FCC's Secret Meetings Raise Significant Process Concerns

A little-noticed article in the Wall Street Journal over Labor Day Weekend concerning the proposed Comcast-Time Warner Cable merger caught my eye, not only because the article obviously concerns an important matter of communications policy, but also because it raises questions regarding a matter of proper administrative agency process. 

In the online version, the article is titled, “Comcast Targeted by Entertainment Giants.” This presages the article’s focus on the substantive communications policy matter. Along with my colleague, Seth Cooper, I filed public comments in the FCC’s proceeding that set forth our views concerning the proper way for the FCC to consider the merger proposal. You can read our comments, and I don’t intend to discuss the substance of the merger proposal here.  

Instead, what I want to focus on is the matter of proper agency process. The article’s subtitle says a lot about my process concern: “FCC Encourages Media Companies to Provide Confidential Complaints on Time Warner Cable Purchase.” According to the WSJ, the FCC “is encouraging those big companies to offer feedback confidentially, people familiar with the matter say.” 

In my decades-long experience with FCC matters, it is fairly unusual, if not unprecedented, for the FCC to take the initiative in encouraging confidential complaints in the context of an on-the-record merger review proceeding. The fact that it is doing so here caught my “administrative law” eye. (As a former Chair of the American Bar Association’s Section of Administrative Law and Regulatory Practice, a current member of the Administrative Conference of the United States, and a current Fellow at the National Academy of Public Administration, I do have such an “administrative law” eye. But, of course, I am speaking here only for myself.) 

The theory spun out in the WSJ article is that the so-called “Entertainment Giants” may be too intimidated to put whatever concerns they may have about the merger on the public record. Unless these companies are able to meet with Commission officials on a confidential basis, so the story goes, they may not present their concerns at all because they fear that they may be subject to retribution by Comcast. 

I can follow the theory, but nevertheless I do question the use of secret meetings in the context of the FCC’s transaction review proceedings. The practice of conducting off-the-record meetings raises questions of fundamental fairness that go to the integrity of the agency’s decision-making process. This is because no one –including Comcast and Time Warner Cable, the parties most directly affected – is in a position to rebut claims made by the parties during the confidential meetings. 

In administrative law terms, the FCC’s merger review proceeding – a proceeding in which the FCC is considering applications to approve the transfer of specific spectrum licenses and other specific authorizations – is an adjudicatory proceeding affecting the legal rights of the parties to the applications. In most cases, adjudicatory proceedings are “restricted” proceedings. This means that ex parte, or off-the-record, contacts between interested parties and Commission decision-making officials are not allowed. In restricted proceedings, all communications between interested parties and FCC officials must be on-the-record. 

But in certain adjudicatory proceedings that may have significant public policy implications beyond the rights of the immediately affected parties, the FCC may invoke what it calls a “permit-but-disclose” process. The agency typically designates major merger reviews “permit-but-disclose” proceedings under Section 1.1206(b) of its rules, and it did so in a public notice in this case. As the name implies, in a “permit-but-disclose” proceeding, an interested party may make an ex parte presentation to Commission decision-making personnel, as long as the person promptly places in the public record the substance of the presentation.

The “permit-but-disclose” process allows interested parties to present their views to Commission officials considering the transaction, while ensuring, at the same time, that the substance of those views is placed in the record so that other interested parties, including the applicants seeking approval of the transaction, have notice of the presentation and an opportunity to respond.

If the Wall Street Journal reporting is accurate, and in fact the FCC is deviating from the “permit-but-disclose” practice in the case of the Comcast-TWC merger proceeding, then I have concerns. Providing fair notice and an opportunity to respond are fundamental elements of due process, even in a constitutional sense. A “permit-but-non-disclose” process, which by definition lacks fair notice and an opportunity to respond, is problematic from the perspective of proper conduct of an adjudicatory proceeding.

Now, I understand that perhaps in this instance the FCC may be invoking a further exception to the restricted proceeding requirements that otherwise apply to adjudicatory matters. Section 1.1204(a)(9) of the Commission’s rules provides that the Commission may allow a secret presentation to be made “to protect an individual from the possibility of reprisal, or [if] there is a reasonable expectation that disclosure would endanger the life or physical safety of an individual.” I understand that this provision may have a role to play as a “safety valve” in very rare situations, including when life or limb may be threatened.

