or platform-like. The traditional way you might look at an antitrust merger is, does company A directly compete with company B? So in the case of Paramount, do they both have big movie studios? Yes. Or do they have streaming assets? Yes.

5:33So that's one way in which you look at it. Another way you want to look at it is distribution, right? Is one necessary to distribute the other? So if Netflix buys important content, what is that going to do to the ability of Warner Brothers rivals to get distribution through Netflix? Will it create a conflict of interest so that it will raise the prices or exclude competitors from getting ready access? These are the kinds of issues that you look at. And you also look at them in different places, right? And this is a very important part. So there are a number of characters to those in the entertainment industry.

6:11You have your DOJ FCC characters, which exist in the backdrop of Donald Trump. Then you have your state attorneys general, who have already started to say something here, right? They have the ability to enforce the antitrust laws. And then you have international antitrust enforcers, including in Europe and the UK and elsewhere, who may or may not block the deal. But collectively, all of these players have the ability to look under the hood and delay it for a year or longer. Okay. So that legal standard is very mushy because in part, it depends on how you define the market that these companies are competing in, correct?

6:51How do you think the regulators will look at the different markets in which these companies compete? Like there's the streaming market, there's the theatrical distribution market, there's the content distribution market, all of it. Yes. So there's a traditional way and there's the modern way. The traditional way, and both are relevant here, the traditional way is, okay, what's similar, right? Studio has produced content, and then they compete for distribution of that content. And so they really are competing in that space. You know, Netflix might be competing in the streaming of an aggregate service that includes its own content and other people's content.

7:31That's sort of more of the traditional way, right? And you can kind of see, well, I pay a few bucks a month for streaming and I can choose between competitor A and competitor B. You know, I am an actor or I'm a producer or I'm a writer and I want to have a relationship with the studio when I want to produce a scripted series. I have the ability to negotiate with somebody. Who am I going to play off each other? Yeah, that was a big deal in that book merger that was blocked, Simon & Schuster blocked, because authors like Stephen King came out and said, wait a second, there are going to be fewer places for me to sell my books.

8:02And that's a there's an analogous situation in Hollywood. If five studios go down to four, it means less buyers. Yes. And so you jumped the gun for me because that's exactly where we're going to take this conversation, which is that's a great analogy because it was a traditional legacy industry merging. And they said they were merging in order to compete against Amazon. That argument did not work in court. And that's the second more modern framing here, right? Because the player you didn't mention but is looming in the background of all this is Google. Google with YouTube and its massive amount of scale and advertising revenue from user-generated content is now the 800-pound gorilla in the industry.

8:45And so anyone who merges is going to say that they need to vertically integrate, they need to compete so that they can put up a competitive alternative to the giant of Google. Well, the Ellisons said that when they bought Paramount. They're like, we need to get to scale and we have the resources to do that. And they're going to make the same argument when they're being pressed about Warner Brothers, is that Hollywood companies just are not big enough anymore. And I understand that argument. I mean, we saw it just now with Disney going up against YouTube over carriage of their networks. Like YouTube kind of just said, we're bigger than you.

9:24We want special treatment. And for most of the analysts that I've seen, they got it. Yeah, so, but where does that argument end? And this is the question I think we all have to ask and answer because we've heard this before, right? Think about all the mergers. I mean, you can look at Warner Brothers alone in Time Warner. It's sort of like the ring in the Lord of the Rings. Anyone who gets it turns crazy and ends up, you know, and so, I mean, one of the first deals I worked on at the FTC early in my career was AOL Time Warner. We can all see how that worked out. But, you know, and then you have AT &T and Warner Discovery.

9:59The question is, has anybody, and they all said at the same time for all these transactions that they needed them to get scale, right? They can't compete without scale. And then they wait a year and then they say, well, now we don't have enough scale. So now we need the next deal. At what point do you draw that line? It's a race to the bottom, you think. The race to scale is a race to the bottom, and it ultimately ends up with the three companies owning everything. That is the path we are on right now. Right. So how do we not have that? How do we allow these companies to do what they do but prevent this kind of oligopoly?

10:37Because the argument is Warner Brothers is not a growing business, Warner Discovery. brief. The TV businesses are dragging down these companies in such a way that they need to do something to create a growth narrative. And they can't, they have been unable to do it on their own. So the only way to do it is to combine. So there are a couple of different ways to approach this problem. One way we approached it when I was in office was to say, well, if the problem is that the big tech companies have too much power, let's take on the big tech tech companies. Let's go after Google on search, which we did and we won.

