Antitrust Unlikely to Restrict Today's 'Runs,' 'Clearances' in Film Distribution

Exclusivity will typically enhance the value of a product for a retailer. Being the only outlet for some period of time from which a customer can purchase the product in a given area should enable the seller to charge a premium price. Because the retailer could charge a premium price under this arrangement, the distributor in turn might be able to charge the retailer a premium price for that period and scope of exclusivity. Indeed, in the 1930s and '40s, that was the logic that underlay the distribution of motion pictures. Distributors would license exhibitors on higher terms for a limited, first-run engagement, granting the theatre owner a “clearance” over competing theatres in a broad geographic area, for a time during and even following the first run engagement.

The Evolution of Antitrust in Film

The landmark antitrust case United States v. Paramount Pictures, 334 U.S. 131 (1948) (http://bit.ly/OJpLlI), restructured the film industry by separating production from exhibition. As part of that restructuring, the U.S. Supreme Court established “rules” for when film clearances and runs would be deemed reasonable. The Supreme Court rejected the argument that clearances were per se unlawful. The court upheld the lower court's finding that a clearance could be reasonable when used to protect an exhibitor's investment in the license and when it was not unduly extended in time or geographic area.

The so-called Paramount/Loew's decree then listed various considerations to be taken into account in determining whether a theatre's clearance was reasonable, including the character and location of neighboring theatres. The Paramount/Loew's decree laid down a guiding rule that there could be no clearance between theatres not in substantial competition with each other. In the years that followed, exhibitors frequently brought private antitrust actions claiming that distributors had conspired with favored exhibitors (usually a large chain theatre), granting them unduly lengthy and broad clearances on early runs of high-grossing
films, in order to boycott independent theatres. The Loew's decree remained in effect until 1992, when it was finally vacated.

In the years since the Paramount/Loew's decree was issued, antitrust law has evolved, giving greater flexibility to manufacturers and distributors in granting territorial or customer exclusivity. The courts have recognized that these “vertical, non-price” restrictions can be beneficial to the manufacturer/distributor and to the retail outlet, and that they are not always “unreasonable restraints of trade” and therefore can be lawful. Courts have recognized that, while such restrictions might reduce intrabrand competition (competition among sellers of the same brand of a manufacturer ' in this case, exhibitors of the same motion picture), the restrictions might promote competition between different brands or movies. Giving theatres geographic clearance may reduce competition among exhibitors playing the film simultaneously, but it may be more lucrative because of the higher licensing terms the film distributor can obtain.

The change in outlook on these vertical restrictions was evident in the U.S. Justice Department's (DOJ) consideration of Comcast's joint venture with General Electric (GE) and NBC Universal (NBCU) in 2011. At the same time, the venture would create a vertically integrated chain from production to network distribution to local cable “exhibitors,” with a potential for abuse of market power at each level, much like the film industry prior to the Paramount/Loew's case.

NBCU owns Universal Pictures, Focus Films and Universal Studios, which produce films for theatrical, television and DVD release. NBCU also owns the NBC and Telemundo broadcast networks, and owns or has interests in numerous national cable networks. Comcast is the largest cable company, at the time having 23 million subscribers and 16 million Internet service subscribers. It had more than 40% of the subscribers in seven of the 10 largest metropolitan areas. Comcast also owned or had interests in various national cable networks. GE, the parent of NBCU, agreed to contribute all of the assets of NBCU and Comcast agreed to contribute all of its cable programming assets, including its national networks (but not its cable system), to a newly formed joint venture controlled by Comcast. The DOJ ultimately permitted the venture to proceed, subject to certain “conduct” restrictions to avert a number of anticipated anticompetitive effects.

In its Competitive Impact Statement supporting a consent judgment permitting the venture, the DOJ described the video programming industry as having three different levels: content production, conduct aggregation or networks, and distribution. The DOJ observed that television production studios license their content so as to maximize revenues. At an earlier time, first-run licenses were reserved for one the four major broadcast networks, followed by broadcast syndication and then cable syndication. Now, more typically, studios first license a program to broadcast networks or, alternatively, a cable network. The content producers then license their programming for subsequent “windows” such as syndication (e.g., licensing series to broadcast and cable networks for subsequent runs), DVD distribution, video-on-demand and pay-per-view services.

