Posts Tagged DISH

Program Access Reform at the FCC: Are Exclusive Programming Deals a Good Thing?

Last week, the FCC decided not to extend certain provisions of the “program access” protections of the 1992 Cable Act. Reading the popular press gives one the false impression that the entire program-access regime was taken apart. In reality, the ban on exclusive distribution arrangements between cable operators and cable networks will be lifted, while other protections for rival distributors will remain in force.

Although the FCC’s Sunset Order suggests that lifting the ban will mostly affect cable-affiliated networks, those networks are generally distributed by their affiliated cable owner without a contract. There is no reason to add an exclusivity provision to a contract that does not exist.

Accordingly, permitting exclusive contracts likely will have a greater impact on independent networks (such as Disney Channel), which are distributed pursuant to a contract. Under the old rules, a cable operator could not tell an independent network: “I will carry you only if you agree not to deal with DISH Network, DirecTV, Verizon, and AT&T.” With the ban on exclusive agreements lifted, a cable operator may make such a take-it-or-leave-it offer.

To ensure access to newly exclusive programming, the FCC will rely on a case-by-case review of any complaints brought by distribution rivals. This ex post approach to adjudicating access disputes is similar to the one used by the Commission for “program carriage” complaints, in which an independent cable network must persuade the agency to permit a complaint to be heard by an administrative law judge. In contrast, the case-by-case approach embraced in the Sunset Order is not consistent with the ex ante prohibition against discriminatory contracting by broadband network owners in the Commission’s Open Internet Order of 2010. When it comes to handling discrimination, the Commission is anything but consistent.

In the Sunset Order, the FCC gave special treatment to cable-affiliated sports programming, often carried on regional sports networks (RSNs). In particular, the FCC established a “rebuttable presumption” that an exclusive contract involving a cable-affiliated RSN violates the Cable Act. Because sports programming is one of the few types of “must-have” programming, this exemption implies that the competitive balance among cable operators and their competitors may not be altered significantly. This is not to say that non-sports programming is meaningless—as the FCC recognized in its Comcast-NBCU Order, the refusal to supply a collection of non-sports programming could impair a rival distributor. But exempting sports programming takes much of the bite out of the rule change.

In addition to effectively exempting the most likely basis for a program access dispute, the Sunset Order makes clear that a distribution rival still can bring a complaint under other sections of the Cable Act. For example, a rival can allege “undue influence” under Section 628(c)(2)(A); discrimination under Section 628(c)(2)(B); or a “selective refusal to deal” under Section 628(c)(2)(B). In other words, the FCC removed one of several ways a cable operator can violate the Cable Act. The agency is still watching.

The FCC also pointed out that approximately 30 cable-affiliated, national networks and 14 cable-affiliated RSNs are subject to program-access merger conditions adopted in the Comcast-NBCU Order until January 2018. These conditions require Comcast to make these affiliated networks available to competitors, even after the expiration of the exclusive contract prohibition. Because these networks account for a significant share (about one third) of all cable-affiliated programming, the effect of removing the exclusivity ban will be further diminished.

The choice between an ex ante prohibition of certain conduct and an ex post, case-by-case review of complaints turns on the potential for efficiency justifications. In reaching its decision, the Commission noted one potential procompetitive benefit of permitting exclusive deals—ostensibly, to promote investment in new programming. While promoting investment in new programming is important (notwithstanding the fact that there are literally hundreds of cable networks, many of which sprouted up during the exclusivity ban), so too is promoting investment in rival distribution networks. With 55 percent of all U.S. households beholden to a single, fixed-line provider of broadband access (mostly cable modem service), the Commission should consider how each of its rules affects broadband investment. Alas, the agency disposed of this consideration in a single paragraph in the Sunset Order, arguing that the case-by-case approach was sufficient to protect the investment incentives of broadband operators.

