Free Press Asks DOJ and FTC to Investigate Alleged Collusion to Undermine Internet TV

January 4, 2010. The Free Press (FP) and other interest groups sent letters to two U.S. antitrust regulators urging them to investigate TV Everywhere for illegal collusion. They also wrote letters urging House and Senate Committees to hold hearings.

For more on TV Everywhere, see story titled "Time Warner and Comcast Announce Principles for Online Video Programming Trial" in TLJ Daily E-Mail Alert No. 1,962, June 29, 2009. See also, January 4, 2010, statement by Kyle McSlarrow, head of the National Cable Telecommunications Association (NCTA).

The FP argument is that there is not enough competition among video distribution companies (cable, satellite and telco), and programming companies, and as a result, prices are too high, and consumers are dissatisfied. Moreover, this is unlikely to change without government regulation. But, the FP narrative continues, the government can assure more competition by invoking antitrust law to impose artificial competition through a compulsory licensing regime for video programming.

Introduction. The FP and other groups assert that "TV Everywhere rests on an illegal agreement among competitors specifically designed to undermine emerging Internet-based competition and consumer choice in video programming delivery."

They also allege that "The principle behind TV Everywhere is to prohibit a consumer from watching television programming over an Internet-based service unless the consumer is also a subscriber to a traditional MVPD. TV Everywhere is thus designed to ensure consumers cannot cancel their MVPD subscriptions and turn to competing TV services that use the Internet, Internet-connected televisions and set-top devices, which perhaps include over-the-air digital streams."

They claim that "the cartel of the old media market is using its power to replicate itself in the new media market". The FP argument focuses on access to programming, and not network management practices of broadband internet access providers.

The FP suggests "compulsory licensing" to internet TV providers as a remedy.

Kyle McSlarrow, head of the National Cable Telecommunications Association (NCTA), stated in the NCTA web site titled "Cable Tech Talk" that "The call for an ``investigation´´ of TV Everywhere has no factual or legal basis no matter how many times Free Press and its allies repeat the words ``collusion,´´ ``cartel´´ and ``illegal.´´".

These groups sent one letter to the Department of Justice's (DOJ) Antitrust Division, and another substantially identical letter to the Federal Trade Commission (FTC). They also sent a similar letter, letter, letter and letter to the leaders of the Senate Judiciary Committee (SJC), Senate Commerce Committee (SCC), House Commerce Committee (HCC), and House Judiciary Committee (HJC), respectively, urging them to hold hearings.

Also, the FP simultaneously released a paper [40 pages in PDF].

The groups which signed the letters are the FP, Public Knowledge (PK), Media Access Project (MAP), New America Foundation (NAF), Consumers Union (CU), Consumer Federation of America (CFA), and the Participatory Culture Foundation (PCF). All of these groups, except the PCF, are Washington DC based.

No providers of internet television joined in these letters. A spokesman for the FP told TLJ that some may fear retaliation.

FP's Factual Narrative. The letters to the FTC, DOJ, and Congress contain only polemic conclusions insufficient to put the agencies or Congress on notice of the factual basis for asserting illegality. In contrast, the FP paper does contain a long factual narrative.

The FP paper describes an environment with distribution companies and programming companies. The distribution companies are based upon cable (such as Comcast, Cox and Time Warner Cable), satellite (Directv and Echostar) or telco (such as Verizon and AT&T). The programming companies include broadcasters (ABC, NBC, CBS, and Fox) and non-broadcasters (including Viacom and Time Warner, a content company that recently split off from Time Warner Cable). Moreover, the paper states that both distribution and programming are concentrated, and that distribution and programming companies often hold stakes in each other.

The paper adds that there are also small programmers, and that the large distributors have "incredible power" over them.

This narrative also states that some of the large distribution companies are also large providers of broadband internet access. For example, Comcast, Time Warner Cable, and Verizon's Fios service all provide a triple play of services -- video, broadband, and digital voice service.  Moreover, it is the broadband component of this service that consumers use to obtain internet television.

