Results tagged “cable TV competition”

November 27, 2017 10:05 AM

Assumptions On Assumptions: The DoJ's Fatally Weak AT&T/TWX Complaint

Good things are even better when they keep coming. When a friend of mine would say, "let me tell you something...before I tell you something else," you knew you'd be laughing a lot. Likewise, who doesn't love Big Sean's "Blessings" (explicit lyrics) ("blessings on blessings on blessings...lessons on lessons on lessons")?  But, unlike Ferg's hilarious commentary, and Big Sean's blessings, some things-- assumptions--only get worse when piled on top of one another.

Last week, the Antitrust Division of the U.S. Department of Justice ("DoJ" or "the Government") filed a Complaint seeking to enjoin AT&T from acquiring Time Warner Entertainment ("TWX").  The DoJ argues that, post-merger, the combined firm will be able to unilaterally raise prices for rival multichannel TV distributors (like cable companies, phone companies, Dish, or over-the-top ("OTT") video providers) and/or retail consumers.  See, Complaint paras. 5-10. The problem with the Government's theory, though, is that even they know that it's a logical house of cards, with a foundation unsupported by any market evidence.    

Relevant Markets

The DoJ notes three kinds of video distributors: 1) traditional multi-channel video programming distributors ("MVPDs"), like cable, legacy phone, and satellite providers; 2) virtual MVPDs ("VMVPDs"), which are similar to MVPDs, but offered over the internet, and available nationally; and 3) subscription video on demand services ("SVODs"), like Amazon Prime and Netflix, who offer video on demand programming nationally, but do not offer live programming like news and sports. Complaint, paras 15-19.  

Based on these definitions, the Government asserts that  two relevant product markets exist: 1) the "All Video Distribution" market, which comprises all types of video distributors (MVPD, virtual MVPD, and SVOD), and 2) the "Multichannel Video Distribution" market, which includes MVPDs and virtual MVPDs (hereinafter, "MVPDs").  The relevant geographic markets, the DoJ argues, are local Designated Market Areas, which are defined by choices of supplier available to consumers (the wireline service providers of Multichannel Video Distribution vary according to their individual network coverage areas).  Complaint, paras 27-30.  

Competitive Effects

The DoJ contends that the merger will harm competition/raise prices in both the All Video Distribution and Multichannel Video Distribution markets throughout the country because it would give the post-merger firm the ability to unilaterally raise the price of wholesale programming (from Turner Broadcasting & HBO) to rival MVPDs.  The enhanced ability to raise prices to rivals is the DoJ's primary argument.

But, almost like the perfunctory "and stuff" ending that teenagers tack on to woefully incomplete answers, the DoJ also claims that the merger will "give the merged company the ability to impede and slow innovation by hindering emerging online competitors and would increase the likelihood of oligopolistic coordination." Complaint, paras. 31-41, generally; quote from Subsection V.B.  I quote the Complaint directly so that readers can see that this alleged harm is simply too general to merit analysis. The Government's main point, though, is not a huge improvement.

Assumptions Everywhere

Putting aside the Government's lack of factual support for its theory, let's look at all the assumptions (unsupported in the Complaint) that we have to accept in order for the Government's argument--that the post-merger firm can profitably raise prices (both for rivals and its retail customers) for TWX programming--to actually make sense.

Assumption: the premerger TWX was not already extracting the highest price that each distributor was willing to pay, i.e., it could have gotten higher prices if it pushed firms into "blackout."

Assumption on assumption *2: Retail MVPD customers are--per subscriber--more profitable than programming (which is also sold on a "per subscriber" basis).
 
Assumption * 3:. "Blackout" situations are always worse for the MVPD distributor than the programmer (i.e., the distributor always loses more customers/revenue from not carrying a channel at a higher price than the programmer forgoes from losing carriage). But see, below..

Assumption * 4: The post-merger TWX, as the owner of its own competitive MVPD, will be even more resistant to the threat of any given rival MVPD not carrying its content, because if some of the rival MVPDs customers defect to other MVPDs as a result of a blackout, at least some of those customers will become AT&T retail MVPD customers.

Assumption * 5: The acquisition of some of the retail customers that will leave an MVPD in response to a TWX programming blackout is at least as valuable as that MVPD was as a program distributor.

Assumption * 6: Post-merger, an MVPD with TWX programming also can profitably charge its own retail customers higher prices.

The Government Knows It's Wrong

Rather than go through every specious block/mistaken factual assumption in the DoJ's Jenga tower of dysfunctional logic, let's just analyze one--Assumption * 3.  This "assumption" (essentially, that the programmer will always get its price, no matter how uneconomic) seems to be something the Government actually believes is required by the antitrust laws; though principles of basic economics, and actual market conditions, say otherwise.  You see, a year ago (and only weeks after this merger was announced), the Government filed suit against AT&T and DirecTV, blaming AT&T's DirecTV unit for every other MVPD's refusal to carry the L.A. Dodgers for (at the time) the past 3 baseball seasons!

The Government filed its case--charging only DirecTV of wrongdoing--knowing full well that AT&T/DirecTV would have to settle prior to closing its merger (which it did in March of this year).  DirecTV's "crime," according to the DoJ, was publicly stating its refusal to accede to Time Warner Cable's (no affiliation w/TWX, and since then acquired by Charter Communications) "extravagant" demands of $5/subscriber simply to carry L.A. Dodgers baseball games, this particular "blackout" continues, and has lasted well over 4 seasons with MVPDs losing relatively few subscribers.

