An antitrust lawsuit has been filed against The Walt Disney Company in a case that targets the entertainment monolith’s dual role as content provider and distributor in business dealings.
Disney operates Hulu, the nation’s second-largest over-the-air pay-TV provider, while controlling ESPN. The proposed class action accuses Disney of running the companies as a single entity, saying the arrangement allows the company to negotiate anti-competitive agreements with competitors who have inflated the cost of live television streamed over the Internet.
The lawsuit pits YouTube TV subscribers, who filed the lawsuit Friday in federal court in California, against Disney. They point to business relationships that effectively grant the company the ability to “price floor” for the market and drive up prices across the industry by raising the prices of its own offerings.
“Since Disney acquired operational control of Hulu in May 2019, prices across the [streaming live pay television] The market, including for YouTube TV, has doubled,” the complaint reads. “This dramatic market-wide price inflation was driven by Disney’s own price hikes for Hulu + Live TV.”
The lawsuit points to guidelines in Disney’s contracts with over-the-air pay-TV competitors that require them to offer ESPN as part of the least expensive package they offer. The term effectively restricts the ability of Disney’s rivals to provide an option that omits ESPN, the most expensive Disney-owned cable channel.
Without this requirement, Disney would not be able to prevent competitors from selling so-called “skinny” packages that provide subscribers with a limited supply of live TV channels, according to the complaint.
Cable TV providers have long criticized Disney’s affiliate fees to carry ESPN and its sister networks as part of a cable package. It is widely believed that these fees have been the primary driver of rising basic cable prices over the past decade. In 2015, ESPN’s affiliate fees were up to four times more expensive than TNT’s broadcast fees, which had the second highest price behind ESPN.
ESPN’s leverage eroded with the advent of cord cutting and viewers avoiding cable television. This was largely due to consumers’ aversion to paying for channels they didn’t watch or want. They flocked to cheaper or free alternatives.
The first substantial volley came from traditional cable and satellite television providers who also controlled Internet service providers. For example, in 2015, Verizon began offering so-called “skinny” packages, taking advantage of the ambiguity of contracts that did not expressly cover the distribution of ESPN on the Internet, to end Disney’s longstanding tenures on pay-TV packages. Disney sued Verizon, claiming ESPN’s demotion as an add-on tier was a violation of its carriage agreement. Verizon eventually capitulated.
The lawsuit also seeks ESPN to contractually require ESPN to be included in any basic cable package and by imposing so-called “most favored nation” clauses in those agreements, which ensure that the cost of ESPN affiliation traded with a given competitor represents an industry-wide floor price. This means that if Disney raises the price of Hulu with Live TV, which it operates, its competitors must do so as well.
YouTube TV subscribers say Google’s relationship with Disney has resulted in an increase in the basic plan from $35 to $65 per month. In 2021, YouTube TV said it could provide a basic plan without ESPN for $15 less than it was charging during a feud with Disney over a content deal.
The lawsuit was filed days before Bob Iger returned to Disney to lead the company. Iger, who succeeded Michael Eisner as CEO in 2005, guided Disney through a period of massive growth, mostly by pursuing mergers that cemented its reputation as a global content powerhouse. It acquired Pixar for $7.4 billion in 2006, Marvel for $4 billion in 2009, Lucasfilm for $4 billion in 2012 and Fox for $71.3 billion in 2019 in a deal that included 20th Century Fox studio, Fox Searchlight and FX Networks.
Today, some of the acquisitions would likely be challenged by competition authorities who have turned their attention to consolidation in the media industry.
The suit, which seeks to represent about five million YouTube TV subscribers who say they pay inflated subscription fees, alleges a violation of the Sherman Act.
Disney did not immediately respond to requests for comment.
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