June 27, 2016 10:53 AM
In his Dissenting Statement from the FCC's recent Business Data Services Order and Further Notice of Proposed Rulemaking
("BDS Order"), FCC Commissioner Ajit Pai compares the FCC's decision to expand its regulation of the "business data services" market to the world Alice encountered in "Through the Looking Glass, and What Alice Found There." In order to give you some idea
of what Commissioner Pai was talking about, let's just look at some of the most obvious errors
the FCC makes in its wholesale abandonment of rational decision-making. Background
Business data services ("BDS") are dedicated circuits that transmit data at speeds of 1.5Mbps or 45Mbps between the customer's location and another point on the incumbent LEC ("ILEC") network. After the break-up of AT&T in 1982, the FCC set prices for the competitive "long-distance" inputs (supplied by the ILECs) of switched and "special" access. Almost 35 years later, in its BDS Order
, the Commission renames "special access" as BDS, but continues price regulation.
In its BDS Order
, the FCC makes a finding that certain provisions in the legacy incumbent telephone company discount tariffs
for business data services are "unjust and unreasonable." Notably, the FCC made no finding as to the "just and reasonable" nature of the ILECs' basic "month-to-month" retail rates for BDS.
The Commission found only that certain terms and conditions the ILECs required in order for a customer to qualify for the largest discounts
off the retail rate were "unjust and unreasonable." Moreover, the Commission also found that the some of the penalties (for the customer failing to meet purchase volume, or contract term, commitments) allowed the ILECs to recover more from a "breached" contract than the ILEC would have received if the customer had fully performed. The Threshold Fallacy
From the outset, we can readily see that the FCC has a bit of a logic problem that it needs to explain, before it can resolve the tariff complaints
. The "month-to-month" BDS rates have not been challenged as unjust/unreasonable, nor do these rates require a purchaser to agree to buy any specific number of circuits or hold the circuits for any period of time.
Given that any customer can purchase BDS on "just and reasonable" rates, terms, and conditions, then wouldn't any rates below the "month-to-month" BDS rates--regardless of terms and conditions
--have to be, by definition, just and reasonable rates? The Commission never explains how it can rationally determine that any terms and conditions--which result in lower prices than the already-established-just-and-reasonable-prices--can be "unjust and unreasonable." Where's the Law?
When you read the BDS Order
, one of the first things you'll notice--as opposed to every other FCC Order--is that the Commission never explains the prevailing legal standard
. Of course, the FCC notes that Section 201(b) of the Communications Act requires that,
[a]ll charges . . . for and in connection with such communication service, shall be just and reasonable, and any such charge . . . that is unjust or unreasonable is declared to be unlawful . . .
See 47 U.S.C. Sec. 201
, but this tells us nothing about what the "just and reasonable" requirement means
Moreover, because "just and reasonable" is an unambiguous, statutory term, the Commission will get no deference from the Court of Appeals. So, why wouldn't the Commission at least get the precedent it wants to rely on in its Order? What the Law Says
In Verizon v. FCC
, 535 U.S. 467
(2002), the Supreme Court's review of its Iowa Utilities Board
remand to the 8th Circuit, Justice Souter, writing for the majority, offers a historical summary of the evolution of the "just and reasonable" standard with respect to rates between businesses (vs. rates between the utility and the public).
When commercial parties did avail themselves of rate agreements, the principal regulatory responsibility was not to relieve a contracting party of an unreasonable rate . . . but to protect against potential discrimination by favorable contract rates between allied businesses to the detriment of other wholesale customers.
, at p. 479 (internal citations omitted). Justice Souter also notes that, with respect to rates/terms set by contract
between two commercial providers, the Court has previously stated that,
the sole concern of the Commission would seem to be whether the rate is so low as to adversely affect the public interest--as where it might impair the financial ability of the public utility to continue its service, cast upon other consumers an excessive burden or be unduly discriminatory.Id
. at pp. 479-480 (citing FPC v. Sierra Pacific Power Co
., 350 U. S. 348
, 355 (1956)).
