Last Friday, a kind of mini-trial was held over the question of whether two media conglomerates, Paramount Pictures and Warner Bros. Discovery, should be allowed to merge in a $110 billion deal. Attorneys for both Paramount and the 12 states suing to stop the merger had time to state their case, and while they were nominally focused on whether a restraining order blocking the merger from consummating should be granted, in reality they were making their case about the merger itself. The states’ lawyer James Weingarten said that their complaint confirmed that the merger was unlawful, and Paramount’s lawyer Jeffrey Kessler (who had worked for the states in successfully prosecuting the Ticketmaster monopoly) vehemently disagreed.
The outcome saw Judge Araceli Martínez-Olguín issue the temporary restraining order (TRO) for 14 days, while more briefs can be filed and a hearing on the states’ motion for a preliminary injunction can be held on August 3. Such an injunction would block the merger for months or longer while the litigation plays out.
But the judge’s ruling signifies more than a two-week pause. Martínez-Olguín essentially bought the states’ case, at least for now. And the pressures on Paramount to pull out of a deal that may be losing significant traction are only going to grow.
Read more from the Prospect on the merger between Paramount and Warner Bros.The logic behind the TRO, explicitly laid out by the states, is that they “are likely to succeed on the merits of their claim that the [merger] Transaction violates Section 7 of the Clayton Act.” As I’ve written, the basic structure of the states’ case is that a merged Paramount-Warner Bros. would enjoy increased bargaining power over distributors at movie theaters and cable companies, and would force higher revenue shares for themselves, leading to higher prices at theaters and on cable.
At last Friday’s hearing, Weingarten reiterated this argument. “There is a structural presumption of unlawfulness in each of the markets,” Weingarten said, referring to a precedent set in a Supreme Court case in the 1960s called Philadelphia National Bank that when a merger creates a certain level of market share (above 30 percent) or an increase in concentration (as determined by a formula known as the Herfindahl-Hirschman Index), it is per se illegal. The threshold for presumed illegality is now lower after the 2023 federal Merger Guidelines written by the Biden administration; those remain in place and are considered valid in the court district where this challenge is being heard.
Because of these statistical realities, a ruling allowing the merger while litigation proceeded would have a transformational impact on the entertainment industry, and bring harm to partners and consumers. If the merger were to proceed while the case was still active, Weingarten said, “the competitors now become colleagues,” sharing confidential information. For which reason, he continued, the TRO should be granted, specifically on the premise that the states had a successful case on the merits.
For his part, Kessler threw up a lot of smoke. He said the market shares were misleading because other studios, like Amazon MGM, would make more movies if Paramount cut theirs back. (This was a really curious statement, considering that Paramount has said for months that it would increase output after the merger.) Weingarten countered that any claims about new entries were fanciful, since the five major studios’ market share has been stable for years and there hasn’t been a single new cable channel introduced since 2021.
A ruling allowing the merger while litigation proceeded would have a transformational impact on the entertainment industry, and bring harm to partners and consumers.
Kessler also said that cable is losing market share to streaming, and relentless cord-cutting would prevent Paramount from threatening blackouts (even though their bargaining leverage amid the cord-cutting would be higher). He added that Paramount had to bulk up to take on streaming giants like Netflix and Amazon. But Weingarten replied that streaming is irrelevant to the specific bargaining dynamics for theater and cable distribution, and that those are still multi-billion-dollar markets. And besides, Paramount has said in its own analysis, which was cited in the states’ complaint, that “tentpole” movie releases—that is, of major productions that would get sustained theatrical release—were critical to its strategy.
There was also a key error. Kessler noted that the states’ argument ignored Apple as a competitor, even though they have made blockbuster films like F1. But Weingarten was quick to retort that F1 was distributed in theaters by Warner Bros. “That’s the value of the Big Five,” Weingarten said.
You could see throughout the hearing that Judge Martínez-Olguín wasn’t really buying Kessler’s argument; at one point she asked him why his points didn’t “just bolster that there are serious questions about the merger?” And Kessler backtracked: he said Paramount would agree to a 30-day delay on closing the deal, as long as there was a decision on a preliminary injunction by early September. That way, provided Paramount won, they could close before the end of that month, when a “ticking fee” tied to the merger kicked in, costing the company $7 million for every day closing was delayed, payable to Warner Bros. shareholders.
