An antitrust lawsuit has been brought against The Walt Disney Company in a case that targets the entertainment monolith’s dual role as a content supplier 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 managing the businesses as a single entity, claiming that the arrangement allows the company to negotiate anticompetitive agreements with competitors that have inflated the cost of live television streamed over the internet.
The suit pits YouTube TV subscribers, who filed the suit on Friday in California federal court, against Disney. They point to business dealings that effectively grants the company the ability to “set a price floor” for the market and push up prices across the industry by raising the prices of its own offerings.
“Since Disney acquired operational control over Hulu in May 2019, prices across the [streaming live pay television] Market, including for YouTube TV, have doubled,” reads the complaint. “This dramatic, marketwide price inflation has been led by Disney’s own price hikes for Hulu + Live TV.”
The suit points to guidelines in Disney’s contracts with live streaming pay TV competitors that require them to carry ESPN as part of the cheapest bundle they offer. The term effectively restricts the ability of Disney’s rivals to provide an option that omits ESPN, cable’s most expensive channel which Disney owns.
Absent this requirement, Disney would not be able to prevent competitors from selling so-called “skinny” bundles that give subscribers a limited offering of live TV channels, according to the complaint.
Cable TV providers have long criticized Disney’s affiliate fees to broadcast ESPN and its sister networks as part of a cable package. It’s widely regarded that such fees were the primary driver of basic cable price hikes in the last decade. In 2015, ESPN’s affiliate fee was as much as four times as expensive as the fee to broadcast TNT, which had the second highest fee behind ESPN.
ESPN’s leverage eroded with the advent of cord-cutting and viewers eschewing cable TV. In large part, this was due to aversion by consumers from having to pay for channels they didn’t watch or want. They flocked to lower cost or free alternatives.
The first substantial volley came from traditional cable and satellite TV providers that also controlled internet service providers. For example, Verizon in 2015 started to offer so-called “skinny” bundles, taking advantage of ambiguity in contracts that didn’t expressly cover distribution of ESPN over the Internet, to end Disney’s long-running mandates on pay TV packages. Disney sued Verizon, claiming the downgrading of ESPN as an add-on tier was a violation of its carriage agreement. Verizon eventually capitulated.
The suit also takes aim at ESPN contractually requiring that ESPN be included as part of any basic cable package and by imposing as part of these agreements so-called “most favored nation” clauses, which ensures that ESPN affiliate fees negotiated with any given competitor represents an industrywide price floor. This means that if Disney raises the price for Hulu with Live TV, which it operates, its competitors have to do so as well.
YouTube TV subscribers say that Google’s dealings with Disney have resulted in an increase of the base package from $35 to $65 per month. In 2021, YouTube TV stated that it could provide a base plan without ESPN at $15 less than it was charging during a feud with Disney over a content agreement.
The lawsuit was filed days before Bob Iger returned to Disney to lead the company. Iger, who succeeded Michael Eisner as CEO in 2005, shepherded Disney through a period of massive growth mostly by pursuing mergers that grew its reputation as a global content powerhouse. He 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 20th Century Fox studio, Fox Searchlight and FX Networks.
Today, some of the acquisitions would likely be challenged by competition enforcers who’ve turned their attention to consolidation in the media industry.
The complaint, which seeks to represent roughly five million YouTube TV subscribers who say they’re paying inflated subscription fees, claims a violation of the Sherman Act.
Disney did not immediately respond to requests for comment.