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UNITED STATES v. COLUMBIA PICTURES INDUS.

December 31, 1980

UNITED STATES of America, Plaintiff,
v.
COLUMBIA PICTURES INDUSTRIES, INC.; Getty Oil Company; MCA, Inc.; Paramount Pictures Corporation; and Twentieth Century-Fox Film Corporation, Defendants, and Premiere, Intervenor-Defendant



The opinion of the court was delivered by: GOETTEL

The culture of the United States during the twentieth century has been largely shaped by its motion pictures. Indeed, the images on the silver screen were so pervasive that much of the world has come to think of this country as it was portrayed in the movies. In the middle of the century, an interloper called television threatened the motion picture industry, but, after a period of retrenchment, Hollywood came back strongly, exhibiting its wares over the airwaves of its new competitor. The popularity of movies on television was well demonstrated, but the question of how to realize royalties comparable to those obtained from theatrical licenses troubled the motion picture industry.

In the last quarter of this century, a new creature known as "pay television" appeared, through which direct revenues could be obtained from the showing of theatrical motion pictures, uncut and uninterrupted, on special television channels. The popularity of this medium has grown so rapidly that it is not impossible that, by the end of the century, it will be the prime method for viewing motion pictures. This case concerns who will reap the enormous revenues available from this enterprise.

THE FACTS

 Cable Television

 Pay television is an outgrowth of cable television. The first cable systems were designed to transmit better signals from commercial television stations to homes in poor-reception areas such as rural communities far from broadcasting stations. Initially, this was done by the use of a tall community antenna, which picked up signals from nearby metropolitan areas and transmitted them to subscribers' sets over a coaxial cable. Later, programs were imported from commercial television stations well outside the community's normal viewing area. As these cable systems grew, they began to create some of their own programming for their subscribers.

 Cable systems were also found to be a desirable method of transmitting television signals in metropolitan areas, where buildings and other obstructions caused reception problems. However, the cost of installation was so great in such areas that other sources of revenue were needed to justify the installation of a cable system.

 In the early 1970's, two major developments contributed to the growth of cable television. First, there was a reduction in the amount of federal regulation of the cable companies. Second, communications satellite technology made possible the simultaneous delivery of programming to cable operators throughout the country. *fn1" Communications satellites are launched to an altitude at which they can maintain a stationary orbit over a part of the United States. By the use of transponders (devices on communications satellites), they are able to amplify and reflect signals received from the programmer's earth communication station. The satellite-reflected signal is received by the pay television system's earth station and then distributed over the cable operator's wires to subscribers to the service.

 There are now many thousands of cable systems operating in the United States. The industry is very decentralized, with no single company having a substantial portion of the cable subscribers. Some companies own more than one system and are known as MSO's (Multiple Systems Operators). Most cable systems offer at least one pay television channel to their subscribers.

 Pay Television

 Prior to the advent of satellite-fed stations, there was a small amount of pay television transmitted on a fairly local basis. Local cable operators charged for special channels that provided motion pictures and sporting events that were not available on commercial television. They would normally provide the basic cable service for prices ranging between seven and ten dollars per month. They found that they could virtually double their income by providing an additional, pay television service, which was optional and billed as an additional monthly fee. Home Box Office, Inc. ("HBO") was a pioneer in providing movies to be shown over local cable systems. When it went on a satellite in 1975, creating a nationwide network, its sales immediately began to expand.

 Initially, it was thought that sports and special programming might be a significant aspect of pay television. However, both of these have to compete with the commercial television market, which can usually offer a larger price for an event of nationwide interest. To the extent that sports programming has been successful on pay television, it has been on a local or, at most, regional basis. The great success in pay television, and the driving force in its growth, has been the new theatrical movie, never before shown on television. As the brochure for Premiere, the programming service that is the subject of these proceedings, states, the "great affection between audiences and films has been responsible for the success of pay television in America."

