In yet another installment of “Nothing Makes Sense Anymore,” apparently Netflix is interested in buying movie theaters, despite the entire Netflix experience being about never leaving your house. The streaming titan had considered buying up the Los Angeles-based Landmark Theatres, only backing out because the price wasn’t right. Whether or not Netflix is still pursuing theater ownership is yet to be seen.

One important note on that: it might not be legal.

Way back in the olden days of the 1940s, the issue of movie studios owning theater chains made it all the way to the Supreme Court, where it did not end in the studios’ favor. The Supreme Court decided that studios owning theaters (among other practices) constituted an antitrust violation and ordered them to sell the theaters.

But what does this mean for Netflix? And what can we expect to change as moviegoers, streamers, and consumers?

Trustbusting 101

The legal precedent for all of this is actually pretty simple. But, it had sprawling effects on Hollywood as a whole. The Hollywood studio system of the mid-20th century is basically the epitome of vertical integration. A business practice of one company owning every single step in the chain of production to maximize profit and control.

In Hollywood, this meant a studio hiring its own departments for “below-the-line” talent — meaning those behind the scenes — and contracting with “above-the-line” talent — actors, directors, writers, etc. Everything was kept in-house so the studio could control expenses and not have to compete with other studios for top talent once they signed on the dotted line.

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It also included owning chains of movie theaters so that studios could control how and when their movies were shown. Movies could be shown exclusively in one studio’s theaters or sold through block-booking. Block-booking is when a theater would have to rent movies in blocks consisting of one popular movie and a handful of less popular movies that they otherwise wouldn’t rent. Sometimes studios would even schedule their most popular movies to only show when other studios weren’t showing theirs.

But as soon as you start talking about minimizing competition, the Federal Trade Commission is going to have an issue. For decades, Hollywood and the U.S. government had been dancing around the issue of monopolies and regulation. But in 1938 the Department of Justice brought a lawsuit against the Big Five studios (Paramount Pictures, Loew’s/MGM, Warner Bros., 20th Century Fox, and RKO Pictures) and Little Three studios (Universal Studios, Columbia Pictures, United Artists) for violating the Sherman Antitrust Act. They settled in 1940 on the condition that the studios would clean up their act.

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Justice William O. Douglas, who took no mercy on Hollywood

Surprise, surprise: the studios did not do that. The DOJ reinstated the suit in 1945 and by 1948 it made it all the way to the Supreme Court. The Court ruled against the studios and forced them to not just change their practices but divest from their theaters. The Court’s opinion named five practices that violated antitrust laws:

  1. Scheduling particular showtimes to avoid competing with other theaters.
  2. Joint ownership of theaters by competing studios.
  3. Issuing exclusive exhibition rights without competitive bidding.
  4. Block-booking and blind-buying.
  5. Discrimination against independent theaters.

(Remember these five things, we’ll talk more about them later.)

The effects of the Paramount Decision, as it would come to be known, went far beyond just the economic. The loss of control over distribution and the declining profits — plus this newfangled thing called television — meant that Hollywood had to be more selective about the projects it greenlit.

Movies got better, creative control moved from executives to filmmakers, and independent productions were finally able to compete. It’s capitalism at its finest: competition makes everybody better.

Enter Netflix

Netflix has been changing the game for the last 20 years. First, with DVDs-by-mail, they basically single-handedly put Blockbuster out of business and certainly contributed to the long decline in movie attendance (how many times have you said/heard, “I’ll just wait until it’s on Netflix?”).

Then, streaming fed our growing need for immediate gratification and to never leave our houses. And finally, Netflix’s original programming has produced many of the biggest hits of the last few years — STRANGER THINGS, THE CROWN, all of those Marvel series — and have certainly kept pace with “the golden age of television.”

netflix-originals
What did we do before Netflix?

But the idea of Netflix owning theaters feels like a major step backward. It’s been sixty years since media producers have been allowed to own theaters and that business model is basically dead. Perhaps that’s why the question of its legality has flown under the radar. The question is also a very complex one.

Is Netflix truly analogous to the Hollywood studios of yore? Would Netflix’s ownership of theaters create a monopoly (or an oligopoly) the way the handful of studios managed? And would the courts allow it?

Let’s try and break these down one by one:

Producer or Distributor?

Historically, Netflix was the definition of a distributor. Meaning they buy the right to bring the movie or show to the audience, either via theater or home release. Even if Netflix had exclusive distribution rights to a product, it was still just distribution. But once they started slapping that “Netflix Original” label on things and financing new projects, things changed. They added production to their resume. And producers are treated differently.

