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Still from Squid Game, Netflix and Siren Pictures Inc., 2021

Recent commentary on the proposed merger between WarnerMedia and Discovery, as well as Amazon’s acquisition of MGM, often has included the suggestion that the online content-creation and video-streaming markets are excessively consolidated, or that they will become so absent regulatory intervention. For example, in a recent letter to the U.S. Justice Department (DOJ), the American Antitrust Institute and Public Knowledge opine that:

Slow and inadequate oversight risks the streaming market going the same route as cable—where consumers have little power, few options, and where consolidation and concentration reign supreme. A number of threats to competition are clear, as discussed in this section, including: (1) market power issues surrounding content and (2) the role of platforms in “gatekeeping” to limit competition.

But the AAI/PK assessment overlooks key facts about the video-streaming industry, some of which suggest that, if anything, these markets currently suffer from too much fragmentation.

The problem is well-known: any individual video-streaming service will offer only a fraction of the content that viewers want, but budget constraints limit the number of services that a household can afford to subscribe to. It may be counterintuitive, but consolidation in the market for video-streaming can solve both problems at once.

One subscription is not enough

Surveys find that U.S. households currently maintain, on average, four video-streaming subscriptions. This explains why even critics concede that a plethora of streaming services compete for consumer eyeballs. For instance, the AAI and PK point out that:

Today, every major media company realizes the value of streaming and a bevy of services have sprung up to offer different catalogues of content.

These companies have challenged the market leader, Netflix and include: Prime Video (2006), Hulu (2007), Paramount+ (2014), ESPN+ (2018), Disney+ (2019), Apple TV+ (2019), HBO Max (2020), Peacock (2020), and Discovery+ (2021).

With content scattered across several platforms, multiple subscriptions are the only way for households to access all (or most) of the programs they desire. Indeed, other than price, library sizes and the availability of exclusive content are reportedly the main drivers of consumer purchase decisions.

Of course, there is nothing inherently wrong with the current equilibrium in which consumers multi-home across multiple platforms. One potential explanation is demand for high-quality exclusive content, which requires tremendous investment to develop and promote. Production costs for TV series routinely run in the tens of millions of dollars per episode (see here and here). Economic theory predicts these relationship-specific investments made by both producers and distributors will cause producers to opt for exclusive distribution or vertical integration. The most sought-after content is thus exclusive to each platform. In other words, exclusivity is likely the price that users must pay to ensure that high-quality entertainment continues to be produced.

But while this paradigm has many strengths, the ensuing fragmentation can be detrimental to consumers, as this may lead to double marginalization or mundane issues like subscription fatigue. Consolidation can be a solution to both.

Substitutes, complements, or unrelated?

As Hal Varian explains in his seminal book, the relationship between two goods can range among three extremes: perfect substitutes (i.e., two goods are perfectly interchangeable); perfect complements (i.e., there is no value to owning one good without the other); or goods that exist in independent markets (i.e., the price of one good does not affect demand for the other).

These distinctions are critical when it comes to market concentration. All else equal—which is obviously not the case in reality—increased concentration leads to lower prices for complements, and higher prices for substitutes. Finally, if demand for two goods is unrelated, then bringing them under common ownership should not affect their price.

To at least some extent, streaming services should be seen as complements rather than substitutes—or, at least, as services with unrelated demand. If they were perfect substitutes, consumers would be indifferent between two Netflix subscriptions or one Netflix plan and one Amazon Prime plan. That is obviously not the case. Nor are they perfect complements, which would mean that Netflix is worthless without Amazon Prime, Disney+, and other services.

However, there is reason to believe there exists some complementarity between streaming services, or at least that demand for them is independent. Most consumers subscribe to multiple services, and almost no one subscribes to the same service twice:

SOURCE: Finance Buzz

This assertion is also supported by the ubiquitous bundling of subscriptions in the cable distribution industry, which also has recently been seen in video-streaming markets. For example, in the United States, Disney+ can be purchased in a bundle with Hulu and ESPN+.

