May 23, 2014 11:24 AM

The Difference between AT&T/DirecTV and Comcast/TWC

After Sunday's announcement that AT&T had entered into an agreement to purchase DirecTV, many parties have rushed to talk about the "media consolidation trend."  The usual suspects have expressed their opposition or express their "skepticism."   Others have applied an equally superficial analysis to come to the opposite conclusion.   

In order to appreciate how the Comcast/TWC merger is different from AT&T/DTV, you have to understand what the two mergers have in common.  One, not-so-obvious thing the two transactions have in common is that one party in each transaction--Comcast and DirecTV--is a co-defendant in major consumer antitrust litigation over the foreclosure of sports programming over the Internet to broadband-only consumers.

These cases are significant, because they should have a direct effect on the outcome of the Comcast-TWC merger, but will, most likely, not affect the AT&T/DTV merger.  It should be noted that these cases have survived a motion to dismiss (opinion), under the heightened Twombly scrutiny requiring antitrust complaints to demonstrate a "plausible" (vs. merely "possible") claim that would establish an antitrust violation, before allowing antitrust plaintiffs to proceed to discovery.  So, we know these cases have some merit.  

Equally noteworthy, these cases are being brought by real consumers (not DC interest groups) in reaction to real behavior in the marketplace; behavior that the DoJ and FCC claimed to be fixed by the Comcast-NBCU merger conditions.  The D.C. interest groups, on the other hand, supported the feckless merger conditions imposed by DoJ and the FCC.  

The Antitrust Litigation

The cases are captioned, Garber v. Office of the Commissioner of Baseball, et al.,  and Laumann v. National Hockey League, et al.  I've mentioned these cases before, here and here.

The plaintiffs are classes of consumers that buy the MLB.TV (or NHL GameCenter Live) online service either by itself or in addition to a subscription TV service.  The defendants in the cases (other than the two named sports leagues) are certain individual teams and some regional sports networks owned by Comcast and DirecTV, and the TV providers themselves.  

The crux of the complaints is that the sports leagues, and integrated RSN/subscription TV companies, allocate markets through what are, essentially, agreements not to compete with one another.  Unlike a typical horizontal territorial allocation scheme, though, these are the result of a series of industry-wide "vertical" distribution agreements with sports leagues and the TV companies' RSNs--the success of the scheme being contingent on identical terms in all agreements.

How the Agreements Work

When the RSN pays all that money for the rights to broadcast all of a team's games, what do they get for their money?

First, the RSN gets the rights to show the games of that team on TV for the home team's "market area".  This means the RSN can set the prices that other subscription TV companies in the home market area have to pay in order to give their viewers access to the games.  This right is exclusive to the RSN for the market area.  Thus, even though when the home team plays away games, the away team also has rights to the game, the contracts are written so that the away team will not sell its broadcasts back into another RSN's "home market."

Second, and most importantly, while the vertically-integrated RSN is technically only buying TV rights, it effectively also gets a promise that the league's online streaming provider (i.e., MLB.TV or NHL GameCenter Live) will refuse to deal--at any price--with broadband-only customers within any teams' home market areas.  (If you want to check for yourself, here's the link to the MLB.TV blackout section.)  Thus, there is some foreclosure value being offered in exchange for the ridiculously high fees being paid by cable RSNs for regional sports rights.

How Does the Antitrust Litigation Affect Analysis of the Two Mergers?

Knowing this important commonality, we can try to understand how the big media mergers will change things.  The Comcast/TWC merger is likely to make things worse for customers and competitors of Time Warner Cable.

According to a study, published last year by Navigant Economics Principals, the "vertical integration premium [the relatively higher fees charged by a vertically-integrated RSN] increases significantly with the local downstream market share of the RSN's affiliated distributor."  The paper isn't available for free, but you can access the presentation to the FCC staff here.  

So, in all likelihood, Comcast's increased share of certain markets (e.g., New York and L.A.) could be expected to lead to increased prices for TV consumers (of any provider) in those former TWC markets. (Comcast will also increase its L.A. market share through its Charter deal.)  Nor would Comcast's accretion of TV market power be likely to change its opposition to the sports leagues making "in market" games available over the Internet.

On the other hand, AT&T's incentives would be expected to change markedly for the better, relative to a standalone DirecTV.  DirecTV, only a few weeks ago, questioned why it would even bother creating and promoting an online video package.  AT&T, though, just last month, AT&T announced its intentions to get behind over the top content in a big way. 

AT&T has different incentives than Comcast with respect to online video, because--according to the Leichtman Research 1st quarter report on broadband additions--AT&T has a much lower share of the market in terms of video-speed broadband than the cable companies.  If you massage the information available from Leichtman (which groups T and VZ together), an overly optimistic approximation (which only includes Comcast and TWC in the denominator) gives AT&T and VZ less than a 40% share of video-speed broadband subscribers.  

