Disney is not a corporation that pushes the bounds of artistic and technological possibility but a corporation that pushes the bounds of legal possibility under a radical pro-consolidation framework that has existed since the 1990s. Its new streaming service Disney Plus proves that the company is willing to lose money in order to generate market power that Disney can later use, often against consumers.
I love movies and TV shows. As a kid, I bonded with my Dad over Mel Brooks, and today I use memes from Step Brothers in presentations. Most people in America love movies. Children dress up as fictional superheroes and princesses, couples fall in love to romantic comedies, and we tell ourselves who we are as a culture based on the stories we absorb.
But I didn’t quite get the political importance of film until I worked in Congress. In 2009, as I was learning how Congress funds government programs, the US Marshals Service took me on a field trip showing me how a specific program requiring expensive equipment worked. US Marshals are a bunch of government officials who serve outstanding arrest warrants.
Like many of the policing and military service branches, they try to increase their budget by impressing young, male Congressional staffers, often by showing them the cool toys taxpayer money funds. So I got taken on a rather depressing tour showing how the US. Marshals work with local law enforcement to arrest people, and essentially got cooperation from local law enforcement by buying them decked out police SUVs and expensive sledgehammers and whatnot. I asked my guide when they got funding for the program they were showing off, and he told me it was in the mid-1990s. To which I said, “Why then?” And he responded, “That was when the movie The Fugitive came out, so that’s when Congress finally understood what we do.”
It’s easy to mock Congress for being ignorant about government, but that’s unfair. Government is massively complex, and stories help all of us—including policymakers—make sense of the world. They help us understand our values, provoke debate, and teach us our history. So I’ve watched with growing trepidation as Hollywood, the center of American entertainment, has come under the thumb of a narrower and narrower group of corporations. While I spend a lot of time thinking about Big Tech, in particular Facebook and Google, the creation and distribution of great American art—movies and TV shows—is increasingly dominated by Disney.
This isn’t because Disney’s animation studio just got really, really good and put out new popular movies about Mickey Mouse. In fact, it doesn’t have much to do with Disney’s ability to make movies or run theme parks at all. Disney is a fundamentally different corporation than it was 15 years ago.
Over the last thirty years, Disney has become a financialized corporation, a shell of what it used to be. The old Disney had problems, rapaciously protecting its copyrights with a powerful lobbying operation and sometimes mistreating its workers. But its executives and employees also obsessively focused on delighting generations of children. This began changing, slightly, in the 1980s, when then-CEO Michael Eisner realized he could radically improve profitability simply by raising tickets at theme parks. Eisner also kicked off an acquisition spree, buying the ABC TV network, which included ESPN.
But Disney’s recent status as what one journalist calls “Imperial Disney” is really the brainchild of Eisner’s successor, CEO Bob Iger, who in his 15 years at the helm of the company bought Pixar, Lucasfilm, BAMTech, Marvel, and large parts of 21th Century Fox, as well spearheaded the corporation’s massive expansion into China. Disney now makes a good chunk of must-have content these days, running every major franchise from Star Wars to Avengers to Toy Story. Disney is a global powerhouse; Shanghai Disneyland (which Iger oversaw) was one of the largest investments in the corporation’s history, taking $6 billion and eighteen years to build; it is eleven times larger than Disneyland itself. The corporation is heavily engaged in politics, with former US Trade Representative Michael Froman, the man who built Obama’s Wall Street-friendly cabinet, serving on the board.
As I’ll show, the new Disney is more a private equity group than a studio, collecting brands and using them to bargain aggressively with partners, suppliers, and consumers. Imperial Disney is the result not of animation genius but mergers and acquisitions genius. It is not a corporation that pushes the bounds of artistic and technological possibility, but a corporation that pushes the bounds of legal possibility under the radical pro-consolidation framework that has existed since the 1990s, as well as the Clinton-era ‘engagement’ framework that encouraged deep integration of American multinationals into China.
And we should all be very, very worried about the consequences of this new Disney.
Bob Iger’s Monopoly of a Lifetime
This weekend, I sat down and read Iger’s book, The Ride of a Lifetime, because Iger more than anyone else transformed Disney into the global player that it is today.