The key question is: is each service more valuable, less valuable, or as valuable in isolation than they are when bundled? If households place some additional value on having a complete video offering (one that includes child entertainment, sports, more mature content, etc.), and if they value the convenience of accessing more of their content via a single app, then we can infer these services are to some extent complementary.

Finally, it is worth noting that any complementarity between these services would be largely endogenous. If the industry suddenly switched to a paradigm of non-exclusive content—as is broadly the case for audio streaming—the above analysis would be altered (though, as explained above, such a move would likely be detrimental to users). Streaming services would become substitutes if they offered identical catalogues.

In short, the extent to which streaming services are complements ultimately boils down to an empirical question that may fluctuate with industry practices. As things stand, there is reason to believe that these services feature some complementarities, or at least that demand for them is independent. In turn, this suggests that further consolidation within the industry would not lead to price increases and may even reduce them.

Consolidation can enable price discrimination

It is well-established that bundling entertainment goods can enable firms to better engage in price discrimination, often increasing output and reducing deadweight loss in the process.

Take George Stigler’s famous explanation for the practice of “block booking,” in which movie studios sold multiple films to independent movie theatres as a unit. Stigler assumes the underlying goods are neither substitutes nor complements:

Stigler, George J. (1963) “United States v. Loew’s Inc.: A Note on Block-Booking,” Supreme Court Review: Vol. 1963 : No. 1 , Article 2.

The upshot is that, when consumer tastes for content are idiosyncratic—as is almost certainly the case for movies and television series, movies—it can counterintuitively make sense to sell differing content as a bundle. In doing so, the distributor avoids pricing consumers out of the content upon which they place a lower value. Moreover, this solution is more efficient than price discriminating on an unbundled basis, as doing so would require far more information on the seller’s part and would be vulnerable to arbitrage.

In short, bundling enables each consumer to access a much wider variety of content. This, in turn, provides a powerful rationale for mergers in the video-streaming space—particularly where they can bring together varied content libraries. Put differently, it cuts in favor of more, not less, concentration in video-streaming markets (at least, up to a certain point).

Finally, a wide array of scale-related economies further support the case for concentration in video-streaming markets. These include potential economies of scale, network effects, and reduced transaction costs.

The simplest of these ideas is that the cost of video streaming may decrease at the margin (i.e., serving each marginal viewer might be cheaper than the previous one). In other words, mergers of video-streaming services mayenable platforms to operate at a more efficient scale. There has notably been some discussion of whether Netflix benefits from scale economies of this sort. But this is, of course, ultimately an empirical question. As I have written with Geoffrey Manne, we should not assume that this is the case for all digital platforms, or that these increasing returns are present at all ranges of output.

Likewise, the fact that content can earn greater revenues by reaching a wider audience (or a greater number of small niches) may increase a producer’s incentive to create high-quality content. For example, Netflix’s recent hit series Squid Game reportedly cost $16.8 million to produce a total of nine episodes. This is significant for a Korean-language thriller. These expenditures were likely only possible because of Netflix’s vast network of viewers. Video-streaming mergers can jump-start these effects by bringing previously fragmented audiences onto a single platform.

Finally, operating at a larger scale may enable firms and consumers to economize on various transaction and search costs. For instance, consumers don’t need to manage several subscriptions, and searching for content is easier within a single ecosystem.

Conclusion

In short, critics could hardly be more wrong in assuming that consolidation in the video-streaming industry will necessarily harm consumers. To the contrary, these mergers should be presumptively welcomed because, to a first approximation, they are likely to engender lower prices and reduce deadweight loss.

Critics routinely draw parallels between video streaming and the consolidation that previously moved through the cable industry. They suggest these events as evidence that consolidation was (and still is) inefficient and exploitative of consumers. As AAI and PK frame it:

Moreover, given the broader competition challenges that reside in those markets, and the lessons learned from a failure to ensure competition in the traditional MVPD markets, enforcers should be particularly vigilant.