Notably, the Government did not accuse DirecTV, or any other MVPD, of participating in an illegal agreement to "boycott" TWC's regional sports network ("RSN").  Moreover, although AT&T settled the DoJ Complaint in March, Charter Communications (the successor to TWC) is still the only MVPD carrying the Dodgers' regular season games.  Thus, ironically, the DoJ, better than anyone, knows full well that the scheme it outlined in its Complaint has no basis in reality--as even the most "must have" sports content cannot be forced on competitors by a single vertically-integrated competitor (lCharter, which owns the programming (L.A. SportsNet) and serves about half of the L.A. area retail market).

Obviously

Likewise, the aggregate retail market conditions also clearly refute DoJ's assumption that price increases can be easily and profitably passed on to retail customers.  So far, as of the 3rd quarter, in 2017 the number of households, nationwide, subscribing to a MVPD service is down over 11% over the past 3 years. Leichtman Research Note, 3Q 2017 at pp. 2-3 (79% of American households subscribe to a pay TV package--down from 88% in 2014; a decline of over 11% in 3 years).  Moreover, satellite (like DirecTV) and telephone (AT&T's legacy U-Verse) MVPDs are losing customers at a much greater rate than cable. Id. at 6 (in Q3 2017 AT&T lost almost twice as many MVPD customers as all cable providers combined). Thus, any price increase--especially by a satellite or legacy telephone MVPD--would only accelerate customer loses!

The DoJ knows that the foundation of its case--assumptions on assumptions--is supported by nothing but mere speculation and out of context "hot docs." Soon enough, U.S. District Court Judge Richard Leon will know as well that the market realities in this case simply cannot support the Government's assumptions. 
 
November 13, 2017 11:22 AM

The Strange Case of the Inverted Vertical Merger

After a year of not really hearing anything about AT&T's proposed acquisition of Time Warner Entertainment ("TWX"), we learned last week that the deal could be in serious jeopardy from the Antitrust Division of the U.S. Department of Justice ("DoJ" or "Department").  Many of the stories earlier in the week, citing "DoJ sources," suggested that the Department wanted AT&T to sell CNN, in order to gain approval.  In an extensive interview at the New York Times DealBook Conference, AT&T's Chairman, Randall Stephenson put the rumor to rest that CNN was a divestiture the DoJ was seeking, or that AT&T had offered. (See video of the full interview).  
 
Stephenson also noted his "surprise" that the Department would have concerns serious enough to litigate; noting that a vertical merger had not been successfully challenged in court in over 40 years, and that Comcast's acquisition of NBCU had presented much more difficult content problems than AT&T's proposed TWX acquisition.  Stephenson is understandably surprised, because he's absolutely correct on the law.  Nonetheless, the DoJ must have some concern about the deal, so what's going on here?
 
What an Anticompetitive Vertical Merger Looks Like
 
The words "vertical" and "horizontal" are used in antitrust to refer to firms' positions in the supply chain, from creating a product through to its delivery to consumers.  Firms at the same position in the supply chain are, of course, direct competitors, and a merger between them would be called a "horizontal" merger. On the other hand, the merger of a bakery with a grocery store would be an example of a vertical merger--the bakery produces products that are distributed to the public through grocery stores.
 
A vertical merger will rarely present an antitrust problem, unless one or both of the two merging partners has "market power." For example, if the distribution of a service is a monopoly (think local telecommunications services prior to the late 1990's) and a provider of a "competitive" service using this distribution network (like a long distance voice company) wanted to acquire the local telephone exchange, the antitrust agencies would likely be concerned that the acquiring firm may be able to foreclose other long distance companies from being able to continue to access the local distribution network to sell their services to end users, resulting in higher prices to consumers of long distance service.
 
AT&T and TWX

AT&T provides consumer fixed line voice, internet, and multi-channel television service throughout the service territories of its former incumbent local exchange providers. AT&T also provides nationwide mobile voice and internet service through AT&T Wireless, and nationwide multi-channel television service through its satellite (DirecTV) and streaming (DirecTV Now) services. All of the consumer services provided by AT&T are "competitive" services, available from multiple providers.
 
TWX is a worldwide entertainment conglomerate.  Its 3 major divisions are HBO (premium television/streaming entertainment), Turner Broadcasting (includes a number of popular cable channels, including CNN, TBS, and TNT), and Warner Bros. (primarily film and television production/distribution).  The Turner Broadcasting division, it should be noted, owns the rights to broadcast a number of basketball (NBA and NCAA Tournament) and MLB games, as well as assorted sports that no one watches, like golf and women's Irish curling [probably].
 
Nominal Overlap: While generally AT&T distributes the programming of others, it does own some regional sports networks under the "AT&T SportsNet" name. Although AT&T owns the exclusive rights to distribute the games of certain local teams (NBA/NHL/MLB/some NCAA) in Houston, Pittsburgh, Portland, OR, Seattle, and Utah, these regional sports properties do not "compete" with the games that Turner Broadcasting distributes nationally.
 
What Is Going On?
 
Adding to the confusion surrounding the Department's concerns, the reactions from even well-informed commenters have diverged greatly. Because this merger presents nothing exceptional from an antitrust perspective, some, like economist Hal Singer, have concluded that the only reason the DoJ is holding up the deal is to further prosecute President Trump's ongoing personal feud with CNN (owned by TWX).  However, others, like Harold Feld, argue that the DoJ is on the right track and that only large scale divestitures (like all of Turner Broadcasting, or DirecTV) could remedy the competitive problems with this merger.  
 
