July 14, 2009 3:36 PM

The Blizzard of Yaahhhs: Is Aspen Skiing A Lift Ticket To Fair Programming Terms?

Competitive subscription TV providers are, most often, confronted with a blizzard of "no"s, or, even worse, a blizzard of "nose" when they ask if they can buy sports programming in a "high definition" format from the vertically-integrated owner of that local sports programming.  Most regional sports programming (most college sports, and all professional sports except football) is owned by a regional programming company that is usually affiliated with a large cable TV company.  The vertically-integrated sports programmers (big cable) are always fighting with competitive subscription TV providers (telco--ILEC and CLEC, competitive cable overbuilders, and satellite).  The major source of contention is access to the "feeds" of local sports content (both "regular" and "high def").  Incumbent cable operators, who do not compete with one another, routinely make all proprietary programming available to other cable incumbents.

A good example of how vertically-integrated video providers can use their programming market power to reduce consumer welfare is described in the FCC complaint filed last week by Verizon against Madison Square Garden L.P. ("MSG"), and Cablevision.  MSG is owned by Cablevision, and MSG owns the exclusive rights to produce and exhibit games of important local sports teams, such as the NY Knicks, NY Rangers, NY Islanders , NJ Devils, and the Buffalo Sabres.   Providers of subscription TV in the NY metro area, and upstate and western New York, believe that the high definition feeds of these events are competitively significant.  Every provider of subscription TV services that is offered the "high-def" format purchases it, and every other provider of subscription TV services wants to buy it.

In its complaint, Verizon claims that MSG is violating Section 628 of the Communications Act, which prohibits vertically-integrated distributors of satellite programming from acting in an unfair, or anticompetitive manner.  Verizon contends that Cablevision is in violation of the Act because it refuses to sell Verizon its "high def" feed for sporting events, for which MSG owns the rights.  Cablevision's response is that, because it transmits the "high def" feed to its distribution points via fiber (vs. satellite) transmission, it is not required to deal at all (much less, fairly) with any other programming distributor.  This post is NOT about Verizon's complaint at the FCC.

 

OK, so far, lot's of skating, but no skiing; so what's the point?  Generally, firms don't have any obligation to deal with each other, on any terms, but that right is not unqualified.  The antitrust case most linked with establishing a cause of action for "refusal to deal" by a dominant firm as the basis for liability under Section 2 of the Sherman Act (which prohibits unlawful attempts to monopolize) is Aspen Skiing v. Aspen Highlands Skiing ("Aspen Skiing") 472 U.S. 585 (1985).  Aspen Skiing is not the only "refusal to deal" case, but it has been described by the Supreme Court in other recent case law as the "leading case" on refusal to deal as a theory of Section 2 liability, and "at or near the outer boundary of Section 2 liability".  Verizon Communs., Inc. v. Law Offices of Curtis V. Trinko, LLP, 540 U.S. 398, 409 (2004) ("Trinko").  

In Aspen Skiing, one company owned one mountain within close proximity to three other mountains, all owned by the defendant.  The two firms found that visitors liked to ski all of the mountains in close proximity--better than they liked to ski either company's mountain(s) exclusively--so they cooperated to offer an "all-Aspen" pass that allowed purchasers to ski all mountains, and revenues were divided by how often visitors used the facilities of the other.  The "all-Aspen" pass outsold any other pass offered by either company separately.  At some point, the partners failed to agree on a revenue split, and the "all-Aspen" pass was discontinued.  The following year, the plaintiff sought to purchase--at retail prices--some tickets from the other ski company that it could offer its guests as a convenience.  The defendant refused to sell on any terms. 

The Supreme Court upheld the judgments of the lower courts, that the defendant's "refusal to accept [retail prices] was apparently motivated entirely by a decision to avoid providing any benefit to [the plaintiff] even though accepting the coupons would have entailed no cost to [the defendant], would have provided it with immediate benefits, and would have satisfied its potential customers. Thus the evidence supports an inference that [the defendant] was not motivated by efficiency concerns and that it was willing to sacrifice short-run benefits and consumer goodwill in exchange for a perceived long-run impact on its smaller rival." Aspen Skiing, at 610-611.

In several cases since Aspen Skiing, the Supreme Court has further elaborated on the "duty to deal" by a dominant firm.  First, in order to establish a "duty" to deal with competitors, the firm in question must have "monopoly power" (the ability to unilaterally raise prices by restricting output).  Second, the firm with monopoly power must also have a history of dealing with the plaintiff, or other similarly-situated firms, on a voluntary basis.

So, the question is, if the FCC decides it can't regulate Cablevision/MSG, can other enforcement authorities take action if they find that MSG's conduct is anticompetitive?

Well, the first question is, "does a regional sports programmer have "monopoly power?"  Yaahh . . . the FCC has noted on several occasions that sports are "must have" programming--particularly the programming of regional sports networks.  Moreover, "high def" feeds are more important for viewing sports programming than other programming.  The Consumer Electronics Association has shown a direct correlation between sports enthusiasm and HDTV sales.  In other words, consumers are not buying HDTVs to NOT get HDTV sports programming.

Second, the sine qua non of an anticompetitive refusal to deal by a dominant firm is the defendant's unwillingness to sell the product or service in question to the smaller rival, even at terms the defendant is willing to accept from other purchasers.  In Trinko, the Court distinguished the Trinko facts [on which it found no liability] from an early refusal to deal case, where the Court did find Section 2 liability, "in Otter Tail Power Co. v. United States, . . . the defendant was already in the business of providing a service to certain customers (power transmission over its network), and refused to provide the same service to certain other customers." Trinko at 410 (internal citations omitted) (emphasis added). 

Does MSG refuse to offer service to rivals, that it voluntarily provides to firms it does not see as competitors?  This fact has already been established beyond doubt.  When MSG refuses to sell to Verizon in service territories in which it does not provide service--at the same (presumably profitable) price that it is providing the service to one or more other purchasers--it is clear that MSG is walking away from profits.

One can only wonder why.  Does MSG/Cablevision really believe it is going to drive Verizon out of business?  Or, are they ensuring their other potential rivals (other incumbent cable companies) of continued supra-competitive profits in order to either tacitly, or explicitly, keep potential entrants happy (and out of Cablevision's markets) at the expense of consumers?  Who knows?

This is a mystery that consumers want to see solved.  The Antitrust Division, or the Federal Trade Commission, and the States of New York, New Jersey, and Connecticut should be just as curious.  If they are, I have a feeling that prospective competitors asking for high definition sports access (throughout the country) will be met with a blizzard of "yaahhs" . . . .

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