But while it might not have been ideal for all consumers, the comparatively laissez-faire approach to competition in the cable industry arguably facilitated the United States’ emergence as a global leader for TV programming. We are now witnessing what appears to be a similar trend in the online video-streaming market.

This is mostly a good thing. While a single streaming service might not be the optimal industry configuration from a welfare standpoint, it would be equally misguided to assume that fragmentation necessarily benefits consumers. In fact, as argued throughout this piece, there are important reasons to believe that the status quo—with at least 10 significant players—is too fragmented and that consumers would benefit from additional consolidation.

[TOTM: The following is part of a symposium by TOTM guests and authors marking the release of Nicolas Petit’s “Big Tech and the Digital Economy: The Moligopoly Scenario.” The entire series of posts is available here.

This post is authored by Nicolas Petit himself, the Joint Chair in Competition Law at the Department of Law at European University Institute in Fiesole, Italy, and at EUI’s Robert Schuman Centre for Advanced Studies. He is also invited professor at the College of Europe in Bruges
.]

A lot of water has gone under the bridge since my book was published last year. To close this symposium, I thought I would discuss the new phase of antirust statutorification taking place before our eyes. In the United States, Congress is working on five antitrust bills that propose to subject platforms to stringent obligations, including a ban on mergers and acquisitions, required data portability and interoperability, and line-of-business restrictions. In the European Union (EU), lawmakers are examining the proposed Digital Markets Act (“DMA”) that sets out a complicated regulatory system for digital “gatekeepers,” with per se behavioral limitations of their freedom over contractual terms, technological design, monetization, and ecosystem leadership.

Proponents of legislative reform on both sides of the Atlantic appear to share the common view that ongoing antitrust adjudication efforts are both instrumental and irrelevant. They are instrumental because government (or plaintiff) losses build the evidence needed to support the view that antitrust doctrine is exceedingly conservative, and that legal reform is needed. Two weeks ago, antitrust reform activists ran to Twitter to point out that the U.S. District Court dismissal of the Federal Trade Commission’s (FTC) complaint against Facebook was one more piece of evidence supporting the view that the antitrust pendulum needed to swing. They are instrumental because, again, government (or plaintiffs) wins will support scaling antitrust enforcement in the marginal case by adoption of governmental regulation. In the EU, antitrust cases follow each other almost like night the day, lending credence to the view that regulation will bring much needed coordination and economies of scale.

But both instrumentalities are, at the end of the line, irrelevant, because they lead to the same conclusion: legislative reform is long overdue. With this in mind, the logic of lawmakers is that they need not await the courts, and they can advance with haste and confidence toward the promulgation of new antitrust statutes.

The antitrust reform process that is unfolding is a cause for questioning. The issue is not legal reform in itself. There is no suggestion here that statutory reform is necessarily inferior, and no correlative reification of the judge-made-law method. Legislative intervention can occur for good reason, like when it breaks judicial inertia caused by ideological logjam.

The issue is rather one of precipitation. There is a lot of learning in the cases. The point, simply put, is that a supplementary court-legislative dialogue would yield additional information—or what Guido Calabresi has called “starting points” for regulation—that premature legislative intervention is sweeping under the rug. This issue is important because specification errors (see Doug Melamed’s symposium piece on this) in statutory legislation are not uncommon. Feedback from court cases create a factual record that will often be missing when lawmakers act too precipitously.

Moreover, a court-legislative iteration is useful when the issues in discussion are cross-cutting. The digital economy brings an abundance of them. As tech analysist Ben Evans has observed, data-sharing obligations raise tradeoffs between contestability and privacy. Chapter VI of my book shows that breakups of social networks or search engines might promote rivalry and, at the same time, increase the leverage of advertisers to extract more user data and conduct more targeted advertising. In such cases, Calabresi said, judges who know the legal topography are well-placed to elicit the preferences of society. He added that they are better placed than government agencies’ officials or delegated experts, who often attend to the immediate problem without the big picture in mind (all the more when officials are denied opportunities to engage with civil society and the press, as per the policy announced by the new FTC leadership).