While Feld makes a compelling case to question the "spite" theory, and he offers the DoJ an ostensible case theory, it's not a convincing argument; as it ignores current market conditions, and relies on a lot of the same, now obsolete, market "assumptions" that the 1992 Cable Act is based on. Of course, this should come as no surprise, since Public Knowledge's current president--Gene Kimmelman--was one of the principle forces behind the Cable Act (on the side of broadcasters).  See, e.g., this NY Times article from 1992.  Note that the 1992 Cable Act continues to richly reward the broadcasters that these ("natural monopoly") arguments favored.  Consumer Reports notes that cable company "price hikes are mainly driven by the rising costs they face for carrying both traditional broadcast networks, such as CBS and Fox, and regional sports channels."
 
The Blind Men and the Elephant
 
Sometimes, as the old fable illustrates, you can't get an accurate picture by focusing on the smallest possible market that could (conceivably) be defined; and this is what I think is going on here.  In Feld's analysis, the post-merger firm is either a distribution colossus (why else would it need to divest DirecTV?), or a "must have" programming hoarder who may well put competitive video distributors (like Comcast?) out of business.  However, to have this opinion one has to explicitly disregard AT&T's stated reason for the deal--to build an advertising platform of the scale to offer competition to the Google/Facebook duopoly on mobile and desktop screens.
 
Public Knowledge, and the other opponents of AT&T's acquisition of DirecTV, ignored the company's stated purpose for that deal--that AT&T needed scale to be a more effective video distribution competitor. Instead, opponents preferred to focus only on the limited number of TV markets that would "lose" a multichannel competitor (those in which AT&T already provided U-verse TV).
 
Three years later, where are we?  Well, customers are continuing to "cut the cord" of traditional pay TV services, like the service offered over AT&T's U-verse.  However, by creating an entirely new video product--DirecTV Now--AT&T has, in less than a year, obtained 800,000 additional customers (a number that represents about 15% of AT&T's entire base of U-Verse TV customers at the time of its DirecTV merger announcement) and 60% of these customers are entirely new customers to AT&T

Said differently, in less than a year of marketing DirecTV Now, AT&T acquired 15% of the customers that took U-Verse TV 10 years to acquire. Rather than losing a choice in a few markets, consumers nationwide gained a choice and acted on it. Thus, consistent with its stated reasoning for acquiring DirecTV, the acquisition allowed it to stimulate output of multichannel video services. Opponents failed to realize the implications of AT&T's DirecTV purchase, in which a new nationwide competitor was created to challenge not only the traditional DirecTV satellite & U-Verse TV services, but also cable companies, other OTT providers, and may have even spurred the entry into the market of newer "large screen" players like Google, Hulu, others.
 
The Opportunity and the Danger
 
The AT&T/TWX merger, as noted by Mark Cuban at a Senate Judiciary Committee Hearing almost a year ago, gives AT&T a chance--and not a very good one, at that (according to Cuban)--to compete against the dominant new media ad giants.  To do this successfully, AT&T will have to, again, expand output of the firm it is acquiring; there simply are not any credible hypotheticals where AT&T "wins" anything by restricting TWX output. 
 
But, if the Department insists on defining the elephant as a snake, based on the shape of its trunk, there is a danger that it leaves existing markets worse off than when it found them.  If, for some crazy reason, AT&T actually agreed to sell off Turner Broadcasting, the only buyer would be another media conglomerate--further concentrating an already highly concentrated market (which is trending toward even greater concentration with Fox-Disney merger rumors) .  Similarly, if AT&T were required to sell off DirecTV, its entire ability to market to a nationwide base of potential video customers would be eliminated--practically guaranteeing that its only profitable strategy would be to restrict output to local market multichannel competitors!
 
April 8, 2014 3:06 PM

The Comcast-Time Warner Cable Merger and TV Quality Broadband Deployment

In Comcast's public positioning of its proposed acquisition of Time Warner Cable, executives of both companies have chosen to characterize the merger more by what it's not than by what it is.  So, we know that the merger is not going to result in any significant efficiencies, because it's not going to reduce consumer prices for cable (even an unconstrained monopoly reduces prices when costs decline).

We also know that the merger is not between two competitors, because--as the companies make it a point to tell us--they don't compete.  TWC's CEO says, "[w]hether you're talking about broadband or video, we don't compete with one another."  Comcast's CFO goes as far to state, "[w]e don't compete in one single zip code."  

Doesn't it kind of seem like they're trying just a little too hard to sell the notion that the combined service territory of Comcast and TWC is not relevant (because, you know, they don't compete)?

Product Market Definition

The last time the DoJ's Antitrust Division ("Government" or "DoJ") looked at a Comcast acquisition, it determined--based on documents from Comcast--that Comcast's "joint venture" (as it was structured at the time) with NBC-Universal would reduce competition in the "video programming distribution" market. See Comp. Impact Stmt. (CES).  The Government seemed especially concerned at the ability of post-merger Comcast to destroy nascent competition from online video distributors. CES at C and D.

Based upon the Government's concerns in the previous Comcast acquisition, and DoJ's focus on cross-elasticity of demand in defining a relevant product market, let's focus on some recent information from the Leichtman Research Group to get some valuable insights into how the Government might define a relevant product market.