Despite some of the exaggerated and unhelpful heated rhetoric bandied about regarding so-called “media giants” – whether they be cable operators like Comcast and Time Warner Cable on the one hand or content programmers on the other – no one seriously entertains the notion that anyone’s life or physical safety is threatened by on-the-record participation in the merger proceeding. So, perhaps agency officials are reading “reprisal” in the sense of an interested party’s possible fears that it might not be treated as well as it otherwise would like in a business negotiation if it expresses concerns about the proposed merger.

Well, of course. It is understandable that one business “giant” (or even little giant) might prefer not to tick off another by expressing concerns in a public proceeding. But this worry, such as it is, must be balanced by concerns about maintaining the integrity of the agency’s administrative process. I don’t know what is said in the secret meetings – well, that’s obvious – but, without knowing more, my sense is that here the balance tips in favor of putting the substance of the claims on the public record. After all, remedies are available if anticompetitive retaliatory conduct is proven, and they will remain available whether or not the Comcast-TWC merger is approved.

Finally, I understand that the Department of Justice, in investigating proposed mergers, conducts secret meetings just like the FCC apparently is conducting in this instance. I don’t know for sure, but I suspect that DOJ is conducting confidential meetings with some of the very same parties with whom FCC officials are meeting. To some extent this just serves to highlight the duplication of effort, in many instances unnecessary duplication of effort, when both DOJ and the FCC investigate the same merger.

But in a more fundamental sense, DOJ’s conduct of confidential meetings just serves to highlight my concern about the FCC’s process. DOJ, an executive branch antitrust enforcement agency, presumably is investigating whatever competitive concerns it may have about the proposed merger, including those brought to its attention by competitors of Comcast and TWC and those who deal with them. But, ultimately, if DOJ concludes the merger presents competitive concerns, it must either file a complaint in court seeking to block or condition it. This would begin an on-the-record process in federal court that will be conducted in full public view.

In the case of the FCC, ultimately it will adopt a public order regarding the applications seeking transfer of specific licenses. But the substance of the secret meetings will never be put on the public record before this official action is taken. Comcast and Time Warner Cable most likely won’t even know who met with whom, and they won’t have an opportunity to respond.

There may be more than I know as to why the FCC is proceeding in the unusual fashion it is. But based on what I know, I think this is a problematic way for the Commission, acting in its quasi-judicial capacity, to proceed in an adjudicatory proceeding.

Alexander Bickel, the prominent constitutional law scholar, wrote in his 1975 book, The Morality of Consent, that "the highest form of morality almost always is the morality of process." I share Professor Bickel’s view regarding the importance of process.

In this case, converting a “permit-but-disclose” proceeding into a “permit-but-non-disclose” one raises significant process concerns.

The Comcast/TWC Merger Proposal: An Antitrust-Based View

Representatives from Comcast and Time Warner Cable [TWC] testified at the House Judiciary Committee hearing on May 8 defending the proposed merger of the two companies. The proposed transaction occurs at an especially interesting time, with the FCC proposing new net neutrality rules at the May 15 Open Meeting and the recent announcement that AT&T and DIRECTV are proposing to merge.

Consumer groups, some members of the media, and members of Congress on both sides of the aisle have weighed in with differing visions of the future of the Internet and paid television service if their arguments do not win the day. But amidst all the hype and rhetoric, it is important to remember that any analysis of the proposed merger should be grounded in traditional antitrust principles, that the market affected by a transaction or regulation be clearly defined, and that consumer welfare be a top consideration of any proposal.

While the proposed merger between AT&T and DIRECTV may impact the competitive assessment relevant to the Comcast/TWC proposal, and vice versa, in this piece I want to focus primarily on the testimony presented at the May 8 House Judiciary Committee hearing. At that hearing, Professor C. Scott Hemphill explained why, in his view, the merger of Comcast/TWC would not pose anticompetitive concerns. In his written testimony, Professor Hemphill considered the application of antitrust law to Internet service providers (ISPs) and video distributors:

Antitrust law has a critical role to play in preserving competition. Competition benefits the economy through low prices, efficient production, and innovative new products and services. Antitrust law accomplishes this, in relevant part, by prohibiting mergers that may “substantially . . . lessen competition” or “tend to create monopoly.” Some of the concerns raised about this merger are best framed as antitrust objections.