 Cables are not the only way to transmit pay television service. Approximately ten percent of all pay television subscribers are served by other transmission methods, which involve sending signals over the air, but which require special equipment to receive the signals. To date, the systems using these methods have not been enormously successful because of a number of technological problems, but, if these problems can be solved, and thus the enormous cost of installing cable systems avoided, even greater growth of pay television can be expected. *fn2"

 At the present time, approximately 31 million of the 77 million television households in the United States have cable service available to them. (The phrase used in the industry is "homes passed.") Of these, more than half (i. e., 17.2 million) are basic cable subscribers. Of the basic cable subscribers, almost half, 8.3 million, receive pay television.

 Most of the cable operators serving these subscribers are affiliated with one or another network program service, although it is still possible for an individual cable operator to program its pay television channel as a "stand alone." *fn3" However, there are financial and technical disadvantages to operating individually. The equipment needed to program on a "stand alone" basis is more expensive and more personnel are needed to operate it. Moreover (surprisingly), the satellite-distributed network signal provides a higher quality picture than those transmitted from independent stations using cassettes or disks.

 Pay television has grown significantly since its inception in 1972. By 1985, it is estimated that there will be between 16 million and 25 million households subscribing to pay television. Billions of dollars annually will be spent on pay television. So popular is the service that it has promoted the growth of cable systems in major metropolitan areas. *fn4"

 As mentioned earlier, HBO was the early pioneer in pay television and the first to go on satellite. Its name is almost synonymous with pay television. It now has almost 6 million subscribers, which is sixty-nine percent of the pay-cable market. HBO's service consists primarily of movies, but it also transmits an increasing number of specials and a decreasing number of sports events. It uses volume discounts to attract operators of large cable systems and MSO's to affiliate with it. It has some exclusive programming, which it generally refuses to license to other pay television companies. *fn5" HBO has recently started a new, separate, all-movie channel called Cinemax, which is intended to complement its service on cable operations carrying more than one pay channel. HBO realizes that it can promote its "second tier" only if it is not perceived as duplicative by subscribers. *fn6"

 The next largest network program service is called Showtime Entertainment ("Showtime"), which has 1.4 million subscribers, amounting to sixteen percent of all pay-cable subscribers. Showtime also transmits by satellite. Its programming is relatively similar to HBO's. *fn7"

 The third largest network, The Movie Channel, also transmits by satellite. It has been in operation for only a year, but already has 460,000 subscribers, representing between five and six percent of all pay-cable subscribers. The Movie Channel, as its name connotes, shows nothing but movies. Unlike its competitors, it is on the air twenty-four hours a day, thereby attracting subscribers who work in the evening, which, for pay television (as for commercial television), is the prime time.

 All of the pay television networks mentioned above send monthly guides to their subscribers, usually having their featured movie of the month on the front cover, with the feature movie for the following month on the rear cover. These covers promote the service by prominently displaying a top program offering, having substantial subscriber recognition and appeal. Besides the feature movie, each network attempts, every month, to offer several additional feature film hits that have not previously appeared on television. The remainder of their programming is filled out by lower quality new films, "encores" (reshowings of hit movies that premiered on pay television some months earlier), older movies, and some "off-nets" (pictures that have been shown on commercial television). As noted earlier, HBO and Showtime also supplement their programming with specials (such as live musical broadcasts from night clubs or specially produced programs) and sporting events. The evidence at the hearing held in this action clearly established, however, that the new, never-before-shown-on-television, theatrical motion pictures are the prime item offered by pay television networks, without which they could not retain or gain subscribers.

 The Motion Picture Producers

 The pay television industry (with rare exceptions) does not produce its own motion pictures. The motion pictures shown are virtually all Hollywood-produced, theatrically released pictures made in the English language. There are at present six major American producers and distributors of motion pictures: Columbia Pictures Industries, Inc. ("Columbia"); Universal Pictures ("Universal"); *fn8" Paramount Pictures Corporation ("Paramount"); Twentieth Century-Fox Film Corporation ("Fox"); United Artists; and Warner Brothers. There are two other "mini-majors" (Disney and MGM) and a number of independent producers. The six major companies, in addition to distributing the films that they produce, also distribute films produced by the independents and others. All of the major motion picture producers do business in this district, are engaged in interstate commerce, receive annual rentals for their films in the hundreds of millions of dollars, and derive revenues from pay television of many millions of dollars.