Thus, Supreme Court precedent, with respect to "just and reasonable," would limit the Commission's ability to step in and void a contract tariff rate/term between two sophisticated entities to situations where the rate was too low
, and reflected an improvident "giveaway" to a commercial customer, at the expense of other customers. Competition Cannot Be Harmed By Limitations on BDS Discount Availability
In its BDS Order,
the FCC states that it has previously expressed concerns about the "potential anticompetitive nature" of the ILECs' term and volume discount plans. Order
at para 92.
The latest expression of concern the FCC cites is from 1996--when Congress gave the FCC a much more effective tool for determining prices/terms between ILECs and their competitors--the Telecommunications Act of 1996, which allows the FCC to order ILECs to provide access to "unbundled network elements" ("UNEs"), at rates much lower than BDS tariff rates, if the FCC believes that competitors would be impaired in their ability to compete "but for" access to the UNEs.
But, the Commission knows the CLECs/wireless carriers cannot credibly make such a claim. In 2004, the D.C. Circuit pointed out,
[a]s we noted with respect to wireless carriers' UNE demands, competitors cannot generally be said to be impaired by having to purchase special access services from ILECs, rather than leasing the necessary facilities at UNE rates, where robust competition in the relevant markets belies any suggestion that the lack of unbundling makes entry uneconomic.U.S. Telecom Ass'n. v. FCC
, 359 F.3d 554
, 591 (D.C. Cir. 2004) (emphasis added
The FCC and the ILECs' wholesale BDS customers have known for quite a while that the FCC couldn't credibly require ILECs to give them access to UNEs, because BDS availability has stimulated, not thwarted, competition in related markets
. But, the statutory term, "just and reasonable," sort of sounds like an unbounded grant of Goldilocks-level discretion. The FCC, seeing saw no reason to reflect on logic, or precedent, moved ahead with its plans to help another privileged class of competitors. And that
is how the FCC went Through the Looking Glass.
October 26, 2015 3:08 PM
On October 16th, the FCC issued an Order Initiating Investigation and Designating Issues for Investigation ("Investigations Order
") concerning the provision of point-to-point data transmission services ("special access") by the country's largest incumbent LECs (AT&T, CenturyLink, Frontier, and Verizon). These services, when provided by ILECs, are still subject to FCC price regulation. Although the FCC has "de-tariffed" many of these services, much like the recently re-classified
"Broadband Internet Access" service, ILEC special access services remain subject to Section 201's requirement that they be "just and reasonable." The Commission's Non-Price "Concern"
Superficially, the FCC's investigation is about the ancillary effects of the volume and term commitments that some CLECs have agreed to in order to receive the ILECs' lowest prices on special access services. However, the Commission's overview and explanation of its concerns suggest that its inquiry is much broader than the competitive concerns with discount contracts that have been identified in the case law, and associated economics literature, the Commission briefly discusses. See, Investigations Order
at n. 54.
The Commission's only potentially
-legitimate non-price concern is succinctly stated only once in the entire first 12 pages of the Investigations Order. The FCC quotes a CLEC ex parte letter arguing that the term and volume commitments in the ILEC tariffs "shrink[ ] the addressable market for competitive wholesale special access providers (thereby preventing them from achieving minimum viable scale), and cause[ ] special access prices to remain higher than would otherwise be the case." Investigations Order
, Paragraph 12 [internal citation omitted].
Everything else the Commission identifies as a question, or unresolved contention between the ILECs and CLECs, is more properly classified as "something that the CLECs don't like having to do in order to get the lowest possible prices." The CLECs' gripes are certainly reasonable (from their perspective), but they are not competition-affecting issues; they are bargaining issues.When Good Discounts Go Bad
One issue (out of many the FCC identifies) is that conduct that is otherwise competitively benign "may be impermissibly exclusionary when practiced by a monopolist." See, U.S. v. Dentsply
, 399 F.3d 181
, 187 (3d Cir. 2005). Sometimes monopolies (firms with market shares approaching, or greater than, 80%) will use "discount contracts" as a way to limit the ability of new entrants to enter the market for the product/service being offered through the discount contracts. The FCC references some of these cases in n. 54. Let's take a closer look at a representative case in order to better understand situations in which these agreements can injure competition.