Professor Hemphill found that most objections to the proposed merger were based on analogies in which foreclosure threats were high—threats that he contends are not applicable to the proposed merger due to differences in the nature and structure of video and broadband markets. Mr. Hemphill elaborated in his live testimony that “there is not so much a threat of foreclosure, but an ongoing fight among powerful firms that make possible the dramatic growth of online video” and other innovations.

Allen Grunes, partner at the law firm Gorey and Gorey LLP, also grounded his testimony in antitrust law. He advanced arguments that the merger would enable input foreclosure, customer foreclosure, and harm competition based on bargaining theory. Professor Hemphill addressed each of those arguments by analyzing the effect of a merged Comcast/TWC on individual markets.

First, Professor Hemphill addressed concerns about the merged company dominating content distribution. He explained that most mergers that receive antitrust scrutiny are combinations of rivals. But Comcast and TWC are not rivals because they do not overlap in any geographic territory. As such, output markets – or the markets for products and services sold by the parties – will not be negatively affected. Consumers will still have the same choice of multichannel video programming distribution service post-merger. 

Second, he explained that antitrust concerns are not present regarding the market for video programming. Post-merger, Comcast/TWC will not acquire increased “monopsony” power, which would theoretically incentivize Comcast/TWC to artificially decrease its demand for programming to drive down the costs the company would have to pay for programming. Unlike in certain markets, like the labor market for example, where competitors can drive down wages by reducing hiring, Comcast/TWC would not be able to manipulate demand for programming by purchasing less. This is because sales of video programming do not decrease the amount of programming available for sale; Comcast and TWC do not compete for rights to a scarce resource. Programmers would still have the power to bargain for and demand the same prices for their content post-merger.

Further, in negotiations for video programming, a merged Comcast/TWC likely would not have sufficiently greater bargaining power with programmers or the ability to cause anticompetitive harm due to its enlarged subscriber base. In order to cause such harm, the merged company would have to be so large that a programmer would be unable to effectively function without Comcast/TWC’s business. The post-merger company will lack the requisite scale to pose such harm.

In their joint written testimony, Comcast CEO David Cohen and Time Warner Cable Chairman and CEO Robert Marcus confirmed that the merged company will only account for 30% percent of cable customers after it divests subscribers to Charter. As Christopher Yoo, a member of the Free State Foundation’s Board of Academic Advisors, explained, critics must overcome one “potentially insuperable obstacle” in order to argue that a company of this scale would create anticompetitive harms to video programmers:

On two occasions, the FCC attempted to institute rules prohibiting cable operators from controlling more than 30% of the nation’s multichannel video subscribers in order to protect the interests of video programmers. On both occasions, the courts invalidated the rules because the FCC’s rationale for imposing the 30% limit was arbitrary and capricious. In both cases, the court indicated that the available evidence suggested that cable operators could control much larger shares of the national market without harming video programmers, driven largely by the advent of competition from direct broadcast satellite (DBS) providers, such as DIRECTV and the Dish Network. Given that the merging parties have committed to reduce their holdings so that the resulting company will control no more than 30% of the national market, these court decisions essentially foreclose arguments that anticompetitive harms to video programmers would justify blocking the merger.

Third, Professor Hemphill found that the transaction is unlikely to lessen competition by enabling foreclosure in the market for programming or in the market for distribution. A company that is able to foreclose competition would aim to inhibit the “competitive prospects of rivals,” which would result in harm to competition, innovation, and ultimately to consumers. A merged Comcast/TWC would not have the incentive or the ability to undermine its rivals’ ability to compete.

Professor Hemphill explained that the merged company would not likely withhold programming from other distributors in order to drive up prices for other MVPDs. Programmers like ESPN will still possess strong bargaining power post-merger. And, new models have emerged in the video marketplace, which enable companies to compete with content producers in new ways. For example, distributors like Netflix that produce their own online-only programming are becoming major content providers and are thriving. Netflix has garnered a larger U.S. base of video customers than Comcast and TWC combined.

Parties that oppose the merger have raised concerns that Comcast/TWC would have the incentive to foreclose the growing online video distribution [OVD] market by taking aim at companies like Netflix. Merger critics fear that the merged company would choke off the broadband Internet access on which Netflix and other OVDs rely. For instance, in a May 7 letter to Chairman Goodlatte and Ranking Congressman Conyers, Consumers Union expressed concerns about the effect approval of the Comcast/Time Warner Cable merger would have on the merged company’s market power, ability to raise prices, and its incentives to act as a “gatekeeper” for video and broadband consumers. 