The FP states that this "Online TV distribution includes a range of business models, including subscription, per-episode fees, advertiser-supported, or some combination." The technologies for connecting TV sets to the internet are also varied. The distributors include Netflix, Hulu, Miro, Vuze, Joost, Apple's iTunes, YouTube, and Amazon Video on Demand.

The FP paper states that "Cable TV distributors can attempt to use their control of Internet access in targeting online TV. All the dominant providers of high-speed Internet access are also cable TV distributors."

The paper continues that as a result of these new services and technologies, some consumers are using broadband and free over the air television, and canceling their video subscriptions. The FP states that distribution companies view this "cord cutting" as a competitive threat.

The FP elaborates: "Online TV could disrupt the cable industry's oligopoly markets, injecting long-sought competition in markets like subscription and on-demand viewing. The entry costs for building an entire network -- like the cable or phone networks, built under government-sanctioned monopolies -- or launching a satellite are very high. Because of the economics of Internet distribution, online TV distributors have low costs of entry. As a result, new competitors like Roku could enter and take some market share, while cable TV distributors will likely have to lower their cable TV prices or provide higher quality -- in short, to compete -- to the benefit of consumers. With online competition, companies like Comcast and Cox would be forced to compete nationally with one another and with programmers."

Moreover, according to the FP, existing and new entrant programmers could become direct competitors to companies like Comcast and Cox. And, all this would result in programmers lowering their prices to consumers.

This FP narrative then describes how distributors and programmers are colluding with "TV Everywhere" to undermine internet television.

The FP alleges collusion by distributors and programmers, but is short of facts. Rather, it asserts that its lack of evidence is the result of the companies' attempts "to hide their actions" and "avoid a paper trail of evidence".

The FP paper cites media accounts of sessions at cable industry conferences at which industry business models were discussed. The FP is shocked to report that these companies seek to maximize profits, and do not want to follow the failed newspaper business model of putting their content online for free.

In contrast, the FP lauds the newspaper business model.

The FP paper sites no instances of actual price fixing, market allocation, or product allocation. But, it states that there is a "plan" that "undermines new entry and competition by explicitly excluding new competitors -- notably online TV distributors".

The paper focuses on access to programming, but not network management practices. The paper does not allege that there is collusion to block consumers' access to the internet television providers. It does not allege that any distributor or programmer is individually blocking such access. Nor does it allege that there is any collusion, or individual conduct, to degrade service involving these companies, or to reduce transfer speeds by targeting protocols. (Although, the report does raise the prior FCC proceeding involving Comcast and the peer to peer Bit Torrent service.) Nor does the paper allege any illegality by triple play providers arising out of dedicating less capacity to broadband internet service, and more capacity to cable and/or voice service.

FP's Antitrust Analysis. None of the letters to the FTC, DOJ, or Congress identify which statutes have been violated. However, the FP paper asserts that there is horizontal collusion among competing distributors and programmers, and that this constitutes in violation of Section 1 of the Sherman Act, which is codified at 15 U.S.C. § 1.

This paper further asserts that there is horizontal collusion to "illegally allocate geographic and product markets regarding high-quality online TV". The argument is that the cable companies have territories that usually do not overlap, and that telcos also tend not to provide overlapping service, and that by offering internet TV they are therefore allocating the market for internet TV.

This paper further asserts that there is horizontal collusion "to set prices across the industry". The FP argument goes, for example, that a distribution company charges one price for each of its video subscribers.

This paper further asserts that there is horizontal collusion to conduct a group boycott by not "supplying content to competing online distributors".

The paper asserts that all of these are per se illegal.

FP's Proposed Remedies. As for remedies, the FP paper states that "The government could require the incumbents to license all TV Everywhere content to online competitors."

It adds that "A compulsory license requires copyright holders to license their content to all comers, setting a maximum price. This license thus ensures parity among content distributors, ending anti-competitive content-lockout by incumbents that are denying content to rival distributors, while also ensuring copyright holders are compensated for their works."

The FP paper also lists other things that the FP seeks. It states that the government should block mergers, and impose "considerable fines and other criminal penalties".

It also suggest new program access rules, and wholesale unbundling rules.

It also suggests "eliminating bundling of TV and Internet services".

