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As has been rumored in the press for a few weeks, today Comcast announced it is considering making a renewed bid for a large chunk of Twenty-First Century Fox’s (Fox) assets. Fox is in the process of a significant reorganization, entailing primarily the sale of its international and non-television assets. Fox itself will continue, but with a focus on its US television business.

In December of last year, Fox agreed to sell these assets to Disney, in the process rejecting a bid from Comcast. Comcast’s initial bid was some 16% higher than Disney’s, although there were other differences in the proposed deals, as well.

In April of this year, Disney and Fox filed a proxy statement with the SEC explaining the basis for the board’s decision, including predominantly the assertion that the Comcast bid (NB: Comcast is identified as “Party B” in that document) presented greater regulatory (antitrust) risk.

As noted, today Comcast announced it is in “advanced stages” of preparing another unsolicited bid. This time,

Any offer for Fox would be all-cash and at a premium to the value of the current all-share offer from Disney. The structure and terms of any offer by Comcast, including with respect to both the spin-off of “New Fox” and the regulatory risk provisions and the related termination fee, would be at least as favorable to Fox shareholders as the Disney offer.

Because, as we now know (since the April proxy filing), Fox’s board rejected Comcast’s earlier offer largely on the basis of the board’s assessment of the antitrust risk it presented, and because that risk assessment (and the difference between an all-cash and all-share offer) would now be the primary distinguishing feature between Comcast’s and Disney’s bids, it is worth evaluating that conclusion as Fox and its shareholders consider Comcast’s new bid.

In short: There is no basis for ascribing a greater antitrust risk to Comcast’s purchase of Fox’s assets than to Disney’s.

Summary of the Proposed Deal

Post-merger, Fox will continue to own Fox News Channel, Fox Business Network, Fox Broadcasting Company, Fox Sports, Fox Television Stations Group, and sports cable networks FS1, FS2, Fox Deportes, and Big Ten Network.

The deal would transfer to Comcast (or Disney) the following:

  • Primarily, international assets, including Fox International (cable channels in Latin America, the EU, and Asia), Star India (the largest cable and broadcast network in India), and Fox’s 39% interest in Sky (Europe’s largest pay TV service).
  • Fox’s film properties, including 20th Century Fox, Fox Searchlight, and Fox Animation. These would bring along with them studios in Sydney and Los Angeles, but would not include the Fox Los Angeles backlot. Like the rest of the US film industry, the majority of Fox’s film revenue is earned overseas.
  • FX cable channels, National Geographic cable channels (of which Fox currently owns 75%), and twenty-two regional sports networks (RSNs). In terms of relative demand for the two cable networks, FX is a popular basic cable channel, but fairly far down the list of most-watched channels, while National Geographic doesn’t even crack the top 50. Among the RSNs, only one geographic overlap exists with Comcast’s current RSNs, and most of the Fox RSNs (at least 14 of the 22) are not in areas where Comcast has a substantial service presence.
  • The deal would also entail a shift in the companies’ ownership interests in Hulu. Hulu is currently owned in equal 30% shares by Disney, Comcast, and Fox, with the remaining, non-voting 10% owned by Time Warner. Either Comcast or Disney would hold a controlling 60% share of Hulu following the deal with Fox.

Analysis of the Antitrust Risk of a Comcast/Fox Merger

According to the joint proxy statement, Fox’s board discounted Comcast’s original $34.36/share offer — but not the $28.00/share offer from Disney — because of “the level of regulatory issues posed and the proposed risk allocation arrangements.” Significantly on this basis, the Fox board determined Disney’s offer to be superior.

The claim that a merger with Comcast poses sufficiently greater antitrust risk than a purchase by Disney to warrant its rejection out of hand is unsupportable, however. From an antitrust perspective, it is even plausible that a Comcast acquisition of the Fox assets would be on more-solid ground than would be a Disney acquisition.

Vertical Mergers Generally Present Less Antitrust Risk

A merger between Comcast and Fox would be predominantly vertical, while a merger between Disney and Fox, in contrast, would be primarily horizontal. Generally speaking, it is easier to get antitrust approval for vertical mergers than it is for horizontal mergers. As Bruce Hoffman, Director of the FTC’s Bureau of Competition, noted earlier this year:

[V]ertical merger enforcement is still a small part of our merger workload….

There is a strong theoretical basis for horizontal enforcement because economic models predict at least nominal potential for anticompetitive effects due to elimination of horizontal competition between substitutes.

Where horizontal mergers reduce competition on their face — though that reduction could be minimal or more than offset by benefits — vertical mergers do not…. [T]here are plenty of theories of anticompetitive harm from vertical mergers. But the problem is that those theories don’t generally predict harm from vertical mergers; they simply show that harm is possible under certain conditions.

On its face, and consistent with the last quarter century of merger enforcement by the DOJ and FTC, the Comcast acquisition would be less likely to trigger antitrust scrutiny, and the Disney acquisition raises more straightforward antitrust issues.

