From Hollywood to Silicon Valley, the Justice Department is backing corporate giants

New Canaan Advertiser – by Steven Pearlstein

There is a battle going on for the future of American business. On one side are a handful of giant corporations that dominate their industries. On the other are the smaller companies they compete against, buy from, or sell to, and the workers they hire. And what you need to know is that under President Donald Trump, the Justice Department is routinely weighing in on the side of the corporate giants. 

We’ve already seen the big-is-better philosophy in the department’s approval of megamergers such as Aetna and CVS in health care, T-Mobile and Sprint in mobile phone service and movie giants Disney and Fox, which in some years account for half of all box office sales. The one time the department went to court to stop a megamerger (AT&T and Time-Warner), it managed to lose.

Now, antitrust chief Makan Delrahim is moving aggressively to help the giants enhance their market power in new ways.

Last month, the Justice Department asked a federal court in New York to terminate a set of 70-year-old decrees that prevented the major Hollywood studios from owning and operating movie theaters. The decrees also prevented the studios from setting minimum ticket prices or requiring independent theaters to take blocks of movies – the likely flops along with the hits – rather than choose which movies they wanted to exhibit.

The department argued that the arrival of new studios such as HBO, Netflix and Amazon Prime, along with the advent of other distribution channels such as CDs, cable TV and streaming over the Internet. The brief also embraced now-discredited economic theories that mergers between producers and distributors, and business practices such as bundling and retail price maintenance, were good for competition and consumers.

Thanks to those decrees, Hollywood is enjoying a golden era, with more studios producing more movies and television programs in ways that offer consumers more choice and convenience than at any time in history.

But all this competition, it turns out, is also giving the studios financial heartburn, forcing them to pay ginormous sums to the most successful actors, directors and screenwriters and take huge financial risks every time they produce a movie. So it is with the aim of taming that risky and costly competition that the major studios have been scrambling to tie up talent with long-term contracts, buy up TV networks, cable channels and telephone companies, and create their own distribution platforms to connect directly with consumers through the Internet.

By moving to lift the old decrees, the Justice Department has given the studios a green light to push ahead with all this consolidation and recreate the old Hollywood cartel and studio system on which it was based. Independents of all kinds – from studios to creative talent to theater chains and content platforms – will be shut out or forced to hand over a hefty share of their profits to gain access to these vertically integrated giants. Price competition will disappear, entry by new players will be curtailed, and disruptive innovators will either be bought up before they pose a challenge or shut out of the marketplace.

This is precisely the kind of oligopoly that the antitrust laws were meant to prevent. That’s why, when the Justice Department announced it was considering lifting the old decrees, associations representing the theater owners, screenwriters and directors urged that the prohibitions be left in place. Of the 82 public comments filed with the Justice Department, 81 opposed lifting the decrees, and the department dismissed them all with a potpourri of legalistic sophistry, a spirited defense of inflated ticket prices (how else to pay for those cushy reclining seats?) and a hollow promise to punish any future anti-competitive behavior.

Within days of the Justice Department announcing its review, Amazon let it be known that it was interested in buying Landmark Theaters, which has been the primary outlet for independent and foreign films that are generally ignored by the three biggest chains. In its filing with the Justice Department, the competition think tank Open Markets warned that with the Paramount precedents no longer in force, Amazon’s strategy will be to dominate the market for independent movies in the same way it came to dominate the book business.

The Trump Justice Department has jumped to the defense of Big Hollywood in other ways.

Currently, the Hollywood screenwriters guild is locked in a titanic legal battle with the three dominant talent agencies. The guild accuses the agencies of conspiring to maintain industry practices that are rife with conflicts of interest and have increased agent income at the expense of their writer-clients. Unable to resolve their dispute through negotiation, the guild last spring ordered its members to fire agents at firms that refuse to sign a new code of conduct. The standoff has continued as the two sides duel in federal court.

Last month, however, the Department filed a motion asking to intervene in the case on the side of the agencies. The government’s court filing strongly suggested that in directing its members to boycott the agencies, the guild had violated federal labor law, as alleged by the agencies. And if this view is eventually adopted by the court, lawyers say it would significantly undermine the power not only of unions representing Hollywood writers, actors and directors, but also those representing professional football, baseball and basketball players in their negotiation with the major sports leagues.

In other words, in the struggle between millionaire performers and billionaire owners over how to divide the spoils of their monopolies, the Trump administration intends to use the antitrust law to weigh in on behalf of the billionaires.