It also wants to "raise awareness".

Some of these proposed remedies are not clearly stated, or not consistent with antitrust law and procedure. First, regarding compulsory licensing, the paper does not explain how the license would work, who would set prices, how prices would be set, or how enforcement would take place. The Copyright Act establishes numerous different and complex compulsory licensing regimes. The FP paper references none of these. It merely states that "The fee, however, could be set to adequately reward the content-provider".

There is also the matter of the practicality and availability of compulsory licensing as an antitrust regime, particularly a regime that would cover so many different industries, technologies, uses, and types of content. The history of judicially approved compulsory licensing is slim. There is the 1950 consent decree in the ASCAP case. There is also the reversed opinion of the Court of Appeals in the landmark Sony Betamax case -- a copyright case, not an antitrust case. The Court of Appeals held the Sony's Betamax infringed copyright, and suggested either an injunction on the sales of the machine, or payment of royalties, which resembles both an award of damages, and a compulsory license. Whatever, the Supreme Court's opinion reversed the Court of Appeals. See, Sony Corp. of America v. Universal City Studios, Inc., 464 U.S. 417 (1984).

The FTC and DOJ have economists who are expert in analyzing the competitive impact of mergers and business practices. They also have lawyers who are experts in antitrust law and litigation. Fines, divestitures, and prohibition of mergers and acquisitions are relatively short run and simple remedies that pose little enforcement difficulty for the FTC and DOJ. However, the FTC and DOJ possess almost no expertise or capacity to oversee and enforce complex mandates, such as those sought by the Free Press. Nor are the District Courts adept at overseeing industries' compliance with complex mandates. These are among the practical reasons why the FP is unlikely to obtain this sort of remedy.

The FP also seeks promulgation of rules. This is not an antitrust remedy. The appropriate procedure for seeking new program access rules, or wholesale unbundling rules, would be to petition the relevant regulatory agency, the FCC, for a rulemaking proceeding. The FP has not done this. Moreover, the FCC lack the requisite statutory authority to promulgate these rules. Hence, the more appropriate process would be to request that the Congress enact legislation directing the FCC to write rules.

The FP's request for elimination of "bundling of TV and Internet services" is not explained. It should be noted that companies that provide both broadband and video, such as Comcast, currently unbundle their triple play offerings. But, they offer discounts for subscribing to all three services. Therefore, if an antitrust argument is to be made against these companies, it would have to be based on the allegation that bundling discounts are illegal under antitrust law.

Neither the DOJ nor the FTC has yet taken this position.

The former head of the DOJ's Antitrust Division, Thomas Barnett, criticized the idea of using antitrust law to stop bundling discounts. He stated in a speech on June 4, 2008, that "there may be areas of bundled discounting and single-product loyalty discounts where any theoretical harm from above-cost discounting is beyond the practical ability of courts to remedy through antitrust litigation, much as above-cost pricing is in the context of predatory pricing." See, story titled "Barnett Addresses Sherman Section 2 Remedies" in TLJ Daily E-Mail Alert No. 1,777, June 6, 2007. However, the current head of the Antitrust Division, Christine Varney, takes a more activist approach to antitrust.

It is also questionable whether the federal judiciary would uphold any antitrust based prosecution of a cable or telco based upon its offering bundling discounts. See, September 4, 2007, opinion [58 pages in PDF] of the U.S. Court of Appeals (9thCir) in McKenzie v. PeaceHealth, and story titled "9th Circuit Rules on Application of Antitrust Law to Bundling Discounts" in TLJ Daily E-Mail Alert No. 1,634, September 5, 2007.

In sum, the FP paper lacks factual assertions to support is claims of illegal horizontal collusion, its legal arguments are grasping, and its seeks some remedies not generally available in antitrust actions.

On the other hand, the FP choose not to proceed at another agency, under a different legal theory, but where it has enjoyed success in the past.

FCC. The FP and other groups did not send a complaint or petition for rulemaking to the Federal Communications Commission (FCC) asking it to take action.

The FCC frequently conducts antitrust reviews in the context of mergers. While a few of the companies about which the FP complains are involved in ongoing mergers, most are not.

