Do Regulators Read the Papers? The Blockbuster Antitrust Fiasco Revisited

by on April 18, 2005

A few weeks ago, video rental giant Blockbuster announced it was abandoning its effort to acquire rival Hollywood Video after Federal Trade Commission (FTC) antitrust officials made it clear they would likely block the deal.

As I mentioned in a post prior to that announcement, this represents a classic example of how backward-looking antitrust policy can be at times. In particular, rarely has a case gotten the “relevant market” for purposes of market power analysis so completely wrong.

The idea that Blockbuster and Hollywood Video only compete against each other is absolutely absurd. To make that claim, antitrust officials are essentially arguing that the relevant market in this case is a niche of a niche of a niche. That is, apparently they believe that the relevant market here is:

(a) the market for video programming;
(b) in which you rent the video programming;
(c) in which you rent the video programming on a piece of tangible plastic;
(d) in which you get in your car and drive to a store to rent the video programming on a piece of tangible plastic.

This is just crazy. Is that really the relevant market in a world in which 85% of all households subscribe to cable and satellite television services and have access to a 500-channel universe of video programming? On those cable and satellite networks, consumers can also gain access to dozens of a la carte video-on-demand (VOD) movies and programs.

The Internet is also increasingly offering an array of video download services, including the popular site. An article on page B1 of today’s Wall Street Journal also mentions how many Bell companies are preparing to roll out IPTV (Internet protocal TV) services with their new fiber networks.

And how about Netflix, which has single-handedly upended this entire business and forced the traditional vendors to abolish late fees? And even if your relevant market is just the good old tangible plastic video store, don’t you think WalMart has a bearing on market price? After all, there are bins of DVDs at WalMart that include new movies for less than $10 bucks. Hell, why rent when you can own for almost the same amount of money?

Don’t these other providers and technologies count as competitors? Why not? As Mr. Spock would say, this is highly illogical.

So the FTC antitrust officials have really gotten it completely wrong in this case and forced Blockbuster to abandon a deal that could have given the firm stronger legs, at least in the short term. Now that the deal has been scuttled, Blockbuster and Hollywood Video are probably in real trouble.

Another article in today’s Wall Street Journal agrees. A front-page story today documents the internal problems at Blockbuster as the firm struggles to figure out how to survive in a world of multi-channel video competition. “At issue is how best to run a company whose business has been gradually eroded in recent years by new competition from a variety of sources–most prominently fast-changing technology,” notes author Martin Peers in the WSJ article. Peers goes on to compare Blockbuster’s current position to that of AOL and Kodak a few years ago: firms struggling to survive a technological earthquake. (And we know how things have ended for those two firms).

Importantly, just to the right of this article on page A1 of today’s WSJ is an article about Adobe Systems seeking to acquire Macromedia Inc., “in a deal that will bring together the software of the two companies with broad resources to distribute documents, video and other media to personal computers, cellphones and hand-held devices.” In other words, another threat to Blockbuster and Hollywood Video is born.

Hello! Is anyone at the FTC reading the papers these days?!? That’s 3 stories just in the WSJ today telling you just how wrong you got it. The digital world is changing right under your noses and your policies remain firmly rooted in the Industrial Age.

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