On Wednesday of this week (11/02), the Antitrust Division of the U.S. Department of Justice ("DoJ") sued AT&T arguing that its DirecTV subsidiary was the "ringleader of information sharing agreements" among rivals that "corrupted" competition among rivals to carry the Dodgers' cable TV channel. Complaint at para 2. According to the DoJ, this is the primary reason that Dodgers' fans in L.A.--living outside of Time Warner Cable's ("TWC") service area have not been able to watch Dodgers' games since the 2013 season.
Unfortunately, the DoJ seems dangerously unaware of findings by a federal court--in an antitrust case on the exact same subject matter being litigated during the same time frame as the facts in the DoJ complaint--that the exclusive sports distribution contracts (that raise consumer rates) may well be the more obvious Sherman Act violation. When we know what DirecTV knew--as a defendant to that litigation--we can better understand why the DoJ could not be more wrong in this case.
L.A. Regional Sports Networks ("RSNs")
Until 2011, Fox Sports was the leading RSN in the L.A. area. It had two channels, one of which distributed games of the Lakers, Kings, and the Anaheim Angels, and the other of which distributed the games of the Clippers, Dodgers, and Anaheim Ducks.
But, as Fox's contract with the Lakers was ending in 2011, TWC swooped in and paid $3 billion for the rights to broadcast the Lakers' non-national games for the next 20 years. As DoJ recounts in its complaint, TWC raised the prices to carry the Lakers (as a standalone channel) well above any range of what any of the other pay TV distributors considered fair value. DoJ Complaint paras. 29-39.
In 2013, Guggenheim Partners paid an unheard of $2.15 billion for the Los Angeles Dodgers baseball team ("Dodgers"). The private equity investors then turned around and sold the exclusive rights to distribute Dodgers' games--in the form of a dedicated "Dodgers channel"--to TWC for an even-more-unheard-of price of $8.3 billion.
Reportedly, TWC never budged on its demands, that every pay TV distributor (i.e., competitors and other cable/satellite companies), would have to pay it--on a per-subscriber basis for the rights to broadcast Dodgers games--regardless of how many of these distributor's customers want to watch the games. Until Wednesday, the narrative was that TWC's "unmitigated disaster" of a deal showed that perhaps there was some limit to the ever skyrocketing costs of sports programming.
DoJ to TWC's Rescue
The DoJ contends that DirecTV privately told other pay TV companies that it was not going to pay TWCs outrageous demands. The DoJ argues that, but for this exchange of information, TWC's competitors, and other pay TV distributors in the L.A. Dodgers home market, would have been happy to pay (and pass along to their consumers) the supra-monopoly prices being demanded by TWC.
Bizarrely, DoJ contrasts the "anticompetitive" situation of today with an earlier--presumably "competitive"--negotiation period, in which TWC (as the new RSN for the Lakers) extorts a price from Cox Communications' subscribers of "60% more" than Cox's internal analysis indicated the content was worth. Complaint at para. 36. No, the DoJ's thinking is that if cable companies aren't just spending their customers' money and passing through rate increases, then something illegal is afoot.
The fact, though, is that the vertical distribution contracts--which are responsible for the sports programming price increases (that DoJ is incomprehensibly fighting for)--were under antitrust scrutiny, and coming up short, throughout the relevant time period covered by the DoJ suit. After looking at these contracts in the light of antitrust precedent, we can truly appreciate just how wrong the DoJ was to go after the victim--and not the cause--of spiraling sports programming costs.
Consumers Fight Anticompetitive RSN Contracts
In 2012, consumers filed class action antitrust lawsuits against the MLB and the NHL in the Southern District of New York. See, e.g., Laumann v. NHL, et al. and Garber v. Office of the Commissioner of Baseball, et al., 907 F. Supp.2d. 462 (SDNY 2012). These cases squarely attacked the contracts at the heart of the exclusive "home television territory" ("HTT") distribution model. Specifically, consumers alleged that the contracts between the teams, MLB (and the NHL), and the RSNs of DirecTV and Comcast, illegally restricted competition in the broadcasting/streaming markets because these agreements also restrict the right of the "away" team--a non-party to these contracts--to sell its own broadcast feed to anyone in the HTT area of another RSN.