In ZF Meritor, LLC v. Eaton Corp
., 696 F.3d 254
(3d Cir. 2012), the product market was heavy duty transmissions for big trucks, such as 18 wheelers, cement mixers, and garbage trucks. The defendant, Eaton, was a monopolist in the U.S. heavy duty transmissions market from the 1950s until Meritor entered in 1989. By 1999, Meritor had garnered a 17% share of the heavy duty transmissions market. In mid-1999, Meritor and a leading European heavy-duty transmissions manufacturer, ZF AG, formed a joint venture to adapt a popular ZF AG model to the U.S. market.
In the U.S. market for heavy duty transmissions, there are 4 direct purchaser customers; these firms are the original equipment manufacturers ("OEMs"). Truck buyers, the ultimate consumers of heavy duty transmissions, purchase trucks from the OEMs by "assembling" components from the OEMs' catalogs. It is, therefore, vitally important for a component part manufacturer to be listed in the OEM catalog--and on reasonable terms.
From late 1999-2000, the U.S. trucking industry experienced a 40-50% decline in demand for new vehicles. Shortly thereafter, Eaton entered into new long term agreements ("LTAs") with the 4 OEMs. Long term agreements were not uncommon in this industry, but Eaton's new agreements were "unprecedented" in their length (the shortest were for a minimum of 5 years).
The new LTAs provided the OEMs with substantial up-front cash "rebates" of $1-2.5 million. In exchange, the OEMs agreed to use Eaton transmissions in a very high percentage (usually, >90%) of their vehicles sold. If an OEM missed its sales targets in any year, it was required to return in full all "advance" rebates it had received from Eaton. Finally, the agreements required OEMs to artificially increase the price of ZF Meritor transmissions by $150-200, and to impose additional "penalties" on customers that still chose ZF Meritor transmissions.
By 2003, ZF Meritor determined that it was limited to no more than 8% of the market due to the Eaton's agreements with the OEMs. ZF Meritor needed to get at least 10% of the market in order to remain viable, so it adopted a strategy of trying to sell directly to the end-user customers. Nonetheless, at the end of 2005, its market share had dropped to 4%, and, in January of 2007, ZF Meritor exited the market. Shortly thereafter, ZF Meritor sued Eaton on antitrust grounds. A jury returned a verdict in favor of ZF Meritor, which was upheld on appeal by the 3d Circuit Court of Appeals.The Commission's Investigation of Dissimilar Discounts
Every antitrust case involving discount contracts, as well as the economic literature cited by the Commission, has several facts in common with the ZF Meritor
case. First, the product or service has to be an input to the product or service the customer sells to its customers. Second, it must be the case that only 1 firm can supply the majority of any customer's demand for the input, and, that firm almost always has a market share of 80% or greater. Third, the primary "victim" of the contracts is not the purchaser, but rather the direct competitor
, of the seller.
Finally, and this last condition is implicit, but the most important for our purposes. In every instance where discount contracts have been found to harm competition, these contracts affect the entire relevant market for the product or service (or a very high majority of that market)
. If a new entrant can enter the market
(for the same service the dominant firm is supplying through its "discount contracts") without selling to the same customers, then the discount contracts can have only a speculative and de minimus effect on competition
--regardless of how "unfair" they may seem to an outside observer.Do CLECs Represent the Majority of Demand for Wholesale Data Transmission Services?
This, of course, is the first question the FCC should have addressed if it was genuinely concerned about competitive conditions in the wholesale transmission market. To understand the importance of CLEC demand to the capital deployment decisions of competitive wholesale network service providers, let's look at a competitor that successfully entered the market after the FCC started its special access inquiry
. Zayo, according to the company history on its website
was founded in 2007 in order to take advantage of the favorable Internet, data, and wireless growth trends driving the demand for bandwidth infrastructure, colocation and connectivity services.
So, if the ILECs have tied up the demand of some CLECs--which could otherwise go to competitors like Zayo, then who is buying from Zayo instead of the ILEC? Fortunately, Zayo solves this mystery in a presentation
to investors in May of this year.