Producers of movies distribute them first to theatres and then license them on DVD, then to pay-per-view, then to premium cable networks, then to regular cable
networks and finally to broadcast networks. At each step in the distribution, the content producer is able to offer its licensee an assurance that it will not face competition from a less costly distribution channel. As the DOJ saw it, “[t]hese windows of exclusivity enable a content producer to maximize the revenues it earns on its content by separating customers based on their willingness to pay and effectively increasing the price charged to the customers that place a higher value on receiving content earlier.” The DOJ accepted that there could be a lawful purpose to a sequence of runs and clearances.

Online and Cable

Online video programming distributors (OVDs) ' such as Hulu, Netflix, Amazon and Apple ' are relatively recent entrants into the video distribution market. OVDs compete with multichannel video programming distributors (MPVDs), such as cable, telephone and satellite distributors. To respond to this competition, MPVDs are increasing their offerings of on-demand choices.

Much like the pre-Paramount days, the DOJ was concerned that vertical integration ' the common ownership of production and exhibition facilities ' would restrict the availability of content and limit the competition and innovation that OVDs now bring to consumers. A combination of production and exhibition could also change the producers' incentives in dealing with downstream competitors. Among other things, a combined company would have the ability to foreclose competitors and establish or protect market power in the downstream market (e.g., cable networks and MPVD distribution) by denying, delaying or raising the price of popular programming. A content provider would not follow that strategy if it were a stand-alone producer because its object would then be to maximize licensing revenue solely from the video production itself. This strategy could enable the vertically integrated cable distributor to defeat the competitive threat of competing MPVDs, OVDs and raise cable prices to subscribers.

FCC Restrictions

Economic studies by the Federal Communications Commission (FCC), whose approval of the Comcast-NBCU venture was also required, examined the impact of a hypothetical distribution dispute that prevented a cable network from carrying the NBC network. These studies estimated the percentage of subscribers who would depart the excluded cable distributor for some other distributor (“the departure rate”), and the percentage of those who would then choose Comcast (“the diversion rate”). The studies from various geographic areas indicated that a vertically integrated Comcast would “almost always” profit from a temporary strategy of refusing to license a particular cable distributor or delaying its availability to later “runs” and would “often” profit from a permanent foreclosure strategy.

Reminiscent of the Paramount/Loew's decrees, the Final Judgment ' the FCC's order approving the transaction ' allowing the Comcast-NBCU venture to proceed prohibited certain anti-competitive conduct by the conduct providers. One of those restrictions was to limit the use of exclusivities (in effect, runs and clearances) to restrict competition in downstream markets (the theatres of the 1930s and '40s, and MPVDs and OVDs of today). The Comcast judgment prohibits the joint venture from entering into any agreement containing terms that forbid, limit or create economic incentives that limit the providing of programming content to OVDs, unless such terms are commonly and reasonably employed by other content producers in the industry. The Final Judgment and FCC order provide an arbitration mechanism to resolve disputes about access to programming. For more, see, “FCC Grants Approval of Comcast-NBCU Transaction,” http://fcc.us/gIwPWA.

Is it appropriate to bottle “old antitrust wine” in the new distribution models of the digital age? Interestingly, the DOJ, states' attorneys general and consumers allege in Electronic Book Antirust Litigation, 11 MD 229 (S.D.N.Y.), that, to combat price-cutting by e-books that would erode sales of hard and soft cover books, publishers considered “windows” of earlier availability to the traditional book market, before making books available to lower cost electronic distribution. This distribution pattern should not be entirely surprising. Runs and clearances were a profitable strategy in the 1930s, and in a somewhat different form, they are still today. Granting an exclusive run, with clearance over subsequent runs at competitors, can continue to enhance the value to customers who are willing to pay more for earlier accessibility ' whether “first run” access is at theatres or bookstores, and the new “subsequent run” is accessible by downloading from the Internet.

Much like the independent theatres of years ago, the concern with digital distribution is that the combination of production, network distribution and retail distribution could lead to market power to exclude the new competitors of the digital age, whether they are OVDs for programming and movies, or e-books for publishing. It is likely that content providers will attempt to find a distribution pattern that offers some measure of exclusivity to licensees who will pay a higher fee for earlier rights ' and unless that exclusivity is unduly long, it is likely to be lawful under the antitrust laws.