MLB fans can only watch games of their "home team" by purchasing a cable package from the RSN (or a distributor of the RSN, such as AT&T, Verizon FiOS, or a satellite or cable company). Fans of other teams could only watch the games of out-of-market teams by purchasing an out-of-market package ("OMP") from the leagues (for streaming customers) or from the RSN (distributing on behalf of the leagues).
The plaintiffs' successfully argued (at every pre-trial stage) that the complicated web of contracts between the teams, the leagues, and DirecTV and Comcast (which prevented a non-party to the contract (i.e., any "away team") from selling its own independently-produced feed of the game to any fan in any part of the country) were "contracts . . . in restraint of trade" in violation of the Sherman Act. The plaintiffs' contention was that, but for these contracts, fans could purchase the away-team feeds of games on an "a la carte" basis, even if they did not want to buy home team's cable package.
The Case History/Court Findings
Throughout the case, DirecTV and Comcast (in the same role as TWC in the DoJ case), vigorously argued at every possible stage that, as the RSNs, they were merely accepting terms set forth by the Leagues and that they did not benefit from the exclusivity--and the higher-than-competitive consumer prices--that this exclusivity produced. The court rejected this argument in both the defendant's motions to dismiss in 2012 (opinion) and their motions for summary judgment in 2014 (opinion).
The court explained that,
evidence that the Television Defendants would not have entered the contracts at the prices prescribed but for the territorial restrictions, is sufficient evidence from which a fact finder could infer a tacit horizontal agreement among the RSNs and MVPDs.
See, Opinion Denying Defendant's Motions for Summary Judgment, at 50 (emphasis added). Further, in rejecting the defendant's motions for summary judgment, the court found,
The clubs in each League have entered an express agreement to limit competition between the clubs - and their broadcaster affiliates - based on geographic territories. There is also evidence of a negative impact on the output, price, and perhaps even quality of sports programming.
In May of 2015, the court certified the plaintiff's class to go forward to trial in order to seek injunctive relief, but not money damages, because there was no common monetary impact among the class members. This decision pretty much guaranteed that the case would settle, which it did, on the eve of trial, earlier this year. The settlement agreement, unfortunately, leaves intact the geographic market exclusivity, which, in turn, ensures that sports content costs will continue to spiral.
To What End?
In many ways, this is/was the perfect case for an antitrust enforcement agency to bring--meritorious, but without the profit potential to ensure the efficacy of private enforcement. However, there is no evidence the DoJ was even aware of this antitrust litigation.
So, instead of taking up the consumer's side, the DoJ chose to sue on behalf of conduct that a United States District Court has already characterized as "express agreement[s] to limit competition between the clubs - and their broadcaster affiliates - based on geographic territories" and their corresponding "evidence of a negative impact on the output, price, and perhaps even quality of sports programming." It is sad that the DoJ didn't follow antitrust developments in this field closely enough to know that agreements which result in distributors paying 60% premiums over value is the result of a "corruption of competition"--rather than competition itself.
Finally, it is interesting to consider that, until several months ago, DirecTV had every reason
to believe that a court would be likely to find that its RSN contracts were an illegal restraint of trade. How ironic that, having dodged a bullet with respect to its RSN agreements, DirecTV would find itself the target of another lawsuit for not agreeing to pay the most anti-consumer RSN contract in America!
Recently, we showed 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.
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.
* * *
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?
I guess everyone that watched yesterday's Senate Judiciary Committee hearing on the Comcast-Time Warner Cable merger had a different opinion on it. I had prepped myself by reading all of those "Comcast owns Washington" and "David Cohen is The Man" articles, but I really wasn't prepared . . . for the awful truth. See and believe (whole hearing here).
Maybe I'm reading this all wrong, but it looked like the Committee Chairman, Sen. Patrick Leahy (D-VT) pretty much indicated that he's cool with the deal--just, you know, as long as they include some net neutrality commitments, or something. It was almost as if Senator Leahy was listening to Comcast's radio commercial as he spoke. So, yeah, that pretty much set the tone.