What? Zayo is selling to some of these same CLECs and
those wascally ILECs? In fact, as we can see, while wireline providers--including those same special access sellers that are under investigation--do constitute the largest group of potential customers for a new entrant, they are still only a minority of total market demand. Moreover, it is hard to say how much the incremental CLEC demand would be--if not "locked down"--but it's doubtful that it would make the pie a whole lot wider. Why Does the FCC Insist on Its Ruse of an Investigation?
We've previously pointed out
that "ILEC special access" is not a relevant product market. Because "ILEC special access" is not a relevant market, it's not at all surprising that the FCC cannot point to a single, specific, direct competitor victim. Instead, the Commission seems quite willing--perhaps too willing--to simply accept the purchasers' assurances that a victim exists; just a more "theoretical" victim than the antitrust laws protect.
So, if the Commission's ostensible question for "investigation" is nothing more than the thinnest veneer to disguise price regulation, why is the FCC even bothering with the pretense of an investigation? While it doesn't make much sense to price-regulate a fraction of a "market," if that's what the FCC wants to do, then it should at least regulate prices in a transparent manner. Good government isn't always smart, but it should always be transparent to its citizens.
October 5, 2015 11:46 AM
The notion that extending regulation of ILEC special access could be bad for anyone (who's not an ILEC), much less retail business customers, may seem incongruous. After all, if the competitors--who are serving real business customers--are in favor of imposing regulations on ILEC special access, then how could it possibly hurt their customers? Competition, Contracts, and Consumer Inertia
Last September, Chairman Wheeler described
the mass market for broadband Internet access as so non-competitive that it made little difference if a customer faced a monopoly, or had a choice of service provider. The Chairman stated,
[c]ounting the number of choices the consumer has on the day before their Internet service is installed does not measure their competitive alternatives the day after. Speech
at 4. The reason, he explained, is that "[o]nce consumers choose a broadband provider, they face high switching costs [like] . . . early-termination fees. . . . Id
. Interesting observation, but is it accurate?
Well, in April of 2010, the FCC surveyed
a representative sample of broadband subscribers about their broadband purchasing/switching behavior over the prior 3 years. The Commission found that 36% of customers had switched broadband providers in the past 3 years (compared with 19% of mobile customers switching providers over the same period). Survey
at 6, 10. Of the consumers that had switched ISPs, the overwhelming majority (86%) said the process of switching providers was either "very easy" (56%) or "somewhat easy" (30%). Survey
Instead of describing any unique market failure in the consumer broadband Internet market, what Chairman Wheeler intuitively sensed was the phenomenon of "consumer inertia
." Consumer inertia is a behavioral tendency in markets where products are purchased through contracts--like cable TV
, or insurance
. In these markets, consumers may aggressively shop for their initial service, but then neglect to continue to monitor market prices and, thereby, over time receive less competitive terms.Consumer Inertia Is Good for Competitors, But Not Customers
The effect of customer inertia--on their service providers--is best illustrated by the fact that there are a lot of locations where competitors are serving retail customers with ILEC special access, even though competitive fiber is available. See, e.g.
, T-Mobile example in last blog
. One reason that a CLEC will not automatically use competitive fiber when it becomes available is that each time a retail customer location switches to a different physical transmission line, the CLEC must physically "groom" the retail customer's premise equipment (modems/servers/PBXs) onto the new network. Carriers Hate Physical Grooms
. A physical groom is a hassle for both the CLEC and the customer. To better understand why, let's consider a hypothetical example.
Let's say you're a CLEC, and you're serving a customer with 5 locations in a metro area. Your own fiber is serving 3 of the customer's locations, and the other 2 are served via ILEC special access. To get those 2 special access locations on anyone's fiber
, you (and your customer) have to physically be present to: 1) allow physical access/wiring by the new access vendor, and 2) configure/test the customer's new service. Also, to mitigate the consequences of any service disruption, this usually happens at 3:00 in the morning, preferably on a weekend.
If the worst happens, the business customer could temporarily lose service, lose business, or even end up causing their IT guy to turn into the Michael Douglas character from Falling Down
. The risk varies, but it's always there, and that's without the nastier risk of . . . competition. Customers Love New Fiber Facilities
. Physical grooms are hard on carriers, but customers love how a groom just "wakes them up!" You see, the retail business market works kind of like Chairman Wheeler imagined the mass market for broadband Internet service to work--at least in the sense that business telecom contracts really do have high termination penalties. See, e.g.
small business customer complaints to the BBB about tw Telecom. Early termination penalties--after the original contract term--may even promote
consumer inertia. But, things change when the service provider wants to change the customer's physical service configuration.
