How Control of Hulu and ESPN Affects Market Dynamics –

According to Hollywood reporterthe late 2022 lawsuit alleged that Disney’s control over both content, ESPN, and distribution, Hulu, allows it to unfairly manipulate the market, resulting in higher prices for live streaming TV services across the industry. Yesterday, Hollywood reporter revealed some updates regarding the lawsuit against Disney.

The complaint states that Disney could use its control over Hulu to raise prices for live TV streamed online. Disney allegedly required competitors such as AT&T-owned DirectTV and Dish’s Sling TV to include ESPN in their basic packages, limiting their ability to offer cheaper alternatives without ESPN. Each agreement Disney strikes with a single competitor sets a floor price that applies throughout the industry, potentially increasing costs for consumers. The lawsuit seeks to represent approximately five million YouTube TV subscribers who believe they are paying excessive subscription fees because of Disney’s alleged actions.

According to Hollywood reporter, U.S. District Judge Edward Davila decided Tuesday to elevate the antitrust lawsuit, meaning the lawsuit can proceed because there is enough evidence and legal basis to further investigate the allegations. Disney’s practices could be deemed anticompetitive if proven, resulting in changes to the company’s operations or potential penalties.

However, subscribers suing Disney for antitrust violations currently do not have the ability to seek monetary damages under federal antitrust claims. Subscribers can still take legal action. For example, plaintiffs could ask the court to issue an injunction preventing Disney from continuing to violate antitrust laws. They may also seek damages under state antitrust and consumer protection laws, which offer various options for obtaining compensation.

Hollywood reporter explains that before 2013, over 90% of U.S. households subscribed to cable or satellite TV packages. The emergence of streaming platforms, starting with HBO offering direct online subscriptions in 2014, has begun to change consumer habits. Services previously available only via cable or satellite television began to offer their content independently on the Internet, breaking away from traditional distribution models. As a result, cable and satellite television, once the dominant controllers of exclusive content, lost their monopoly on must-see movies and TV shows as consumers turned to streaming alternatives. Streaming platforms have revolutionized the traditional cable and satellite television industry, changing the way consumers access and watch content

Hollywood reporter then describes how the introduction of Sling TV in 2015, after separating TV content from traditional cable and satellite packages, ushered in the concept of vMVPD: virtual multi-channel video programming distributors. Unlike traditional providers, vMVPD delivers content over the Internet, allowing subscribers to watch TV on a variety of devices without the need for a physical cable box or satellite dish. With the introduction of vMVPD, consumers could access live TV channels via Internet streaming without traditional cable TV subscriptions. Following this innovation, other large companies such as AT&T, Google and YouTube entered the market. These companies offered similar streaming services, providing consumers with a more flexible and potentially cheaper alternative to traditional cable or satellite TV subscriptions.

According to The Hollywood Reporter, Disney argued that the contract terms it imposed were intended to directly harm live pay television (SLP TV) providers, not consumers. However, the court did not agree with Disney’s defense. Instead, it acknowledged allegations that Disney raised prices significantly after taking control of Hulu. This allegedly impacted not only the prices consumers paid for Disney subscription packages, but also increased costs for competitors that rely on ESPN content. The court found that Disney’s control over Hulu allowed it to influence the market, potentially stifling competition. Despite Disney’s argument that SLPs were harmed, the court found that consumers ultimately experienced higher prices and reduced competitive opportunities in the streaming television market.

Hollywood Reporter then describes significant negotiations between Disney and AT&T’s DirectTV on carriage agreements for ESPN and other AT&T TV Now channels. Due to Disney’s control over Hulu, it had significant leverage in the negotiations. So, as the carriage agreement with AT&T-owned DirectTV neared expiration, Disney warned DirectTV subscribers that they could lose access to ESPN and other Disney-owned channels. Disney used the platform Monday night footballhighly-rated program to publicly put pressure on AT&T DirectTV. It stated that AT&T was unwilling to agree to terms that Disney believed were fair, despite recent agreements with other distributors that Disney claimed were market-based. Facing potential subscriber backlash and the threat of losing ESPN, AT&T DirectTV relented to Disney’s terms. AT&T raised the price of the base package of its live streaming service, AT&T TV Now, by $15 shortly after capitulating to Disney’s demands.

The court found that Disney could require its competitors to include ESPN in their basic, cheapest subscription packages. In other words, any competitor providing a live TV streaming service must offer ESPN even on its cheapest package, which limits its ability to offer cheaper packages without ESPN. The court also noted that Disney’s contracts provided that affiliate fees to ESPN set an industry-wide floor price. By setting these high fees, Disney created a floor price that competitors had to adhere to, effectively standardizing higher costs for ESPN across all services. The court found that these practices allowed Disney to avoid suffering from price competition. Because Disney set a high industry-wide floor price for ESPN, competitors could not offer lower prices for similar content packages, limiting overall competition in the market and potentially leading to higher prices for consumers.