ANALYSIS – Hollywood dealmaking risks antitrust scrutiny

By Reuters Staff
July 22, 2009

HollywoodBy Sue Zeidler
LOS ANGELES, July 22 (Reuters) – As media giants band together to reinvent themselves in the digital age, potentially sharing everything from online video sites to DVD distribution, they have to be careful not to raise antitrust hackles.

Hollywood has long butted heads with competition regulators, dating all the way back to the 1940s when the U.S. Supreme Court ruled studios had too much control over the distribution of their own content and forced them to sell movie theaters.

Dealmaking is expected to heat up in the entertainment
industry as studios experiment with various ventures and partnerships to tackle tumbling DVD and advertising sales.

Some media watchers believe recent collaborations to bring TV programming to the Web — such as Hulu.com and “TV Everywhere” — have the potential to raise regulatory eyebrows, resurrecting the issue of “vertical integration.”

“I think there’s going to be more effort in entertainment to consolidate and the Justice Department will take a much more aggressive view,” said Max Blecher, a top antitrust litigator with the firm of Blecher & Collins.

Media and legal experts believe entertainment companies should brace for tougher scrutiny under President Barack Obama, who as a candidate criticized the Bush administration’s handling of antitrust issues overall and of media consolidation in particular.

There have not been any huge mergers in the media industry this year, but plenty of other partnerships are in the works.

Viacom Inc’s Paramount Studios was in early talks with News Corp’s Fox and Sony Corp’s Sony Pictures to combine their DVD manufacturing and distribution operations to cut costs, for example.

Hulu.com, a popular free video website, boasts investment from three media conglomerates: General Electric’s NBC Universal, News Corp and Walt Disney Co.

And Comcast Corp, which owns the E entertainment
network, and Time Warner Inc, home of HBO and CNN, are recruiting more content providers to their “TV Everywhere” initiative to make cable programming available online.

“Hulu’s runaway success over the last year and its growing number of exclusivity agreements mean that it could see some of the added scrutiny that Mr. Obama believes is necessary in the world of media,” wrote Cord Blomquist on his tech policy blog called The Technology Liberation Front.

HOW MUCH IS TOO MUCH
Comcast and Time Warner have said they endorse a framework to bring TV content to customers online in a pro-competitive and non-exclusive manner. Yet some believe “TV Everywhere” could spark antitrust concerns.

“There are a few levels on which it could become problematic. It seems like a system designed to prevent the emergence of competitors,” said themediawonk.com editor Paul Sweeting.

The U.S. Justice Department declined to comment for this story.

Sean Gates, an antitrust lawyer at Morrison and Foerster, said regulators may look into a project like “TV Everywhere” if it turned out to be an exclusive or dominant distribution channel.

“Sometimes other content distributors may fear an outlet such as this will become de facto exclusive, cutting them out. If those fears are founded on fact, that may be something the agencies would be interested in,” he said.

But Gates, who represented studios in a Justice Department probe into on-demand video enterprise Movielink in 2001, and other lawyers, believe market dynamics and issues like piracy will play a big role in any antitrust analysis.

Movielink, a joint venture formed by five movie studios, was cleared of all antitrust suspicions by the Justice Department in 2002 and some antitrust lawyers believe the advent of online piracy played a role in the decision.

“The big concern from an antitrust perspective is whether something will hurt consumers and raise prices. But when you’re competing with free, its hard to argue companies are raising prices to a point where consumers will be hurt,” said Gates.

Blecher also believes changing market dynamics will factor into regulatory considerations, as entertainment can be found on big and small screens, online and offline.

“There are so many different ways to see a movie now,” he said. “Do you include theaters, DVDs, movies available on TV and On Demand? That will be the key legal question.”

Any industry undergoing enormous transformation, such as the one reshaping the media sector, needs to be careful of not risking antitrust ire, analysts say.

“When there’s great change in an industry, antitrust enforcers have traditionally paid close attention to efforts by market incumbents to protect the status quo or steer change in a particular direction favorable to them,” said David Meyer, former principal deputy assistant attorney general at the Justice Department’s antitrust division, now an antitrust lawyer at Morrison & Foerster.

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