This is true even in light of the fact that the DOJ decided to challenge the AT&T-Time Warner (AT&T/TWX) merger.

The AT&T/TWX merger is a single data point in a long history of successful vertical mergers that attracted little scrutiny, and no litigation, by antitrust enforcers (although several have been approved subject to consent orders).

Just because the DOJ challenged that one merger does not mean that antitrust enforcers generally, nor even the DOJ in particular, have suddenly become more hostile to vertical mergers.

Of particular importance to the conclusion that the AT&T/TWX merger challenge is of minimal relevance to predicting the DOJ’s reception in this case, the theory of harm argued by the DOJ in that case is far from well-accepted, while the potential theory that could underpin a challenge to a Disney/Fox merger is. As Bruce Hoffman further remarks:

I am skeptical of arguments that vertical mergers cause harm due to an increased bargaining skill; this is likely not an anticompetitive effect because it does not flow from a reduction in competition. I would contrast that to the elimination of competition in a horizontal merger that leads to an increase in bargaining leverage that could raise price or reduce output.

The Relatively Lower Risk of a Vertical Merger Challenge Hasn’t Changed Following the DOJ’s AT&T/Time Warner Challenge

Judge Leon is expected to rule on the AT&T/TWX merger in a matter of weeks. The theory underpinning the DOJ’s challenge is problematic (to say the least), and the case it presented was decidedly weak. But no litigated legal outcome is ever certain, and the court could, of course, rule against the merger nevertheless.

Yet even if the court does rule against the AT&T/TWX merger, this hardly suggests that a Comcast/Fox deal would create a greater antitrust risk than would a Disney/Fox merger.

A single successful challenge to a vertical merger — what would be, in fact, the first successful vertical merger challenge in four decades — doesn’t mean that the courts are becoming hostile to vertical mergers any more than the DOJ’s challenge means that vertical mergers suddenly entail heightened enforcement risk. Rather, it would simply mean that that, given the specific facts of the case, the DOJ was able to make out its prima facie case, and that the defendants were unable to rebut it.  

A ruling for the DOJ in the AT&T/TWX merger challenge would be rooted in a highly fact-specific analysis that could have no direct bearing on future cases.

In the AT&T/TWX case, the court’s decision will turn on its assessment of the DOJ’s argument that the merged firm could raise subscriber prices by a few pennies per subscriber. But as AT&T’s attorney aptly pointed out at trial (echoing the testimony of AT&T’s economist, Dennis Carlton):

The government’s modeled price increase is so negligible that, given the inherent uncertainty in that predictive exercise, it is not meaningfully distinguishable from zero.

Even minor deviations from the facts or the assumptions used in the AT&T/TWX case could completely upend the analysis — and there are important differences between the AT&T/TWX merger and a Comcast/Fox merger. True, both would be largely vertical mergers that would bring together programming and distribution assets in the home video market. But the foreclosure effects touted by the DOJ in the AT&T/TWX merger are seemingly either substantially smaller or entirely non-existent in the proposed Comcast/Fox merger.

Most importantly, the content at issue in AT&T/TWX is at least arguably (and, in fact, argued by the DOJ) “must have” programming — Time Warner’s premium HBO channels and its CNN news programming, in particular, were central to the DOJ’s foreclosure argument. By contrast, the programming that Comcast would pick up as a result of the proposed merger with Fox — FX (a popular, but non-essential, basic cable channel) and National Geographic channels (which attract a tiny fraction of cable viewing) — would be extremely unlikely to merit that designation.

Moreover, the DOJ made much of the fact that AT&T, through DirectTV, has a national distribution footprint. As a result, its analysis was dependent upon the company’s potential ability to attract new subscribers decamping from competing providers from whom it withholds access to Time Warner content in every market in the country. Comcast, on the other hand, provides cable service in only about 35% of the country. This significantly limits its ability to credibly threaten competitors because its ability to recoup lost licensing fees by picking up new subscribers is so much more limited.

And while some RSNs may offer some highly prized live sports programming, the mismatch between Comcast’s footprint and the FOX RSNs (only about 8 of the 22 Fox RSNs are in Comcast service areas) severely limits any ability or incentive the company would have to leverage that content for higher fees. Again, to the extent that RSN programming is not “must-have,” and to the extent there is not overlap between the RSN’s geographic area and Comcast’s service area, the situation is manifestly not the same as the one at issue in the AT&T/TWX merger.

In sum, a ruling in favor of the DOJ in the AT&T/TWX case would be far from decisive in predicting how the agency and the courts would assess any potential concerns arising from Comcast’s ownership of Fox’s assets.

A Comcast/Fox Deal May Entail Lower Antitrust Risk than a Disney/Fox Merger

As discussed below, concerns about antitrust enforcement risk from a Comcast/Fox merger are likely overstated. Perhaps more importantly, however, to the extent these concerns are legitimate, they apply at least as much to a Disney/Fox merger. There is, at minimum, no basis for assuming a Comcast deal would present any greater regulatory risk.

