DISTRIBUTION THE NEWSLETTER OF THE DISTRIBUTION AND FRANCHISING COMMITTEE Antitrust Section — American Bar Association Vol. 15, No. 1 — January 2011 In this Issue Message from the Chair . 1 Mobile Advertising: An Economic Perspective . 3 Recent Antitrust Issues in Distribution of DVDs . 9 Online Distribution in the EU: The New Rules on Vertical Restraints and their Implications for Internet Retailing Across the Atlantic . 12 Distribution and Franchising Committee:• ABA•Section of Antitrust Law Recent Antitrust Issues in Distribution of DVDs Howard Marvel and Kivanc Kirgiz 1 Introduction continually attempting to protect their own window from being shortened, even as all but the first-release Motion picture studios have long supplied movies to theaters argue that the start date of their particular consumers through an elaborate system of distribution window should be moved earlier. “windows” in which consumers pay lower rates per viewing as the time from a movie’s initial release Traditionally, motion pictures were first released through increases. This system allows studios to charge different theaters, where the average price of admission was $7.85 prices to consumers through different distribution during the first three quarters of 2010. 2 Roughly four channels depending on their preferences for watching months after the theatrical release, the video-release movies close to their release date. Such legal price window opened with movies being made available for discrimination permits the studios to maximize the value sale or rental in DVD or Blu-ray Disc format. Still later, of their copyrighted content and provides financial movies were released to video on demand, “premium” incentives to produce and market new movies. cable channels, such as HBO, Showtime, and Starz, and then to advertising-supported broadcast and cable The movie studios organize the window system through television. Recently, this distribution window hierarchy a series of vertical contracts with various exhibitors and has been in flux as the movie studios have responded to distributors, doing so with the legal protection of their declining DVD sales, new distribution business models, copyrights. Thus an owner of a legal copy of a particular such as Netflix and Redbox, and technological advances movie, say one purchased in DVD format, cannot in the distribution of digital content, such as video-on- redistribute that movie to others, because that demand. Specifically, some movie studios have now put redistribution represents the creation of an additional in place a delayed release window for online subscription copy, which the copyright owner is permitted to halt. (Netflix) and kiosk rental companies (Redbox, Blockbuste r The price discrimination is a very old system, but one Express), where DVD and Blu-ray titles would be availabl e where the members of the distribution windows are through these outlets 28 days after their “street” date. At continually changing and the windows themselves are the same time, some movie studios are experimenting fought over bitterly. The firms in each window are with different windows for video-on-demand services, 1 Howard Marvel is Professor Emeritus at The Ohio State University and Kivanc Kirgiz is a Principal at Cornerstone Research. The views expressed in this paper are solely those of the authors and do not represent those of Cornerstone Research or any client. 2 Average ticket price up 3% on last year , THE HOLLYWOOD REPORTER, Oct. 29, 2010, available at http://www.hollywoodreporter.com/ news/average-ticket-price-3-last-33635. January 2011 9 Distribution and Franchising Committee: ABA Section of Antitrust Law such as Time Warner’s plans to offer a premium video- their release. The cases settled after Redbox’s lawsuit on-demand service that will offer movies on pay against Universal, the first one filed, survived a motion television services shortly after their theatrical release to dismiss the antitrust allegations. 5 Although the court and ahead of their DVD release. 3 allowed Redbox’s case against Universal to proceed, we will argue that there is perhaps less here than meets the This note considers two examples of attempts to invoke eye. While the competitive impact of contractual vertical antitrust allegations as the players in the industry reacted restraints that extend the ability to price discriminate to developments in the movie distribution business. The beyond that afforded by copyright law requires case-by- first case involves movie studios’ decisions to institute a case examination, it is unlikely that any competitive new delayed release window for online subscription and harm has taken place in this case. kiosk rentals. Redbox, an operator of rental kiosks, has argued that Universal Studios (“Universal”), Warner The case against Netflix is still ongoing, 6 and Netflix’s Home Video (“Warner”), and Twentieth Century Fox burden will be to show that the fears it had expressed Home Entertainment (“Fox”), who have given up their about Wal-Mart as a potential competitor were proven copyright protection through the sale of movies on by the marketplace to have been unwarranted, and that discs, have tried to replace that protection with vertical its acquisition of Wal-Mart’s customer base was nothing distribution controls that violate the antitrust laws. 4 In more than a purchase of the assets of a failed competitor. the second case, Netflix and Wal-Mart are alleged to have Redbox’s lawsuits against Universal, Warner and Fox entered into an agreement to shape competition within Redbox has an innovative business model based on renting and across release windows through an agreement by DVDs through kiosks located at high-traffic locations “such which Wal-Mart left the “online DVD rental market,” as McDonald’s restaurants, Wal-Mart stores, grocery stores selling its subscriber-customers to Netflix. The such as Albertson’s, Kroger, Stop & Shop, Harris Teeter, and Netflix/Wal-Mart arrangement is alleged to be Meijer’s, convenience stores like 7-Eleven, drug stores such anticompetitive, as it supposedly constitutes horizontal as Walgreen’s, and Navy and Marine bases throughout the market division that impairs the functioning of one, continental United States and Puerto Rico.” 7 Since its and more recently two, exhibition windows. establishment in July 2002, Redbox rapidly expanded The disputes between Redbox and the three studios from two test markets and currently has kiosks at nearly have settled. The parties reached distribution agreements, 25,000 locations. It offers rentals of a limited number under which the studios provide DVDs and Blu-ray discs of individual titles for $1 per day, compared to the to Redbox at discounted prices but only allow Redbox $4.99-for-three-day rental fee that Blockbuster movie to rent DVD and Blu-ray discs starting four weeks after rental stores now charge for new releases. 8 3 Tom Lowry & Marc Graser, Time Warner ramps up premium VOD , VARIETY, Nov. 3, 2010, available at http://www.variety.com/article/VR1118026821. 4 Netflix negotiated agreements with movie studios, whereby it agreed to a delayed release window. Netflix did not file any lawsuits against the studios . 5 Warner and Fox signed distribution agreements with RedBox before the courts issued decisions on the pending motions to dismiss. 6 Currently a proposed settlement agreement with a maximum payment of $40 million between Wal-Mart and the plaintiffs is awaiting approval from the Court. Netflix remains as the lone defendant. 7 Amended Complaint ¶ 19, Redbox Automated Retail, LLC v. Warner Home Video, Case No. 09-613 (D. Del. Nov. 30, 2009), ECF No. 1. 8 Eric Gruenwedel, Blockbuster Bows New In-Store Movie Pricing , HOME MEDIA MAGAZINE, Dec. 1, 2010, available at http://www.homemediamagazine.com/blockbuster/blockbuster-bows-new-store-movie-pricing-21294. January 2011 10 Distribution and Franchising Committee: ABA Section of Antitrust Law According to most industry observers, the rapid growth Redbox would obviously prefer that its release window of Redbox and Netflix’s rental and video-on-demand open sooner, as that would increase its sales. This desire services have greatly contributed to the decline of DVD is no different from the preferences of other market sales and brick-and-mortar store rentals. Blockbuster, participants to improve their distribution windows. What the largest rental chain, is currently in bankruptcy is different is that Redbox’s window trails that for DVD reorganization. 9 Movie Gallery and Hollywood Video, sales. This matters because under copyright law’s “first which together comprised Blockbuster’s principal within- sale” doctrine, a DVD sold is very different from a DVD segment competition, have both ceased operations. 10 that is rented, at least so long as the content of the disc According to data from the Digital Entertainment is a movie rather than a sound recording or a computer Group, 11 DVD shipments to retail in U.S. and Canada program. With the sale of a DVD, the studio loses have declined by 27 percent between 2007 and 2009 control over the DVD it sells; under copyright laws, it after a 141 percent growth between 2002 and 2005 can only protect itself against unauthorized copying of the and flat sales between 2005 and 2007. DVD’s content, not the use of the product itself. As long as Redbox has purchased a legitimate DVD, it is free to Facing declining revenue from DVD sales as well as rent that disc to multiple consumers. More importantly, higher priced brick-and-mortar store rentals, studios