Zero Rating, Programming Discrimination Seen as Key AT&T/TW Issues

“This case raises obvious concerns about whether AT&T would have the incentive and ability to harm consumers if it were permitted to acquire Time Warner," Public Knowledge Senior Staff Attorney John Bergmayer said in a statement. House Commerce Committee member Tony Cardenas, D-Calif., who has pushed on Dodgers carriage issues in the Los Angeles area (see 1609020037), called the DOJ allegations "troubling." The Dodgers and FCC didn't comment.

Even if the FCC doesn't have an oversight role in the deal review, zero rating and program access/program discrimination issues also will be core to what DOJ looks at, a commission official told us. But FCC oversight raises the likelihood of conditions not specific to the transaction, the official said. The agency's approval of Charter's buy of TWC and Bright House Networks contained non-deal specific requirements (see 1605100050).

Aside from one broadcast TV license for a station managed by a third party, TW has "a fair number ... of licenses that are essentially operational," and the company is reviewing them to see which if any will need to be transferred to AT&T "and which could be relinquished," General Counsel Paul Cappuccio said during the company's Q3 earnings call Wednesday. There have been questions whether the FCC would have any regulatory oversight of AT&T/TW due to license transfer issues (see 1610260022).

There is political pressure to get the FCC involved because of its tendency to use the transactions process for setting conditions, said Phoenix Center for Advanced Legal and Economic Public Policy President Lawrence Spiwak in an interview. There's interest in addressing zero rating and "typical vertical integration issues" like programming discrimination, he said. It isn't clear what AT&T's and TW's theory of their argument to combine is, or also how DOJ might view it, added Spiwak.

Allegations

By spearheading the sharing of information with other MVPDs, DirecTV "corrupted the Dodgers Channel carriage negotiations and the competitive process that the Sherman Act protects," DOJ said in its suit filed Wednesday in U.S. District Court in Los Angeles against AT&T and DirecTV. The complaint said DirecTV Chief Content Officer Daniel York swapped information with Cox Communications, Charter Communications and AT&T about SportsNet LA carriage plans, aiming to reduce fear that competitors would carry the channel and giving the MVPDs greater leverage in their negotiations with the programmer.

The complaint cites voicemails left with York and texts between York and his counterparts at other MVPDs. Those private communications, plus some public communications, made clear to York and other executives they likely wouldn't lose subscribers to each other while waiting to carry the Dodgers channel, DOJ said.

The case alleges three Sherman Act violations by DirecTV and asks for a permanent injunction stopping AT&T and DirecTV from sharing nonpublic information about negotiation position or strategy about video programming with other MVPDs when any of those pay-TV providers are in negotiations. It also asks that AT&T/DirecTV be required to monitor communications between York and other executives involved in information sharing -- as well as any future replacements -- and their counterparts at horizontal competitors, and periodically report those conversations to DOJ. It asks that AT&T/DirecTV be required to implement a training and compliance program.

Reaction

“We respect the DOJ’s important role in protecting consumers, but in this case, which occurred before AT&T’s acquisition of DirecTV, we see the facts differently," AT&T said. "The reason why no other major TV provider chose to carry this content was that no one wanted to force all of their customers to pay the inflated prices that Time Warner Cable was demanding for a channel devoted solely to LA Dodgers baseball. We make our carriage decisions independently, legally and only after thorough negotiations with the content owner. We look forward to presenting these facts in court.”

“Although thorough enforcement uncovered evidence of wrongdoing in this instance, we should not allow further consolidation that invites this type of behavior across the entire market," Bergmayer said. He said the suit shows deal conditions can be tough to enforce. "Behavioral merger conditions may be so difficult to enforce that the best path is for the Department of Justice to block deals that would harm competition.” Parents TV Council President Tim Winter said that “the simple solution to this mess is to allow those video subscribers who want to purchase the Dodgers network the ability to do so. End of story. But time and again, the greedy cable cabal forces carriage of channels that consumers may not want to watch -- or pay for. This case is emblematic of what’s currently wrong with the Pay-TV industry, and we hope that this lawsuit paves the way for more consumer choice.”

Given the possibility of New AT&T using its content to the advantage of its own distribution platforms or its distribution reach to advantage its TW content, "this is how zero rating in such a large, vertically integrated merger or company plays out," Free Press Matt Wood emailed us. "Because it's self-dealing by paying itself for sponsored data ... it can charge rates that are superficially nondiscriminatory but actually unaffordable for rival content providers.”

Akin to net neutrality and interconnection matters being key considerations in Comcast's buy of NBCUniversal and the cable operator's attempt to buy Time Warner Cable, AT&T/TW will involve zero rating, said Doug Brake, Information Technology and Innovation Foundation telco policy analyst. Some wireless providers have zero-rating services, but AT&T is "looking at something a little more aggressive" that would let it compete not just with wireless but also cable, and is looking to use TW programming brands as an anchor, he said. Treatment of content also likely will be a big issue, Brake said. "The wildcard is really the politics of it all -- to what extent it becomes a political hot potato.”

Criticism of AT&T/TW is growing. Public interest groups sent a letter to Hillary Clinton and Donald Trump Wednesday, urging the presidential front-runners to reject the transaction as "runaway consolidation" and asking whoever is elected "to redress the harms caused by increasing corporate and monopoly power over all aspects of American life." Signatories included 18 Million Rising, the Alliance for Community Media, Color of Change, Common Cause, Credo Action, Demand Progress, Fight for the Future, Free Press, Future of Music Coalition, the Greenlining Institute, Media Alliance, New America's Open Technology Institute, Presente.org, RootsAction and Stop the Cap, plus Barry Lynn, New America’s Open Markets Program director.