The only Senators that represented my consumer interests, i.e., unchaining broadband Internet customers from the pay-TV business model, were Sen.'s Blumenthal (D-CT), Franken (D-MN), and Lee (R-UT). I've already explained that the real problem here is the accretion of power that cable-affiliated RSNs have over pay-TV/broadband competitors. In other words, this merger will harm the ability of consumers to ever use broadband Internet access--from any broadband provider--as a substitute for subscription TV service.
The rest of the Committee members were distracted--like toddlers chasing soap bubbles--by the agenda of net neutrality "concerns" that we've seen hyped and re-hyped by the press for the last 3 months. The reason that these "distractions" consumed the attention they did is, some believe, a sign of Comcast's power to intimidate the "real" witnesses away.
And, according to this report, Comcast's "casting" of the issues covered in the hearing could not have worked out better for them. Unfortunately, if the only people who are going to speak up about this merger can't pass up a public platform for their "net neutrality/broadband is a utility" shtick--then Comcast really is in great shape.
3 Reasons Why "Net Neutrality" Is Comcast's Best Friend
1. The only "managed service" Comcast needs is the one they already have. I can't say it any simpler than that. When Prof. Susan Crawford went off the handle a couple weeks ago, at the rumor that Apple might have requested a "managed service" from Comcast, she failed to understand that this is precisely what is needed if the Internet is ever going to become a content delivery rival to TV. If Comcast made "TV quality content delivery" available to some third party, then it would be available--and that's the point.
If a "managed" video delivery service is not available for wholesale purchase by Apple, then it's not available to any competitor to Comcast's cable service. The fact is that Comcast will be happy to "swear off" offering managed services, because that's just like telling them to shut the door behind them for all those new markets where they'll be the dominant broadband and subscription TV company.
2. Internet interconnection is not a merger issue (either). Senator's Klobuchar (D-MN) and Franken (D-MN) wasted a fair amount of their time and attention on this little canard. In fact, I'd say this line of questions, more than any other, made David Cohen look like the most reasonable person in the room.
In the media, this issue is hyped a lot by Stacey Higginbotham from GigaOm. She loves this issue--writes about it constantly (see), even when Comcast isn't buying its rivals. Not surprisingly, a few days before the hearing, she writes, "expect more questions about paid peering and the Comcast merger."
The reason this line of inquiry helps Comcast avoid harder issues is that buying transit is a long-established, industry-wide practice, and would exist even if Comcast was a "common carrier." Neither the FCC nor the DoJ, is going to do anything to change this practice in a merger review.
3. Data Caps. The essence of this complaint is that the heaviest users don't like the ISP's pricing structure. This complaint, like the previous issue, is a quixotic attempt to establish price regulation on ISPs.
The "data caps" issue is only an issue for the highest use consumers--who want the lower use consumers to subsidize their consumption. These people share the Reed Hastings view of net neutrality--averaging out the restaurant bill is fair, especially if you're the only guy drinking $100 champagne.
At the hearing, TWC said they deal with this issue in an interesting way: they don't impose caps, but if a customer agrees to not exceed a certain amount of data downloads (and be subject to throttling, if they go over), the consumer gets $5 off their monthly bill. My guess is that Comcast will have no problem offering this one up.
Look, the net neutrality people aren't the "bad guys" here. But, if a significant part of the merger opposition is ceded to the usual suspects--the same folks that seem intent on recycling their same net neutrality arguments, no matter the forum--then that's a shame.
This merger squarely presents the DoJ and the FCC with a very fundamental "crossroads" choice--the future of competition for the broadband Internet versus the cable TV business model. The public interest cannot settle for a bunch of buttercup-and-whipped-cream "commitments" to net neutrality. The consequences are too high.
I wanted to end on a cheerful note, so I'll leave it at this. Remember, kids, while advocacy from 2005 ages poorly, this still-super fly Chamillionaire video never will. Enjoy!
Maybe, I'll send some "Chamillitary" gear over to Prof.'s Crawford/Wu, and Free Press. So, you know, at least the crew can be dressed in the "era-appropriate" pop fashion when they hit the NPR circuit.
