Commitments and Conditions in the Comcast-NBC Universal Transaction

I believe that commitments, once made, should be kept.

And I believe the FCC's transaction review process needs reforming.

These two beliefs of mine were called to mind in recent days by two events: (1) Comcast-NBC Universal's filing with the Federal Communications Commission detailing its compliance with the conditions imposed when the agency approved the combination of the two companies in January 2011; and (2) the controversy that has broken out concerning implementation of the online video distribution condition by the FCC. (I may refer to Comcast-NBC Universal here as "Comcast." Don't worry, it is just shorthand.)

With respect to the first point, even a cursory review of Comcast's compliance report indicates the company appears to have gone "above and beyond" in its efforts to comply with the FCC's conditions. Comcast's efforts, in many instances costly, regarding expansion of local news programming, children's programming, broadband deployment and adoption, carriage of new independent networks, and so forth, are impressive.

I haven't gone back over all of the FCC's lengthy approval order, and the more than twenty-five pages of fine-print conditions. And absent someone holding a gun to my head, I won't, at least not now. But it certainly appears as if Comcast has kept its commitments. Keeping commitments, once made, is commendable.

Now, as to the second point, regular readers of this space know that I have serious, long-standing concerns regarding the way the FCC reviews license transfer applications. I've written often over the years about what I see as the frequent, unprincipled abuse of the review process. Here's a Legal Times piece, "Any Volunteers," from 2000, and here's one, "Reform the Process," from the National Law Journal published in 2005. There are many other more recent pieces I've written too.

In essence, the FCC uses the vagueness of the "public interest" standard, under which it reviews transactions, to impose conditions that are not closely related to core concerns implicated by the specific transaction and which should be considered, if at all, in generic rulemaking proceedings. As decision time for the FCC draws nigh, the applicants (supplicants, really) offer up so-called "voluntary" commitments that then are adopted by the FCC as conditions in the order approving the transaction. In other words, the agency engages in "regulation by condition." Just look at the plethora of various conditions extracted in connection with approval of the Comcast-NBC Universal transaction.

Speaking of which. When the FCC was considering the Comcast-NBC Universal transaction, I published an essay, "The FCC Risks Over-Conditioning the Comcast-NBCU Merger," criticizing the online video distribution condition the Commission was considering extracting from the applicants as the price for transaction approval. I called the online condition "problematical," especially with regard to requirements that Comcast's proprietary programming assets be shared with unaffiliated entities on "non-discriminatory" terms, and that "comparable programming" be made available to online distributors at "economically equivalent prices." In my view, such mandatory sharing conditions at government-reviewed prices, in a market as effectively competitive as the video distribution market, have the effect of stifling investment in new programming assets. And conditions that depend on the exercise of broad discretion to decide whether programming is "comparable" to other programming, and to decide whether such programming is offered at "economically equivalent prices," invite government-sanctioned favoritism for some entities over others under the guise of leveling playing fields. And, importantly, such decisions examining programming for "comparableness" are constitutionally suspect as well under the First Amendment.

So, one predictable result of such a regulatory regime is the likelihood of lots of implementation disputes concerning comparable programming and equivalent prices. Comcast-NBC Universal presently is engaged in one such (preliminary) dispute with unaffiliated content programmers regarding Comcast's ability to access licensing agreements the content providers have with other video distributors. The present dispute concerns fashioning a confidentiality agreement under which the details of the licensing deals will be disclosed to Comcast so it can determine for itself the terms on which it must offer "comparable" programming.

I don't have any interest here in opining on the current dispute, except to say that such controversies, and there are likely to be many more, were all quite foreseeable. And they were avoidable, because, in the context of video marketplace competitiveness, there was no evidence – as opposed to mere supposition -- that the costs imposed by the online video condition would not outweigh its benefits. As I pointed out in the January 2011 "Over-Conditioning" piece, "the commissioners should be acutely aware of the limits of their ability to predict future marketplace developments."