When Iger became CEO of Disney in 2005, he set three goals. First, Disney would acquire and create as much high-quality content as possible. As he put it, “Great brands would become even more powerful tools for guiding consumer behavior.” Second, Disney would become a technology company, because “modern distribution would be an essential means of maintaining brand relevance.” And three, Disney would become a truly global company, with its target of penetrating China.
That was fifteen years ago. Iger’s goal was basically to turn Disney into a vertically-integrated global monopolist over entertainment, instead of the House of Mickey. He sought power, and was willing to jettison the old Disney culture to get it. One of the interesting nuggets that Iger discloses is how everyone at Disney used to be obsessed with, well, Disney. Former CEO Michael Eisner almost always wore Disney ties with figures like Mickey Mouse on them, and most top executives enjoyed Disney gear, or at least pretended to love it. Iger writes in a chortling tone how he, having come from the ABC sports division, escaped this particular tacky way of dressing. It’s a small hint that Iger disrespected the culture in a way his predecessors did not.
So has Iger succeeded in acquiring massive amounts of power? The short answer is yes. To answer that more fully, I want to draw attention to some truly wonderful reporting on the entertainment industry by Matt Zoller Seitz, who reported on Disney’s new policy of refusing to allow first-run theaters to show old Fox movies.
Disney has traditionally kept its movies in the vault, with theaters unable to show classic Disney fare. The goal is to create artificial scarcity, keep audiences excited that Disney films are something special. Disney is now applying its policy to its 21st Century Fox back catalog, which includes classics like Beneath the Planet of the Apes, Zardoz, Alien, Aliens, Say Anything, The Princess Bride, Moulin Rouge, and so forth. (Alien‘s fans are already upset).
This is a huge amount of film removed from circulation. As the American Prospect’s Brett Heinz noted, Disney, because of its acquisitions of Pixar and Fox, now “owns one in seven of all films to ever receive a Best Picture nod.” It can and does withhold these films from theaters.
One way to recognize monopoly power is when a corporation chooses to withhold output, which is what Disney is doing by sticking its old films into the vault. It shouldn’t be able to do this with its new Fox content, this is likely evidence that the merger was anticompetitive, but since neither Obama nor Trump enforced such laws, symptoms of monopoly power are a validation of Iger’s strategy. So how will this shift impact the market? Who is going to get hurt?
This restructuring of the movie market is going to have significant impacts on what we can see in theaters and what filmmakers can create. Most theaters, after an explosion of megaplexes in the 1990s due to private equity and lax merger enforcement, are large chains who don’t really show old movies. Because of the size and reach of chains, movie releases are increasingly first week phenomena, and so Marvel and Star Wars-type branding dominates over weirder and more interesting fare.
But there are still 600 independent first-run theaters left in the United States, and independent theaters are different than chains. They often screen films to celebrate old movies, or they show documentaries or iconoclastic movies. Independent theaters are some of the few places indy movie makers can show their films. These are the theaters Disney is now crushing, and what’s left of independent distribution will likely disappear, leaving an oligopoly of theater chains and giant studios controlling movies.
So that’s one illustration of Disney’s new market muscle under Iger. But Disney’s power goes well beyond withholding old films. It has roughly half of all ticket sales, and as Seitz notes, it is able to demand coercive terms from theater owners, not just higher fees, but promises to screen Disney films, even ones that are likely to be unpopular. This is a practice known as block booking, where a distributor forces a theater to show movies that are less in demand in return for getting access to must-have content, like say a Star Wars or Marvel movie on opening weekend. Block booking is technically illegal under an old antitrust precedent, but, well…
With the market power Disney now commands, theater chains can’t say no. As Heinz reported a few weeks ago, when Disney negotiated the rights to show Star Wars: The Last Jedi with movie theaters, it gave the theaters “a set of top-secret terms that numerous theater owners say are the most onerous they have ever seen,” including giving Disney “65% of ticket revenue from the film, a new high for a Hollywood studio,” and forcing them to “show the movie in their largest auditorium for at least four weeks.”’ If the theater didn’t comply, Disney could impose a 5 percent tax of box office revenue on top of its already existing 65 percent share.
Once again, that is power, which was Iger’s true aim.
