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 22, 2015 3:23 PM
Over a year ago, I explained
why the Comcast-TWC merger may present regulators with concerns. On the other hand, I also explained
that the AT&T-DirecTV merger presented consumers with nothing but opportunities. As noted
earlier this week, those opportunities have only expanded with ISP/MVPD competition and increased pressure on the programming bundle. The post-merger AT&T-DirecTV would be a tempting target that may well give some programmers an incentive to "cheat" the industry-standard distribution agreements, and finally let go of the Bundle.
But, recently, news reports
have said the FCC may require AT&T to accept "interconnection conditions" as a prerequisite to granting its approval to AT&T's acquisition of DirecTV. This would be a mistake, because it would also undermine the careful restraint the Commission showed in its (still overly-broad-for-the-purpose) Open Internet Order
In a general sense, all regulations distort economic incentives; and overly broad regulations create more profoundly-distorted incentives. Still, the FCC did show some restraint--with respect to Internet interconnection--in its ultimate Order. The Commission should decline invitations to undo its previous well-considered reservations, as it will only promote moral hazard and careless network practices by those it has been asked to "help." Regulations Shouldn't Distort Market Discipline--Lessons from the Mortgage Crisis
Overly-broad regulations--designed to minimize one market risk--can easily distort incentives in adjacent markets (or market participants) in ways that create worse problems than the one the regulation was supposed to address. This was the message of Charles Plosser, the President and CEO of the Federal Reserve Bank of Philadelphia, as he reflected on the role of prior government regulations in contributing to the mortgage crisis.
In a speech
entitled, "Responding to Economic Crises: Good Intentions, Bad Incentives, and Ugly Results
," Plosser considers why we continue to see financial crises, despite the fact that each crisis inevitably brings its own new regulations. He concludes that, it's "[b]ecause the public and our lawmakers seldom recognize that attempts to insure against bad economic outcomes can sometimes be counterproductive."
Plosser (quoting economist Allan Meltzer
) says, "Capitalism without failure is like religion without sin. It doesn't work." He explains that regulations cannot insure "all manner" of market participants against bad outcomes (or limit the ability of firms to take risks); because while such rules might reduce market volatility, they would also limit innovation and economic growth.
Plosser offers a number of examples where regulations undermined market discipline, making the overall system more vulnerable. For example, in the decades preceding the crisis, the government provided numerous implicit and explicit subsidies to financial firms (Fannie/Freddie) and others that became "too big to fail." By limiting these firm's risk, the subsidies gave lenders the impression that the government would always bail these firms out. Thus, those lending the money to these firms had little incentive to limit the amount of debt they allowed the firms to accept.
Plosser concludes that better regulations, and not simply more regulations, are the proper response to market failures. He cautions,
If regulation distorts incentives, it can create moral hazard problems whereby firms don't bear the costs they impose on others. Such regulations can have unintended consequences that interfere with achieving the regulations' goals. The Commission's Invitation to Create Moral Hazard
Of course, there aren't perfect parallels between the financial system and the Internet, but there are enough similarities to draw some useful lessons. The financial markets function best when they keep money flowing to efficient uses from efficient sources. Similarly, the Internet, especially the market for Internet interconnection, has become the world's most efficient system for the routing and delivery of data traffic.
As we have explained previously (see, here
), the market for Internet interconnection works well, and has its own market discipline, which serves consumers well. Where the financial markets efficiently reward accurate risk evaluation, the market for Internet interconnection rewards those firms that invest in the most efficient networks to provide valuable traffic routing to prospective interconnection partners.
Thus, the FCC wisely decided
not to regulate Internet interconnection as a separate "service," despite being heavily lobbied to do so by a tiny minority of firms." In its recent Open Internet Order
, the Commission, also wisely, declined to impose any specific interconnection obligations on ISPs, choosing to "rely on the regulatory backstop prohibiting common carriers from engaging in unjust and unreasonable practices." Order
Recent events have vindicated the Commission's restraint. Some of the same firms requesting regulation have, indeed, been able to reach fair terms with large ISPs. Level 3
and Comcast, as well as Cogent
and Verizon, have recently been able to reach mutually-beneficial, long-term agreements.
Unfortunately, though, a few parties, including one (Cogent) that has had found itself on the "disciplined" end of Interconnection market discipline more than any other (see, e.g.
, problems with Level 3
, going back to AOL
as a dial-up ISP), and another best known for recently gaming
the Commission's own competitive bidding system, have asked
the FCC to supplant competitive market discipline with extraordinary relief in the form of conditions to an otherwise pro-competitive merger. These parties have nothing to lose by asking for relief
However, if the FCC accedes to these demands, AT&T's broadband Internet consumers can only lose. Because, notwithstanding any evidence that AT&T is acting unjustly or unreasonably with respect to Cogent or Dish, these firms are asking the Commission to impose different terms on AT&T than other ISPs. It is, therefore, more than likely that the FCC--if it agreed to do so--would be imposing a weaker link (through non-competitive interconnection terms) into some retail customers' supply chain. This is no way to ensure consumers have the best end-to-end broadband Internet access. It will, however, ensure that the FCC gets more requests to regulate outcomes best decided by a more efficient market.
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.