Paramount’s goal in this hearing was to speed up the process, and subsequently not let the case include fact witnesses who could speak to the real harms of the merger. Kessler’s preference would be a quickie trial in August limited to economic experts. Weingarten rejected that, saying that “expert testimony is not a substitute for facts. Your honor should hear the evidence from the market competitors and customers.”
Judge Martínez-Olguín’s issuance of the TRO doesn’t fully settle this dispute. But it does say that the states “present[ed] compelling evidence that the combined firm resulting from the transaction will possess substantial market share,” which allowed her to “presume the proposed merger is likely to violate antitrust laws.” Paramount can rebut this presumption in the course of a trial, but that would likely require a real trial, not just two experts battling it out in a quickie hearing. Martínez-Olguín even savages the expert opinion Paramount presented in their brief, saying that at best, their “proof” creates a dispute over the facts, which would need to be adjudicated. And in a footnote, she dismisses the idea that whatever the merger does to streaming markets has any bearing on the impact on theatrical or cable markets, one of Kessler’s key arguments.
That doesn’t sound like someone who would allow a quickie trial or a merger in advance of the litigation. Martínez-Olguín agrees that unwinding the merger after the fact would be “difficult, if not impossible.” Combine that with the need to sort out the facts, and you’re on a road straight toward that $7 million-per-day ticking fee. It’s possible that she’ll deny the preliminary injunction, but the revealed preference of the judge makes that unlikely, in my view.
Paramount still “plans” to close by September 30, but, to tweak the old saying, Paramount plans and Judge Martínez-Olguín laughs.
Paramount has other problems. The Writers Guild of America filed its own case last week, which is a perfect complement to the states’ case. The WGA argues how the merger would harm creative professionals in the industry, who would also face a lack of bargaining leverage with one less studio bidding for their services. The complaint contains fascinating quotes from showrunner Michael Schur (The Office, Parks and Recreation) and screenwriter David Koepp (Spider-Man, Disclosure Day) about the realities of the business in the 21st century and how writers are already at a disadvantage.
The WGA has moved to combine the cases, which would make the case against Paramount more comprehensive, and require more time to resolve the proceedings. There are other suits from shareholders and Paramount+ subscribers, but the WGA one seems to have the most legs.
Read: Paramount-Warner Would Create a Hollywood Jobs ApocalypseParamount has already readied itself for a long fight, even hiring Paul Clement, a Supreme Court litigator, in case they want to appeal. But having the costs go up does not bode well for the source of the company’s wealth. Paramount CEO David Ellison’s dad Larry has his fortune commingled with his stake in Oracle, and its sharply negative stock movement over the last month suggests limited investor tolerance for the delays. The Gulf state money tied into the deal, in the wake of the Iran war’s resumption, may be even more impatient.
The other options for Paramount are to enter into negotiations with the states and try to find a way to settle, or to give up. None of these are particularly good for the company. If Paramount walks, they’ll owe Warner Bros. a $7 billion termination fee. A settlement seems unlikely to work, considering the rancor between Paramount and California Attorney General Rob Bonta, who is leading the states’ case. And besides, Bonta is winning. He doesn’t have much pressure on him to settle, particularly with many thousands of his Hollywood-based constituents dead set against the deal. Claims seemingly seeded by the pro-merger side that Bonta would agree to a settlement if CNN was spun off have been roundly rejected by the AG himself.
If settlement is a dead-end and the cost of fighting in time and money becomes prohibitive, giving up might just start to look attractive, even despite the $7 billion. Is there a moment where Paramount ends up saving money by failing, considering that the $7 billion would also be due if it lost in court? There is a world where all this money being spent to make the deal makes more sense being plowed into good movies and TV shows that can generate revenues.
Unless the real benefit to Ellison is taking over and MAGA-fying the news media. That’s not part of the merger challenge, but it lurks in the background of Paramount’s decision-making. It may be worth it to Ellison to lose money and create a threat of bankruptcy if his news empire can exist as a human shield for Donald Trump. But Ellison’s financial backers may not have the same kind of drive.