The Disney Plus Endgame
Yet another way to recognize power is the intentional foregoing of selling your product to customers in order to capture market power elsewhere, or what is known as vertical foreclosure. This is most apparent in the new Disney Plus, which bundles all of Disney’s massive trove of content into a Netflix-like bundle. In some ways, this looks like Iger’s endgame in the strategy for global dominance. Disney can produce must-have branded content, force theaters to show all of its branded content, and then leverage that across its global network of theme parks and its dominant streaming service. It is vertically integrated from production lot to the end consumer.
Iger’s strategy is to do what Netflix is trying to do, except with more raw power. Netflix’s strategy is to produce so much content and sell it at a loss through subscriptions, in the hopes it can drive its competitors out of business. Once it has a large base of subscribers and no competitors, it can then raise prices on its subscribers (as it is doing in the US) and pay its talent less money. Where else are they going to go?
Well, it turns out they can go to Disney. But to set up a viable competitive product requires Disney to have a superior streaming service. What makes a streaming service good is the content, and Disney has content in spades. Yet, Disney also sells a lot of content to Netflix, and earns a lot of money doing that. To launch a rival streaming product, Disney must stop selling its content to Netflix. Otherwise, Netflix viewers have no reason to watch Disney Plus. In other words, for some time as it gains subscribers, Disney will have to lose money it could otherwise make in order to differentiate its streaming service.
Such a move cuts against much industrial organizational economic theory. Theorists posit that corporations like Disney tend not to intentionally lose money just to acquire market power, because foregoing revenue is not, apparently, rational. This theory is nonsense. After all, if Disney is willing to tolerate losses just to drive competitors out of business, then vertical foreclosure is deeply problematic, and perhaps illegal. What’s interesting is that our antitrust enforcement is so lax that Iger announced his strategy of knocking out fellow intermediaries to Wall Street, and put it in his autobiography:
“We were now fully committed to also becoming a distributor of our own content, straight to consumers, without intermediaries. In essence, we were now hastening the disruption of our own businesses, and the short-term losses were going to be significant. (As one example, pulling all of our TV shows and movies—including Pixar and Marvel and Star Wars—from Netflix’s platform and consolidating them all under our own subscription service would mean sacrificing hundreds of millions of dollars in licensing fees.)”
Iger goes on to note something even more remarkable, saying about the company’s new streaming service that “it would take some time before success would be measured in profits.” It would instead, he wrote, “be measured in subscribers.” Consider what’s he really saying, which is that Disney isn’t trying to make a profit. That’s crazy. No one can compete with an entertainment powerhouse that sells half the movie tickets in the country, that has overly strong copyright protections, as well as unlimited loss-making capacity. Iger goes on:
“We wanted the service to be accessible to as many people as possible around the world, and we had settled on a price that we estimated would bring in somewhere between sixty and ninety million subscribers in the first five years. When Kevin announced we would be selling it for $6.99 a month, there was an audible gasp in the room.
The response from Wall Street went far beyond anything we anticipated. In 2015, our stock dropped like a stone when I talked about disruption. Now it was soaring. The day after our investors conference it jumped 11 percent, to a record high. By the end of the month, it was up nearly 30 percent.”
The New Studio System
Analysts are betting Iger is setting up a new studio system. Disney will lose money in order to generate market power that the corporation can later use, often against consumers. Consumers will get a nice bundle at first, with great content at a low price. But that price will creep up over time, as it has with Netflix. And it’s not just consumers who will find their choices radically constrained. The real target of Iger’s monopolization strategy is suppliers of entertainment products. Put another way, the target is labor.
With its streaming service Disney Plus, Disney is radically changing how creators are compensated for their work. Traditionally, TV and filmmakers get paid an upfront amount, and then paid again on the backend through residuals or royalties on sales of movies in the after-market. But now, with Disney+, there will be no after-market; Disney will simply take its content and distribute it directly to subscribers, with no one actually paying directly for TV or movie.
Comedy legend Judd Apatow discussed the problem on Twitter, noting “Disney is also beginning to change how much back end profits they will make available to TV talent… They are so powerful they can just redefine how much everyone gets paid in success to their benefit.” The new arrangement in Hollywood looks increasingly like the pre-1948 studio system, where creators are signed to single studios, who have power and control over their careers and creative output.
Iger has so far succeeded in his strategy. But what are the costs of this strategy to Hollywood and the economy?