The Antitrust Risk of a Comcast/Fox Merger Is Likely Overstated

The primary theory upon which antitrust enforcers could conceivably base a Comcast/Fox merger challenge would be a vertical foreclosure theory. Importantly, such a challenge would have to be based on the incremental effect of adding the Fox assets to Comcast, and not on the basis of its existing assets. Thus, for example, antitrust enforcers would not be able to base a merger challenge on the possibility that Comcast could leverage NBC content it currently owns to extract higher fees from competitors. Rather, only if the combination of NBC programming with additional content from Fox could create a new antitrust risk would a case be tenable.

Enforcers would be unlikely to view the addition of FX and National Geographic to the portfolio of programming content Comcast currently owns as sufficient to raise concerns that the merger would give Comcast anticompetitive bargaining power or the ability to foreclose access to its content.

Although even less likely, enforcers could be concerned with the (horizontal) addition of 20th Century Fox filmed entertainment to Universal’s existing film production and distribution. But the theatrical film market is undeniably competitive, with the largest studio by revenue (Disney) last year holding only 22% of the market. The combination of 20th Century Fox with Universal would still result in a market share only around 25% based on 2017 revenues (and, depending on the year, not even result in the industry’s largest share).

There is also little reason to think that a Comcast controlling interest in Hulu would attract problematic antitrust attention. Comcast has already demonstrated an interest in diversifying its revenue across cable subscriptions and licensing, broadband subscriptions, and licensing to OVDs, as evidenced by its recent deal to offer Netflix as part of its Xfinity packages. Hulu likely presents just one more avenue for pursuing this same diversification strategy. And Universal has a history (see, e.g., this, this, and this) of very broad licensing across cable providers, cable networks, OVDs, and the like.

In the case of Hulu, moreover, the fact that Comcast is vertically integrated in broadband as well as cable service likely reduces the anticompetitive risk because more-attractive OVD content has the potential to increase demand for Comcast’s broadband service. Broadband offers larger margins (and is growing more rapidly) than cable, and it’s quite possible that any loss in Comcast’s cable subscriber revenue from Hulu’s success would be more than offset by gains in its content licensing and broadband subscription revenue. The same, of course, goes for Comcast’s incentives to license content to OVD competitors like Netflix: Comcast plausibly gains broadband subscription revenue from heightened consumer demand for Netflix, and this at least partially offsets any possible harm to Hulu from Netflix’s success.

At the same time, especially relative to Netflix’s vast library of original programming (an expected $8 billion worth in 2018 alone) and content licensed from other sources, the additional content Comcast would gain from a merger with Fox is not likely to appreciably increase its bargaining leverage or its ability to foreclose Netflix’s access to its content.     

Finally, Comcast’s ownership of Fox’s RSNs could, as noted, raise antitrust enforcers’ eyebrows. Enforcers could be concerned that Comcast would condition competitors’ access to RSN programming on higher licensing fees or prioritization of its NBC Sports channels.

While this is indeed a potential risk, it is hardly a foregone conclusion that it would draw an enforcement action. Among other things, NBC is far from the market leader, and improving its competitive position relative to ESPN could be viewed as a benefit of the deal. In any case, potential problems arising from ownership of the RSNs could easily be dealt with through divestiture or behavioral conditions; they are extremely unlikely to lead to an outright merger challenge.

The Antitrust Risk of a Disney Deal May Be Greater than Expected

While a Comcast/Fox deal doesn’t entail no antitrust enforcement risk, it certainly doesn’t entail sufficient risk to deem the deal dead on arrival. Moreover, it may entail less antitrust enforcement risk than would a Disney/Fox tie-up.

Yet, curiously, the joint proxy statement doesn’t mention any antitrust risk from the Disney deal at all and seems to suggest that the Fox board applied no risk discount in evaluating Disney’s bid.

Disney — already the market leader in the filmed entertainment industry — would acquire an even larger share of box office proceeds (and associated licensing revenues) through acquisition of Fox’s film properties. Perhaps even more important, the deal would bring the movie rights to almost all of the Marvel Universe within Disney’s ambit.

While, as suggested above, even that combination probably wouldn’t trigger any sort of market power presumption, it would certainly create an entity with a larger share of the market and stronger control of the industry’s most valuable franchises than would a Comcast/Fox deal.

Another relatively larger complication for a Disney/Fox merger arises from the prospect of combining Fox’s RSNs with ESPN. Whatever ability or incentive either company would have to engage in anticompetitive conduct surrounding sports programming, that risk would seem to be more significant for undisputed market leader, Disney. At the same time, although still powerful, demand for ESPN on cable has been flagging. Disney could well see the ability to bundle ESPN with regional sports content as a way to prop up subscription revenues for ESPN — a practice, in fact, that it has employed successfully in the past.   

Finally, it must be noted that licensing of consumer products is an even bigger driver of revenue from filmed entertainment than is theatrical release. No other company comes close to Disney in this space.