These concerns are unfounded. First, online video services contribute much value to broadband Internet and harming the OVD business would drive away broadband subscribers who love their Netflix and similar services. As David Cohen and Robert Marcus stated in their joint written testimony: “We have no interest in degrading our broadband services to disadvantage OVDs or providers of other content and services. That would only harm the attractiveness of our fastest-growing business – high-speed data – and simply makes no business sense.”

Next, Comcast’s regulatory commitments made as a condition of its NBC-Universal acquisition prevent it from blocking or discriminating against any content provider. Some witnesses at the May 8 House Judiciary hearing, particularly Dave Schaeffer CEO of Internet backbone provider Cogent Communications, decried the recent Comcast-Netflix interconnection agreement as evidence of Comcast’s intent to disadvantage OVDs and providers of other content and services. However, as Professor Hemphill explains, paid peering is “a new variant of an old business practice” – paying for interconnection – and peering agreements should instead be seen as “a sign that the market is working well. The proposed merger does not change that.” Indeed, paid peering is “a means to put a price on the additional capacity demands resulting from the increased popularity of online video. It is efficient for the distributor and its end-users, considered collectively, to pay for that capacity, rather than spreading the expense among all ISP customers. Doing so better aligns use with cost and incentivizes both investment and economical use.”

The proposed Comcast/TWC merger may create some uncertainty regarding the future form of the broadband marketplace, including the PayTV market segment. But this is not a reason in and of itself for regulators to be concerned; rather the proposed merger is mainly a function of the constantly evolving marketplace.

What is clear is that the broadband marketplace, and the video segment of that market, are both fiercely competitive today. And these markets have grown and developed without unnecessary and burdensome regulatory interference. Businesses are efficiently negotiating to reach agreements that enable companies to roll out innovative distribution platforms and business models to compete for and meet the needs of consumers.

The proposed merger of Comcast/TWC is a transaction that should allow the merged company to react to new consumer behaviors and demands. Based on well-established antitrust principles, the proposed merger of Comcast/TWC likely will not harm these vibrant marketplaces.

Here Comes Another Katrina

Batten down the hatches and get out of the wind's way. Windy hyperbole, that is! 

Here comes another Katrina. 

No, thankfully, I don't mean another Hurricane Katrina. I'm only raising a warning about Katrina vanden Heuvel's op-ed regarding the proposed Comcast – Time Warner Cable merger published last Friday in the Washington Post. 

Ms. vanden Heuvel is already certain that, in her elegant language, the proposed merger doesn't pass the "smell test." When the merger was announced, I said in a statement that it would get close government scrutiny, and that it should. But I also said the assessment should be based on facts and not overheated rhetoric. By this standard, I'd say Ms. vanden Heuvel's op-ed fails the smell test. 

In what is a pretty short piece, here are some key examples of claims that are misleading or off-base: 

Ms. van Heuvel asserts the merged company would have "virtual monopoly cable control" over news and public service programming in various locales like Chicago, New York, Philadelphia, Los Angeles, and other large cities. In an era of media abundance, this statement is preposterous on its face. By referring to monopoly "cable" control, I guess Ms. vanden Heuvel supposes she is clever. But I'd say too clever by half. 

As I explained in my recent Washington Examiner piece – "Cable Merger Shows How Legacy Language Leads to Outdated Policy" – it is easy to distort proper regulatory analysis and merger reviews by resorting to legacy language that has little to do with current marketplace realities. A current reality is that Comcast and Time Warner Cable don't compete with each other in any material way, so if the two are allowed to combine, there will be no reduction in the number of marketplace competitors or consumer choice. 

Another current reality is that there is no such thing as a "cable monopoly," except possibly in a very limited number of locales, and certainly not in the cities Ms. vanden Heuvel names. This is because no matter how much Ms. vanden Heuvel and self-styled consumer advocates may proclaim otherwise, the proper market for assessing the merger's competitive impact is the broader broadband marketplace. And in this market, the "cable" companies compete with the "telephone" companies like AT&T, Verizon, CenturyLink, and Frontier; "satellite" companies like DIRECTV and DISH TV; "fiber" companies like Google Fiber, which, by the way, just announced it is proposing to serve as many as 34 more cities in addition to the three already served; and the various wireless broadband operators. These broadband competitors generally offer Internet data, video, and voice services, either bundled together in various packages or singly. 