Well, I can't say that since then the commissioners have become acutely aware of their limits in predicting future marketplace developments. And I can't say the FCC transaction review process has been reformed – not yet.

But I can say that it looks like Comcast-NBC Universal is meeting the commitments it made, and that's something worth noting, and saying too.  

The Tennis Channel Ruling: No Mere Foot Fault

This was no mere foot fault. A Federal Communications Commission Administrative Law Judge (ALJ) issued a decision yesterday that was far enough out of bounds that perhaps it will be a game-changer that persuades policymakers that outdated legacy communications laws and policies no longer make sense.

The ALJ ruled in favor of the Tennis Channel in its "program carriage" complaint against Comcast. In essence, the ALJ ruled that Comcast discriminated against the Tennis Channel, which is not affiliated with Comcast, by not acceding to the Tennis Channel's request that it be moved, in the midst of its contract term, to the same program tier as two of Comcast's affiliated sports channels. The ALJ finds the Tennis Channel is sufficiently similar to the Golf Channel and Versus channels that they must all be located in the same program neighborhood for Comcast to avoid running afoul of the anti-discrimination prohibitions in the agency's carriage regulations.

In today's dynamic broadband world, including the broadband video world, the FCC inflicts much marketplace damage in the name of preventing or rectifying "discrimination." Just witness last year's promulgation of net neutrality mandates. Net neutrality mandates are based on public utility-style regulation that has, at its core, a prohibition on discrimination. This discrimination regulation may have been appropriate in the monopolistic Ma Bell-era but it is not proper in today's competitive multi-platform broadband environment.

In the Tennis Channel case, the ALJ purports to be enforcing the Commission's program carriage regulations promulgated under Section 616 of the Communications Act which gives the FCC authority to prevent multichannel video programming distributors (MVPDs) like Comcast from restraining the ability of unaffiliated video program vendors from competing "fairly by discriminating."

"Fairly by discriminating." Aha. There's a lot of room for the exercise of unbridled administrative discretion encompassed in those three words.

In my "Build Back That Broadband Wall" commentary, published just last week in the Washington Times, I highlighted four examples to show how the FCC is extending, or proposing to extend, legacy analog-era regulations developed in last century's monopolistic narrowband environment into today's competitive broadband world. One example, somewhat prescient in light of the ALJ's decision, was the FCC's program carriage regulations.

Here is what I said in my commentary:

"The commission proposes to expand existing program carriage rules intended to prevent cable operators and other video programming distributors from discriminating against unaffiliated programming vendors. The existing rules, adopted in the early 1990s when cable operators still possessed market power and when vertical integration was more pronounced, no longer serve any useful purpose. Today, only two of the 25 most-viewed cable networks are wholly owned by cable operators. With two nationwide satellite television operators and a broadband telecommunications provider competing vigorously in most locales - not to mention a growing number of popular Internet video sites - cable operators lack the incentive and ability to discriminate against unaffiliated programmers. So there is a good argument the existing program carriage requirements should be eliminated, especially in light of free speech concerns raised by the government mandating carriage of particular programs. At the very least, however, the regulations should not be expanded as the commission now proposes. Contrary to the First Amendment, the expanded regulations would have the government injecting itself even further into decisions about what programming video providers must carry and where in their channel lineups such programming must appear."

To understand what is wrong with the ALJ's decision, in a very fundamental sense, please carefully consider what I wrote above – before the issuance of the ruling in favor of the Tennis Channel.

And, now also consider this:

·      In this instance, the Tennis Channel's placement in Comcast's program lineup was in accordance with a contract between the parties in which the Tennis Channel had agreed to its lineup placement. The amount of compensation negotiated under the contract was, of course, related to the agreed-upon tier placement.

·      Several other MVPDs simply made a decision not to carry the Tennis Channel at all, thus obviating any need to bargain about placement of the channel.