The FCC did employ some of the vocabulary of antitrust in its 2008 Comcast order, which followed a complaint filed by the FP and Public Knowledge. The FCC order found that BitTorrent presented a "competitive threat to cable operators", and Comcast's NMPs pose "significant risks of anticompetitive abuse".

However, the order in that proceeding states that the FCC relied on its 2005 policy statement [3 pages in PDF], not the Sherman Act, for both substantive law and enforcement authority. Specifically, the FCC relied upon the policy statement's provision that "consumers are entitled to run applications and use services of their choice". See also, story titled "FCC Asserts Authority to Regulate Network Management Practices" in TLJ Daily E-Mail Alert No. 1,805, Monday, August 4, 2008.

That FP/PK complaint alleged unilateral conduct involving network management practices. In contrast, the just released paper alleges horizontal collusion involving licensing of content.

But, the FP could have, but did not, assert violation of the FCC policy statement's provision that "consumers are entitled to competition among network providers, application and service providers, and content providers".

Other Viewpoints. Time Warner Cable stated in a release on January 4, 2010, that "Time Warner is committed to providing consumers who subscribe to cable, satellite, telephone or other multi-video platforms with more value for their money, by allowing them to watch their favorite shows when they want to watch them on both their TVs and over the Internet at no additional charge. That is what TV Everywhere is, and it is quite plainly beneficial for consumers. We will also continue to pursue many other ways to distribute in a safe and secure way over the Internet our content to people, whether or not they subscribe to a video service."

The Independent Film and Television Alliance (IFTA), which represents what the FP labels small programmers, filed a comment on July 29, 2009, in the FCC's proceeding titled "In the Matter of Annual Assessment of the Status of
Competition in the Market for the Delivery of Video Programming" and numbered MB Docket No. 07-269.

The FP asserts that small programmers have no power to bargain with the large distributors, and suffer as a result. The FP also asserts that its proposals will benefit these small programmers.

The IFTA complained about the current situation, including the concentration and vertical integration of the cable and content companies. The ITFA blames vertical integration, and its woes, on the FCC's removal of the Financial Interest / Syndication Rules in the 1990s.

But, IFTA also complained about the big internet television companies. For example, it suggested that "Amazon, iTunes, and other destination websites have not been able or willing to take independent programming directly from smaller companies".

The ITFA also complained about the access of independents to TV Everywhere. It stated that "Initiatives such as ``TV Everywhere´´ do not address and indeed further exacerbate the problems of lack of access and competition in video programming since the programming offered on destination sites will be the same programming of the underlying cable service."

Comcast filed reply comments [31 pages in PDF] with the FCC in this video competition proceeding on August 28, 2009, in which its described competition in online video generally (see, pages 13-16) and its TV Everywhere and VOD services (see, pages 16-18).

The NCTA's McSlarrow stated on January 4 that there is no horizontal collusion as alleged by the FP. "TV Everywhere envisions separate, bilateral agreements between one content company and one or more individual distributors. It is purely vertical in nature --  like any arrangement between a content company and a distributor.  As online video evolves, various distributors and content companies may --  and likely will --  come to widely varying bilateral arrangements."

He continued that "developing and implementing this concept isn't easy, given the vast numbers of possible participants; but calling any of this ``collusion´´ is, to be kind, strange. The fact that distribution of content requires a number of differing and competing parties to enter into a multitude of bilateral agreements is normal. Contrary to Free Press' suggestions, the antitrust laws do not prohibit, but encourage collorabation, even among competitors, that lead to innovation and new products and services for consumers."

He also wrote that the "Free Press is really complaining about the decisions content owners make as to how their content should be distributed. As it happens, many programmers rely on the subscriber-based license fees they receive from cable operators and other distributors to remain economically viable. In order to sustain that model and continue investing and creating, many content owners may want to ensure that they are compensated for the viewing or use of their programs online. There is nothing nefarious or mysterious about this: programmers invest tens of billions of dollars a year to produce high quality content; they have the right to experiment with different business models and determine how to recoup that investment in terms of distributing their content on different platforms."