Disney is the world’s largest licensor, earning almost $57 billion in 2016 from licensing properties like Star Wars and Marvel Comics. Universal is in a distant 7th place, with 2016 licensing revenue of about $6 billion. Adding Fox’s (admittedly relatively small) licensing business would enhance Disney’s substantial lead (even the number two global licensor, Meredith, earned less than half of Disney’s licensing revenue in 2016). Again, this is unlikely to be a significant concern for antitrust enforcers, but it is notable that, to the extent it might be an issue, it is one that applies to Disney and not Comcast.

Conclusion

Although I hope to address these issues in greater detail in the future, for now the preliminary assessment is clear: There is no legitimate basis for ascribing a greater antitrust risk to a Comcast/Fox deal than to a Disney/Fox deal.

On Friday the the International Center for Law & Economics filed comments with the FCC in response to Chairman Wheeler’s NPRM (proposed rules) to “unlock” the MVPD (i.e., cable and satellite subscription video, essentially) set-top box market. Plenty has been written on the proposed rulemaking—for a few quick hits (among many others) see, e.g., Richard Bennett, Glenn Manishin, Larry Downes, Stuart Brotman, Scott Wallsten, and me—so I’ll dispense with the background and focus on the key points we make in our comments.

Our comments explain that the proposal’s assertion that the MVPD set-top box market isn’t competitive is a product of its failure to appreciate the dynamics of the market (and its disregard for economics). Similarly, the proposal fails to acknowledge the complexity of the markets it intends to regulate, and, in particular, it ignores the harmful effects on content production and distribution the rules would likely bring about.

“Competition, competition, competition!” — Tom Wheeler

“Well, uh… just because I don’t know what it is, it doesn’t mean I’m lying.” — Claude Elsinore

At root, the proposal is aimed at improving competition in a market that is already hyper-competitive. As even Chairman Wheeler has admitted,

American consumers enjoy unprecedented choice in how they view entertainment, news and sports programming. You can pretty much watch what you want, where you want, when you want.

Of course, much of this competition comes from outside the MVPD market, strictly speaking—most notably from OVDs like Netflix. It’s indisputable that the statute directs the FCC to address the MVPD market and the MVPD set-top box market. But addressing competition in those markets doesn’t mean you simply disregard the world outside those markets.

The competitiveness of a market isn’t solely a function of the number of competitors in the market. Even relatively constrained markets like these can be “fully competitive” with only a few competing firms—as is the case in every market in which MVPDs operate (all of which are presumed by the Commission to be subject to “effective competition”).

The truly troubling thing, however, is that the FCC knows that MVPDs compete with OVDs, and thus that the competitiveness of the “MVPD market” (and the “MVPD set-top box market”) isn’t solely a matter of direct, head-to-head MVPD competition.

How do we know that? As I’ve recounted before, in a recent speech FCC General Counsel Jonathan Sallet approvingly explained that Commission staff recommended rejecting the Comcast/Time Warner Cable merger precisely because of the alleged threat it posed to OVD competitors. In essence, Sallet argued that Comcast sought to undertake a $45 billion merger primarily—if not solely—in order to ameliorate the competitive threat to its subscription video services from OVDs:

Simply put, the core concern came down to whether the merged firm would have an increased incentive and ability to safeguard its integrated Pay TV business model and video revenues by limiting the ability of OVDs to compete effectively.…

Thus, at least when it suits it, the Chairman’s office appears not only to believe that this competitive threat is real, but also that Comcast, once the largest MVPD in the country, believes so strongly that the OVD competitive threat is real that it was willing to pay $45 billion for a mere “increased ability” to limit it.

UPDATE 4/26/2016

And now the FCC has approved the Charter/Time Warner Cable, imposing conditions that, according to Wheeler,

focus on removing unfair barriers to video competition. First, New Charter will not be permitted to charge usage-based prices or impose data caps. Second, New Charter will be prohibited from charging interconnection fees, including to online video providers, which deliver large volumes of internet traffic to broadband customers. Additionally, the Department of Justice’s settlement with Charter both outlaws video programming terms that could harm OVDs and protects OVDs from retaliation—an outcome fully supported by the order I have circulated today.

If MVPDs and OVDs don’t compete, why would such terms be necessary? And even if the threat is merely potential competition, as we note in our comments (citing to this, among other things),

particularly in markets characterized by the sorts of technological change present in video markets, potential competition can operate as effectively as—or even more effectively than—actual competition to generate competitive market conditions.

/UPDATE

Moreover, the proposal asserts that the “market” for MVPD set-top boxes isn’t competitive because “consumers have few alternatives to leasing set-top boxes from their MVPDs, and the vast majority of MVPD subscribers lease boxes from their MVPD.”

But the MVPD set-top box market is an aftermarket—a secondary market; no one buys set-top boxes without first buying MVPD service—and always or almost always the two are purchased at the same time. As Ben Klein and many others have shown, direct competition in the aftermarket need not be plentiful for the market to nevertheless be competitive.