Consider that, among multi-channel video providers, cable companies lost 1.7 million customers in 2013.  But, AT&T and Verizon added 1.5 million MPVD subscribers last year.  The Leichtman numbers show that customers are not so much "cutting the cord" (only 105k customers stopped buying from an MPVD in 2013) as they are switching MVPDs--but customers are choosing MVPDs that are also broadband providers.  Very high percentages (according to AT&T, well over 90%) of both cable and telco MPVD subscribers are also broadband customers.  The Leichtman data confirm this for Comcast and TWC, as well.

Purchasing video service from another broadband provider, allows the customer to purchase services they want from the MPVD, but also purchase services directly from an online vendor, like Netflix.   In its earlier analysis of the significant competitive effect of online video distributors, the Government referred to this practice as "cord-shaving." CES, at C.2(b).

Given consumer behavior, it seems likely that the Government will focus on a broadband market--of a sufficient speed to facilitate a competitive MPVD service--as the primary relevant product market.  Because it is this market in which the traditional "hypothetical monopolist" test would yield the greatest supply substitution responses.  For all practical purposes, we should consider broadband providers offering service at 10-15Mbps as participants in the "MVPD-bandwidth" market.

Geographic Market Definition

If one's primary concern was to look at the area over which the post-merger firm might be able to reduce competition, then that territory would be (at least) the total number of MVPD-bandwidth broadband customers in each geographic market served by Comcast or Time Warner Cable.  Within this total subset of homes passed will also include the majority of the customers capable of being served by AT&T and Verizon.

What is difficult to figure out from publicly available data is what percentage of MVPD-bandwidth homes will be served within that area by Comcast, Time Warner Cable, AT&T, and Verizon.  For our purposes, just to get a ballpark idea of the type of numbers we would be looking at, we are going to use a datapoint from the Leichtman 1Q 2014 Research Notes that the number of FiOS and U-Verse addressable homes stands at 41 million, giving the companies a video market penetration rate of 26%.  

Let's further assume--and this is a generous assumption toward Comcast--that AT&T and Verizon compete with Comcast and TWC in 70% of their combined service territory, but that all of AT&T and Verizon's customers were won in this territory.  This would give us a total denominator of about 59 million homes passed (that could receive MVPD quality broadband).

Market Shares

To get useful MPVD-broadband numbers, we are going to work with the Leichtman numbers we used earlier, but, because it is impossible to tell from the telco broadband numbers how many AT&T and Verizon broadband customers are actually U-verse and FiOS customers, we are going to use MPVD customers as a proxy, in order to allow us to get some ballpark market share numbers.

merger table_smaller.pngSo, we can see that the result of this merger, for anyone that has to depend on getting content, carriage, or online video distribution to these 60 million households will be looking at a market that goes from "moderately concentrated" to "highly concentrated" under the DoJ Horizontal Merger Guidelines at Section 5.3.

Competitive Effects

The competitive effects on both MPVD rivals like AT&T, RCN, and Verizon, as well as online video distributors like Netflix, are likely to be significant in terms of their ability to get competitive programming.  Add to this the fact that Comcast will also control 12 major regional sports networks, and it is easy to see how the post-merger firm could restrict output of the most inelastic, and  "linear," of linear programming to broadband and online video competitors.

Comcast RSN Map w caption.pngThis last effect is, potentially, disastrous for the future deployment of more MVPD-bandwidth broadband in the area that would be served by the combined Comcast-TWC, because it eliminates what is potentially the biggest source of pent-up consumer demand for MVPD-quality broadband as a substitute for traditional MVPD bundled service--online access to regional sports programming.  

How do we know the significance of real-time sports programming to the value of the broadband Internet?  Because the first truly linear, all HD, over-the-top channel--the WWE Network--has attracted almost 700,000 customers paying $10/month, in only 6 weeks

If the DoJ and the FCC value the availability of MVPD-bandwidth broadband throughout the Comcast-TWC territory, then Comcast might have a reason to worry.  But, commenters on the political left and right have conceded Comcast's powerful influence over the government; so, Comcast probably does have a decent chance of moving forward with this acquisition.  Unfortunately, it just postpones the day when consumers can choose to buy only the video content they want from the vendors they want.



March 26, 2014 12:11 PM

Net Neutrality Rules: Do They Really Limit "Cattywampus" ISPs?

On Sunday, the Wall Street Journal reported that Apple was in talks with Comcast to provide a new type of streaming TV service.  The report was vague on the specific service except to note that: 1) the parties were "talking," 2) an Apple device-to-be-named-later was going to be used, 3) the service would involve a "managed" (or guaranteed bit-rate) transmission path over Comcast's ISP, and 4) would require a significant investment by Comcast.  

Predictably, the Twittosphere erupted with the swift condemnations due any speculative service that whiffs of net neutrality blasphemy.  If the speculation involves Comcast, then it wreaks of blasphemy.

The Meandering Meaning of Net Neutrality

But, what is the "dogma" of net neutrality?  Is it the FCC's 2005 Internet "Freedoms?"  Is it the Open Internet Rules that were vacated--no blocking and no unreasonable discrimination?  Public Knowledge just told the FCC that the two biggest "threats" to the Open Internet are ISP data caps and "peering"/interconnection disputes.  PK at pp. 6-10.   

If net neutrality can be said to have any consistent premise, it is best depicted metaphorically in this 14 second, Geico commercial.
 

