Written by: Eric Blaine
Researched by: Amanda Husted
Edited by: Adam Gottlieb
Managing Editor: Jennifer Hill
American motion picture studios have a bipolar reputation. There is the glamorized but satisfying notion of Hollywood as being a delightfully messy mixture of high-powered fast-talkers, gonzo auteurs who will do anything for their art, sleazy agents, stylish stars, and the distinct possibility to dreams may very well come true. However, there is also the doleful realization that movie studios are almost all merely one branch of multinational corporations, those unappealing guys who combine all the worst qualities of bureaucracy, economics, and salesmanship. Movie studios are big businesses, and while making movies often involves art, entertainment, and attractive distillations of cool, they also have to keep an eye on profit margins and bottom lines.
So when one reads that 20th Century Fox, Universal, and Warner Bros. (owned by News Corporation, NBC, and Time Warner respectively) refused to deal with rising DVD retailer Redbox because, frankly, they didn’t think they were making enough money, it’s pretty hard to imagine these three studios as being anything but tedious bean-counters just looking to squeeze some more cash out of whatever source they can find. It strikes many as unseemly, but it’s not the gloriously despicable evil that Hollywood villains could cook up.
The fact that Redbox is suing them both under antitrust law, however, highlights one of the most litigated aspects of anti-competition statutes: the idea that a contract, combination, or conspiracy that restrains trade is something that invariably harms consumers like you and me, and is not tolerated, even in a free market economy. Conspiracies and restraints sound like something more common in the glamorized version of Hollywood, though in truth, they are very common, very mundane, and represent very large amounts of cash.
The lead-up to this lawsuit is straightforward. Redbox’s business model is to place its automated kiosks in locations with a lot of foot traffic, like grocery stores and malls. The kiosks function essentially as DVD vending machines – customers are able to select from hundreds of new and older DVDs and pay $1.00 per night to rent them (or pay $25.00 if they lose the movie). Because the vending machines require virtually no overhead, Redbox is able to stay profitable despite charging only 20% of what brick-and-mortar stores like Blockbuster will charge for the same movie. The combination of low price and convenience has helped Redbox expand from twelve machines in 2004 to thousands in a little over five years.
There is a lot about Redbox’s operations that movie studios just don’t like. For one, studios make vast amounts of money selling new DVDs, and are concerned that having such a low-price alternative will only drive down the demand for new DVDs. Also, after renting a DVD a certain number of times, Redbox sells it, either directly to consumers or to used DVD distributors. Because the quality of used DVDs is virtually the same as for new versions, this further dilutes the market for DVD purchases.
Late this year, Warner Bros., Universal, and Fox had enough. They prohibited their distributors from selling DVDs to Redbox until at least thirty days have passed since the date the movies initially hit the shelves. This means that Blockbuster, Target, and Walmart will have a month to rent and sell a movie before Redbox can even start stocking its machines with it. This directive followed lengthy negotiations in which the studios tried to get Redbox to agree to raise its one-dollar-a-night price, with Redbox steadfastly refusing.
Redbox thereafter filed an antitrust suit, alleging an illegal restraint of trade.
Cut to Flashback!
“Antitrust” is a term given to a broad range of laws meant to prevent business entities participating in certain activities that prevent competition in the free market. The term antitrust arose from the peculiar history of business governance in America’s late 19th century. During that time, one corporation was barred by law from owning the stock of another corporation. The captains of industry (or robber barons, depending on who you asked) didn’t much like this rule, and an elegant solution was devised: shareholders of a corporation could transfer their stock to a trust, and have the trustees operate the corporation or purchase stock in another corporation. The same ends were met, and the law barring corporate ownership of another company’s stock was thoroughly circumvented. The awesome social power that these trusts enjoyed alarmed reformers of the day, who saw rampant harm to consumer choice and the competition of free markets in the actions of entities like the Sugar Trust and Standard Oil.
In 1890, the outcry was great enough for Congress to pass the Sherman Antitrust Act, a law that grants the Federal government authority to break up trusts and other combinations that impermissibly restrained trade and, thereby, harmed the economic welfare of consumers. Moreover, it grants to private actors the right to sue for damages if they are harmed by the illegal antitrust activities of others. Though the days in which corporations cannot own stock in other corporations is long past, the operative language of a “contract, combination, or conspiracy in restraint of trade” is still a fertile ground for both governmental and private litigation.
Such private antitrust suits are common, and potentially lucrative if they prevail. In the recent past, the National Football League has been sued by manufacturers of athletic clothing, alleging that the NFL’s business model drives out small and medium-sized companies and drives up prices for NFL apparel. Similarly, class actions have been filed against telecommunication companies for allegedly agreeing not to branch out into new technologies – technologies, it is said, that would help drive prices down.
Perhaps most on point for Redbox, the United States Supreme Court has held that manufacturers that impose minimal retail prices on their products sold by third parties are not in per se violation of the Sherman Act. In Leegin Creative Leather Products Inc v PSKS Inc., the Court held that a company must demonstrate that its minimal price restriction conforms to the demand that the restriction be commercially reasonable not only for itself, but for all aspects of the economy including consumers. This is a major change from previous precedent, which held that minimal price requirements are as a matter of law violations of antitrust law.
A contract, combination, or conspiracy to restrain trade is precisely what Redbox is alleging against Universal, Fox, and Warner Bros. By directing their distributors not to sell Redbox some of its products until Redbox competitors have had the products for a month, Redbox alleges, these studios are depriving Redbox’s customers of the choice to view a Universal, Fox or Warner Bros. movie, with the naked justification that Redbox is simply not charging people enough money.
It will come as no surprise that Universal, Fox, and Warner Bros. dispute Redbox’s allegation. Fox notes that the economic crisis has harmed its bottom line recently, and that its actions are not only in its own best interest, but in the best interests of consumers. Others wryly speculate that Fox’s economic woes stem more from poor business judgment leading to a string of flops, particularly in its feature film division. Universal’s outlook is similarly bleak. Yet Warner Bros.’ movie studio has been more commercially successful of late, buoyed with a number of successful franchise tent-poles.
Meanwhile, other movie studios are watching closely, especially in light of the recent ruling in Leegin Creative. An executive with Paramount Pictures praised the litigation (without actually backing one side or the other), saying it “gives us access to information that will allow us to make an informed decision about Redbox’s impact on our home entertainment business.”
Even in these lawsuits, the two versions of Hollywood can be seen competing with each other. Lawyers for each party casts itself in the mold of a perfectly innocent, utterly reasonable party just trying to make it through its day the best it can, while being beset by the greedy, arrogant bullying of low down tough guys with lots of money. Meanwhile, the parties’ legal briefs hinge on dusty old precedent and abstract legal arguments, about as far away from the glamour and excitement of movie sets. Time will tell not only which party prevails in these suits, but which aspect of Hollywood controlled the outcome.