In fact, nothing disrupts consumer inertia like the customer spending a lot of time on the phone with their current supplier (as a customer might do to prepare for a coordinated service cutover). In fact, since the CLEC is only coordinating with the customer because it has alternatives
, it's only a matter of time before the customer starts thinking the same thing.
So, referring back to our previous example, let's say you're the CLEC and have been serving this customer for 7 years. And, let's say that the customer has had no disruptions/complaints in that 7 years. You've been sending out bills and they've been sending out checks; it's every carrier's "fairy tale" customer relationship!
Then, you try to do something nice by putting the customer's special access locations onto competitive fiber, and what happens? The customer's eye starts wandering, suddenly nothing in your contract is good enough for them anymore, you become clingy, and, before you know it . . . the "fairy tale" unravels in tears and bitter rancor?!
Well, it's not always that bad. But, at best, if you want to keep the customer, you're probably going to have to lower their price, and stop coming home drunk (or the telecom equivalent). So it's kind of easy to see--from the CLEC's point of view--why, if a customer's service was initiated using ILEC special access, they would need a really good reason
to take the customer off that service.
* * *
Some carriers are lobbying for the blanket extension/expansion of special access regulation, because this service fits comfortably with the network architecture they decided on
15-20 years ago. But, Chairman Wheeler recognizes the limiting effects of inertia on retail consumers, and he knows better than to simply assume that the outcome favored by service providers is also the best outcome for their customers. If the effect of extending special access regulation is to keep retail customers believing that their choices are no different than "the day before they had their service installed" many years ago, do these carriers really believe the FCC will think this is the best choice outcome for consumers?
September 24, 2015 11:10 AM
I was troubled to see the FCC, in its Technology Transitions Order
, tell ILECs that they would not get the full benefit of their new fiber deployments until the Commission concludes its "review" of competition in the "special access market." Order
, paras. 101-143. Then, last Thursday, the FCC announced
that it had taken a "major step" in its review of competition in the special access "market" by making its collected data available to the parties. And, that made me feel a lot better. (just kidding!)
The FCC should
be moving forward with its review, if only because it's been 14 years since AT&T first petitioned the FCC to revisit its 1999 Pricing Flexibility Rules
. However, the fact that the FCC has not, more recently, focused on the threshold question of whether ILEC special access service is even a distinct "relevant market" should give the public doubts about how quickly this matter will conclude.
You see, the FCC can never justify economic regulation for the benefit of "consumers" if the regulation does not apply throughout the entirety of a rationally-defined market. For example, last September, Chairman Wheeler explained in a speech
that he believed cable to be dominant over the most important part of the consumer broadband market (25Mbps and above), yet the FCC's Open Internet rules
applied much more broadly. Likewise, the last time the FCC made rules
affecting ILEC special access, point-to-point data transmission was only widely available from the ILEC.
As a rational matter, unless the Commission's rules cover (at least the majority of) an entire relevant market, its rules cannot possibly provide benefits to consumers in that market. Here's why it's doubtful that "ILEC special access" services constitute a relevant product market in most parts of the country. It's Not a Market If Similarly-Situated Customers Don't Use It
Several years ago, the FCC had a "forum
" on special access, and you know what? Everyone was old! And, so are the companies and carriers that buy a lot of ILEC special access. The next time you see a story about special access, look at the age of the companies complaining. I guarantee you that they all started before 2000.
Why aren't there any "young" companies complaining about special access? Well, probably for the same reason there's no young Bingo players: it's not that fun, and younger gamblers had better alternatives when they picked up the habit.Bandwidth Intensive Customers Don't Need ILEC Special Access
. If this isn't obvious, just look at the blog
where I explained why Google (and other content delivery companies) took Netflix's "interconnection service" candy at the 11th hour of the net neutrality proceeding. Netflix was trying to obtain--through regulatory pan-handling--the same benefits that these companies had invested so much capital to create through their own networks.