The ISPs are like "Mr. Tickles."  The whole rest of the Internet stakeholders are represented as the man in the portrait holding Mr. Tickles.

Yet, firms like Cisco, who on Monday announced a 2 year and $1 billion commitment to cloud services, as well as competitive over the top companies like Amazon, Hulu, and yes, Apple TV, continue to want to invest in cloud services.  In other words the leading Internet infrastructure equipment maker fully expects that--even without rules--the ISP (Mr. Tickles) will continue to "hold still" and not "git all cattywampus" on them.

The Flimsy Factual Bases for "Concerns" About the Open Internet

First, let's acknowledge one point on which everyone should be able to agree.  The "open Internet" is valuable to every consumer, and every seller, that touches the Internet economy.  In fact, the rise of the Internet economy seems to be proof that the "open Internet" is so important that virtually every aspect of that "openness" is already guaranteed by existing contracts between the thousands and thousands of Internet stakeholders.  

But, those that think rules must be necessary to ensure the continued openness of the Internet must have some reasons, right?  Well, if we look closely, the concerns that have been advanced in past FCC proceedings have been largely based on theoretical predictions that haven't really materialized.

Peering Concerns

The first FCC concerns about "peering" (i.e., settlement-free Internet interconnection) vs. "transit" (i.e., "paid" interconnection) were expressed by Internet backbone competitor GTE in the MCI/WorldCom merger. See paras. 147-150.  The FCC adopted GTE's concern, which was that the combination of WorldCom's UUNet and MCI's backbone would have had no "peers."  Thus, because a combined WorldCom/MCI would have been able to require "paid peering" by any other ISP or backbone seeking to use its network, the post-merger firm could raise the costs of any new entrant.  

This disaster was averted when MCI agreed to divest its Internet backbone to Cable and Wireless.  In fact, the divestiture to C&W was considered a huge failure, and MCI's alleged bad faith failure to satisfy the concerns of the Department of Justice was a primary concern behind the DoJ's challenge to WorldCom's proposed acquisition of Sprint 2 years later.   In short, the remedy didn't work, but was apparently unwarranted, anyway. 

"Net Neutrality, Broadband Discrimination"

In 2003, Professor Tim Wu argued, in the above-titled paper, that "[c]ommunications regulators over the next decade will spend increasing time on conflicts between the private interests of broadband providers and the public's interest in a competitive innovation environment centered on the Internet."  With the exception of Comcast's protocol-specific BitTorrent throttling in 2007, these concerns have largely failed to materialize.  Notably, Prof. Wu never mentions the FCC's previous (and PK's current) concerns about peering as a cause for concern.

Broadband ISP "Incentives" to Discriminate, Circa 2010

In the Open Internet Order, the FCC largely parrots Prof. Wu's concerns that broadband ISPs have the incentive and the ability to discriminate against "over the top" providers offering services that compete with the voice and/or subscription video services sold by the ISPs.  The FCC first establishes, using the ISPs' own statements, that consumers view certain online applications as substitutes for voice and subscription TV service. Order, para 22.

Then, the FCC simply assumes from comments of groups advocating rules (and not ISPs or voice/video competitors) that, of course the ISP has incentives to discriminate against online alternatives.  Yet, the record contained no data supporting the FCC's conclusion (showing, e.g., higher profits in TV/voice than broadband Internet).  Order, paras 23-24.

Public Knowledge expressed no concerns about data caps and peering in the 2010 docket.

The Problem with Apple TV . . .

Supposedly, Apple wants Comcast to help it deliver some kind of super-cool IPTV that will actually make you want to buy video service from Comcast (vs. get it on the Internet).  As part of this service, Apple wants Comcast to offer Apple TV a guaranteed quality of Internet access, so that its video content would not be affected by general congestion issues that can otherwise cause videos to buffer.  And that higher quality access, even if not exclusive to Apple, is a problem . . .

Is The Problem With "Net Neutrality"

My fear is that "net neutrality" is no longer about just a reasonable set of minimal consumer expectations designed to keep the Internet creepy enough to hold the Interest of consumers and the NSA, while at the same time keeping it wholesome enough to prevent SkyNet from becoming self-aware by 1997 (or whatever similarly-fevered nightmares the rules protect us from). 

terminators.jpg
Skynet logo.jpg










Without a presumptive tolerance for commercially-reasonable service deviations, net neutrality becomes a fetish devoid of any utility.  If we can't limit proscribed conduct to only practices or agreements that unreasonably restrict Internet "output," then how do we know whether rules are serving consumers or requiring everyone to serve a concept that may have limited benefits?





March 20, 2014 11:02 AM

How the FCC Looks at Sports, Blackouts, and Broadband Consumers

The first day of March Madness is one of the greatest TV watching days in America, made even better by our special devotion to drinking and gambling.  Monday's article on Recode reminds us, though, that broadband-only consumers will be forced to spend this great national holiday watching TV in a bar.  

wheeler_zero_sign_2_caption.jpgThe value consumers place on sports content is as obvious as the rising prices of subscription TV.  But, sports content, and its regulation (or lack thereof) can also provide some insights into the FCC's priorities, and the relative value that the FCC places on the sports consumer (vs. the sports programming distributors).  It is also interesting to compare how the FCC views sports content distribution practices with how a court might view the same practices under the antitrust laws.