Exclusivity will typically enhance the value of a product for a retailer. Being the only outlet for some period of time from which a customer can purchase the product in a given area should enable the seller to charge a premium price. Because the retailer could charge a premium price under this arrangement, the distributor in turn might be able to charge the retailer a premium price for that period and scope of exclusivity. Indeed, in the 1930s and '40s, that was the logic that underlay the distribution of motion pictures. Distributors would license exhibitors on higher terms for a limited, first-run engagement, granting the theatre owner a “clearance” over competing theatres in a broad geographic area, for a time during and even following the first run engagement.

The Evolution of Antitrust in Film

The landmark antitrust case United States v. Paramount Pictures , 334 U.S. 131 (1948) ( http://bit.ly/OJpLlI ), restructured the film industry by separating production from exhibition. As part of that restructuring, the U.S. Supreme Court established “rules” for when film clearances and runs would be deemed reasonable. The Supreme Court rejected the argument that clearances were per se unlawful. The court upheld the lower court's finding that a clearance could be reasonable when used to protect an exhibitor's investment in the license and when it was not unduly extended in time or geographic area.

The so-called Paramount/Loew's decree then listed various considerations to be taken into account in determining whether a theatre's clearance was reasonable, including the character and location of neighboring theatres. The Paramount/Loew's decree laid down a guiding rule that there could be no clearance between theatres not in substantial competition with each other. In the years that followed, exhibitors frequently brought private antitrust actions claiming that distributors had conspired with favored exhibitors (usually a large chain theatre), granting them unduly lengthy and broad clearances on early runs of high-grossing
films, in order to boycott independent theatres. The Loew's decree remained in effect until 1992, when it was finally vacated.

In the years since the Paramount/Loew's decree was issued, antitrust law has evolved, giving greater flexibility to manufacturers and distributors in granting territorial or customer exclusivity. The courts have recognized that these “vertical, non-price” restrictions can be beneficial to the manufacturer/distributor and to the retail outlet, and that they are not always “unreasonable restraints of trade” and therefore can be lawful. Courts have recognized that, while such restrictions might reduce intrabrand competition (competition among sellers of the same brand of a manufacturer ' in this case, exhibitors of the same motion picture), the restrictions might promote competition between different brands or movies. Giving theatres geographic clearance may reduce competition among exhibitors playing the film simultaneously, but it may be more lucrative because of the higher licensing terms the film distributor can obtain.

The change in outlook on these vertical restrictions was evident in the U.S. Justice Department's (DOJ) consideration of Comcast's joint venture with General Electric (GE) and NBC Universal (NBCU) in 2011. At the same time, the venture would create a vertically integrated chain from production to network distribution to local cable “exhibitors,” with a potential for abuse of market power at each level, much like the film industry prior to the Paramount/Loew's case.

NBCU owns Universal Pictures, Focus Films and Universal Studios, which produce films for theatrical, television and DVD release. NBCU also owns the NBC and Telemundo broadcast networks, and owns or has interests in numerous national cable networks. Comcast is the largest cable company, at the time having 23 million subscribers and 16 million Internet service subscribers. It had more than 40% of the subscribers in seven of the 10 largest metropolitan areas. Comcast also owned or had interests in various national cable networks. GE, the parent of NBCU, agreed to contribute all of the assets of NBCU and Comcast agreed to contribute all of its cable programming assets, including its national networks (but not its cable system), to a newly formed joint venture controlled by Comcast. The DOJ ultimately permitted the venture to proceed, subject to certain “conduct” restrictions to avert a number of anticipated anticompetitive effects.

In its Competitive Impact Statement supporting a consent judgment permitting the venture, the DOJ described the video programming industry as having three different levels: content production, conduct aggregation or networks, and distribution. The DOJ observed that television production studios license their content so as to maximize revenues. At an earlier time, first-run licenses were reserved for one the four major broadcast networks, followed by broadcast syndication and then cable syndication. Now, more typically, studios first license a program to broadcast networks or, alternatively, a cable network. The content producers then license their programming for subsequent “windows” such as syndication (e.g., licensing series to broadcast and cable networks for subsequent runs), DVD distribution, video-on-demand and pay-per-view services.

