Hollywood has finally produced a drama in which the script has been lost and every actor has forgotten the storyline.
Paramount Skydance wants to acquire Warner Bros. Discovery. California Attorney General Rob Bonta, joined by eleven other state attorneys general, wants to stop it on antitrust grounds. Paramount CEO David Ellison has responded by threatening to move much of the company out of California to Tennessee, Georgia, or Texas unless Bonta negotiates. Bonta calls that “blackmail.” Meanwhile, Paramount is considering major strategic moves, from selling CNN to moving its headquarters, preserving studio lots, guaranteeing theatrical windows and making various promises about jobs and film production.
Almost none of this involves antitrust law or enforcement.
The Clayton Act, one of the pillars of antitrust law proteting competition, does not guarantee California a motion-picture industry. It does not protect Hollywood jobs, preserve famous studio names, regulate CNN’s editorial direction or require five historic movie companies to remain independent forever.
Antitrust law asks whether a transaction may substantially lessen competition. Properly understood, that means determining whether the merger is likely to give the combined company sufficient market power to raise prices, reduce output, diminish quality or obstruct competitive entry.
And yet Bonta’s case is not frivolous. Paramount and Warner Bros. are direct, horizontal competitors. The states allege that the combined company would distribute approximately 27% of wide-release theatrical films, more than 30% of anticipated blockbusters and roughly 27% of basic-cable programming. They contend that fewer major film distributors would enable the combined company to demand a larger share of box-office revenue from theaters. They also argue that a company controlling CNN, MTV, Nickelodeon, Comedy Central, HGTV, TNT, TBS, Cartoon Network and dozens of other channels could extract higher carriage fees from cable and satellite distributors.
Those are complaints based on recognizable consumer-welfare theories. If the states can establish that Paramount and Warner meaningfully constrain one another today, and that their combination would lead to higher prices or less programming tomorrow, they will have identified a legitimate competitive problem. Though often characterized as laissez-faire, traditional antitrust enforcement defined does not stamp approvals on mergers merely because business wants them. Concentration can create market power, and undue market power can harm consumers.
But identifying a theory is not the same as proving it.
The states’ case depends heavily on markets drawn around the declining institutions of twentieth-century entertainment. It treats “major studios” as though the category were ordained in Hollywood’s golden age and preserved in amber. It minimizes Amazon-MGM, Apple, Netflix, Lionsgate, A24, Neon and other companies capable of financing, producing or distributing major films. It also treats basic cable as a self-contained market even as millions of consumers abandon cable and streaming companies compete aggressively for movies, news, sports and entertainment.
Consider: the Justice Department spent eight months investigating the transaction. Its career staff reviewed more than two million documents from more than 80 custodians, examined data, took testimony and heard from third parties throughout the industry. It concluded that the merger was unlikely to harm competition in streaming, linear television or theatrical film distribution. Indeed, the department found that combining Paramount+ with HBO Max and Discovery’s content could produce a more formidable competitor to Netflix, Disney and Amazon—a likely benefit to consumers.
The Justice Department’s conclusion, of course, is not binding on the states or courts. But it deserves more than Bonta’s description of federal approval as a political “rubber stamp.” A state attorney general who wants a federal court to disregard an extensive federal investigation should present better evidence, not louder rhetoric.
Bonta instead keeps drifting into subjects that antitrust law is poorly equipped to address. His complaint and public statements emphasize employment, California’s economy, opportunities for writers and actors, the number of stories that will be told and the breadth of viewpoints reaching the public. These may be legitimate political concerns. They are not substitutes for economic proof that the transaction will harm competition.
Bonta’s description of Paramount’s relocation threat as “blackmail” is equally theatrical. Paramount is entitled to decide to move to Nashville or Nairobi. California imposes taxes, labor costs and regulatory burdens that companies may rationally seek to avoid. Other states, with lower costs, are willing to provide sweeteners like tax breaks. The merger delay itself could cost Paramount approximately $7 million a day in payments to Warner shareholders beginning this fall. Ellison has a fiduciary duty to consider ways of reducing those costs.
Even in this context, however, Ellison’s ultimatum is still problematic.
“Settle by October 1st or we leave” sounds less like a considered business judgment than an effort to put Bonta on the spot. It does nothing to answer the states’ allegations about theatrical distribution or cable bargaining power. Worse, it undercuts Paramount’s earlier assurances that the merger would strengthen Hollywood, preserve employment and expand film production.
If relocation makes economic sense, Paramount should relocate. If it does not, the company should not pretend that moving thousands of employees is a bargaining chip in an antitrust negotiation. The court should give the threat precisely the weight it deserves—none, either way.
There is a revealing test for Bonta as well. If Paramount’s promise to retain jobs and facilities in California would persuade him to abandon the lawsuit, then the case is not really about competition. It is an exercise in state protectionism. If the merger is genuinely unlawful, no employment promise can cure it. California residents do not become immune from higher prices because the company charging them maintains an office in Los Angeles.
Warner Bros.’ corporate history supplies another useful caution. The studio has passed from the Warner family to Seven Arts, Kinney National, Warner Communications, Time Warner, AOL Time Warner, AT&T and Warner Bros. Discovery. Again and again, executives have promised that the latest corporate combination would generate revolutionary synergies. AOL Time Warner became one of the most notorious mergers in American history. AT&T’s adventure in entertainment ended with WarnerMedia being spun off and combined with Discovery. Warner survived these experiments; many of the corporate theories did not.
That history may be a reason for Paramount shareholders and lenders to worry. It is not a reason for an antitrust court to block the transaction. Antitrust law does not prevent executives from overpaying, assuming too much debt or making foolish predictions about corporate synergy. Capital markets discipline bad business judgment. The government’s role begins only when a transaction threatens the competitive process.
Amid all this bluster, however, there may be room for a sensible settlement. If the states can prove that the combined cable portfolio would create excessive bargaining leverage, Paramount could divest a coherent package of channels.
Any remedy should be structural, enforceable and tied to a demonstrated competitive harm. A CNN divestiture might contribute to such a remedy, although CNN’s political slant and editorial policy should have nothing to do with the analysis. Promises to preserve jobs, maintain studio lots, release a specified number of films or protect CNN’s editorial “independence” are irrelevant to antitrust. If such metrics were to be accepted, they would turn antitrust enforcement into continuing industrial supervision.
The twisting of antitrust law could also normalize the use of the law by politicians to dictate where companies operate, how many people they employ, what products they produce and how news organizations conduct themselves. That is not competition policy. It is economic planning with a Hollywood backdrop.
The Paramount-Warner controversy has become a contest between two forms of political pressure. Bonta invokes antitrust law to defend California workers and Hollywood institutions. Ellison threatens to move those workers and institutions unless Bonta relents. Each side is trying to make California’s economic interests determine the disposition of a federal antitrust case.
Both should take a step back and engage the competitive issues of antitrust law.
It will ultimately be up to a court to determine whether the merger will raise prices, reduce output, diminish quality or prevent the entry of new competitors. If the states prove those harms, the transaction should be blocked or restructured. If they merely prove that the combined company will be large, politically controversial and possibly badly managed, the government must step aside.
Consumers are entitled to competitive markets. Paramount is not entitled to Warner Bros., and California is not entitled to Paramount. That is the beginning—and should be the end—of antitrust analysis.
Robert H. Bork Jr. is the president of the Antitrust Education Project.