The FCC On Sports Blackouts

A good way to see just how the FCC views sports content consumers, relative to broadcasters and pay TV providers is to look at the FCC's NPRM to eliminate its sports blackout rules.  The proceeding began in November of 2011, when a group called the Sports Fan Coalition (Public Knowledge, Media Access Project, and some sports fan sounding groups) filed a petition to eliminate the rules.  

The petitioners were absolutely right and reasonable.  The FCC should have simply said, "we agree--and we're actually a little embarrassed that the rule was adopted at all, much less still on the books."

In reality, it took the FCC two more years to unanimously approve . . . a Notice of Proposed Rulemaking to ask questions about the effects of "repealing" the sports blackout rules (that it had no clear authority to adopt in the first place).  To reassure industry that the FCC hadn't found religion, Acting Chairwoman Clyburn was careful to explain that, "[e]limination of our sports blackout rules will not prevent the sports leagues, broadcasters, and cable and satellite providers from privately negotiating agreements to black out certain sports events."

Because, you know, what could go wrong with private blackout agreements between leagues, RSNs, and their MPVDs?  It's not like the agreements could be more anticompetitive than the rules themselves, right?

A Year Earlier, In a Court of Law . . .

In December 2012, a federal district court in New York issued an opinion refusing to dismiss antitrust complaints filed by TV and Internet consumers against Major League Baseball, the National Hockey League, Comcast, DirecTV, and other affiliated RSNs.  (Yes, the defendants are the same parties the FCC "will not prevent" from entering into private blackout agreements.)  The Southern District of New York ruled that the complaints presented a "plausible" claim that blackout agreements between the baseball and hockey leagues, and Comcast, DirecTV, and their RSNs were being used to eliminate Internet competition, require customers to purchase from MVPDs, and generally increase prices to consumers.

Here are some excerpts from the court's opinion describing how real consumers view the types of agreements the FCC "will not prevent" (internal quotes refer to the plaintiffs' complaints):

Plaintiffs challenge "defendants' . . . agreements to eliminate competition in the distribution of [baseball and hockey] games over the Internet and television [by] divid[ing] the live-game video presentation market into exclusive territories, which are protected by anticompetitive blackouts" and by "collud[ing] to sell the 'out-of-market' packages only through the League [which] exploit[s] [its] illegal monopoly by charging supra-competitive prices."  Opinion, at 2. Emphasis added.

The Complaints allege that the "regional blackout agreements," made "for the purpose of protecting the local television telecasters," are "[a]t the core of Defendants' restraint of competition." "But for these agreements," plaintiffs allege, "MVPDs would facilitate 'foreign' RSN entry and other forms of competition." Plaintiffs argue that the "MVPDs also directly benefit from the blackout of Internet streams of local games, which requires that fans obtain this programming exclusively from the MVPDs." Id. at 8.

Back at the Commission . . .

Public comments on the FCC's sports blackout NPRM were a filed a few weeks ago.  Major League Baseball does not typically blackout telecasts in response to gate sales.  But, realizing that its own private blackout agreements may soon be illegal, the MLB, predictably, argues the FCC rules are still needed--as an anticompetitive backstop to the anticompetitive agreements the FCC "will not prevent."  Of course, the MLB doesn't tell the FCC why it might not have as much access to private blackout agreements in the future.

In its comments, the Sports Fan Coalition devoted a several pages of its comments to explaining (as then Acting Chairwman Clyburn noted) that, even without the FCC's rules, anticompetitive private blackout agreements will still be available to the leagues, the RSNs, and the big cable and satellite companies.  But, the SFC is simply responding to the FCC's primary concern in the NPRM.

full fcc at meeting_caption2.jpgFCC Priorities: TV, TV, and TV

The contrast between the federal district court's skepticism and the FCC's comfort with private blackout agreements could not be clearer.  It is notable, but not terribly surprising, that there is no reference to the two year old consumer antitrust cases anywhere in the sports blackout docket; not in the original petition, the FCC's NPRM, or in any party's comments.  It's almost as if the FCC and sports consumers are in different worlds.    

If you just read the FCC's press releases, and the speeches from the Chairman and other Commissioners (and their tweets), you might think broadband Internet was a huge priority.  Yet, it's difficult to reconcile the FCC's statements with the fact that the Commission tolerates agreements by regulated TV distributors (broadcast, cable and satellite) that require sports leagues/teams to refuse to deal with broadband-only consumers on any terms for "in market" games.

The Chairman says that he will target legal restrictions on the ability of cities and towns to offer broadband service.  I'd be more impressed if he targeted restrictions in sports content distribution agreements that intentionally reduce the value of the broadband Internet to all consumers.




August 5, 2010 5:41 PM

BIF-PIB Redux: Doo. Dah. Dippity!

No reason to even apologize about the fact that I haven't been blogging much recently (relative to my normal furious pace of about 1 every 10 days)--and I'm not apologizing.  I could make a lot of excuses (and, believe me, I do!).  But, hey, there just hasn't been a whole lot of FCC Policy to be blogging about.  Don't take my word for it--even Harold Feld 
says so
--and he's a prodigious blogger.  Blame Chairman Genachowski.  My personal laziness is purely coincident.

However, I do have one slightly timely follow-up point on my last post on video competition.  Earlier this week, Mr. "PIB" (Party in Back, in the mulletary sense of the term) made his appearance on the Comcast-NBC merger.  How so?