It is no accident that the relaxation of the exclusivity ban was opposed by Google, Verizon, and AT&T—each of whom is deploying broadband networks (of both the fixed and mobile variety) in competition with incumbent cable operators.  If these rival networks cannot secure access to cable programming, then convincing a cable customer to “cut the cord” will be that much harder. And if rivals cannot reach a certain level of penetration, then their investments will not generate positive returns; if that happens, we won’t see as much broadband investment as we hoped for.

To the extent that the Sunset Order is a harbinger of the FCC’s newfound embrace of case-by-case adjudication of discriminatory conduct, then it is a good thing. To ensure that 4G network operators or Google do not lose their appetite to invest in broadband networks, however, the FCC must be vigilant in enforcing the new rules.

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AT&T/T-Mobile RIP

Yesterday, AT&T announced it was halting its plan to acquire T-Mobile. Presumably AT&T did not think it could prevail in defending the merger in two places simultaneously—one before a federal district court judge (to defend against the DOJ’s case) and another before an administrative law judge (to defend against the FCC’s case). Staff at both agencies appeared intractable in their opposition. AT&T’s option of defending cases sequentially, first against the DOJ then against the FCC, was removed by the DOJ’s threat to withdraw its complaint unless AT&T re-submit its merger application to the FCC. The FCC rarely makes a major license-transfer decision without the green light from the DOJ on antitrust issues. Instead, the FCC typically piles on conditions to transfer value created by the merger to complaining parties after the DOJ has approved a merger. Prevailing first against the DOJ would have rendered the FCC’s opposition moot.

The FCC’s case against the merger was weak. I have already blogged about the FCC’s Staff Report, but one point is worth revisiting as we digest the fate of T-Mobile’s spectrum: The FCC placed a huge bet on the cable companies’ breathing life into a floundering firm. In particular, the Staff Report cited a prospective wholesale arrangement between Cablevision and T-Mobile as evidence that some alternative suitor—whose name did not rhyme with “Amy and tea” or “her eyes on”—could preserve the number of actual competitors in the marketplace. However, within days of the FCC’s placing its bet on the cable industry, Verizon announced its intention to gobble up the spectrum of Comcast, Time Warner, and Bright House. Over the weekend, Verizon declared its purchase of spectrum from Cox.  To be fair, Verizon’s acquisition does not preclude T-Mobile and Cablevision from entering into some spectrum-sharing arrangement; let’s not hold our breath.

This episode highlights the danger of regulators’ industrial engineering: The wireless marketplace is so dynamic that a seemingly reasonable bet by an agency was revealed to be a stunning loser in just a matter of days. By virtue of AT&T’s “winning the auction” for T-Mobile’s assets—Deutsche Telekom, T-Mobile’s parent, is leaving the American wireless industry one way or another—the marketplace selected the most efficient suitor for T-Mobile. If the cable companies or some other suitor were interested in entering the wireless industry, then presumably they would have stepped forward when T-Mobile was still on the open market.

Can you blame the cable companies for their lack of interest in wireless? Who wants to enter an industry with declining prices that requires billions in network investment that cannot be re-deployed elsewhere in the event of a loss? When asked what Deutsche Telekom plans to do with its U.S. assets now that the AT&T deal has unraveled, a company spokesman said: “There’s no Plan B. We’re back at the starting point.” Such gloom is hard to reconcile with the FCC’s belief that a viable suitor is lurking in the background.

Short of Google’s or DISH Network’s or some non-communications giant’s swooping down in the coming days, the net costs of the FCC’s risky intervention will begin to mount. The ostensible benefits of intervention were to prevent a price increase and to preserve the cable companies’ play on T-Mobile’s spectrum. The second benefit has evaporated and the first benefit was never proven in the FCC’s Staff Report. On the cost side of the ledger, AT&T’s customers will soon experience increased congestion as their demand for wireless video and other bandwidth-intensive applications outstrip the capacity of AT&T’s network. And T-Mobile’s customers will never get to experience 4G in all its glory. (Deutsche Telekom has little incentive to upgrade a network it plans to sell.) The FCC has certainly capped AT&T’s spectrum holdings in place, but has the agency advanced the public interest?

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