Whether consumers are fully informed or uninformed, consumers will pay a competitive package price as long as sufficient competition exists among sellers in the [primary] market.

The competitiveness of the MVPD market in which the antecedent choice of provider is made incorporates consumers’ preferences regarding set-top boxes, and makes the secondary market competitive.

The proposal’s superficial and erroneous claim that the set-top box market isn’t competitive thus reflects bad economics, not competitive reality.

But it gets worse. The NPRM doesn’t actually deny the importance of OVDs and app-based competitors wholesale — it only does so when convenient. As we note in our Comments:

The irony is that the NPRM seeks to give a leg up to non-MVPD distribution services in order to promote competition with MVPDs, while simultaneously denying that such competition exists… In order to avoid triggering [Section 629’s sunset provision,] the Commission is forced to pretend that we still live in the world of Blockbuster rentals and analog cable. It must ignore the Netflix behind the curtain—ignore the utter wealth of video choices available to consumers—and focus on the fact that a consumer might have a remote for an Apple TV sitting next to her Xfinity remote.

“Yes, but you’re aware that there’s an invention called television, and on that invention they show shows?” — Jules Winnfield

The NPRM proposes to create a world in which all of the content that MVPDs license from programmers, and all of their own additional services, must be provided to third-party device manufacturers under a zero-rate compulsory license. Apart from the complete absence of statutory authority to mandate such a thing (or, I should say, apart from statutory language specifically prohibiting such a thing), the proposed rules run roughshod over the copyrights and negotiated contract rights of content providers:

The current rulemaking represents an overt assault on the web of contracts that makes content generation and distribution possible… The rules would create a new class of intermediaries lacking contractual privity with content providers (or MVPDs), and would therefore force MVPDs to bear the unpredictable consequences of providing licensed content to third-parties without actual contracts to govern those licenses…

Because such nullification of license terms interferes with content owners’ right “to do and to authorize” their distribution and performance rights, the rules may facially violate copyright law… [Moreover,] the web of contracts that support the creation and distribution of content are complicated, extensively negotiated, and subject to destabilization. Abrogating the parties’ use of the various control points that support the financing, creation, and distribution of content would very likely reduce the incentive to invest in new and better content, thereby rolling back the golden age of television that consumers currently enjoy.

You’ll be hard-pressed to find any serious acknowledgement in the NPRM that its rules could have any effect on content providers, apart from this gem:

We do not currently have evidence that regulations are needed to address concerns raised by MVPDs and content providers that competitive navigation solutions will disrupt elements of service presentation (such as agreed-upon channel lineups and neighborhoods), replace or alter advertising, or improperly manipulate content…. We also seek comment on the extent to which copyright law may protect against these concerns, and note that nothing in our proposal will change or affect content creators’ rights or remedies under copyright law.

The Commission can’t rely on copyright to protect against these concerns, at least not without admitting that the rules require MVPDs to violate copyright law and to breach their contracts. And in fact, although it doesn’t acknowledge it, the NPRM does require the abrogation of content owners’ rights embedded in licenses negotiated with MVPD distributors to the extent that they conflict with the terms of the rule (which many of them must).   

“You keep using that word. I do not think it means what you think it means.” — Inigo Montoya

Finally, the NPRM derives its claimed authority for these rules from an interpretation of the relevant statute (Section 629 of the Communications Act) that is absurdly unreasonable. That provision requires the FCC to enact rules to assure the “commercial availability” of set-top boxes from MVPD-unaffiliated vendors. According to the NPRM,

we cannot assure a commercial market for devices… unless companies unaffiliated with an MVPD are able to offer innovative user interfaces and functionality to consumers wishing to access that multichannel video programming.

This baldly misconstrues a term plainly meant to refer to the manner in which consumers obtain their navigation devices, not how those devices should function. It also contradicts the Commission’s own, prior readings of the statute:

As structured, the rules will place a regulatory thumb on the scale in favor of third-parties and to the detriment of MVPDs and programmers…. [But] Congress explicitly rejected language that would have required unbundling of MVPDs’ content and services in order to promote other distribution services…. Where Congress rejected language that would have favored non-MVPD services, the Commission selectively interprets the language Congress did employ in order to accomplish exactly what Congress rejected.

And despite the above noted problems (and more), the Commission has failed to do even a cursory economic evaluation of the relative costs of the NPRM, instead focusing narrowly on one single benefit it believes might occur (wider distribution of set-top boxes from third-parties) despite the consistent failure of similar FCC efforts in the past.

All of the foregoing leads to a final question: At what point do the costs of these rules finally outweigh the perceived benefits? On the one hand are legal questions of infringement, inducements to violate agreements, and disruptions of complex contractual ecosystems supporting content creation. On the other hand are the presence of more boxes and apps that allow users to choose who gets to draw the UI for their video content…. At some point the Commission needs to take seriously the costs of its actions, and determine whether the public interest is really served by the proposed rules.