Well, Congressman Rick Boucher, Chairman of the House Energy and Commerce Committee's Subcommittee on Communications, Technology, and the Internet concluded his investigation into the Comcast-NBC Universal merger and deemed it to be not a threat to competition.  In fact, he sent letters to the Department of Justice's Antitrust Division and to the FCC, urging expeditious approval of the merger to "ensure continued consumer access to content." 

Who could argue?  After all, the antitrust and consumer protection laws were founded on the principle that the best way to ensure that consumers receive maximum access to a good or service was to let one company control as much of that market as possible.  Or maybe that was the principle on which the Hudson's Bay Company, and the British East India Company were founded.  Hmmm?  One or the other . . .  

Competition or mercantilism, toe-may-toe, toe-mah-toe . . . . No matter; the top dog on this subject matter at the House of Representatives told the reviewing agencies to fold up tent, conclude that the industry is competing like heck out there, approve the merger, and crack open a cold Bud Light!  This is some serious political cover:  the political version of "The Eagle Has Landed." 

Of course, I could always be wrong, and the reviewing agencies could continue their own investigations, and make an independent assessment of how the merger will affect competition in the markets for video programming and video distribution.  But . . . why would they bother?  It's summertime and the livin' is easy.

Now, we just sit back and watch, listen and learn, as the story unfolds about the competitive irrelevance--nay, benefits--of vertical concentration in the subscription video market.  But be careful out there, partner, with trying to make a general assumption about vertical integration in communications markets.  Woe to anyone who makes that same mistake about vertical contracts between service providers and handset manufacturers in the mobile wireless market!  The Party in Back is strictly for incumbent video providers and programmers . . .

July 14, 2010 3:48 PM

The FCC's "Mulletary" Enforcement of Video Competition

When I say "mulletary", I mean like "military", but in the way of the "mullet", as in the haircut, as in "BIFPIB":  business in front, party in back.  That's right, the mullet.  Like Billy Ray Cyrus, "Joe Dirt", and every '80's metal band.  But, why in the world would I compare video competition policy enforcement to the mullet?  I'll say it again. Two words: "BIF" "PIB"--business in front, party in back.  Why?  Because when confronted with the stubborn lack of video competition, to the detriment of consumers, the Commission has steadfastly talked tough in public (on the front end), but refused to break up the party out back with the owners and distributors of cable programming.  The result?  

Just look at the chart in the last FCC Video Competition Report to Congress, where the Commission reported that subscription video, and programming are the only major services for which prices have steadily increased since the Telecom Act was adopted in 1996.  What's more, the last Video Competition Report was produced in the last administration.  So, is there a "party in back"?  When prices are climbing in a down economy, both in nominal terms, and relative to the CPI, you bet there's a "party in back"! 

Nonetheless, the tough-talking, "business in front" continues unabated.  Like the mullet militia, the Commission will almost certainly not want to be reminded of their "style" when this administration goes out of style . . . as they all must . . . whether in four, or eight, years.  Let's look at some examples of the "mulletary" enforcement of "video competition policies."

"Business in Front"

Exclusionary Programming Practices.  On January 20, 2010, the Commission adopted rules to prevent incumbent cable operators, and owners of "must have" programming (like real time sports programming), from using the so-called "terrestrial loophole" to exclude certain competitors from access to this essential programming.  This programming is considered essential because customers will not buy subscription television that does not give them access to local sports programming.  The "terrestrial loophole" was originally designed to prevent owners of closed circuit TV systems (like the live feed you might see on the "Jumbotron" at FedEx, or the Verizon Center) from being required to broadcast the entire feed (including proprietary "programming", like birthday announcements, marriage proposals, product promotion contests, etc.) to all providers of subscription television service.  The FCC has found that just because the sports program (i.e., the game) is transmitted for distribution over a wire, it does not give the owner/licensee of the sports programming the right to exclude rivals from access to this essential content.

In fact, despite the "loophole", which (according to interpretations rejected by the Commission) would allow the owner of the sports event to foreclose access to anyone that didn't own access, cable distributors that owned programming did choose to make transmission of these sports events (both conventional and high-definition feeds) available to non-competing, adjacent incumbent cable operators, but not to competitive video providers, either "in-region" or in adjacent regions.  The rules became substantially effective at the beginning of April and fully, technically effective, on June 21, 2010.

The FCC laid down the law . . . it could be said.  Yet Verizon, and AT&T, have had formal complaints pending with the Commission for over a year (since July and August of 2009) regarding their inability to get access to the high-definition feeds of local New York sports programming owned by Cablevision--even in areas where neither company competed against Cablevision.  See, Order, 17.

Programming/Distribution Concentration.  Let's move on to the still-pending Comcast/NBC/GE merger, where the largest owner and distributor of subscription TV programming filed a request with the FCC on January 28, 2010 for approval to acquire one of the largest network programmers.  Interesting stuff, really, because Business Week already declared the death of "free TV", even before the FCC got into the "business in front" part of the "mullet-ary" style review.   Others also expressed concern that the proposed merger would threaten "free TV." 

As a public statement, but not a binding rule, the FCC tries to hold itself to a 180 day "time clock" for reviewing mergers.  Technically, this would require the Commission to approve or reject the Comcast/NBC/GE merger in a couple of weeks.  Accordingly, the FCC hired an attorney to lead the investigation in late May.  Final comments on the merger are due in early August.