In other words, the real competition that Comcast and Time Warner Cable confront is not from each other, but rather from other broadband providers all seeking to serve, with their differing technological platforms and service offerings, ever-changing, heterogeneous consumer demand for high-speed broadband. 

Perhaps not surprisingly, but nevertheless significantly, Ms. vanden Heuvel's op-ed never mentions AT&T, Verizon, DISH, DIRECTV, Sprint, T-Mobile, Google, or any other marketplace broadband competitor of Comcast and Time Warner Cable. 

Next, Ms. vanden Heuvel is concerned that the combined company will be able to "exact price concessions from content providers, forcing some out of business, limiting innovation and variety." She is especially worried in this regard about "discrimination" against Netflix, perhaps because she fears her Netflix subscription price will rise as quickly as a house of cards can crumble. 

Ms. vanden Heuvel shouldn't worry too much. I wonder whether she knows that little 'ol Netflix now has as many subscribers, around 30 million, as Comcast and Time Warner Cable combined, and that on any given night, one-third of the usage on the Internet in the U.S. is attributable to Netflix streaming videos. Together with Google's YouTube, these two major video providers are responsible, on average, for about 50% of Internet usage on any given night. 

Now, if Ms. vanden Heuvel were an economist, rather than a polemicist, she likely would be less inclined to worry about Netflix, which has seen the price of its stock more than double over the past year. Indeed, she might even begin to ask questions about what economists call "two-sided" pricing plans. Under two-sided pricing, Netflix, Google, and other so-called "edge" providers with large amounts of video traffic might pay more for carriage of their traffic to defray the costs incurred by the various broadband providers in building out, maintaining, and constantly upgrading their high-speed networks. After all, don't forget that the need for such constant expansion and upgrading is driven to a significant extent by the exponential increase in the amount of video traffic carried on the Internet providers' facilities – back to Netflix again. 

Anyway, Ms. vanden Heuvel need not worry too much about Netflix for another reason. Although she suggests that "net neutrality" is under assault – I confess to being an accessory to the assault! – she doesn't acknowledge that Comcast has pledged that it, along with Time Warner Cable, will continue to adhere to the net neutrality condition to which Comcast agreed when the FCC approved its merger with NBC Universal in 2011. These net neutrality prohibitions remain in effect until 2018. 

Finally, Ms. vanden Heuvel claims that consumers will suffer if the merger goes through and the U.S. "already suffers from worse Internet service, speed and affordability than other developed countries." Perhaps it may be literally true that the U.S. trails one or another "developed" country in one of the dimensions she cites. But I suspect this is another case of Ms. vanden Heuvel trying to be clever by half with her language. The reality is that the U.S. is in the very top tier of developed countries – especially given the geography and land mass size of America, say, as opposed to a South Korea or a Belgium – in deployment and adoption of broadband. Indeed, the U.S. ranks in the top tier of developed countries with respect to the delivery of high broadband speeds at affordable prices. 

As far back as 2007 I wrote a piece about what I called the "talking broadband down" crowd, which was led, vociferously, by then-FCC Commissioner Michael Copps, who despite mounting evidence to the contrary, is still pushing the same tired line. As I explained in 2007, the real aim of the "talking broadband down" crowd was to use distorted assertions that the U.S. was lagging to justify an activist  pro-regulatory agenda. That agenda has not changed. 

Without reciting here all the statistics that show U.S. leadership, I will simply refer you to Roslyn Layton's fine new report examining the broadband performance of European Union countries. Ms. Layton, a visiting fellow at the American Enterprise Institute and an Internet economist at Aalborg University in Copenhagen, Denmark, shows, by various key measures, that the EU countries now lag behind the U.S. with regard to broadband. And Ms. Layton shows that E.U. leaders recognize they are lagging behind. 

In sum, the government's review of the proposed Comcast – Time Warner Cable merger has not yet even begun, and I've said the merger deserves close scrutiny. My purpose here is not to endorse the merger, but rather to argue that such scrutiny ought to be based on facts, and not on overwrought hyperbole that bears little resemblance to current marketplace reality. 

With that purpose in mind, you are duly warned that here comes another Katrina, this one bringing windy hyperbole.