The appendix at the end of the blog
shows network investment by companies that were new enough to not need special access, but yet old enough to have purchased high-bandwidth transmission capacity at "rock bottom" prices in the wake of the 2002 telecom meltdown. These companies would never have invested that kind of money to build their own networks if they were destined to be dependent on ILEC special access. Small/Medium Retail Customers Have Non-Special-Access Competitive Alternatives
One might argue that it's unfair to just look at the most bandwidth-intensive customers, because CLECs often rely on special access to serve fairly small (in terms of number of locations) business customers. I couldn't agree more. That's why it was interesting that just last week, Comcast Business Services announced
that they are able to serve multi-location business customers throughout the country through wholesale agreements they have struck with other large regional incumbent cable companies.
While Comcast's announcement focused on the fact that it could now (with out-of-region wholesale agreements) serve large national multi-location customers, the more interesting point was that it's in-region business unit (small/medium customers) has been the fastest growing part of its business for the last several years. Similarly, the success of "bring your own access," web-based business providers, like RingCentral
is further testament to the fact that small and medium business customers generally do have choices for competitive phone service--regardless of whether the customer's existing CLEC provider can use these substitutes as wholesale inputs for their
The bottom line is that it's not a "market" if not everyone needs it--then it's just a brand. But, even old customers of old brands can find it in themselves to switch brands . . . It's Not a Market If There Are Substitutes
You know what's interesting if you compare who filed comments in this proceeding 10 years ago with the companies that are still active now? It's who's missing. Any guesses? Hint: what's different between these two?
No matter what your lyin' eyes are telling you, these are not a "before and after" picture of the same guy. One is T-Mobile Chairman John Legere (before he became a hippie), and the other is John Legere look-alike Christopher Walken.
When the FCC kicked off its special access review, in 2005, T-Mobile filed essentially the same special access comments
as Sprint. But, after the introduction of the iPhone in 2007, it became clear (to everyone not named Sprint) that mobile data was the future of wireless, and bandwidth constrained cell-sites would not satisfy, or attract, customers for long.
Hence, T-Mobile took its first major step in quitting special access in the Fall of 2008, when it named
6 new vendors of advanced fiber backhaul solutions. By February of 2010, it was reported
that T-Mobile had replaced copper backhaul with fiber in 7% of its towers, with plans to raise that number to 25% of its towers by the end of 2010. Finally, in August of 2012, T-Mobile announced
that it had upgraded all of its cell sites to advanced backhaul services, 95% of which were served by fiber.
The T-Mobile example is indeed dramatic. But, just as T-Mobile switched tens of thousands of locations to fiber, there are other successful wireless competitors that entered the market after T-Mobile, like Cricket and Metro PCS (acquired by AT&T and T-Mobile, respectively), that never
used ILEC special access (or at least never complained about it to the FCC).
* * *
Some CLECs have pointed out that there are always going to be some significant number of buildings that will only be accessible via ILEC facilities. But, this fact does not make those locations a "market," because, there is no evidence that the ILECs price services to these locations any differently than they do for the bulk of their customers that do have access to competitive alternatives.
Thus, the FCC cannot rationally conclude that there is a separate "market" for a subset of an ILEC's customers (that the ILEC does not treat differently) for a service that not all of the ILEC's competitors, or retail customers, need to use. And this is why this proceeding will not conclude anytime soon.
April 19, 2013 9:54 AM
In my earlier post
on Susan Crawford's Captive Audience, I concluded by noting that some of the most interesting questions raised by the book are not actually discussed, or even articulated. The questions raised all relate to how Professor Crawford explains that Comcast, as the dominant incumbent provider of subscription television service, has used (and, she predicts, will continue to use) sports programming to maintain its current market dominance in subscription TV, and possibly transfer some of this market power into Internet content. The Comcast/NBCU Merger
Crawford weaves together a compelling story about Comcast's past anticompetitive behavior toward competitive subscription video providers, like RCN and Verizon. Comcast's pre-NBCU exclusionary behavior was also predicated on vertical integration with regional sports networks (RSNs). The acquisition of the NBC broadcast network, she adds, will enable Comcast to purchase even more sports content in the future and extend its pattern of anticompetitive behavior. Therefore, she speculates that, with the addition of the NBCU cable channels Comcast will have other, non-sports tools with which to weaken, or exclude, video competitors.
