Last month, AMC and Carmike announced plans to merge. They would form the nation’s largest cinema chain with over 8,000 screens. Also last month, Napster founder Sean Parker announced a new product—Screening Room—which will stream first-run movies into the home potentially in competition with entities like AMC/Carmike. Screening Room customers purchase a proprietary box for $150, and each movie will cost $50. Several commentators have suggested that Screening Room will revolutionize film distribution, and, with regard to AMC/Carmike, that Screening Room represents such clear competition that whatever incremental market power AMC/Carmike might accrue as a result of their merger would be easily constrained.
While movies may seem to be a single product—a collection of images and sounds—they are in fact many different products. And this is so because of how movies are distributed. In the most common form of distribution, movies are first shown in theaters, then made available for purchase/rent (DVD, Blu-ray, 4K, streaming), cable, and ultimately broadcast. This routine is the “release windows” business model. Movies can also be released simultaneously or straight-to-video. Some content distributors, like Amazon, are vertically integrating and creating and distributing (streaming) their own content outside of these models. NBC/Universal may be buying DreamWorks for this reason.
The release windows business model is designed primarily to maximize profits by waterfalling movies through a series of price-discrimination markets. The studios make the movie available in different formats at prices that decline over time based on the format: each new window opens in series after demand in the previous window has been satisfied. At one end of the spectrum is a consumer who very much wants to see the movie will pay a lot to see it immediately. She is happy to go to a theater to do so. She may spend on concessions. At the other end of the spectrum is the price sensitive consumer who would not expend any effort or pay any money to watch a movie. Perhaps he doesn’t even subscribe to cable. He would wait for the movie to be shown for free on television. Staggering allows the studios to target the most price insensitive first, and then progress along the demand curve saturating each demand band before moving to the next.
Releasing a movie in all formats and at different price points at the same time allows cannibalization between bands. A consumer might go to a movie in the more-expensive theater band, but wouldn’t go to the theater at all if the film were also available on DVD at the same time. If movies were released in all formats at the same time, the theater would lose a sale at a higher price. By staggering the windows, the studios may capture revenues associated with these marginal customers that it might not otherwise.
In this regard, Screening Room creates a whole new “window” along the curve. It addresses the marginal customers in the “theatrical band” who might consume more movies if the prices were better and the marginal customers in the “purchase/rent” band who might pay a little bit more to see a first run movie but may not want to go to the theater. As such, Screening Room will likely not be a substitute to the majority of theater-goers. It is also unlikely that Justice will find this “disruptive technology” argument compelling. If a merger is otherwise anticompetitive, a disruptive technology actually has to be disrupting something for it to be compelling, all else equal. The prospect that a technology could disrupt a market is insufficient to carry the day. So I doubt the emergence of Screening Room will play any meaningful role in the analysis of the AMC/Carmike deal.
AMC-Carmike aside, there may be other antitrust issues percolating. Variety is reporting Screening Room is looking to be the exclusive content partner to the studios. That may mean that the studios agree to stream first run films only through Screening Room and no other over-the-top or other service. If so, Screening Room becomes the default provider for content in that particular window, excluding other potential providers. In many respects, this requirement is reminiscent of the exclusive dealing arrangements in the early days of B2B ecommerce markets. In order to get the market off the ground, the markets were asking the participants to participate only on one platform. The FTC shot that idea down in October 2000, by announcing their view that a market for marketplaces could be monopolized through these exclusive dealing arrangements.
There are aspects of Screening Room that also reminds one of the Justice Department’s successful complaint against Apple in eBooks. In that case, the Justice Department alleged that Apple induced the major book publishers into dropping the “wholesale” model of distributing books and adopting an “agency” model. Under the wholesale model, stores like Amazon were free to set whatever price they wanted for books, including below cost. Under the agency model, the publishers retained title to the books selling “through” sellers like Amazon at the price the publishers wanted. Making a unilateral decision to move from the wholesale to agency model would not have violated the Sherman Act. The Justice Department, and ultimately the courts, found that Apple had induced the publishers to do so and that was an illegal conspiracy violating Section 1 of the Sherman Act. The Justice Department alleged that the conspiracy had the effect of raising prices to consumers of bestsellers, and that Apple did so to pocket a portion of those rents. Purportedly, Screening Room has approached the major studios, is seeking exclusive dealing arrangements, and is setting the price of a first run home-shown film, offering the theaters a piece of the sale, perhaps like Apple.
Books are in many ways like films. There will be a band of consumers that very much want to read the best sellers when they come out and will pay more to do so. There are also consumers who are happy to wait until the book is available for less, later, like in paperback format. By charging one price for all eBooks irrespective of where they are in the distribution timeline, Amazon is collapsing the release window business model for books. They are charging less to the band that is most willing to pay more and they are ultimately charging more to folks who would prefer to wait for their books at cheaper prices. The consumers that would buy a bestseller but for the higher price benefit, but only in accelerating consumption that they would have engaged in anyway.
Amazon’s practice is economically suboptimal: raising the price of books that are not best sellers reduces sales and leaves demand unmet. While consumers of bestselling eBooks pay less, they would have paid more. Their welfare is being met inefficiently. The benefit to the marginal consumer that would have consumed the lower priced product is only in accelerating consumption that would have occurred anyway when the price of the book decreased. By destroying windowing in books, Amazon is reaping rents from the price sensitive consumers, denying access to eBooks for some class of price sensitive consumers, and denying revenues to the publishers who rely on those revenues to curate new talent. The publishers were right to try to stop Amazon’s practice.
Screening Room does not suffer from this infirmity, however. They are actually bringing a product to market that would not otherwise get there as quickly absent the exclusivity. I believe that the exclusivity the B2B eMarketplaces asked for was necessary in order to establish the markets and so was justified, and that the FTC’s decision to condemn it played a meaningful role in the failure of so many e-markets.
It will be interesting to see what Justice does with Screening Room given eBooks and the B2B “market for markets.”