·      If Comcast is required to move the Tennis Channel from its present location, it almost certainly will be required, due to channel capacity limitations, to displace another program channel that Comcast has determined, based on its business judgment, either is more popular with its customers, or one that at least deserves an opportunity to try to build audience support.

·      In rendering his decision on "discrimination," the ALJ was required to make determinations concerning the similarity of the programming among program channels. It is true, I suppose, that tennis and golf are both "sports." But to make the type of determination rendered in this instance, the government regulator is required to examine the intricacies of program genres, program ratings, target audiences, and the like. This type of examination into programming decisions raises obvious free speech concerns.

So, in sum, the ALJ's decision in the Tennis Channel case was a ball hit out of bounds. The Free State Foundation's mission, proclaimed on our website, is to promote understanding of "free market, limited government, and rule of law principles." By ignoring the competition that exists in today's video marketplace, by, in effect, abrogating the negotiated contract in mid-term, and by deciding to substitute his judgment concerning the carriage and placement of programs based on an examination of the contents of the programming, the ALJ has managed to offend free market, limited government, and rule of law principles in one fell swoop.

In the not too much longer-term, taking account of today's competitive video marketplace in which cable operators, satellite operators, and telephone companies – and, increasingly, popular Internet video sites -- all compete for viewers, Congress should repeal the provision in the Communications Act authorizing the FCC to promulgate and enforce program carriage regulations.

A proper understanding of the First Amendment demands no less.
In the near-term, the FCC commissioners should reverse the ALJ's decision.

Unreasonable Tactics, Reasoned Decisionmaking, and the Rule of Law at the FCC

Over the past decade or so, the FCC's review of proposed mergers of communications companies has gotten much more unseemly as the Commission often has resorted to the practice of extracting midnight "voluntary" commitments from the merger applicants in exchange for approval of a merger. I first wrote about this unseemly practice in a March 2000 Legal Times piece entitled "Any Volunteers?" The Commission's practice of using its unbridled discretion under the vague public interest standard to force companies to engage in what I then called "the FCC's version of 'Let's Make a Deal'" denigrates the notion the agency is deciding mergers on a principled basis under a rule of law regime. Instead, the process smacks more of politics than principled decisionmaking.


Unless it is careful, the FCC risks further erosion of confidence in the way it handles merger proceedings in connection with its review of the proposed Comcast-NBCU merger. The "public interest" groups, such as Free Press, Public Knowledge, and Media Access Project, are leading a full-fledged assault on the merger. (Because the public interest is, as noted above, an indeterminate standard, any entity is free to call itself a public interest group, and, of course, media outlets are free happily to embrace such self-designation for some groups but not for others that might not meet their own conception of what is in the public's interest.) It is the perfect right of such groups to oppose the Comcast-NBCU merger if they please, and, indeed, to do so vigorously. No problem with that.

The problem arises with some of the tactics the groups employ in mounting such opposition. These tactics have the effect of undermining the role of the FCC acting independently on the basis of its expertise and experience. And the problem is only compounded if the Commission allows itself to become complicit – or, in effect, an enabler – in a process that begins to look more like a political advocacy campaign than a reasoned decisionmaking process conducted under established administrative law norms.

Here's a sampling of what I have in mind when I refer to problematic tactics in the context of an FCC proceeding, such as the proposed merger, which is principally adjudicatory in nature. Free Press is promoting a video it calls "How to Save the World from Comcast" that begins by announcing the Comcast merger "is headed for us like an asteroid" and gets more untethered from earth-bound facts from there. On the same "Stop the Merger" web page, Free Press urges its supporters to use a suggested comment form to enter a brief comment to be forwarded to the FCC. As Broadcasting & Cable's John Eggerton observed in a May 21 report, Free Press's tactic is beginning to swell the FCC's public docket with comments, although many just adhere to the suggested form and some appear to be duplicates filed by the same person. Finally, along with other groups, Free Press is urging the FCC to hold a number of public hearings around the country so that people can express their views on the merger.