The Justice Department is not the only government agency charged with enforcing competition law. The other is the Federal Trade Commission, which is somewhat more independent. Normally the relationship between the agencies is collegial and collaborative. But earlier this year, in a case with huge legal and commercial significance, the Justice Department took the unusual step of siding with computer chip maker Qualcomm against the FTC, asking the federal appeals court in California to overturn a lower court decision that the company had engaged in practices that raised prices and reduced competition.

The suit arises from Qualcomm’s unique role in the cellular phone market, where it is the monopoly supplier of two computer chips used by virtually all handset makers (think Apple and Samsung). It also holds patents that are part of the common standards used by all handset and chip makers, which make it possible for different handsets to communicate with each other over different wireless networks.

In exchange for having its technology adopted as the industry standard, Qualcomm agreed to license that technology to any company at reasonable rates.

What happened instead, however, was that Qualcomm threatened to withhold its must-have chips from any handset manufacturer that didn’t also agree to pay an exorbitant licensing fee for its must-have technology. After a lengthy trial, District Court Judge Lucy Koh ruled that this “no license-no chip” tying strategy had raised cellphone prices and reduced competition in the chip market, in violation of the antitrust laws. She ordered Qualcomm to renegotiate its deals with handset makers and license its cellular patents to rival chipmakers, using arbitrators if necessary to determine “fair and reasonable” royalties.

In their brief filed with the federal appeals court, the Justice Department lawyers sounded more like corporate defense attorneys than crusading trustbusters. They argued that monopoly pricing and profits were a good thing in the technology sector because they spurred innovation by rivals seeking to unseat the current monopolist – an argument used unsuccessfully by Microsoft in defending itself in the landmark case brought by the Clinton Justice Department. The department also told the court that because Qualcomm was the U.S. national champion in the global race to develop 5G technology, any antitrust concerns must take a back seat to national security concerns.

What gives a peculiar odor to this defense of monopolist behavior is that, until a few years ago, the monopolist was an important client of Delrahim, the man who now heads the antitrust division. Delrahim is said to have recused himself in matters relating to the FTC and Qualcomm. But just in case his subordinates had any doubt about where he stood on the matter, Delrahim gave several speeches about the danger of using the antitrust law to prevent abusive behavior by companies whose patents are incorporated in industry standard-setting arrangements. He even went so far as to tear up a 2013 agreement with the Patent Office setting out guidelines for standard setting organization, asserting (without proof) that such arrangements foster collusion among licensees to hold out for lower royalties and deny patent holders the rightful fruits of their innovation.

What is becoming clear from these and other actions is that, as with so many other federal agencies in the Trump era, the foxes are now in charge of the antitrust chicken coop. Under the guise of spurring innovation and protecting national champions, antitrust enforcement has now become another weapon in the service of corporate giants, political cronies and ideological fellow travelers.

Long-standing precedents and protocols are being discarded without justification. Unions are being threatened with loss of their antitrust exemption. Enforcement is being undermined. And companies daring to collaborate on setting standards or negotiating with regulators over tougher environmental standards are investigated for illegal collusion. In other words, a century-old law designed to curb the concentration of economic power will now be used to enhance it.

The Justice Department naturally rejects this characterization. Officials point to divestitures it has recently won in the Bayer-Monsanto and Parker-Hannifin mergers, and its intervention on behalf of upstart Oscar Insurance Company of Florida in its fight with the state’s Blue Cross Blue Shield company. It has also been active in opposing anti-poaching agreements among employers and overly restrictive state licensing regimes. For the most part, however, these initiatives involve aspects of antitrust law that are settled or narrowly technical.

More significant is the investigation that Justice recently launched into the business practices of tech giants such as Google, Apple, Facebook and Amazon, which could have much broader impact on the economy and involves economic and legal issues that remain hotly contested. Unfortunately, based on the positions the department has taken relating to Qualcomm, Hollywood and the telecom mergers, there is good chance that the government will wind up giving its blessing to the tech giants’ anti-competitive behavior, rather than moving aggressively to restrain it. And that would be the worst outcome of all.

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Pearlstein, a Washington Post economics columnist and the Robinson professor of public affairs at George Mason University, is the author of “Can American Capitalism Survive?”

https://www.ncadvertiser.com/opinion/article/From-Hollywood-to-Silicon-Valley-the-Justice-14918993.php