 The production and distribution of new motion pictures is a high-risk, capital-intensive business. *fn9" In recent years, the costs of producing and distributing theatrical motion pictures have increased noticeably. The revenues from motion picture theater admissions, however, have not grown correspondingly. One explanation is that, historically, over seventy percent of the movie theater attending public has been composed of people under thirty years of age. Because of changing demographic characteristics of the country, the size of this group is decreasing. The older folks a group that is increasing in size tend to stay home and watch television. Because of these changes, as well as the rapidly growing market for pay television, the motion picture producers' interest in pay television revenues has intensified. While their total revenues from this source have been continually increasing, their revenue per television subscriber has been decreasing in some instances, causing concern among the producers, particularly the major studios. Nevertheless, although the pay television network services obtain only one-third of their movies from Columbia, Universal, Paramount, and Fox (the four movie companies involved in this action), they pay for those pictures film rentals amounting to about one-half of their total expenditures, since they believe that these four major producers supply one-half (or more) of the most popular movies on pay television. *fn10"

 New motion pictures do not get shown immediately on pay television. Films are first released theatrically to the motion picture theaters throughout the United States. The length of the theatrical run varies depending on the popularity of the picture. Some are withdrawn almost immediately when poorly received, while others are so popular that they are re-released for a second theatrical showing the following year. However, the usual length of the theatrical run of a picture is about a year or so. *fn11" The movie is then available for exhibition on pay television for the next year or two, *fn12" after which it is sold to commercial television.

 Generally, when a film is made available to pay television, all of the existing networks have an opportunity to bid on it. In the past, the length of time a picture would be available to pay television, as well as the number of times it would be shown and, of course, the price to be paid, was a matter for negotiation between individual movie companies and individual network program services. In determining the price to be paid, a prime consideration was how well the picture had done at the theatrical box office. Other factors, such as awards won and suitability of the picture for pay television, were lesser considerations. As mentioned earlier, the motion picture companies distribute some films that they did not produce. On some occasions, the independent producers sell the television rights (both pay and commercial) separately. Thus, it is possible for a pay television network to purchase the pay television rights directly from an independent producer before the film has been distributed theatrically. HBO has been particularly active in this market for what are known as "pre-buys." In this manner, a pay television network can obtain an "exclusive," although it is bargaining, usually, without the benefit of knowing the theatrical box office appeal or the motion picture critics' reviews.

 The entire motion picture industry has viewed the rapidly evolving market of pay television with some alarm. The theater owners are concerned that people will stop going to the movies and will stay home as pay television subscribers. The distributors are concerned that they do not receive nearly as high a percentage of the gross revenues from pay television as they do from theatrical exhibition. When quality motion pictures derived most of their income from a flourishing theatrical market, the collateral pay television licenses were viewed as merely a little bit of gravy. With the market's shift, the bargaining over prices has become much more intensive.

 The movie companies have been particularly dissatisfied with the revenues received from HBO. Memoranda from the files of Paramount reveal a continuing unhappiness over the "disproportionate amount of money being retained by the cable operators and the programming companies" *fn13" and its "ultimate goal of substantially eliminating or severely altering" HBO's dominant position in the pay-cable market. *fn14" Consequently, it has become the desire of the movie companies to control the distribution of films to pay television. Besides increasing their revenues, according to the views of some at Paramount, such control would also have the effects of mitigating "potential problems on the theatrical distribution side" and of creating an outlet for "marginal productions" that would not otherwise be accepted on pay television. *fn15"

 A plan considered by some of the movie companies was to induce Showtime to join them in an exclusive arrangement. During 1979, various discussions were held as to this possibility, but no agreement was reached because, among other reasons, Showtime's owners were concerned about the antitrust problems of such an agreement with a number of movie companies.

