On November 20, 2017 the U.S. Justice Department filed a suit against the announced merger between AT&T and Time-Warner, arguing that the resulting company would end up with an unmatched dominant position in the media market that would lead to abuses and unfair practices against its competitors and consumers in general. AT&T was one of the biggest telephone and internet providers in the U.S. and in 2015 it acquired DirecTV, which was the largest satellite company in the country. On the other hand, Time-Warner owned important media and content production companies such as cable channels HBO, TNT and CNN, as well as the Warner Bros. movie studio.
Both companies stated that the merger — in which AT&T would acquire Time-Warner for $108.7 billion — had the purpose of combining the universe of media content, programming and original productions of Time-Warner with the digital and satellite platforms of AT&T and DirecTV. They claimed that the merger would benefit consumers because distribution rights and licensing costs would be reduced since the service provider would now own the content, which would translate to lower monthly bills to its clients. Both AT&T and Time-Warner asserted that they operated in different relevant markets and that each division would continue to compete separately with their own competitors, so the marketplace would not be affected.
“Some experts compare [the abuse of dominant position] to school-yard bullying, where a bigger kid picks on a smaller one just because he’s small.”
The Justice Department argued that the merger would result in serious detriment to consumers since AT&T competitors would receive unfavorable fees and conditions for distribution rights and licensing of Time-Warner channels and media content. Some smaller providers, without the capacity to take on these unfavorable fees and conditions, may either opt out of distributing Time-Warner channels and media content all together, or accept them by raising prices to their customers in order to cushion this increase in costs. In both cases, AT&T would be left as the only viable option for consumers, either by price or by content.
Ultimately, AT&T and Time-Warner came out victorious in the courts, and the merger was confirmed in June 2018. The resulting company is now known as Warner Media. However, the controversy certainly put the spotlight on the topic of free competition and the risks that a company with dominant position in the market may represent. Abuse of this dominant position happens when companies take advantage of their financial strength or sizeable market share to unfairly exploit the vulnerability of its weaker competitors with the only purpose of limiting competition or pushing them out of the marketplace altogether. Some experts compare it to school-yard bullying, where a bigger kid picks on a smaller one just because he’s small.
For instance, Star Wars fans anxiously awaited the premier of Episode VIII: The Last Jedi, in 2017. It was expected that this would be one of the biggest blockbusters of the year and would rake in hundreds of millions of dollars in worldwide box-office revenue for Disney — the parent company of Lucasfilm Studios, which owns the franchise—as well as for movie-theater chains and cinemas that screened it. Unfortunately, not every movie theater was able to do so.
The Wall Street Journal reported that Disney imposed a series of conditions to movie-theater chains and cinemas that wished to screen the film. It said that Disney was demanding up to 65% of revenue from ticket sales and that the movie be screened in the biggest theater for up to 4 straight weeks. Some cinema operators called these conditions “the most onerous” they had ever seen.
Disney is relying on the fact that it is the most successful movie studio in the world, being the parent company not only of Lucasfilm Studios (Star Wars, Indiana Jones), but also of Marvel Studios (Avengers, Spider Man), Pixar Animation Studios (Toy Story, Frozen), Disney Animation Studios (The Lion King, The Little Mermaid), and Walt Disney Studios (Mary Poppins, Pirates of the Caribbean), among others. This gives Disney tremendous advantage when negotiating with movie-theater chains and cinemas, because if they refuse or oppose Disney’s impositions they risk losing the right to screen the movies from any, or all, of its other studios —which have produced some of the biggest box-office successes in history and are highly profitable for cinema operators.
The problem lies in the fact that bigger movie-theater chains with many screens may be able to accommodate Disney’s demands, but a small local cinema with only 1 or 2 screens cannot. On the one hand, total revenue and profit margins are lower for smaller cinemas, so the financial impact of paying 65% of ticket sales is greater. And on the other hand, compromising their largest theater to screen the same movie for 4 straight weeks limits their ability to screen other films from other studios, which may promise to be as successful in the box-office. As a result, smaller cinemas would be left to compete unfairly with bigger movie-theater chains, and other movie studios to compete unfairly with Disney. Executives at Disney know this — but at the end of the day, they are the biggest kid in the school-yard.
In Disney’s own Star Wars saga Anakin Skywalker was blinded by his pretenses of greatness and eventually succumbed to the Dark Side to become iconic bad-guy, Darth Vader. It seems here that Disney’s pretenses of success may also be guiding it to eventually turn a dark path in an already obscure and highly-concentrated media market.
