Twelve states sued to block the $110 billion merger between Hollywood studios Paramount and Warner Bros. on Monday, arguing that the combination would mean lower revenues for theater owners and cable distributors, and therefore higher prices for moviegoers and cable subscribers.
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The case, filed in the Northern District of California by the state’s attorney general Rob Bonta and 11 other state attorneys general across the country, went for the easiest and most explicable theory of harm: The combined studio would have the leverage to force higher splits with theaters for the biggest films, and the highest fees from cable companies for carriage of their networks.
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Combined, the merged company would have a 27 percent market share of box office revenue based on the last four years of receipts, and a 27 percent market share of basic cable based on carriage fees (calculated by overall viewership, the number is even higher at 34 percent). The merger would consolidate Hollywood into four major studios that would control 85 percent of wide-release films and 93 percent of so-called “tentpole” releases from which theaters make most of their money. Just two companies (the new Paramount–Warner Bros. and Disney) would control 59 percent of basic cable. One out of every four dollars in basic cable and theatrical releases would flow to this merged company.
“With this lawsuit, California and our sister states are fighting for free and fair markets, not rigged markets. America has no kings in government or our economy,” said Bonta in a statement.
The lawsuit kicks off what will surely be a contentious process that has already been marked by Paramount’s threats to leave California and upend long-settled antitrust precedents. But in the states’ corner is a “ticking fee” that raises Paramount’s merger price each day that the acquisition hasn’t closed after October 1. The ticking fee, which accumulates daily, translates to roughly $7.2 million per day, starting in less than three months. A merger challenge can take years to resolve.
THE FEDERAL GOVERNMENT APPROVED THE MERGER last month, both because of at least implicit promises by Donald Trump ally and Paramount CEO David Ellison to defang CNN and promote conservative-leaning media narratives, and an ideological disinclination to challenge mergers of any kind, something that has helped lead to a $3.2 trillion surge in global dealmaking. The political officials at the Justice Department are simply overruling staff on any challenge to corporate consolidation, including with the Paramount–Warner Bros. combination.
State enforcers in California, Arizona, Colorado, Connecticut, Massachusetts, Minnesota, Nevada, New Jersey, New Mexico, New York, Oregon, and Washington decided to pick up the slack for the federal government in this case, and they could have gone in a lot of different directions.
After all, the merger combines two of the five major Hollywood studios, more than 50 basic cable networks, two top premium cable channels (HBO and Showtime), three streaming services (Paramount+, Discovery+, and HBO Max), and three television production studios (Paramount Television, CBS Studios, and Warner Bros. Television) into one company. There are any number of ways that will affect competitors, workers, and customers, all of which involve reduced output, imposition of market power, and eventually higher prices.
I was expecting that they would make an argument about Hollywood workers having fewer studios bidding for their work, similar to the successful Justice Department argument that blocked the merger between two publishers during Joe Biden’s term. But while the lawsuit, which can be read , nods to “threaten[ing] the livelihoods of tens of thousands of workers,” it opted to focus its case on two specific issues: theatrical releases and basic cable. These were deemed the markets that were most defined and had the most precedent value in federal courts.
In essence, the case comes down to bargaining leverage. Movie theaters rely on constant new releases to thrive. They negotiate “splits” with the studio that divvy up the box office receipts. With fewer movies available and fewer studios doing the negotiating, theaters will have less ability to negotiate a favorable split. They will subsequently charge higher prices to customers to recapture some of that lost revenue, and neglect investing in their theaters (like bigger screens or more comfortable seating) for a better experience.
This is particularly true for so-called “tentpole” releases, a distinct market category in the industry. These are films with big budgets, existing intellectual property, and well-known directors and stars. They are the blockbusters, and they go into wide release. Ellison is quoted directly in the complaint, saying that tentpoles are simply a must for theatrical release: “Large franchises and big pieces of intellectual property are launched in theaters, period.”