 Premiere

 During the latter part of 1979, most of the major movie companies discussed the possibility of entering a joint venture to start their own pay television network. Warner Brothers, however, already had its own plans under way, which culminated in the creation of The Movie Channel, and therefore was not interested. United Artists also decided not to participate, apparently because of concern over the antitrust problems. (The "mini-majors" (Disney and MGM) declined for various reasons to participate in a joint venture.) The remaining four major producers Columbia, Universal, Paramount, and Fox decided that they had sufficient size and resources to participate in a joint venture that could increase their revenues and help them control pay television distribution of motion pictures. Along with Getty Oil Company ("Getty"), in April 1980, they created a joint venture, which they named "Premiere," to set up a satellite-fed network program service designed to be a prime time showcase for the exhibition of feature films on pay television.

 The joint venture agreement provides that Premiere is to have certain films distributed by the movie company venturers *fn16" available to it exclusively for a nine-month period, before those films are shown on the existing satellite-fed network programming services. Premiere is scheduled to begin transmitting its programming on January 2, 1981. It intends to exhibit the new films contributed by the venturers as exclusives, as well as a larger number of other films obtained from venturers or other producers and distributors. (Most of these latter films would not be new to the pay television market and would not be obtained on an exclusive basis.)

 Under the joint venture agreement, the four motion picture producers are to contribute films *fn17" to the venture, and their contributions are to be valued according to a rather complex allocation formula, designed to assign relative values to the different contributions, first as between cash and films, and then as among the specific films contributed. Each film is initially valued at $ 1 million. To arrive at the total value of the films contributed in a year, the total number of films is multiplied by $ 1 million. To determine how revenues are to be paid back to each of the movie companies, that aggregate value is allocated among the films contributed on the basis of the ratio of each film's theatrical rental expressed as a percentage of the total theatrical rentals of all films contributed that year, although there is a maximum value placed on each film (regardless of the box office rentals) of $ 4 million, and a minimum of $ 250,000. The critical criterion for allocating revenues to the movie companies for their pictures is the box office rentals of the pictures, although the evidence indicates clearly that theatrical revenues are accurate indications of pay television popularity only about one-half of the time.

 Any net revenues remaining after the payment of Premiere's current operating costs, capital expenditures, and the cost of licensing movies are to be used to return each venturer's contributions, with the movie companies' contributions being valued according to the allocation formula. After all venturers have received a complete return of their contributions, any remaining net revenues are to be distributed equally among the five participants as profits. The allocation formula precludes a movie company from negotiating with Premiere for a higher allocation for a particular film than would be received under the formula, even if in its business judgment the film's value to pay television was not properly reflected in its box office rentals, and, conversely, requires adhering to the allocation even if Premiere believes the film will not be as well received on pay television as it was at the box office. The movie companies have thus agreed on the price for their motion pictures, replacing the prices that would normally be set by the marketplace with a transaction between themselves and Premiere that places a value on each film, within a minimum and maximum range, and allocates revenues to the movie companies for their pictures by a formula.

 Critical to the operation of this venture is the nine-month "window," during which the films contributed by the movie companies are to be available only to Premiere, among the network pay television services. *fn18" Under the agreement, the movie company venturers can license their films to nonsatellite pay-cable television and to the pay systems that do not use cable. However, as indicated earlier, these amount to only ten percent of the pay television market. In addition, following the nine-month window, the movie company venturers are free to license their films to the existing satellite-fed network program services. But, to date, those services have refused to license what they consider to be "used goods." During 1981, there will be approximately thirty-nine to forty-five movies subject to the window. *fn19" It is undisputed that the venturers consider this nine-month window *fn20" essential and would not have participated without it.

 Getty's role in this joint venture is primarily as a financial backer. It is obligated to contribute a total of $ 30 million to the venture, of which it has already spent.$ 7.4 million. *fn21" Getty is, of course, primarily a multi-billion dollar oil company engaged in the various aspects of the petroleum industry, but it also has an eighty-five percent interest in Entertainment and Sports Programming Network, ...


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