Our full comments are available here.

Today, the International Center for Law & Economics released a white paper, co-authored by Executive Director Geoffrey Manne and Senior Fellow Julian Morris, entitled Dangerous Exception: The detrimental effects of including “fair use” copyright exceptions in free trade agreements.

Dangerous Exception explores the relationship between copyright, creativity and economic development in a networked global marketplace. In particular, it examines the evidence for and against mandating a U.S.-style fair use exception to copyright via free trade agreements like the Trans-Pacific Partnership (TPP), and through “fast-track” trade promotion authority (TPA).

In the context of these ongoing trade negotiations, some organizations have been advocating for the inclusion of dramatically expanded copyright exceptions in place of more limited language requiring that such exceptions conform to the “three-step test” implemented by the 1994 TRIPs Agreement.

The paper argues that if broad fair use exceptions are infused into trade agreements they could increase piracy and discourage artistic creation and innovation — especially in nations without a strong legal tradition implementing such provisions.

The expansion of digital networks across borders, combined with historically weak copyright enforcement in many nations, poses a major challenge to a broadened fair use exception. The modern digital economy calls for appropriate, but limited, copyright exceptions — not their expansion.

The white paper is available here. For some of our previous work on related issues, see:

Our greatly lamented colleague Lary Ribstein was a movie buff. Some time ago he wrote an encyclopedic article on business in the movies, “Wall Street and Vine: Hollywood’s View of
Business.”  At the time of his death, he and I were in discussions about publishing this article in the journal I edit, Managerial and Decison Economics.  After his tragic death, I contacted his widow, Ann, and received permission to publish the article.  It is now published in the June issue of MDE.  (If your library does not subscribe to MDE, the article is still available on SSRN.)  Anyone with any interest in the movies and their perception of business must read this article. Given the volume of Larry’s scholarship, it is amazing that he had time to see as many movies as he discusses in this article.

Our friends at Chillin’ Competition have a short interview with Herb Hovenkamp up as part of their “Friday Slot” series.  Here are a couple of tidbits to entice you to go read the whole thing:

“Oscar” of the best antitrust law book? Non-antitrust book?

Best Antitrust Book:  Oliver E. Williamson, Markets and Hierarchies: Analysis and Antitrust Implications (1975).

Best non-antitrust book:  Louis Menand, The Metaphysical Club: A Story of Ideas in America (2001)

* * *

Let’s do it like economists => assume that you could change 3 rules, principles, judgments, institutions in the current EU antitrust system. What would you do? 

Answer: I would speak only to the United States system, where I would change the following three things:

A.  The per se rule against tying arrangements (insofar as it still exists)

B.  The strict recoupment requirement in predatory pricing cases when prices are clearly below average variable cost

C.  The federal courts’ repeated refusal to see the competitive harm in reverse payment settlements in pharmaceutical infringement cases

* * *

A piece of “counterfactual” analysis: what would you do if you weren’t in your current position?

I would be either a Dutch Reformed clergyman or a Professor of American History

* * *

Favorite movies?

Sappy chickflicks: The NotebookSleepless in SeattleTitanic

Poets vs. capitalists

Larry Ribstein —  17 December 2011

Eric Felten writing in yesterday’s WSJ, observes the hypocrisy of the poets who withdrew from competition for the T.S. Eliot Poetry Prize because it was funded by a financial firm. “Hedge funds are at the very pointy end of capitalism” sniffed one self-described “anti-capitalist in full-on form.” The anarchist vegan correctly observed that the funder’s business “does not sit with my personal politics and ethics.”

Felten notes that modern winners of a poetry prize do not “expect the florid lickspittlery once lavished on those who provided artists their livings.” He also calls out the hypocrisy of a poet who turned down a hedge funded prize but wasn’t too shy to acknowledge the support of

the ‘Arts for Everyone’ budget of the Arts Council of England’s Lottery Department. Which is to say, she’s happy to bank the cash culled from the easy marks who pay the stupidity tax, but not the earnings of a mainstream investment firm. * * * So let’s get this straight: If the investment bankers’ money is grudgingly handed over to the taxman it’s squeaky clean. But if it is given voluntarily, the lucre is filthy. What an odd and upside-down moral equation.

But Felten shouldn’t have focused all of his ire on poets.  I have written about American filmmakers who similarly find a lot to dislike in the capitalists who support their work but have little problem with government.

Filmmakers imagine finance

Larry Ribstein —  14 November 2011

Margin Call is the best film to come out of the recent financial crisis. This is no polemic masquerading as a “documentary” (Inside Job) or good vs. evil melodrama (Money Never Sleeps). It is serious film, with superb acting, script, direction and photography, which uses the financial crisis as the realistic backdrop for a timeless story.

And yet the film is fatally flawed. Its serious qualities make more transparent its defects, which it shares with most films about business—filmmakers’ sour view of capitalists, which colors their view of business and perennially hobbles their efforts to make credible films about the business world.