Producers of movies distribute them first to theatres and then license them on DVD, then to pay-per-view, then to premium cable networks, then to regular cable
networks and finally to broadcast networks. At each step in the distribution, the content producer is able to offer its licensee an assurance that it will not face competition from a less costly distribution channel. As the DOJ saw it, “[t]hese windows of exclusivity enable a content producer to maximize the revenues it earns on its content by separating customers based on their willingness to pay and effectively increasing the price charged to the customers that place a higher value on receiving content earlier.” The DOJ accepted that there could be a lawful purpose to a sequence of runs and clearances.

Online and Cable

Online video programming distributors (OVDs) ' such as Hulu, Netflix, Amazon and Apple ' are relatively recent entrants into the video distribution market. OVDs compete with multichannel video programming distributors (MPVDs), such as cable, telephone and satellite distributors. To respond to this competition, MPVDs are increasing their offerings of on-demand choices.

Much like the pre-Paramount days, the DOJ was concerned that vertical integration ' the common ownership of production and exhibition facilities ' would restrict the availability of content and limit the competition and innovation that OVDs now bring to consumers. A combination of production and exhibition could also change the producers' incentives in dealing with downstream competitors. Among other things, a combined company would have the ability to foreclose competitors and establish or protect market power in the downstream market (e.g., cable networks and MPVD distribution) by denying, delaying or raising the price of popular programming. A content provider would not follow that strategy if it were a stand-alone producer because its object would then be to maximize licensing revenue solely from the video production itself. This strategy could enable the vertically integrated cable distributor to defeat the competitive threat of competing MPVDs, OVDs and raise cable prices to subscribers.

FCC Restrictions

Economic studies by the Federal Communications Commission (FCC), whose approval of the Comcast-NBCU venture was also required, examined the impact of a hypothetical distribution dispute that prevented a cable network from carrying the NBC network. These studies estimated the percentage of subscribers who would depart the excluded cable distributor for some other distributor (“the departure rate”), and the percentage of those who would then choose Comcast (“the diversion rate”). The studies from various geographic areas indicated that a vertically integrated Comcast would “almost always” profit from a temporary strategy of refusing to license a particular cable distributor or delaying its availability to later “runs” and would “often” profit from a permanent foreclosure strategy.

Reminiscent of the Paramount/Loew's decrees, the Final Judgment ' the FCC's order approving the transaction ' allowing the Comcast-NBCU venture to proceed prohibited certain anti-competitive conduct by the conduct providers. One of those restrictions was to limit the use of exclusivities (in effect, runs and clearances) to restrict competition in downstream markets (the theatres of the 1930s and '40s, and MPVDs and OVDs of today). The Comcast judgment prohibits the joint venture from entering into any agreement containing terms that forbid, limit or create economic incentives that limit the providing of programming content to OVDs, unless such terms are commonly and reasonably employed by other content producers in the industry. The Final Judgment and FCC order provide an arbitration mechanism to resolve disputes about access to programming. For more, see, “FCC Grants Approval of Comcast-NBCU Transaction,” http://fcc.us/gIwPWA.

Is it appropriate to bottle “old antitrust wine” in the new distribution models of the digital age? Interestingly, the DOJ, states' attorneys general and consumers allege in Electronic Book Antirust Litigation, 11 MD 229 (S.D.N.Y.), that, to combat price-cutting by e-books that would erode sales of hard and soft cover books, publishers considered “windows” of earlier availability to the traditional book market, before making books available to lower cost electronic distribution. This distribution pattern should not be entirely surprising. Runs and clearances were a profitable strategy in the 1930s, and in a somewhat different form, they are still today. Granting an exclusive run, with clearance over subsequent runs at competitors, can continue to enhance the value to customers who are willing to pay more for earlier accessibility ' whether “first run” access is at theatres or bookstores, and the new “subsequent run” is accessible by downloading from the Internet.

Much like the independent theatres of years ago, the concern with digital distribution is that the combination of production, network distribution and retail distribution could lead to market power to exclude the new competitors of the digital age, whether they are OVDs for programming and movies, or e-books for publishing. It is likely that content providers will attempt to find a distribution pattern that offers some measure of exclusivity to licensees who will pay a higher fee for earlier rights ' and unless that exclusivity is unduly long, it is likely to be lawful under the antitrust laws.