The Breakdown of Capitalism
One of the most important consequences is that Disney is simply getting rid of functional markets. Disney will simply pick and choose content, without guidance from, well, people being willing to pay money for tickets. It will be an uber-Netflix, and will simply give subscribers what it thinks they want, instead of what they choose to pay for.
Friedrich Hayek’s great intellectual innovation in economics was about the importance of information and prices in markets. Through open and competitive markets, the price system, he argued, carries information across millions of people who buy and sell things to each other, serving as a coordinating body that lets producers know what to produce and consumers know what is available inexpensively. It is decentralized and works through free exchange and liberty, but also is remarkably efficient (as long as there are no monopolies and regulations ensure power asymmetries among those engaging in exchange aren’t severe.)
In entertainment, this price system works via consumers being willing to pay money to see a movie, or to watch ads to see a TV show. These reflect a market transaction. A consumer is giving up money or time to pay for something, which indicates he or she thinks that something is a quality product. Aftermarkets where syndications and film rights are traded help quantify what creators are worth, and that enables creators to have bargaining leverage when they want to do something weird, controversial, or interesting. Such markets enabled strange movies like Back to the Future or shows like Seinfeld or All in the Family to get made, because they empower creators and audiences.
A subscription service based on monopoly power breaks this entire process. Netflix, for instance, pretends to have fancy algorithms to determine quality, but it’s not clear that they have figured out a good quality filter superior to the price system. Central planning in movies and TV shows doesn’t deliver as much as decentralized production and distribution, for the simple reason that a centralized system is less likely to let as much weird stuff through. Disney is likely to lose its filmmaking edge; indeed, it is already so large and has so many brands that the bad remake of films like The Lion King do suggest a loss of creativity. Such a loss will not matter to Disney the corporation, because to will have distributive power to compensate, but it will matter to all of us who love movies, and those who make them, and to the societies all over the world who use film and art to make sense of the world.
Yet another consequence of Disney Plus is that it will erode the basic foundations of capitalism. In his book, Iger notes he had to find ways to compensate Disney division heads with arbitrary metrics to get them to put their stuff on Disney Plus, and this was hard, because they were used to hitting revenue targets. The division heads have a point. Capitalism is premised on selling final goods for more than it costs for the initial inputs, otherwise you are destroying wealth. By selling below cost, which is what Disney may be doing, the corporation is reducing aggregate wealth to acquire market power. It’s simply impossible to compete with someone who is willing to gain revenue by paying a dollar for fifty cents. Disney may or may not be doing that with its low Disney Plus price, but the fact that Disney Plus makes it impossible to measure value coming out of each division shows that the breakdown of the price system and potential below-cost pricing is likely eroding value.
Disney and China
There’s one last serious problem, and that is China’s increasing use of Western corporations to censor Americans. We saw this with the NBA, but Disney is clearly the biggest villain here. The US government wrote about this problem in 2015, it has only gotten worse. Here’s Iger, on the recent Hong Kong protests and the NBA:
“The biggest learning from that is that caution is imperative. To take a position that could harm our company in some form would be a big mistake. I just don’t believe it’s something we should engage in in a public manner.”
And yet Disney is not staying neutral but is taking sides. China’s side. You will never see any criticism of China in a Disney movie or entertainment property, and ESPN is using Chinese propaganda in portraying the geopolitics of Southeast Asia. What this means is that monopoly power for Disney is monopoly power for the Chinese government. And the more assets Disney acquires, the more leverage for China.
What Is to Be Done?
I don’t have a fully thought out way of breaking up Disney yet. I am working through how to address this market power, which is simply overwhelming. It will likely require vertical and horizontal restrictions, and addressing problems with the abuse of copyright protections to leverage additional market power.
The nice thing is that we’ve dealt with similar problems in the past, and succeeded. And I’m pretty confident that we can do so again. After all, Imperial Disney is less than 15 years old. The public policy underpinning Disney’s consolidation of power isn’t a permanent state of being, it’s just a particularly noxious way of regulating our entertainment industry.
Editor’s note: A previous version of this article appeared in BIG, Matt Stoller’s newsletter on the politics of monopoly. You can subscribe here. Matt Stoller is the author of Goliath: The Hundred Year War Between Monopoly Power and Democracy and a fellow at the Open Markets Institute.
The ProMarket blog is dedicated to discussing how competition tends to be subverted by special interests. The posts represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty. For more information, please visit ProMarket Blog Policy.