May 20, 2015 6:01 PMshowed how the broadband market is more competitive than the FCC wants to admit, and we've explained why the Big Media companies have a much greater profit incentive (than ISPs) to see the continuation of the (largely artificial) separation of content delivery into two businesses (subscription TV and broadband Internet access). But, the fact is that broadband Internet access does compete with pay-TV video; the FCC's just wrong about whose side ISPs are on.
Channel Bundling: Consumers (and ISPs/MVPDs) Hate It
Nielsen reports that consumers are buying more channels than ever, yet watch the same number that they always have. The reason: big content companies require MVPDs to buy, and resell, all their channels ("the Bundle") in order to get the few channels that their customers want. The Bundle is so important to media companies that they all use the same restrictive distribution contracts to protect it.
Buzzfeed collected an excellent compendium of quotes about the Bundle late last year. If you click on the article, you'll see that the only ISP/MVPD defending the Bundle was Comcast (who also produces a significant amount of content). Consumers--and their retailers, MVPDs/ISPs--don't like the Bundle.
Cablevision v. Viacom
In 2013, Cablevision filed an antitrust case against Viacom over Viacom's requirement that Cablevision buy, and carry, a package of its least-watched channels in order to be able to buy any of its most-watched channels. See Cablevision statement and Complaint (redacted version). Cablevision's antitrust claim is that the companies' 2012 distribution contract is an illegal tying agreement under Section 1 of the Sherman Act.
Cablevision says that, in order to get access to the 8 Viacom channels it needs to be able to offer, Viacom requires it to purchase (and carry) 14 other channels that Cablevision's customers don't want. The "standalone" price of the 8 channels Cablevision wanted to buy was set high enough to subsume Cablevision's entire programming budget; thus, it's only option was to buy all 22 channels. Complaint ¶ 8, ¶ 28.
Cablevision argues that the capacity it must dedicate to the 14 channels it does not want prevent it from competitively differentiating itself by purchasing better content from Viacom's competitors. As Cablevision explains, its channel capacity is finite;
Cablevision can devote only a portion of its available capacity to channels because Cablevision also offers other bandwidth intensive services (including high-speed Internet access). Cablevision would not reallocate bandwidth from these other services, which consumers increasingly demand, to carry more channels.
Complaint ¶ 27.
Tying agreements are "per se" illegal under the antitrust laws. This means that a plaintiff does not have to demonstrate that the agreement actually had the effect of reducing competition in any market. Instead, the plaintiff need only demonstrate the existence of the agreement, that plaintiff was economically "coerced" to buy the tied product, and that it suffered damages as a result.
Accordingly, last June, a federal district court in Manhattan denied Viacom's motion to dismiss, finding that Cablevision had sufficiently plead a plausible violation of the antitrust laws. Cablevision's claim has moved on to discovery, but its ultimate success is far from guaranteed. However, regardless of Cablevision's ultimate success, it would be a mistake to assume that the converse claim--if Viacom were seeking strict enforcement of all contractual provisions--would be any easier to prove.
Verizon's Skinny Bundles
Perhaps this was Verizon's insight, when it announced its new "Custom TV" offers last month, allowing customers to choose their own "customized" channel package that includes more channels they want, and less of those they do not want. For the basic price, Verizon's Custom TV customers get a general selection of popular cable news/entertainment channels, and can choose 2 (out of 7) channel groupings ("skinny bundles"), organized by topic/genre. Customers can add other skinny bundles for $10/bundle/month.
The reaction from the content owners was predictably swift, and angry. Disney, Fox, and NBC were quick to condemn what they perceived as Verizon's reckless disregard for the Bundle. Disney quickly sued Verizon for breach of contract.
Is Verizon Breaching It's Contracts?
Verizon has said repeatedly that it is not breaking its contracts with programmers. Therefore, we have to believe that Verizon is buying all the channels for all the customers it is required to pay for; even if that means every customer. This seems likely, because, while the Custom TV promotion may "break the Bundle," some say it won't save you a bundle.
Other MVPDs have also said that Verizon may be within its rights under the contracts. Cox Communications told Fierce Cable that its agreements typically require the MVPD to buy and deliver channels to 85% of MVPD customers. If the bundles are as valuable to consumers as Disney seems to think, then it's possible that 85% of Verizon's customers are buying ESPN. Still, Disney isn't betting on it.
Will a Court Enforce the Bundle?
The news reports have said that Disney is suing Verizon for breach of contract, and is seeking money damages and an injunction. I haven't seen Disney's complaint (a public version has not yet been filed), but I'm guessing that the injunction would be to prevent Verizon from continuing to sell channel packages that don't conform to the parties' contract.
If Disney is really dead set on preserving the Bundle, or preventing a jailbreak among its distributors, it's going to have to convince a court to order Verizon to 1) transmit content to at least some customers who have said they don't want it, and/or 2) limit customers' ability to decline unwanted content. This is a real longshot.
Courts are very reluctant to award specific performance if money damages will adequately compensate the aggrieved party. Furthermore, courts are reluctant to grant any remedy that would result in "economic waste." If I'm right about the relief Disney wants, it might as well have listed "economic waste" in its prayer for relief.
If Verizon has breached its contracts with Disney, Disney will get money damages for any measurable loss it has suffered. But, an important part of the Bundle is the deadweight loss that channel bundling imposes on MVPDs, and their subscribers, and the protection from competition that it affords programmers. Unless a court finds it worth rescuing, this part of the Bundle may well be gone; and that's a good thing.
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Every time a piece of the Bundle breaks off, consumers benefit and programmers get closer to having to compete on price as well as quality. The fact that Cablevision and Verizon have been motivated to take up for consumers--and take on the Bundle--is another example of the competitive performance of the broadband Internet market. Still, it's a good thing the FCC was spent the same time drafting more pervasive regulations for ISPs--so they wouldn't favor the Bundle . . . just in case?