In a nutshell: Eric Dale (Stanley Tucci), a risk management employee of a large securities firm becomes one of many casualties of a downturn in the firm’s business. On the way out the door he hands subordinate Peter Sullivan (Zachary Quinto) a USB drive. Sullivan, a rocket scientist who chose a career in finance, learns from this information that the firm’s substantial mortgage-backed security portfolio was based on a flawed real estate pricing model, and now threatens the firm’s financial soundness. Moreover, since the rest of Wall Street used the same model, the whole financial world is vulnerable (obviously an oversimplification of the causes of the financial crisis, but this is movieland). The revelation works its way up the corporate hierarchy, including executive Sam Rogers (Kevin Spacey), all the way to the top, CEO John Tuld (Jeremy Irons). Tuld and Rogers must decide whether to solve the firm’s problem by dumping the portfolio on its unsuspecting customers.

Unlike so many films about business, this one makes the business credible. The audience understands the setup. Though a few of the firm’s employees, including Dale, had an inkling this could happen, nobody acted on this information. The firm’s dilemma is also clear: selling the securities could save the firm in the short term but destroy it in the longer term because the firm will lose its customers’ trust. Hence the tension between the coldblooded Tuld and the conscience-ridden Rogers. This realism contrasts starkly with the hokey business scenarios in films like Wall Street I and II, which derived their limited dramatic power more from foreboding atmospherics than inherent logic.

Margin Call also differs from other business films in the depth of its characters and absence of obvious villains. There is no looming “corporation” that somehow is able to motivate its employees to behave like evil automatons. Here the corporation dissolves into its all-too-human employees.

Having shed the defects of the typical business film, Margin Call had a chance at greatness. Lurking in the film is an existentialist core, the story of how a crisis brings people to question the worth of what they are doing. While they were surfing the financial wave the universe was in a perfect harmony, where hard work created deserved wealth and happiness all around. But when the wave crashes their world loses its meaning. Finance looks like a zero-sum game, a way to transfer wealth from starving dogs to fat cats, as Tuld says. Nothing is immune. Dale laments leaving his former career as an engineer where he built a bridge that saved time and money. But his former subordinate Will Emerson (Paul Bettany) points out that maybe the drivers wanted to take the long way around. Rogers says digging holes would be better than what he does. At least he loves his dying dog and clings to it as his anchor. But then the dog dies and ends up in the hole he has dug. Where is the value?

In a better world, the film’s characters might have confronted the void and, possibly, found something to hold on to. But instead the deeper message vanishes leaving the simplistic point that the problem lies in the financiers and their sandcastles built of money. The characters are moral monsters obsessed with how much they and others make. When they flank a cleaning lady on the elevator we see and hear through her eyes their nasty conversations.

The characters’ search for meaning might, in this better world, have started with their jobs. But their self-rationalizations are lame. Tuld says, “It’s not wrong,” but the only reason he can offer is that “it’s all just the same thing over and over; we can’t help ourselves,” –followed by a list of years of financial crashes in recent world history. Will Emerson says, “If you really wanna do this with your life, you have to believe you’re necessary.” But the only necessity he finds is that “people wanna live like this in their cars and big . . . houses they can’t even pay for.” The film judges the characters for us — the cleaning lady, Rogers left with nothing but his dead dog, his childless woman subordinate, Sarah Robinson (Demi Moore) who threw her life away for an empty career, Tuld’s death’s-head face.

This is what happens to so many films about business. In my study of films about business and my law review articles How Movies Created the Financial Crisis and Imagining Wall Street I see a common theme: The artists who make films resent and distrust the capitalists who provide their money under the condition that the artists satisfy merciless markets that have no time for art. Of course the market’s judgment has to be shown to be irrational. So capitalism is often presented as a zero-sum game, where results depend on chance. Crashes happen, and people suffer. It has nothing to do with anything real.

In most business films (e.g., Oliver Stone’s Wall Street), this diminutive narrative of business shrinks the whole film: the characters are cardboard, the drama forced, the technical features marshaled to shore up the weaknesses. But since Margin Call is a serious film, its failure to fulfill its promise is more obvious. This film forces us to consider why filmmakers are so unable to reckon with the lives that so many Americans lead within large firms.

Perhaps the most prominent American filmmaker who could create a plausible narrative of big business was Billy Wilder. His films, such as The Apartment and Double Indemnity, had characters who found personal meaning even if some of their co-workers had not. But, then, Wilder was not subject to the anti-capitalist disease of modern filmmakers. He had not led his entire life in Hollywood or in movie theaters. His early years in Nazi Germany made him appreciate that free enterprise was not the worst thing in the world.

There was another story to be told in Margin Call, if only the filmmakers had been receptive to it. Finance is not basically a zero-sum game. It brings the resources together that create the worthwhile dreams that people do have. Where did the money come from to build Eric Dale’s bridge? The financiers who assembled the cash to build the construction and design firms were as responsible for the bridge as the engineers who worked for those firms. Financial engineering doesn’t create just instruments only rocket scientists can understand, but also the institutions that encourage investors to hand over their money.