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).
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.
So, 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.
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.
This 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.
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.
The 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.
FCC 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.
If you haven't noticed yet, you probably shouldn't rely on me for your telecom news--because I'm really not that timely. Nonetheless, if you read at all, God bless you, brother (or sister); without you, I wouldn't even have a reader. So, for all my whining about subscription TV prices and practices, I would be remiss in not reporting what's come out in the last week on our subscription TV vertical foreclosure issue.
Cablevision has decided to spinoff its MSG programming unit to its shareholders as a separate property. Contrary to some speculation, though, the spinoff in itself does not solve the potential antitrust problem of vertical foreclosure faced by competitors that are unable to obtain all of MSG's programming because the management of MSG and Cablevision will be the same. Still, though, by separating MSG as a standalone programmer, it will become more obvious over time how much this business is losing if it continues to refuse revenue from subscription television providers like AT&T, DirecTV, RCN, and Verizon in service territories where these companies do not even compete with Cablevision's subscription television service.
This will take a little time, though. But, if the transaction requires any license transfers, it should be easier for all downstream competitors in the MSG programming area to get access to all of MSGs programming on reasonable terms. If an FCC license transfer proceeding is necessary, one can expect competitors to demand, and likely be successful, at getting access to cable programming at the same terms available to other competitors, as a condition to merger approval. My guess is that the Commission would be sympathetic to these requests.
Alternatively, if the FCC's cable ownership caps are overturned by the Court of Appeals, Cablevision might fetch a higher price from an adjacent incumbent cable company (like Time Warner Cable, or Comcast), and its shareholders might benefit more by holding MSG and becoming "arms merchants"--capitalizing on a regulatory environment that seems likely to promote increased subscription TV competition. So, the Blizzard hasn't started yet, but the temperature and the barometer are both falling. . .
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, I've got to stop chasing my tail, and I promise this will be my last blog (for at least a little while) on the subject of the subscription TV-cable programmer price spiral. Maybe it's just the natural insecurity of a new blogger, but I feel compelled to point out whenever someone with even more experience as a reporter is reporting on something I've noticed, which--in case you haven't been reading is my completely-consumer (I'm a telecom guy, remember) fixation on subscription TV prices. This past Friday, April 3d, Rob Pegoraro of the Washington Post wrote an on-line article, on the propagation of "included" channels and the unstoppable increase in subscription TV prices (the same article was printed in the Sunday, April 5th print edition of the post). Mr. Pegoraro made an observation, also from last week's Cable Show, that prices for subscription TV bundles were going higher--across the board--whether the provider be cable, telco, or satellite. His article makes some of the same observations that I have made, in a general sense, but he makes others, that are even more concise and compelling. You might have to register for the Post article, but it's short, and worth the read. However, his conclusions, and hoped-for solutions, are largely the same that surfaced in my March 24th post.
So, for those of you that don't want to set up a Post account, I'll copy the last three paragraphs of Mr. Pegoraro's article (from the on-line version, with active links), that describe the problem-solution dichotomy in a more succinct manner than I have managed to do so far:
Given last week's posts, one of the big attractions of the Cable Show was to hear how the big programmers viewed the upstart Internet content distributors. Therefore, I was especially intrigued by a panel presentation by big cable programmers cleverly titled, "Jumping Through (Hulu) Hoops: Programming for a New Video Paradigm". Every panelist seemed, in one sense or another, to regard the Internet as something to be either shunned, ignored, or to be indulged, but in limited amounts, and with great care. The primary concern with putting programming on line seemed to be jeopardizing the "dual" revenue stream that the large programmers get from subscriptions and advertising revenue. No one wanted to be "broadcasters" (not even the broadcasters--Fox and NBC)--in the sense of being reliant on advertising revenue alone.
The spectrum of opinions regarding the value of placing programming on the Internet seemed to go from the "more progressive" that saw some perceived value in either using the Internet to "monetize" (this was a word that was used a lot) non-first-run (i.e., repeat) programming, or in using the Internet to promote interest in new channels, or new shows on existing channels.