November 4, 2016 11:09 AM
On Wednesday of this week (11/02), the Antitrust Division of the U.S. Department of Justice
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
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.
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.
. at 30/57.
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
May 11, 2015 11:25 AM
In its recent Net Neutrality/Broadband Reclassification Order
, the FCC justifies the need for the Order's
pervasive regulations in essentially one statement, "broadband providers (including mobile broadband providers) have the economic incentives and technical ability to engage in practices that . . . harm other network providers, edge providers, and end users." Order
¶ 78. The Commission's discussion of the ISPs' incentives/ability to harm consumers and other market participants is almost as conclusory.
The FCC appeared focused on a result that required it to presume
an uncompetitive broadband market. Supporting its premise, the FCC relies on citations from its 2010 Order
, and some gerrymandered market shares, in which it defines "markets" by arbitrary selections of speed vs. consumer demand substitution. See, e.g., Order
, n. 134. By ignoring broadband market performance, the Commission not only failed to understand that ISPs were unlikely to be the problem, but the FCC also missed a chance to conduct a more circumspect analysis of whether consumers could truly access the content of their choice online.The FCC Didn't Consider Broadband Market Performance
The FCC states that, "[b]roadband providers may seek to gain economic advantages by favoring their own or affiliated content over other third-party sources." Order
¶ 82. The Commission offers less than a handful of specific examples ISPs "act[ing] to harm the open Internet." Order
, n. 123.
Only in the Madison River example, was the ISP clearly seeking to favor its own service (long distance voice termination). It is worth noting, though, that the reason Madison River had an incentive to favor its circuit switched voice was because--as a rural ILEC--the FCC set Madison River's rates well in excess of cost
; so its incentive was created
by one FCC
regulation and then preempted by another (later) FCC regulation.
Nonetheless, the best indicator of a market is performing competitively is whether it is responding to consumer demand by adding capacity, or whether it simply raises prices and takes more profits. Broadband speeds have consistently moved higher, actually following
the Moore's Law
trajectory. And, the Commission notes, broadband capital investment reached levels in 2013 that had previously only been seen during the telecom bubble. Order
¶ 2. Moreover, connected devices, bandwidth speeds, and user adoption of streaming services has soared. Order
¶ 9. The FCC Didn't Consider the Evidence on ISP Incentives
The Commission recognizes that, "the growth of online streaming video services has spurred further evolution of the Internet." Order
at ¶ 9. But, untethered by evidence to the contrary, the FCC leaps to the [wrong] conclusion that, "these video services directly confront the video businesses of the very companies that supply them broadband access to their customers." Id
Almost a year ago, AT&T Chairman Randall Stephenson, explained why this theory didn't make sense for most ISPs. In his prepared testimony for the House and Senate Judiciary Committees about the AT&T's proposed acquisition of DirecTV, Stephenson states its motivation to acquire DirecTV is about trying to earn any profit on TV,
Today, 60 cents of every video dollar we earn goes straight to programmers, before we spend a penny to market our service, install a set top box, send a bill, or answer a customer's call. As a result, our video product is, on its own, unprofitable. Statement
of Randall Stephenson, CEO and President, AT&T Inc., before the House Judiciary Committee, June 24th 2014 at p. 3 (emphasis added). Thus, the FCC's theory--that ISPs have an incentive to prevent consumers from accessing video content online, because the ISP would prefer to sell them the same content at a loss to the ISP
--is simply untenable.
Even if the ISP does earn a profit on video, it would still not have any incentive to discourage their broadband customers from accessing online video content, unless it earns a greater profit from its video service than from its broadband service
. This is not the case for Comcast, whose broadband revenues and company profits continue to boom
, despite continued losses of video subscribers.
So, if the FCC's theory doesn't even make sense for the Prince of Darkness
, then ISPs are unlikely to be the problem. But, why don't consumers have access to more content over the Internet?Traditional Linear Content Owners Don't Have the Same Incentives As ISPs
Even though the three largest streaming video providers (Amazon, Hulu, and Netflix) have expanded their content through original programming, and consumers have embraced online streaming video, the fact is that consumers still don't have access to that many more online programming choices than they did in 2010. If you compare the most popular streaming sites in 2011
, with what's available today
, the only significant new entrants are Sling TV
and HBO Now
. Unfortunately, cord-cutting is more of a media headline
than a consumer phenomenon.