Moreover, on July 13, 2010, the FCC held a public hearing at Northwestern University regarding the consequences of the merger, chaired by Commissioner Copps.  Commissioner Copps released a public statement, concurrent with the public hearing, discussing the potentially dire consequences of the proposed merger--not only for traditional subscription television consumers, but also for the "new media" markets.   In Commissioner Copps' public statement on the hearings, he concludes, "[a]s for me, I have said before that approval of this proposed transaction would be a very steep climb."  [emphasis added]  Now that's some serious business. . . which brings us to . . . .

"Party in Back"  

Exclusionary Programming Practices.  Well . . . there is that matter of the FCC never enforcing an act of exclusion by a vertically integrated owner of cable programming and distribution--despite rules and practices to the contrary.  As I said a year ago, practices such as these--refusals to deal with some firms on terms that have been voluntarily offered to other, similarly-situated, firms--have been condemned as anticompetitive by the Supreme Court.   

They're Competing Like Heck Out There!  As part of its "business in front" approach to video competition policy, the Commission announced the previously-mentioned "public forum" to review the merger. Coincidently, though, on the same date (June 3, 2010), Communications Daily reported, "[t]he FCC is partway through trimming a backlog of requests from cable operators to be freed of local rate and equipment regulation, said commission and industry officials. The Media Bureau in recent months has stepped up approvals of petitions seeking findings of effective video competition . . . ." [emphasis added].  The story went on to note that the FCC is making "effective competition" determinations for video markets at a rate greater than once a day--as many as 30 times in May alone?!  Wow!  Is the subscription TV market "effectively competitive?"   

I don't know, but maybe the answer depends on the circumstances.  Do over 90% of cable consumers have a choice of at least one "same media" subscription video provider (as is the case in the wireless industry)?  Doubtful--but such a finding should be vital to the approval of a certain pending merger.  Why?  Because the Commission previously found that only wireline-delivered multichannel video had a price-constraining effect on the behavior of the incumbent cable provider. Video Competition Order, 3.  

Does the FCC have to exclude wireless-to-wireline competition?  It would seem so, because the Commission made a similar finding only a few weeks ago.  In the recent Qwest Phoenix Forbearance Order, the FCC reached the same conclusions about wireless voice as they did about wireless video when they declined to include wireless voice--even for customers that only used wireless voice--as a competitive market participant.  Qwest Phoenix Order, 55, n.164.

Even if not everyone agreed with the Commission on the ineffectiveness of cross-media wireless competition, the outcome would be unlikely to change in the video market.  In an article entitled "Wall Street Loves Cable. . . Still", Multichannel News recently reported one analyst's observation:

'The operating environment in cable is better,' [UBS cable analyst] [John] Hodulik said, adding that the competitive threat may have reached a crest with Verizon Communications announcing last month that it would no longer build out new FiOS markets and DirecTV being less aggressive in new subscriber additions.
Programming/Distribution Concentration.  So, how will the FCC tackle a big media merger, unpopular with consumers?  Will the "business in front" be followed by a "party in back"?  Some would say the party never ended for this industry.  Regardless, this year's Video Competition Report should be as interesting an exercise in intellectual contortions as its conclusions are predictable . . . and, no doubt, the same team will write the order approving the Comcast/NBCU/GE merger.

Still, in a transparent and data-driven world, the FCC--should they decide to approve this merger--should adopt a riff on the old English Solicitor custom . . . and wear formal wigs at the Open Meeting . . . like these.  Plus, if I had my druthers, every separate statement endorsing any conclusion of vigorous competition in the subscription TV market would have to conclude with this graphic prominently displayed.  

August 28, 2009 11:45 AM

A Funny Thing Happened . . . Part 2

Meanwhile, . . . back at the ranch . . . given the potential for inter-governmental "enforcement competition", it is helpful to look at what the FCC's existing longitudinal data sets are showing regarding the performance of markets that, unlike the wireless applications market, are firmly under the jurisdiction of the Commission.  Does the FCC have information that could lead a "fact-driven" agency competitor (like the Antitrust Division or the FTC) to believe that the Commission has any "infra-marginal" markets that might look like good "acquisition targets?"

The following slide was presented by the Media Bureau to the FCC at the Commission's first open meeting at the beginning of this year.  This slide graphically illustrates the price performance of several different communications services from 1995 through 2008 vs. the Consumer Price Index ("CPI").  In the relevant time period, the CPI for all products and services (including food and energy) increased by about 38%.  During this period, the price of most major communications services--including mobile wireless service--declined in absolute terms, not just relative to the CPI.  Every service, that is, except cable television service--which increased by about three times the rate of inflation (122% vs. 38% for the CPI).   The Commission attributed this poor performance to a lack of competition in the market for subscription TV services.  Below is "Slide 5" of the Media Bureau's presentation on January 15th, and was based on data presented in the Commission's Report on Cable Industry Prices ("Cable Price Report"), which was released on the following day.
Rates-for-Communications-Se.jpg 
 So, could the FTC and/or the Antitrust Division sense an opportunity to expand their own jurisdiction?  Well, since the FCC's wireless focus seems to be on vertical integration between handset providers, wireless data applications providers (or at least one provider), and wireless service providers, does the Commission's cable data tell us anything about the effect that vertical integration (with set-top box providers and programmers) has had on the relative poor performance of cable prices?  As a matter of fact, the Commission's data does shed some light on the degree to which vertical integration is responsible for the poor performance of the cable market.
Continue reading A Funny Thing Happened . . . Part 2