As I said, the problem is not that Free Press, Public Knowledge, Media Access Project, or any other group, wishes to participate in the FCC's process and express their opposition to the merger. They are free to express such opposition in any way that conforms to the agency's rules. The problem arises if the Commission allows itself to be influenced or distracted by the groups' tactics in a way that delays what ought to be the agency's timely consideration of the merger or that detracts from what should be – and what should appear to the public to be -- a deliberative process focused on evidence directly relevant to established decisional factors.

Surely the FCC's ultimate decision should not accord much weight to the sheer number of short form letters submitted for or against the merger. These letters are almost entirely devoid of any facts relevant to the decisional considerations. Instead, they merely express, in formulaic terms, a computer-generated opinion. Such mass form letter-writing campaigns may be a relevant consideration in a purely legislative process. But it is inappropriate for them to be given much decisional weight in the consideration of an adjudicatory decision that should be grounded, in significant part, on expert economic and technical analysis, not organizational letter-writing muscle. The Commission cannot reach a reasoned decision simply by counting form letters.

By the same token, the Commission should reject calls for it to hold hearings across the country on the merger. Engaging in such a process is likely to turn consideration of the merger into distracting opportunities for showmanship that add no information to the record that cannot otherwise be supplied through the agency's normal processes. The relevant committees in Congress already have held four hearings and could decide to hold others as well. Indeed, if Congress were so disposed, it could even adopt legislation that would impact the Commission's consideration of the merger or squash it outright.

But the FCC is not a mini-Congress and should avoid allowing itself to be turned into one. Under established administrative law norms, the FCC is considered an independent regulatory agency that at times acts in a quasi-legislative capacity (such as when it engages in generic rulemaking), and at other times, such as in the consideration of a merger, in a quasi-judicial capacity. Again, as with the mass form emails, what would be the real purpose of field hearings? To count the number of witnesses that the Commission itself allows to testify for or against the proposal?

The Commission, rightly, has established a participatory process that allows interested parties a full opportunity to submit comments and replies to the agency, and they can do so easily through the Commission's website, or by mail if they prefer. In truth, there really is no relevant evidentiary information that would be presented to the Commission in field hearings that otherwise cannot be presented. Presumably, the Commission does not intend to base its decision on the "intensity" of the opposition that can be generated by Free Press and its allies to turn out for a hearing, or the number of signs waved in the back of the room.

There has always been a gap between the theory behind the creation of independent regulatory agencies such as the FCC and the reality. When Congress created the FCC it said it was putting its faith in, as the Senate Report put it, "one independent body" that would base its decisions on its specialized expertise. Indeed, the principal rationale for creation of the Commission in the independent agency format was that the commissioners would apply their "expertise" – a word oft-used in the legislative debates – to the technical and rapidly changing field of communications.

The reality is that application of the FCC's presumed expertise does not – and should not – occur in a vacuum. To a degree much greater than supposed, or at least admitted, by the Progressive-era theorists, every commissioner brings his or her own philosophical or policy perspective to each decision. This is in no way improper. But what would be improper, and injurious to the FCC as an institution, is for the Commission to allow itself or its processes to be used in a way that obviously invites the courts to conclude the agency itself is downgrading the role of its own expertise, while elevating considerations more suited to political campaign advocacy. And if this occurs, the FCC's credibility as an institution with expertise won't be damaged only in the eyes of the courts that review its decisions, but also in the eyes of the broader public the agency is supposed to serve.

Note that, quite deliberately, I have said not one word about the merits of Comcast-NBCU merger process, although I do have views on the subject. My concern here is for maintaining the integrity of the FCC's decisionmaking process, and certainly not only in the context of the Comcast merger or any particular merger proceeding. As a long-ago former Associate General Counsel of the FCC, a member of the Administrative Conference of the United States, and a former chair of the American Bar Association's Section of Administrative Law and Regulatory Process, I understand – indeed, I believe deeply -- that process matters with respect to the maintenance of the rule of law.