AT&T has already announced plans to dramatically expand its very high speed broadband footprint.  AT&T's successful deployment of higher broadband speeds is dependent on consumers having a reason to purchase higher capacity service.  This is why AT&T will want to push--more content online--especially linear content that consumers want.  

By understanding what has kept linear content--specifically, the sports programming that is so important to consumers--off the Internet, it is easy to see why broadband consumers will be better off with AT&T owning DirecTV than they are now.

Hi Jonathan. You write that PK "supported" the merger conditions in Comcast/NBCU. I don't think the blog post you linked to (which I wrote) supports that claim. That post is pretty clearly skeptical of the specifics of the conditions but looks on the bright side: the precedent that online video has the potential to compete with cable.

I still think the attention to online video set a valuable precedent. And the DoJ's Competitive Impact Statement was great and I have cited it many times.

I'm not a fan of most behavioral merger conditions because they usually don't work, but sometimes (as was the case in Comcast/NBC) they're all that's available.

John | May 23, 2014 3:02 PM | Reply

Hey, John. I know it probably won't mean much now, but I am really sorry for not publishing your comment. Thank you for reading my blog and offering a comment. I usually get an email that tells me that a comment is pending, but I didn't get one for your comment (or I did and it went into the spam mailbox--I get a lot of fake comments). Anyway, I'm not trying to make excuses. I am sorry I didn't publish your comment.

On your point about PK not supporting the merger conditions in Comcast/NBCU, you are right, your blog post was trying to put the best face on an outcome you didn't support. I didn't get that nuance until I saw your comment, then went back and read your post.

At the time I wrote this, I guess I didn't appreciate your position vis-a-vis your members/supporters. In the past, when I have had clients opposing something I was never in a position of offering anything beyond a "disappointed . . .weighing alternatives" type reaction immediately after a negative outcome. Thus, I misinterpreted your "hopeful resignation" as a "declaration of (partial?) victory" which sometimes advocates also make.

Thanks again for your note. I apologize for my delay. --Jonathan

Jonathan Lee replied to comment from John | March 7, 2015 10:48 AM | Reply

Oh, and for what it's worth, I think you're right that AT&T wants to put more content "online," and this is a likely motivation for the DirecTV deal. I would love to be wrong about this, though, but I don't think it wants to create a real online video competitor along the lines of what Dish is looking at doing, Rather I would predict that AT&T wants to create some kind of online video package that is only available to AT&T wireless or wireline customers.

John Bergmayer | May 23, 2014 3:09 PM | Reply

I know this is a year after you had posted this but I was interested not in the merger but how these companies exist premerger.

Comcast and TWC do not compete in the same markets. TWC has NYC, Comcast has Philly. This is the same everywhere in the US. How is this not a violation of the Sherman Act for a horizontal territorial agreement? They deliberately do not compete with each other to hinder competition so that one or the other can dominate their given territories.

Thanks,

Adam

Adam | March 6, 2015 1:30 PM | Reply

Hi Adam:

Thanks for your note, and your question. As you point out, it would seem like these two companies must have an agreement not to compete with each other. But, there is a difference between behavior that looks like it was coordinated, and actual behavior that results directly from an agreement to divide territories. In other words, if two parties simply don't want to compete, the law can't make them--but that doesn't necessarily mean they have an agreement.

In the case of cable companies, historical regulation provides most of the explanation for what you observe. When the cable companies started to bring their service to urban/suburban areas in the late 1970's/1980's, they had to get permission from the local governments (to use public rights-of-way). In return for their agreement to provide service throughout a city/county, the cable system usually received an "exclusive franchise." So, in the beginning, the cable companies couldn't legally compete with each other.

In 1992, federal law prevented states/local franchising areas from granting "exclusive" video franchises. But, by this time, if one cable company had built out an area, that incumbent had a significant advantage--because the only revenue source was video, and a potential competitor would still have to absorb the high cost of laying wires throughout an area.

Now, obviously, things are different--a competitor can get video and Internet revenues also--but it is still a very risky business. This is why, for most residential consumers, the only company that has entered the video/Internet market in the two areas you mentioned (NY/PHL) is Verizon, the incumbent local phone company.

And, VZ is not a typical new entrant, because it started with already having wires serving every customer. So, even in services where Comcast or TWC weren't traditionally "cable guy buddies" (e.g., high speed data transport for business customers), you don't often see them extending outside of the geographic area where they already have wires.

So, the bottom line is that for businesses that started out being highly regulated (usually because of very high fixed costs before any service could be provided) if they aren't competing with each other, the reason might be that they don't think it's a very attractive business to get into as a competitor. Thus, where if Pepsi didn't sell in NYC and Coke didn't sell in Philly, you could definitely infer an agreement was the only logical reason, it's different with the high fixed cost network industries.

I hope this helps, Adam. Thanks again for your note. --Jonathan

Jonathan Lee replied to comment from Adam | March 7, 2015 9:16 AM | Reply

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