Since Netflix doesn’t release its viewership numbers, it’s impossible for the public to know whether more of its viewership comes from Netflix originals or the projects it distributes. For that matter, we can’t really know if more of its income is from originals or non-originals since they are all part of the same subscription package. So we can’t rule one way or the other, producer vs. distributor, based on the numbers.

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But we do know — or can reasonably deduce — that Netflix wants to buy movie theaters in order to screen their original productions. Whether it’s to maximize profits off these productions or to be eligible to major awards, we can assume that Netflix does not own the theatrical distribution rights for its non-originals, so it will only be Netflix Originals in these theaters. That puts us in the realm of production, i.e. a studio.

21st Century Monopoly

It’s hard to imagine Netflix creating a monopoly at this time since modes of exhibition are in such flux (theaters, streaming, and cord-cutting, oh my). And an oligopoly would require Netflix’s compatriots like Amazon and Hulu to follow suit and engage in some shady dealings that would rig the market. (I’m not saying that won’t happen, but let’s not count our chickens before they hatch.)

But let’s look back at those enumerated no-no’s that SCOTUS handed down. The easiest way for Netflix’s theaters to get in trouble would be to engage in — or even have the potential to engage in — these practices. We here at ComicsVerse, unfortunately, don’t own a crystal ball so we’ll do the next best thing: speculate wildly!

Scheduling showtimes to avoid competing with other theaters

Scheduling at a potential Netflix theater would have to be very carefully thought out: how do you compete with your own service that has anything you want available 24/7? If anything Netflix would be competing with itself, not other theaters.

Joint ownership of theaters by competing studios

SCOTUS ruled that these agreements between studios and their theaters reduced competition in admission pricing and bidding for screening rights. It’ll be interesting to see if other streaming services join in and perhaps try to hitch their wagon to Netflix’s. But even so, given the existing strategies of fighting for exclusive rights to shows and movies, it’s hard to imagine these intensely competitive companies going dutch on a theater chain.

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Issuing exclusive exhibition rights without competitive bidding

This is where it gets sticky. Netflix’s theaters will likely be the only theaters that can show Netflix Originals. But this goes both ways. In the past, Netflix has had trouble getting theaters to show their films so they can be eligible for awards. Whether this is because of some stigma against Netflix or for the behind-the-scenes economics we don’t know.

So the question becomes will Netflix continue to attempt to have their films shown in other theaters or will they be exclusive to Netflix’s theaters? The former is perfectly legal, so long as bidding practices are fair and competitive. The latter would be a clear violation of the Paramount decision.

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BEASTS OF NO NATION played for a week in limited markets in order to be nominated for a Golden Globe

Block-booking and blind-buying

Block-booking is less of an issue these days because studios are not creating such a massive number of films that need to be shown. Netflix (or any other production company) simply doesn’t make enough movies to be able to sell them in blocks of five at a time. And since Netflix still has its streaming service, there is little reason to try to sell more niche content on the coattails of potential blockbusters.

Blind-buying is also a more or less dead practice; focus groups and market testing are such a part of the filmmaking process that keeping information from potential exhibitors will only hurt the studio in the end.

Discrimination against independent theaters

Will Netflix try to get the most bang for its buck by only dealing with big chains? Or does the market for Netflix’s often off-beat content align more with the demographics of independent theaters? Probably a little of both.

Netflix would be smart to try to tap the independent market with its documentaries and foreign language productions. But this all goes back to the question of exclusivity: is Netflix willing to share its originals with any other theater, regardless of size?

The United States v. Netflix

I probably should have disclaimed this at the beginning, but I am by no means a legal expert. In my non-expert opinion, if Netflix does follow through with buying theaters, there will be a legal battle no matter what. There is no law that says that movie studios can’t own theaters. But as part of a Supreme Court decision, it becomes a bit more open to interpretation.

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The decision in the Paramount case ended with studios divesting from their theaters, but that was not necessarily what the case was about. The case was about monopolistic business practices. Taking away the theaters was almost a punishment or at least a preventative measure. If Netflix were to do everything 100% by the book, they might be fine. Or the courts could rule that this burgeoning vertical integration is stepping too close to the line and shut it all down.

Either way, Netflix’s apparent step backward into traditional movie exhibition is sure to change the game once more. And we haven’t even touched on the logistics of it all: How will they balance streaming and theater presentations? What will the pricing be like? Will they accept MoviePass? Is it actually just a room full of those airplane seats with the screens and you can stream Netflix content on demand? Only time will tell.

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