Noted constitutional law scholar Alexander Bickel wrote in his 1975 book, The Morality of Consent, that "the highest form of morality almost always is the morality of process." Whether or not one agrees with Professor Bickel's precise formulation, there should be no disagreement that the FCC should have as one of its own highest objectives the careful guarding of the integrity of its process.

Comcast-NBCU: Vertical Integration And The Difference It Makes

The Congressional Research Service (CRS) just released "The Proposed Comcast-NBC Universal Combination: How it Might Affect the Video Market." Prepared early last month, the now-public CRS report takes no overall stance on the proposed merger itself. Rather, it notes that the U.S. Department of Justice and the FCC will likely approve the Comcast-NBCU deal. Nor does CRS report make any hard predictions about the likely effects of the merger, if approved. But the report does provide an overview of some of the arguments that recently have been advanced from different quarters about the perceived benefits or perceived harms that the merger would bring.

Although the CRS report purports to summarize claims being made about the proposed Comcast-NBCU merger made by others, the report does seem to offer an overly sympathetic treatment to claimed vertical integration threats to programming access. The report reads:

Perhaps the greatest danger that a vertically integrated company poses to a non-integrated competitor is to deny the competitor access to must-have programming that it owns or controls. Lack of access could even foreclose competitors from the market. Inferior or more expensive access to that programming also could place non-integrated rivals at a competitive disadvantage.

The report then discusses disputes over cable company ownership of regional sports networks (RSN) as a situation that "[t]he FCC has identified…where a vertically integrated cable company is likely to benefit from exclusivity, to the detriment of competition and consumers." The report points out that Section 628 of the Communications Act and the program access rules adopted by the FCC to implement that section, among other things, prevent vertically integrated cable operators from discriminating in the prices, terms, and conditions at which it makes its satellite-delivered programming available to its competitors. The CRS report insists those same rules "prohibit a vertically integrated cable operator from having exclusive access to the programming in which it has an attributable interest." (Whether the statute permits application of the program access rules to terrestrially-delivered programming as the FCC concluded in a recent rulemaking order is a matter of debate and will likely be litigated.)

All of what the CRS report says in this regard may be true, or at least mostly true. But taken in a vacuum, it can also be somewhat misleading and thereby exaggerate the potential competitive harm. Vertical mergers do not typically present the kind of competitive harm to consumer welfare characteristic of horizontal mergers. As the FCC observed in the Adelphia Order, "vertical transactions, standing alone, do not directly reduce the number of competitors in either the upstream or downstream markets."

FSF Distinguished Adjunct Senior Scholar Richard A. Epstein addressed some of these issues in his recent FSF Perspectives paper "The Comcast and NBCU Merger: The Upside Down Analysis of Dr. Mark Cooper." Describing the potential harm from merger transactions as "increase in market concentration to the extent that it allows the new firm to raise its prices above the competitive level," Professor Epstein wrote: "As a matter of basic theory, this risk may materialize in horizontal mergers, but rarely will appear in vertical ones, which involve the integration of two facilities or services at different levels in the chain of production." And, " the vast bulk of this transaction lies on the vertical side of the line, which involve the linkage of a transmission company — Comcast — with a content company—NBC Universal."

Absent contextual emphasis on the contrasting competitive dynamics of horizontal and vertical mergers, one can easily read too much into conceivable harms posed by a vertical integration like Comcast-NBCU. The CRS report, however, puts vertical integration threats to programming access more in the context of "big-is-bad" concerns. The report's opening line reads: "The proposed combination of Comcast, the largest distributor of video services in the United States, and NBC Universal (NBCU), a major producer and aggregator of video content, would create a huge, vertically integrated entity with potentially enormous negotiating power." But reduction of transaction costs and technology economies resulting from vertical mergers that make a merged entity bigger typically benefit consumers.

