A legal battle is threatening to derail Paramount's Gulf-backed takeover of Warner Bros Discovery, with lawyers arguing it would lead to higher prices and fewer film and television choices.
If successful, the challenge could delay or block the $110 billion blockbuster merger.
The Paramount-Warner Bros merger would be transformative for Hollywood by combining two of Hollywood's most famous film studios. But a coalition of a dozen states are asking a US federal judge to consider a request granting a temporary restraining order, or TRO, and preliminary injunction, which would postpone the acquisition.
Three Gulf sovereign wealth funds are backing the takeover bid: Saudi Arabia's Public Investment Fund, Abu Dhabi's L'imad Holding and the Qatar Investment Authority.
The filing focuses on US anti-trust law, which regulates corporate mergers to protect against monopoly, collusion and price-fixing. The states also argue the merger would cost thousands of jobs.
Californian Attorney General Rob Bonta and 11 of his colleagues are pushing for the TRO to be granted before then, arguing in a lawsuit on Monday that the merger would “extinguish competition” between the two studios and “inflict substantial harm on movie theatres, basic cable distributors and ultimately, audiences nationwide”. Mr Bonta said it would also lead to higher prices, lower quality and fewer choices of film and television.
The states in a filing said the merger would leave only the combined company and Disney to control 59 per cent of all basic cable TV in the US.
After this merger, for every dollar generated by wide-release theatrical films and basic cable channels in the US, the combined company will pocket more than 25 cents, the lawsuit said.
In response, Paramount said the complaint “reflects a fundamentally flawed application of the anti-trust laws”.
“Any attempt to block this transaction undermines the very principles anti-trust law is designed to promote: more competition, more choice for consumers, and more opportunities for creators and workers,” a company representative said in a statement.
In US anti-trust law, holding a 30 per cent market share is typically the threshold to determine whether or not a business – or in this case, a merger – is legal.
“It all depends upon how well Paramount and Warner make their case for how the market is functioning. I do think there are other platforms other than theatre [and] theatrical distribution,” said Shubha Ghosh, a professor at Syracuse University.
Syracuse University
But there is the question of the future of these distribution channels. Two of the summer’s hottest films in the US – Backrooms and Obsession – are now on streaming services weeks after their theatrical releases.
Paramount says the merger would boost competition for streaming services. William Kovacic, a professor at George Washington University, said Paramount’s argument is that dimensions of the industry rise and fall, and the industry is now in an age where streaming has emerged as an option for consumers.
“There’s a dimension of quality and the vicarious thrill of watching these images on a giant screen with the sound just swallowing you up, as opposed to putting on your headphones and watching something on a laptop screen or a smaller device,” Prof Kovacic said.
“That's basically what the debate boils down to.”
What comes next?
A US judge has scheduled a hearing for the request on Friday.
The challenge from the US states represents one of the final major hurdles for the merger. The Department of Justice has approved the deal, as have regulators in China and the UK. The EU is set to decide on July 22.
Paramount chief executive David Ellison said in April that he believed the company would close the proposed acquisition by September.
The legal challenge is expected to cause some delays, with Prof Kovacic anticipating some resolution by the first quarter of next year, but the expectation remains that it will be signed off before long and potentially outside the courtroom.
“In some ways, this is working out predictably. As far as what the final result will be, it really will kind of depend upon how the courts perceive the markets that are at issue in this case,” Mr Ghosh said.