Usually, studios get better deals for these tentpole releases, with a higher split and guaranteed weeks of booking. Now there will be fewer studios making them. Paramount-Warner will control 30 percent of these tentpole releases, based on the last four years of box office revenues. (Adding Disney would raise that market share to 60 percent.)
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As the lawsuit points out, we have a recent example of this in action. Disney acquired the 20th Century Fox movie studio in 2019, bringing major movie studios down from six to five. Disney’s CEO immediately said it would reduce new Fox studio releases, and that’s exactly what happened. In the last four years, Fox has released less than half as many films as it did between 2015 and 2018. The pandemic played a role there, but Disney announced a reduction in output for Fox before the pandemic even began. Fox’s reduced output is four times as large as other studios over the same period, and 4,000 employees lost their jobs.
Paramount has said that it would “guarantee” at least 30 films a year from itself and Warner Bros. (which would exist as a separate studio under the same owner). But the lawsuit says this isn’t an enforceable guarantee, and it defies common sense. Paramount wouldn’t “cannibalize its sales” by releasing two features close together. The lawsuit notes that Warner Bros. committed to 16 releases in 2023 and “more than 20” in 2024, but then released only 11 and 9 in those years, respectively. In addition, Paramount has said it would sharply reduce staff head count by half, making it impractical to add output, to say nothing of the extreme amounts of debt it is taking on that is incompatible with a sharp increase in film production. Even if they managed it, the films would likely be worse.
“Theatres, distributors, and the viewing public should not be forced to rely on Defendants’ empty commitments to protect them from the effects of an unlawful merger,” the lawsuit states. “They are better served if Paramount and Warner Bros. continue to compete for their business.”
The basic cable argument also involves leverage, though it’s a little weaker because cable is a decaying business. With over 50 basic cable channels, including some that feature rare must-see events like the NCAA March Madness tournament and presidential debates on CNN, a combined Paramount can ask for higher “carriage rates” from cable distributors to increase its revenues. Those inevitably filter down to subscribers.
Paramount can also threaten blackouts if it doesn’t get its way, and cable distributors will have to see them as credible since it would involve so many channels. Programming would not have to be as robust in a world with reduced competition, either.
It’s impossible for this to be fixed with new entrants, since it requires enormous amounts of capital to create a new movie studio or cable network.
“The likely result is higher prices, lower quality, and less content,” the lawsuit concludes.
PARAMOUNT HAS BEEN AMASSING DEFENDERS and defenses in advance of the lawsuit. First, it made some high-profile hires, including Jeffrey Kessler, an ace antitrust lawyer who worked for the states and won the Ticketmaster monopolization case. The New York Times reported Sunday that Paramount also hired Paul Clement, who has argued many cases before the Supreme Court. That suggests how far the studio would be willing to go to win.
In fact, it is threatening to destroy antitrust precedent in the process. Makan Delrahim, the former Justice Department Antitrust Division chief in Trump’s first term, made an oblique threat on LinkedIn that the Supreme Court decision in Philadelphia National Bank “isn’t in the statutory text and I would bet at least 7 votes … at the Supreme Court who would overturn it today.” Philadelphia National Bank is an important case that set a 30 percent market share, which is at issue in this case, as presumptively anti-competitive and unlawful. Indeed, this merger complaint cites Philadelphia National Bank.
That’s not the only threat from Paramount. It has reportedly threatened to force the states to pay the “ticking fee” if they win the case, which could come out to over a billion dollars. This kind of financial intimidation has been tried in other cases and failed. Slightly more seriously, Semafor reported that Paramount would consider leaving California if the state filed the merger challenge. Paramount vowed to keep both existing studio lots in place in a consent decree, and the relationships on the executive and talent side of Hollywood are such that this would put Paramount at a competitive disadvantage, but it definitely shows how much market power it has and how it is ready to abuse it.
I could see Paramount threatening to locate most of its film production outside California; that would be as vindictive as I would expect. But that’s not going to change the lawsuit’s credible case that the merger is illegal. A judge will decide, whether Paramount likes it or not.
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