An antitrust lawsuit has been launched against The Walt Disney Company in a case targeting the entertainment monolith’s dual role as content provider and distributor in business dealings.
Disney operates Hulu, the country’s second-largest live-streaming pay TV provider, while also controlling ESPN. The proposed class action accuses Disney of operating the assets as a single entity, arguing that the settlement allows the company to negotiate anti-competitive agreements with competitors who have inflated the cost of live Internet television streaming.
The lawsuit pits YouTube TV subscribers, who filed the lawsuit Friday in California federal court, with Disney. They mean business relationships that effectively grant the company the ability to “set a floor price” for the market and raise prices across the industry by increasing the prices of its offerings.
“Since Disney acquired operational control of Hulu in May 2019, prices across the [streaming live pay television] The market, even for YouTube TV, has doubled,” the complaint reads. “This dramatic price inflation across the market has been driven by Disney’s own price hikes for Hulu + Live TV.”
The lawsuit points to guidelines in Disney’s contracts with live streaming pay TV competitors that require them to carry ESPN as part of the cheaper package they offer. The term effectively limits the ability of Disney’s rivals to provide an option that omits ESPN, the most expensive cable channel owned by Disney.
Absent this requirement, Disney would be unable to prevent competitors from selling so-called “skinny” bundles that offer subscribers a limited supply of live TV channels, according to the complaint.
Cable TV providers have long criticized Disney’s affiliate fees for carrying ESPN and its sister networks as part of a cable package. Those fees are widely believed to have been the primary driver of basic cable price increases over the past decade. In 2015, ESPN’s affiliate fee was four times more expensive than the fee to broadcast TNT, which had the second-highest fee behind ESPN.
ESPN’s leverage has eroded with the advent of cable cutting and viewers shunning cable TV. In large part, this was due to consumers’ aversion from having to pay for channels they didn’t watch or want. They flocked to low-cost or free alternatives.
The first substantial flurry came from traditional cable and satellite TV providers who also controlled Internet service providers. For example, Verizon in 2015 began offering so-called “skinny” bundles, taking advantage of ambiguity in contracts that did not expressly cover distribution of ESPN over the Internet. ending Disney’s longstanding mandates on pay TV packages. Disney sued Verizon, arguing that downgrading ESPN as an additional tier was a violation of its carriage agreement. Verizon eventually capitulated.
The lawsuit also targets ESPN contractually requiring that ESPN be included as part of any basic cable package and imposing so-called “most favored nation” clauses as part of these agreements, which ensure that ESPN affiliate commissions negotiated with a competitor data represent an industry-wide price floor. This means that if Disney raises the price of Hulu with Live TV, which it runs, its competitors must do so too.
YouTube TV subscribers say Google’s dealings with Disney have led to an increase in the basic package from $35 to $65 a month. In 2021, YouTube TV said it could provide a basic plan without ESPN for $15 less than it charged during a feud with Disney over a content deal.
The lawsuit was filed just days before Bob Iger returned to Disney to lead the company. Iger, who succeeded Michael Eisner as CEO in 2005, has guided Disney through a period of massive growth primarily by pursuing mergers that have enhanced 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 as part of a deal that included studio 20th Century Fox, Fox Searchlight and FX Networks.
Today, some of the acquisitions would likely be contested by law enforcement agencies who have turned their attention to consolidation in the media industry.
The complaint, which seeks to represent an estimated 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.