Disney owns both Hulu and ESPN. The court is considering whether this violates antitrust laws

A lawsuit against Disney over its dual role as a content provider and distributor in a business relationship cleared a legal hurdle when a federal judge advanced a key antitrust claim over the entertainment monolith’s ownership rights to ESPN and Hulu.

U.S. District Judge Edward Davila on Tuesday rejected arguments to dismiss the lawsuit, finding that the company could have used the Hulu purchase to raise prices for live TV streamed over the Internet across the market. Disney could impose anticompetitive terms on its rivals, including AT&T’s DirectTV and Dish’s Sling TV, by forcing them to offer ESPN as part of the cheapest package they offer and by introducing so-called most-favored nation clauses that ensure that ESPN’s negotiated affiliate fees with any given competitor represents the lowest price level in the entire industry, the court said.

More at The Hollywood Reporter

However, YouTube TV subscribers suing Disney could not seek damages under federal antitrust claims in the case. For these claims, they can now seek an injunction blocking further antitrust violations. They can also still pursue damages for violations of state competition and consumer protection laws.

As recently as 2013, over 90 percent of U.S. households subscribed to cable and satellite TV packages. This number has declined with the rise of streaming platforms. Starting with HBO in 2014, which offered subscriptions to its catalog entirely online, the previously cable-only service began separating its content from cable and satellite plans, which has since lost its status as a purveyor of must-see movies and TV shows .

Following an industry-first unbundling of content, what would become virtual distributors of multi-channel video programming was born in 2015 when Dish-owned Sling TV offered subscribers the ability to watch a subset of traditional cable channels without a cable subscription. Other similarly positioned companies, including AT&T, Google, and YouTube, subsequently entered the market with live streaming pay TV (SLPTV) options.

In 2022, YouTube TV subscribers sued Disney over allegations that the company inflated prices for live streaming over the Internet. At the heart of the case is Disney’s control of the highly coveted channel on ESPN and SLPTV on Hulu and whether the entertainment giant negotiated anticompetitive broadcast deals for ESPN, driving up subscription prices across the market. The complaint, which purports to represent approximately five million YouTube TV subscribers, alleged violations of the Sherman Unreasonable Trade Restraints Act and various state competition and consumer protection laws.

Disney’s defense was multi-pronged. Among its main arguments was that imposing allegedly anti-competitive contract terms harmed SLPTV providers rather than consumers.

Judge Davila disagreed. Although the carriage agreements at issue in the case were between ESPN and SLPTV, the lawsuit correctly alleged that Disney uses the agreements “and its control over Hulu” to suppress competition in order to sell subscription packages to consumers, it said. The court pointed to allegations that Disney, since taking control of Hulu, had “with impunity raised prices – as well as the main input costs of its competitors” at ESPN.

The first major carriage deal negotiations that Disney faced after taking control of Hulu were with AT&T’s DirecTV, which offered a competing live TV offering on the Internet called AT&T TV Now. As the existing deal neared expiration, Disney warned DirecTV subscribers that they would lose access to ESPN and other channels it owned. On Monday night football the most-watched program on cable television at the time, said: “To date, AT&T has refused to reach a fair, arm’s length agreement with us, even though the terms we are seeking are consistent with the most recent market terms of agreements we have reached with other distributors.” AT&T capitulated five days later, forcing it to raise the price of its basic package of live TV streaming services by $15.

Through its carriage agreement with AT&T, the lawsuit argued that Disney “not only ensured that AT&T/DirecTV Now would not be able to undercut Hulu + Live TV, but also ensured that competing AT&T’s costs were high enough to enable streaming of television programming live which AT&T/DirecTV Now we had to raise our base price, which had to include ESPN, well above the price of Hulu + Live TV.”

The court concluded that Disney could have imposed conditions on its competitors that forced them to offer ESPN as part of the cheapest package they offered and to ensure that the affiliate fees ESPN negotiated with a given competitor matched the industry-wide floor price, “without being subject to price competition.” “

But YouTube TV subscribers won’t be able to seek damages under antitrust claims that allow for triple damages, after Davila found they weren’t directly harmed by the allegedly anticompetitive conduct. The lawsuit “does not allege that Plaintiffs purchased SLPTV subscription packages from a member of the conspiracy, but rather from a victim of Disney’s anticompetitive conduct,” he wrote. They may be able to recover damages if they prevail on alleged violations of state competition and consumer protection laws.

Disney did not respond to a request for comment.

In the wake of Hollywood’s dual strikes last year, a brighter light has been shed on Disney’s role as a content provider and distributor. The Writers Guild of America released a report warning against excessive consolidation in Hollywood. It said Disney’s series of mergers — with Pixar, Marvel, Lucasfilm and others — have led to price hikes for streaming services, further vertical integration of the company, forced creators to forgo revenue from future TV content licensing, and “reduced production and innovation,” the report said. Dozens of writers have written to the Federal Trade Commission in support of changes to its draft merger guidelines that would allow courts to consider the impact of mergers on work.

The best of a Hollywood reporter