If finance, even so envisioned, is worthless, then we can more readily believe that the rest of the world is, too. But we are also receptive to an existentialist construction of a reason to live. In the end, Rogers might have found that reason in constructing a financial solution to the financial dilemma instead of caving in to Tuld’s demand for a short-term solution that sacrificed both the firm’s customers and its own reputation. Or Rogers might have rejected this solution and taken the cash, just as Fred McMurray succumbed to murder in Double Indemnity. But at least we would have seen that finance gave him the same kind of choices that people have in other walks of life.

In the end the film can claim at least one important accomplishment. It shows that a realistic portrayal of business can be dramatic. Business does not have to be a generic prop. But it also shows that filmmakers’ anti-finance bias has real artistic costs. Filmmakers’ impoverished narrative of business can dilute the drama inherent in what so many people do with their lives.

Note:  This review was written for the Atlas Society’s Business Rights Center and was first published on their website.  My thanks to the Atlas Society for encouraging me to think and write about this film.

Today’s WSJ covers Hollywood’s treatment of business.  And so, of course, they went to the Source (link added):

Hollywood has been famously left-leaning for decades, even as it teemed with shrewd business operators. Larry Ribstein, a professor of law at the University of Illinois who wrote a paper called “Wall Street and Vine” about the historically negative portrayal of business in film, concludes that the ongoing antipathy to corporate execs in films has nothing to do with politics. Rather, many creative types—notably screenwriters and directors—are expressing their own perennial resentment of bottom-line focused studio heads, who often seek to dilute a film’s message for mass-market appeal.

Orson Welles, director of the 1941 classic “Citizen Kane,” about a ruthless media mogul based on William Randolph Hearst, detested interference and famously refused to allow studio executives to visit the set. “He was feeling that artist resentment,” says Mr. Ribstein.

The Journal article has interesting background on the current “Margin Call,” which it describes as unusually fair to business, and suggests it’s because the director’s (J.C. Chandor) father, worked for Merrill Lynch:

A low-budget movie with a high-powered cast, its Wall Street characters are flawed, cynical—but, for once, actually human. * * *.

Mr. Chandor says he wanted to draw a more balanced portrait of the financiers who were being demonized in the media for causing the global economic collapse. The caricatures of executives being denounced by politicians at the time bore little resemblance to Mr. Chandor’s dad, he says.

I wonder how sympathetic the film comes out. I remember another director whose father worked in the securities industry — Oliver Stone.  (My article about Wall Street discusses, among other things, all the father-son threads in the movie).

Into Eternity

Larry Ribstein —  24 April 2011

One of the ways I celebrated my birthday yesterday in Chicago was seeing a movie in the afternoon(!) at the Siskel Center.  The film is Into Eternity.  

Here’s the setup:  Finland has nuclear waste which can be dangerous to humans for 100,000 years.  So they’ve decided to bury in a way that it will be safe for 100,000 years. 

As the film details in thoughtful depth, this involves a couple of problems, the least of which is how to keep nuclear waste harmless for 100,000 years.  The simple answer is to bury it very deep in bedrock, then seal the whole miles long and deep structure with concrete. 

Where it gets complicated is:  what if somebody finds the stuff. Seems unlikely, but as the film emphasizes, anything can happen in 100,000 years.  How can you warn them off when you don’t know what kinds of creatures they will be in 100,000 years, much less what language they’ll speak?  This is what one of the talking heads in the film calls the ultimate decision under uncertainty:  what do you do when you don’t know what you don’t know?

The Finnish government decided in its infinite wisdom to solve the problem of how to guide future civilizations for 100,000 years by requiring that instructions be given now, in Finnish — a language that the vast majority of even modern humans don’t understand.  I suppose the intuition is that the super-Millennium will bring us the Age of Finland.

The film’s subtext is that, if this is the best we can do, maybe we shouldn’t mess with nuclear power at all. And don’t forget the film was made and released before the earthquake. The film doesn’t tell us what we should do instead.

Here’s another take on the problem:  the effects of anything we do now are unknowable over much shorter periods than 100,000 years.  Trying to micromanage the future is folly. 

What you need is an institution that can utilize the knowledge that is dispersed through many people over time and space.  This institution is the market, which aggregates and communicates knowledge through prices.  See Hayek.  

Trusting markets may not be perfect.  But the film’s real lesson is that this is likely to work out better than trusting the Finnish (or any other) government to come up with the ultimate solution now.

I’ll be discussing Inside Job with Steve Davidoff and Roberta Romano, at the invitation of the Yale Law & Business Society. I managed to get through the movie last night without throwing any sharp objects at the screen.  I’m hoping to repeat that performance on Wednesday.

Suggested reading: How movies created the financial crisis, Wall Street and Vine and Imagining Wall Street.

Watch this space for commentary on the film and the Yale discussion later this week.