11:15Let's go after Google on ad tech and their control over web-based advertising. We did that and we won. The FTC today lost a case against Facebook, but at least they took that swing. I saw that. Facebook was found to have not acted in an anti-competitive way by buying rivals like Instagram and WhatsApp. Well, because TikTok. But at the time, the FTC could have blocked that deal 10 years ago based on the information they had at the time. But isn't that the argument that everybody thought Facebook was a monopoly until TikTok came along? And everybody thought that Google was a monopoly. And now they're talking about AI and open AI eating their lunch, if that happens.

11:58Right. Except for if you're an advertiser. Right. I know. And we just talk about it all the time. It's really hard to have a media business these days when Facebook and Google and Amazon take 70, 80 % of the market off the table. Right. The media and entertainment industry is turning into theater, a really high end niche product that does not have the scale to compete on the advertising side. So what do we do about that from an antitrust perspective? Well, there are a couple of things you can do. One is I'm not convinced that merging everybody up and rolling them into a massive platform is going to solve the problem rather than exacerbate the problem.

12:41I think we have to hold the big tech companies more accountable. The fact of the matter is they have too much power. And if the media companies can't compete with these massive businesses because the tech companies have too much power, then let's do something about the tech companies. Yeah, good luck. It seems like that ship has kind of sailed, but maybe not. And the political winds are certainly not blowing that direction, considering how much that tech companies are kissing Donald Trump's ass. Well, that's the other problem here. That's the practical matter here. Yes. And so in my area of the world, until the last few years, it was an insular community of antitrust lawyers who looked at everything in terms of prices.

13:21What is it going to consume? Are we going to pay more or less? Is their movie ticket going to go up? Is the cost of advertising on a network TV going to go up? Or is your streaming price going to go up? All that's relevant. But then the world has changed. And you mentioned the Penguin Random House Simon & Schuster deal. We blocked it not based on the price of books going up, but based on the negotiating leverage that the publishers had over authors, increasing so that authors would get less for their professional works. That's what, in the industry, we call a monopsony concern. And we won. We won based on that alone.

13:55It was the first time ever that we blocked a merger based on that theory. We need to start thinking about that. We also need to start thinking about conflicts of interest. If you own the platform and compete on the platform, is that really the kind of world we want? Yeah, I've seen some data that suggests that if Netflix takes the Warner Brothers library off of the licensing market and hoards it on its platform, how much damage that would do to the overall licensing market. Exactly. And so it's about the ability to exercise power. And then the other thing now that has become clear, and we see this with Colbert and Kimmel, is now you have a government that's willing to use the gate or its gatekeeping function on these mergers to influence what people do and do not say, what they can and cannot say, and how they say it.

14:47And so when you have a massive amount of concentration and you have a government that's willing to influence speech, that is a very dangerous situation for our society and our democracy. Well, and they're also, it seems like, directing certain deals to get done and certain deals to not get done. I mean, we saw this with Trump last time where the Fox-Disney merger just went through without much discussion at all. If that were another media company, I think Trump and his DOJ probably would have been a little bit more aggressive there or FTC. And now we're seeing it where he's talking about the Ellisons being so awesome.

15:26And David Ellison's a great young man. And, you know, he's getting a payoff for CBS. So do you think it's just about that now? Do you think it's just about whoever has the most political influence will win the day here? I hope not. But what are the legal ramifications or implications outside of the Trump administration? That's where the state attorneys general come in. Yeah, that's what I'm getting to. So can the state attorneys general do anything here? Yes. Right. And California has already come out and said that they're going to take a close look in a big swing. And they have the resources to do that.

16:02New York has the resources to do that. Private citizens can also sue. That being said, it's very expensive and difficult. But the states do have a role to play here. But do you think that will be effective? I mean, when was the last time a state attorney general blocked a big corporate merger? They can. So the state AGs were effective. Even in the last administration, they brought their own cases and supermarket mergers. Okay. Oh, right. The Kroger thing. Yeah. Exactly. And the FTC ended up winning in that case as well, much to their credit. But there's a lot that states can do, and they've become more active, and they've invested more in their litigation capability.

16:41And I think this is really important, particularly in the state of California, because I'm a creative rights, artist rights person. That's where I think, and I think there's a lot that the industry needs to do to protect itself. And so it needs to make sure that it's protecting itself, not just against corporate concentration and the ability to extract more from the creators, but it also happens at the same time of this AI transformation. and the negotiating leverage, the ability of people who act, the people who write, the people who produce to make sure that they're protecting their interests has never been greater, perhaps in the history of the industry.