Of course, there are three objections to this. The first consists of arguing that statutes are needed now because courts are too slow to deal with problems. The argument is not dissimilar to Frank Easterbrook’s concerns about irreversible harms to the economy, though with a tweak. Where Easterbook’s concern was one of ossification of Type I errors due to stare decisis, the concern here is one of entrenchment of durable monopoly power in the digital sector due to Type II errors. The concern, however, fails the test of evidence. The available data in both the United States and Europe shows unprecedented vitality in the digital sector. Venture capital funding cruises at historical heights, fueling new firm entry, business creation, and economic dynamism in the U.S. and EU digital sectors, topping all other industries. Unless we require higher levels of entry from digital markets than from other industries—or discount the social value of entry in the digital sector—this should give us reason to push pause on lawmaking efforts.

The second objection is that following an incremental process of updating the law through the courts creates intolerable uncertainty. But this objection, too, is unconvincing, at best. One may ask which of an abrupt legislative change of the law after decades of legal stability or of an experimental process of judicial renovation brings more uncertainty.

Besides, ad hoc statutes, such as the ones in discussion, are likely to pose quickly and dramatically the problem of their own legal obsolescence. Detailed and technical statutes specify rights, requirements, and procedures that often do not stand the test of time. For example, the DMA likely captures Windows as a core platform service subject to gatekeeping. But is the market power of Microsoft over Windows still relevant today, and isn’t it constrained in effect by existing antitrust rules?  In antitrust, vagueness in critical statutory terms allows room for change.[1] The best way to give meaning to buzzwords like “smart” or “future-proof” regulation consists of building in first principles, not in creating discretionary opportunities for permanent adaptation of the law. In reality, it is hard to see how the methods of future-proof regulation currently discussed in the EU creates less uncertainty than a court process.

The third objection is that we do not need more information, because we now benefit from economic knowledge showing that existing antitrust laws are too permissive of anticompetitive business conduct. But is the economic literature actually supportive of stricter rules against defendants than the rule-of-reason framework that applies in many unilateral conduct cases and in merger law? The answer is surely no. The theoretical economic literature has travelled a lot in the past 50 years. Of particular interest are works on network externalities, switching costs, and multi-sided markets. But the progress achieved in the economic understanding of markets is more descriptive than normative.

Take the celebrated multi-sided market theory. The main contribution of the theory is its advice to decision-makers to take the periscope out, so as to consider all possible welfare tradeoffs, not to be more or less defendant friendly. Payment cards provide a good example. Economic research suggests that any antitrust or regulatory intervention on prices affect tradeoffs between, and payoffs to, cardholders and merchants, cardholders and cash users, cardholders and banks, and banks and card systems. Equally numerous tradeoffs arise in many sectors of the digital economy, like ridesharing, targeted advertisement, or social networks. Multi-sided market theory renders these tradeoffs visible. But it does not come with a clear recipe for how to solve them. For that, one needs to follow first principles. A system of measurement that is flexible and welfare-based helps, as Kelly Fayne observed in her critical symposium piece on the book.

Another example might be worth considering. The theory of increasing returns suggests that markets subject to network effects tend to converge around the selection of a single technology standard, and it is not a given that the selected technology is the best one. One policy implication is that social planners might be justified in keeping a second option on the table. As I discuss in Chapter V of my book, the theory may support an M&A ban against platforms in tipped markets, on the conjecture that the assets of fringe firms might be efficiently repositioned to offer product differentiation to consumers. But the theory of increasing returns does not say under what conditions we can know that the selected technology is suboptimal. Moreover, if the selected technology is the optimal one, or if the suboptimal technology quickly obsolesces, are policy efforts at all needed?