This is where Professor Crawford leaves us, but is this it? Crawford expresses regret at the failures of the FCC and the Antitrust Division to protect consumers in the context of this merger. Her disappointment is understandable, but it is also crying over spilt milk.
For Professor Crawford, the only hope would be a regulatory re-write in order to separate content ownership from cable/broadband distribution. But, if RSNs are the source of Comcast's power over competition, then Comcast obtains this power as a result of an agreement
with the sports team or a league. Agreements that "unreasonably" restrain trade are always a violation of Section 1 of the Sherman Act
. Antitrust, Sports and Broadcast Television
All professional sports leagues get some limited antitrust exemptions to allow their teams to cooperate for reasons that are integral to producing their product. For example, Congress passed the Sports Broadcasting Act of 1961
to allow professional sports leagues to have antitrust immunity in negotiating television contracts with broadcast networks (not cable, satellite, or RS networks).
The motivation for this exemption was to allow the leagues to set what were considered commercially reasonable blackout policies in order to protect the live gate revenues of home teams. In order to protect the home teams' ability to continue to maximize ticket sales, the league believed that it had to prevent other individual teams from striking their own bargains with broadcasters that would allow other games to be broadcast in competition with the home teams' game.
What is interesting about the Sports Broadcasting Act is that, with respect to broadcasters, negotiating a "television contract" was not fraught with much competitive peril. No matter who won the broadcast rights, every television owner could still watch every broadcaster's channel. Would Congress have still passed this law if the exemption gave the league and the network owner the power to harm consumers or other networks?
This is the situation Crawford describes with Comcast and the RSNs. They make deals with teams or leagues for the "exclusive" rights to games--but not just the exclusive right to televise games to their customers on their systems. No, the RSN is buying an "exclusive" for an entire market area, and can therefore decide on what, if any, terms competitors and other incumbent cable operators will be able to distribute these games to their customers. Are the leagues using contracts with RSNs to restrain trade?
A Second Chance for the Government?
Yes, of course they are. This was the recent conclusion of a federal district court judge in Manhattan in ruling that allows class action plaintiffs to move forward to discovery on their antitrust complaints against the NHL, MLB, Comcast, DirecTV, and several RSNs. In a 53 page opinion
the court explains that plaintiffs' complaints make a "plausible" showing that the defendants have violated the antitrust laws through distribution agreements that amount to territorial market allocations that unreasonably restrain competition.
Restrain trade? moi
Note, however, that the counts in these complaints do not allege harm to competition and competitors, the harm on which Professor Crawford is focused. But this does not mean that these antitrust complaints cannot succeed, they just haven't been brought. In these two cases (joined as Laumann v. NHL, et al.
) the class action plaintiffs are consumers (viewers) of the NHL, MLB, and of Comcast. See plaintiff's complaint against MLB here
The plaintiffs contend that they have been harmed as the result of an elaborate territorial allocation scheme devised by MLB and the NHL, and enforced through agreements with the RSNs, who understand that none will attempt to compete outside of its specific service territory. These agreements prevent consumers from buying out-of-market games on anything less than an "all or nothing" basis, and the leagues have agreed to protect the RSNs from competition so that "in market" games are not available, either online or on any other cable/satellite channel, at any price.
Contrast these professional sports RSN agreements with the NCAA agreements, which--as a result of the NCAA's prior antitrust violations
--do not mandate exclusivity. Thus, if a local channel (like UHF channel 20 here in the DC area) buys the rights to broadcast Maryland Terrapins basketball games, their broadcast will still air even though the same game might also be purchased by a national network like ESPN.
While the plaintiffs in the Laumann
case have won the ability to move to discovery and a trial, they probably won't, because Comcast, the other RSNs, and the leagues have every incentive to write big checks to the plaintiffs in order to avoid the "NCAA" precedent. But, the success of these class action suits may well embolden other antitrust enforcers, like state attorneys general, or even the Department of Justice, to bring their own actions. So perhaps consumers can avoid much of the long-term "captivity" Professor Crawford predicts.