17:20And so reducing their leverage is going to be disastrous for the future. Even if Comcast or Paramount buy this company and dramatically reduce the number of movies released in theaters, that could have an impact on multiplexes around the country and the world. And so it's not just a corporate thing. Like I could see other states getting involved here and being like, wow, you're kind of killing the theater business. The Republicans have targeted Netflix or seem to be targeting Netflix. Daryl Issa, congressman, and there's a US senator, Roger Marshall. They have sent letters to Attorney General Pam Bondi that have essentially mirrored the paramount position on this potential auction.

18:06And they have said that, quote, to allow this would be to diminish incentives to produce new content and major theatrical releases, as evidenced by Netflix's own statements dismissing movie theaters as outdated, which could undermine opportunities for the full range of industry professionals, both in front of and behind the camera. So this is a political issue. These Republicans seem to be going after Netflix in particular. And Netflix responds by saying that, first of all, they are not the industry leader in TV viewing. If you actually look at the Nielsen gauge, they are the number four distributor behind YouTube, Disney and NBC Universal.

18:48Do you believe that? Well, that's why I wanted to ask you, because it depends how you define the market. If you define it just by streaming, Netflix is clearly the leader. If you define it by video consumption, then, you know, these linear channels still pump out tons of hours of viewing via sports and news. So, like, how are we going to define the market for the purpose of antitrust evaluation? Right. And so, in my view, the right way to define the market is by power. Okay. But that can mean different things to different people. What's an objective marker of power? If I'm negotiating with Netflix, can I credibly say I'm going to distribute my video as user-generated content over YouTube?

19:34Or can I forego Netflix and instead go to linear? The answer to that is clearly no, right? For a significant segment of high-end scripted television. Well, they want, yeah, they want exclusives and they're trying to get more exclusives. But there are other options. You can sell your show to probably 10, 15 buyers in this country. Just nobody has the distribution power of Netflix, but you can sell it elsewhere. Not to get what you need, though, right? And so I can go to a fruit stand every week, but it's not going to substitute for my grocery store. The fact of the matter is there are certain realities, and the antitrust laws are flexible enough to understand that.

20:15They get that just because in theory you can do something doesn't mean it's in the market. It asks the question, practically speaking, do you have an alternative or do they have enough power that they can raise the price or reduce quality or reduce the deal you're going to get by 5 % or 10 % without losing enough consumers or artists or others to make that unprofitable? If you take that kind of test that you applied here, you can get a very clear answer. Yeah, I'm not sure I agree with you in the current market. I think there are enough options right now, but I do agree that if they swallow Warner Brothers, then that significantly reduces the options.

20:56Well, that's the question. I mean, the most prolific TV studio that is not Netflix right now is probably Warner Brothers. They produce a ton of shows for all types of buyers, for themselves and for others. And to put that studio under Netflix with a mandate to produce just for Netflix, I think that does take a big chunk out of the market. Yes. And the test, the legal test is an absolute certainty that it's going to cause harm. The legal test is that it may substantially lessen competition or tend to create a monopoly. It's probabilistic. You don't have to prove it to a certainty. And just for the record, Netflix would argue that this deal would increase production because of all the suitors out there.

21:38They are the only entertainment company that is making more and more content every year. And they would look to use Warner Brothers to make more content. That's their position. Correct. We don't know if that would end up happening. And ultimately, they have a long-range plan, probably, where if they can eliminate competitors and some of these linear dinosaurs die off, at some point in 10 years, 15 years, there are three buyers or four buyers. And then they can squeeze as much as they want. Yes. So when I was in office, I viewed thousands of mergers and every party to an anti-competitive merger came in and said, we need to be a monopoly so that we can make everyone's lives better.

22:17Right. That's what the other Netflix argument is, is that this would give Netflix customers more content for the same or less money. Right. And probably heard very similar arguments every other time somebody bought or sold Time Warner.

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25:11Peacock is US only. It's not on the same level as the others. On the Nielsen gauge every month, it's much lower. NBCUniversal, which they own, is above Netflix. And that includes NBC and all of their other channels that have pretty significant sports rights. This merger would combine two legacy studios, Universal and Warners. And I think, I mean, they're both in Burbank. They'd probably sell off one of the lots or combine them or do something there. Like, what is the argument against this merger? that's a more straightforward, you know, two massive studios coming together and they're just going to exercise more power on both sides of the market if they merge.