At times, the FCC has seemed to (sort of) recognize the problem. A little over a year ago, Chairman Wheeler was telling
broadcasters that he was looking out for them with strong net neutrality protections, and that they should embrace Internet distribution of their programming. Except for the few broadcast channels that are part of the Sling TV package
, the Chairman's speech fell on deaf ears. Chairman Wheeler didn't seem to appreciate that--because the FCC ensures the broadcasters fat margins
on retransmission fees (much like Madison River's terminating access margins)--they have no incentive to expand output!
Similarly, Chairman Wheeler understood that the linear content market had failed last summer, when he asked
the CEO of TWC to resolve disputes between TWC's regional sports network (RSN), which carries the Los Angeles Dodgers, and other MVPDs serving the Dodger's home television market. Because of pricing disputes, when Chairman Wheeler wrote to TWC, a large majority of Dodgers' fans--4 months into the 2014 baseball season--could still not watch the team on TV.
Chairman Wheeler probably thought he understood TWC's incentives pretty well--the company had a merger with Comcast pending before the Commission--when he asked TWC to respond in a competitive manner to consumer demand. But, RSNs have powerful economic incentives to restrict output. Thus, Chairman Wheeler was, again, mistaken about incentives. TWC's merger with Comcast has come and gone, but 70% of the Los Angeles viewing market still cannot watch
the Dodgers on TV or online. A Question of Incentives
As of Friday, Chairman Wheeler was [still] telling
cable ISPs they should "overcome their temptations" to favor their TV businesses over their broadband Internet services. Meanwhile, in an L.A. Times article
yesterday, broadcast programmers candidly noted that, despite using public spectrum to distribute their content, they plan to favor even more of their own content over third party sources
. Perhaps the Chairman was talking to the wrong group?
By now, you probably understand that I think the FCC would have been wise to spend some time thinking about whether the industries it regulates have incentives that are aligned with consumer welfare. Had the FCC thought about it, they probably didn't need to impose such pervasive regulations on ISPs. Likewise, if the FCC's rules are distorting the incentives of traditional TV programmers, then the FCC should eliminate these rules, also.
On the other hand, what if traditional linear programmers simply like their FCC incentives more than those of the competitive broadband Internet, and are simply in "harvest" mode (restricting output/raising prices in the face of a slow decline in demand)? Broadcasters aren't (usually) ISPs, so who will police them?
Certainly not the FCC. But, to be fair, neither have the DoJ or the FTC looked into the matter. However, some parties are looking out for consumers . . . and the answer may surprise you. We'll discuss further in the next post.
May 23, 2014 11:24 AM
After Sunday's announcement
that AT&T had entered into an agreement to purchase DirecTV, many parties have rushed to talk about the "media consolidation trend." The usual suspects have expressed their opposition
or express their "skepticism
." Others have applied an equally superficial analysis to come to the opposite conclusion
In order to appreciate how the Comcast/TWC merger is different from AT&T/DTV, you have to understand what the two mergers have in common. One, not-so-obvious thing the two transactions have in common is that one party in each transaction--Comcast and DirecTV--is a co-defendant in major consumer antitrust litigation
over the foreclosure of sports programming over the Internet to broadband-only consumers.
These cases are significant, because they should have a direct effect on the outcome of the Comcast-TWC merger, but will, most likely, not affect the AT&T/DTV merger. It should be noted that these cases have survived a motion to dismiss (opinion
), under the heightened Twombly
scrutiny requiring antitrust complaints to demonstrate a "plausible" (vs. merely "possible") claim that would establish an antitrust violation, before allowing antitrust plaintiffs to proceed to discovery. So, we know these cases have some merit.