In addition, it's worth remembering that although the FCC has previously concluded in the Adelphia Order and NewsCorp-Hughes Order that a vertically integrated cable or DBS provider might have incentive to temporarily foreclose RSN access to its competitors, it has not so held that cable or DBS providers have the incentive to engage in permanent foreclosure. Regardless, Comcast will not be acquiring any RSNs in the proposed merger.

Of course, the CRS will hardly be the last word out of Congress on Comcast-NBCU. The Senate Commerce Committee will continue the ongoing examination of the merger with a hearing Thursday. FCC Chairman Julius Genachowski will testify about the Commission's license transfer approval process. DOJ Antitrust Division Chief Christine Varney is also set to speak. But all such testimony and discussion of the proposed merger should be considered in the context of a vertical integration.

Richard Epstein on the Comcast-NBCU Merger

Last Friday, the Free State Foundation published a Perspectives from FSF Scholars on the proposed Comcast-NBCU merger by Richard Epstein, one of the nation's foremost law and economics scholars. In his Perspectives paper, Professor Epstein, Free State Foundation Distinguished Adjunct Senior Scholar, refutes the testimony on the merger of the Consumer Federation of America's Dr. Mark Cooper. Indeed, Professor Epstein states that Dr. Cooper has achieved a rare feat in that the "evidence that he presents against this proposed merger suffices to explain emphatically why it ought to be approved."

You should read Professor brief paper in its entirety. But here are a few excerpts:

• "Dr. Cooper's analysis does not engage in this elementary form of analysis. The words "efficiency" and "benefit" do not appear anywhere in the analysis, so that the implicit baseline for his dubious judgment is that any cost of the merger is in and of itself to require its rejection by the applicable public authorities."

• "Dr. Cooper has the rare skill to turn an economic virtue into a social vice. He writes that the two companies have in their respective roles of distributor and content provider, 'a competitive rivalry. For example, in providing complementary services, broadcasters and cable operators argue about the price, channel location and carriage of content.' Argue? What his odd choice of words shows us is that he has no explanation as to why the reduction in transaction costs should count as a social loss, when in fact it allows the provision of more services at lower prices. The gains from vertical integration are treated as though they create a social loss, which is even more mysterious because he does not bother to establish that either firm has any level of monopoly power to begin with."
  

• "He then fortifies this analysis with one kind of alarmist prediction that makes sense only to those who are convinced that both companies with commit hari-kari after their linking up their fortunes. Thus he thinks that Comcast will carry only NBC content, which NBC will in turn only supply to Comcast. But why would either company wish to make its network weaker than it need be, by entering into actions of exclusion that hurt itself as much as any outsider? If the purchase of outside content allows Comcast to satisfy its customers' tastes, it will go for it. If selling content to other service providers allows NBC to gain more revenues, all the better. Both points are especially true for Comcast which does not have nationwide penetration in the cable market."

• "[T]he last thing that any analyst should do is botch the antitrust analysis in any field that is as important as speech. Instead, the question is to ask why this combination might affect the market in speech. Here two points are relevant. The first is that the political speech market has never been healthier, because the coming of age of the web introduces more political content and lower cost of access than ever before. Entertainers may experience serious grief with the web because they are trying to sell content that is easily pirated. But political commentators are intent upon giving away content for free in the in the hope that every reader will forward a particular story to his or her entire list. Puhleeze forward!!"
  

• "The situation is in reality exactly the opposite of what Dr. Cooper topsy-turvy analysis predicts. Efficiency is even more important when first amendment issues are at stake than when they are not. He is not able to perform a minor intellectual miracle of having an upside down antitrust analysis saved by topsy-turvy First Amendment analysis. His errors don't cancel each other out. They cumulate."

Anyone interested in following the Comcast-NBCU merger, especially those susceptible to falling for the wildly exaggerated claims of the so-called public interest groups, should read Professor Epstein's paper. At the same time, it would be useful to have in mind Professor Epstein's impressive bio.