Last, as Bo Heiden’s thought provoking symposium piece argues, it is not a given that antitrust enforcement of rivalry in markets is the best way to maintain an alternative technology alive, let alone to supply the innovation needed to deliver economic prosperity. Government procurement, science and technology policy, and intellectual-property policy might be equally effective (note that the fathers of the theory, like Brian Arthur or Paul David, have been very silent on antitrust reform).

There are, of course, exceptions to the limited normative content of modern economic theory. In some areas, economic theory is more predictive of consumer harms, like in relation to algorithmic collusion, interlocking directorates, or “killer” acquisitions. But the applications are discrete and industry-specific. All are insufficient to declare that the antitrust apparatus is dated and that it requires a full overhaul. When modern economic research turns normative, it is often way more subtle in its implications than some wild policy claims derived from it. For example, the emerging studies that claim to identify broad patterns of rising market power in the economy in no way lead to an implication that there are no pro-competitive mergers.

Similarly, the empirical picture of digital markets is incomplete. The past few years have seen a proliferation of qualitative research reports on industry structure in the digital sectors. Most suggest that industry concentration has risen, particularly in the digital sector. As with any research exercise, these reports’ findings deserve to be subject to critical examination before they can be deemed supportive of a claim of “sufficient experience.” Moreover, there is no reason to subject these reports to a lower standard of accountability on grounds that they have often been drafted by experts upon demand from antitrust agencies. After all, we academics are ethically obliged to be at least equally exacting with policy-based research as we are with science-based research.

Now, with healthy skepticism at the back of one’s mind, one can see immediately that the findings of expert reports to date have tended to downplay behavioral observations that counterbalance findings of monopoly power—such as intense business anxiety, technological innovation, and demand-expansion investments in digital markets. This was, I believe, the main takeaway from Chapter IV of my book. And less than six months ago, The Economist ran its leading story on the new marketplace reality of “Tech’s Big Dust-Up.”

More importantly, the findings of the various expert reports never seriously contemplate the possibility of competition by differentiation in business models among the platforms. Take privacy, for example. As Peter Klein reasonably writes in his symposium article, we should not be quick to assume market failure. After all, we might have more choice than meets the eye, with Google free but ad-based, and Apple pricy but less-targeted. More generally, Richard Langlois makes a very convincing point that diversification is at the heart of competition between the large digital gatekeepers. We might just be too short-termist—here, digital communications technology might help create a false sense of urgency—to wait for the end state of the Big Tech moligopoly.

Similarly, the expert reports did not really question the real possibility of competition for the purchase of regulation. As in the classic George Stigler paper, where the railroad industry fought motor-trucking competition with state regulation, the businesses that stand to lose most from the digital transformation might be rationally jockeying to convince lawmakers that not all business models are equal, and to steer regulation toward specific business models. Again, though we do not know how to consider this issue, there are signs that a coalition of large news corporations and the publishing oligopoly are behind many antitrust initiatives against digital firms.

Now, as is now clear from these few lines, my cautionary note against antitrust statutorification might be more relevant to the U.S. market. In the EU, sunk investments have been made, expectations have been created, and regulation has now become inevitable. The United States, however, has a chance to get this right. Court cases are the way to go. And unlike what the popular coverage suggests, the recent District Court dismissal of the FTC case far from ruled out the applicability of U.S. antitrust laws to Facebook’s alleged killer acquisitions. On the contrary, the ruling actually contains an invitation to rework a rushed complaint. Perhaps, as Shane Greenstein observed in his retrospective analysis of the U.S. Microsoft case, we would all benefit if we studied more carefully the learning that lies in the cases, rather than haste to produce instant antitrust analysis on Twitter that fits within 280 characters.


[1] But some threshold conditions like agreement or dominance might also become dated.