Equally noteworthy, these cases are being brought by real consumers (not DC interest groups) in reaction to real behavior in the marketplace; behavior that the DoJ and FCC claimed to be fixed
by the Comcast-NBCU merger conditions. The D.C. interest groups, on the other hand, supported
the feckless merger conditions imposed by DoJ and the FCC. The Antitrust Litigation
The cases are captioned, Garber v. Office of the Commissioner of Baseball, et al
., and Laumann v. National Hockey League, et al
. I've mentioned these cases before, here
The plaintiffs are classes of consumers that buy the MLB.TV (or NHL GameCenter Live) online service either by itself or in addition to a subscription TV service. The defendants in the cases (other than the two named sports leagues) are certain individual teams and some regional sports networks owned by Comcast and DirecTV, and the TV providers themselves.
The crux of the complaints is that the sports leagues, and integrated RSN/subscription TV companies, allocate markets through what are, essentially, agreements not to compete with one another. Unlike a typical horizontal territorial allocation scheme, though, these are the result of a series of industry-wide "vertical" distribution agreements with sports leagues and the TV companies' RSNs--the success of the scheme being contingent on identical terms in all agreements.How the Agreements Work
When the RSN pays all that money
for the rights to broadcast all of a team's games, what do they get for their money?
First, the RSN gets the rights to show the games of that team on TV for the home team's "market area". This means the RSN can set the prices that other subscription TV companies in the home market area have to pay in order to give their viewers access to the games. This right is exclusive to the RSN for the market area. Thus, even though when the home team plays away games, the away team also has rights to the game, the contracts are written so that the away team will not sell its broadcasts back into another RSN's "home market."
Second, and most importantly, while the vertically-integrated RSN is technically only buying TV rights, it effectively also gets a promise that the league's online streaming provider (i.e
., MLB.TV or NHL GameCenter Live) will refuse to deal--at any price--with broadband-only customers within any teams' home market areas. (If you want to check for yourself, here's the link to the MLB.TV blackout section
.) Thus, there is some foreclosure value being offered in exchange for the ridiculously high fees being paid by cable RSNs for regional sports rights.How Does the Antitrust Litigation Affect Analysis of the Two Mergers?
Knowing this important commonality, we can try to understand how the big media mergers will change things. The Comcast/TWC merger is likely to make things worse for customers and competitors of Time Warner Cable.
According to a study, published last year by Navigant Economics
Principals, the "vertical integration premium [the relatively higher fees charged by a vertically-integrated RSN] increases significantly with the local downstream market share of the RSN's affiliated distributor." The paper isn't available for free, but you can access the presentation to the FCC staff here
So, in all likelihood, Comcast's increased share of certain markets (e.g
., New York and L.A.) could be expected to lead to increased prices for TV consumers (of any provider) in those former TWC markets. (Comcast will also increase its L.A. market share through its Charter deal
.) Nor would Comcast's accretion of TV market power be likely to change its opposition to the sports leagues making "in market" games available over the Internet.
On the other hand, AT&T's incentives would be expected to change markedly for the better, relative to a standalone DirecTV. DirecTV, only a few weeks ago, questioned
why it would even bother
creating and promoting an online video package. AT&T, though, just last month, AT&T announced
its intentions to get behind over the top content in a big way.
AT&T has different incentives than Comcast with respect to online video, because--according to the Leichtman Research
1st quarter report on broadband additions--AT&T has a much lower share of the market in terms of video-speed broadband than the cable companies. If you massage the information available from Leichtman (which groups T and VZ together), an overly optimistic approximation (which only includes Comcast and TWC in the denominator) gives AT&T and VZ less than a 40% share of video-speed broadband subscribers.
AT&T has already announced
plans to dramatically expand its very high speed broadband footprint. AT&T's successful deployment of higher broadband speeds is dependent on consumers having a reason to purchase higher capacity service. This is why AT&T will want to push--more content online--especially linear content that consumers want.
By understanding what has kept linear content--specifically, the sports programming that is so important to consumers--off the Internet, it is easy to see why broadband consumers will be better off with AT&T owning DirecTV than they are now.
March 20, 2014 11:02 AM
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.
Back at the Commission . . .
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.
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.