Federal Register, Volume 61 Issue 187 (Wednesday, September 25, 1996)

[Federal Register Volume 61, Number 187 (Wednesday, September 25, 1996)]
[Notices]
[Pages 50301-50322]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-24599]

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FEDERAL TRADE COMMISSION

[File No. 961-0004]

Time Warner Inc., et al.; Proposed Consent Agreement With
Analysis To Aid Public Comment

AGENCY: Federal Trade Commission.

ACTION: Proposed consent agreement.

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SUMMARY: In settlement of alleged violations of federal law prohibiting
unfair or deceptive acts or practices and unfair methods of
competition, this consent agreement, accepted subject to final
Commission approval, would require, among other things, a restructuring
of the acquisition by Time Warner Inc. of Turner Broadcasting System,
Inc., which are two of the country's largest cable programmers. Time
Warner, Turner, TCI and its subsidiary Liberty Media Corp. have agreed
to make a number of structural changes and to abide by certain
restrictions designed to break down the entry barriers created by the
proposed transaction.

DATES: Comments must be received on or before November 25, 1996.

ADDRESSES: Comments should be directed to: FTC/Office of the Secretary,
Room 159, 6th St. and Pa. Ave., N.W., Washington, D.C. 20580.

FOR FURTHER INFORMATION CONTACT: William Baer or George Cary, FTC/H-
374, Washington, D.C. 20580. (202) 326-2932 or 326-3741.

SUPPLEMENTARY INFORMATION: Pursuant to Section 6(f) of the Federal
Trade Commission Act, 38 Stat. 721, 15 U.S.C. 46 and Section 2.34 of
the Commission's Rules of Practice (16 CFR 2.34), notice is hereby
given that the following consent agreement containing a consent order
to cease and desist, having been filed with and accepted, subject to
final approval, by the Commission, has been placed on the public record
for a period of sixty (60) days. Public comment is invited. Such
comments or views will be considered by the Commission and will be
available for inspection and copying at its principal office in
accordance with Sec. 4.9(b)(6)(ii) of the Commission's Rules of
Practice (16 CFR 4.9(b)(6)(ii)).

Agreement Containing Consent Order

The Federal Trade Commission (``Commission''), having initiated an
investigation of the proposed acquisition of Turner Broadcasting
System, Inc. (``Turner'') by Time Warner Inc. (``Time Warner''), and
Tele-Communications, Inc.'s (``TCI'') and Liberty Media Corporation's
(``LMC'') proposed acquisitions of interests in Time Warner, and it now
appearing that Time Warner, Turner, TCI, and LMC, hereinafter sometimes
referred to as ``proposed respondents,'' are willing to enter into an
agreement containing an order to divest certain assets, and providing
for other relief:
It is hereby agreed by and between proposed respondents, by their
duly authorized officers and attorneys, and counsel for the Commission
that:
1. Proposed respondent Time Warner is a corporation organized,
existing and doing business under and by virtue of the laws of the
State of Delaware with its office and principal place of business
located at 75 Rockefeller Plaza, New York, New York 10019.
2. Proposed respondent Turner is a corporation organized, existing
and doing business under and by virtue of the laws of the State of
Georgia, with its office and principal place of business located at One
CNN Center, Atlanta, Georgia 30303.
3. Proposed respondent TCI is a corporation organized, existing and
doing business under and by virtue of the law of the State of Delaware,
with its office and principal place of business located at 5619 DTC
Parkway, Englewood, Colorado 80111.
4. Proposed respondent LMC is a corporation organized, existing and
doing business under and by virtue of the law of the State of Delaware,
with its office and principal place of business located at 8101 East
Prentice Avenue, Englewood, Colorado 80111.
5. Proposed respondents admit all the jurisdictional facts set
forth in the draft of complaint for purposes of this agreement and
order only.
6. Proposed respondents waive:
(1) any further procedural steps;
(2) the requirement that the Commission's decision contain a
statement of findings of fact and conclusions of law;
(3) all rights to seek judicial review or otherwise to challenge or
contest the validity of the order entered pursuant to this agreement;
and
(4) any claim under the Equal Access to Justice Act.
7. Proposed respondents shall submit (either jointly or
individually), within sixty (60) days of the date this

[[Page 50302]]

agreement is signed by proposed respondents, an initial report or
reports, pursuant to Sec. 2.33 of the Commission's Rules, signed by the
proposed respondents and setting forth in detail the manner in which
the proposed respondents will comply with Paragraphs VI, VII and VIII
of the order, when and if entered. Such report will not become part of
the public record unless and until this agreement and order are
accepted by the Commission for public comment.
8. This agreement shall not become part of the public record of the
proceeding unless and until it is accepted by the Commission. If this
agreement is accepted by the Commission it, together with a draft of
the complaint contemplated hereby, will be placed on the public record
for a period of sixty (60) days and information in respect thereto
publicly released. The Commission thereafter may either withdraw its
acceptance of this agreement and so notify the proposed respondents, in
which event it will take such action as it may consider appropriate, or
issue and serve its complaint (in such form as the circumstances may
require) and decision, in disposition of the proceeding.
9. This agreement is for settlement purposes only and does not
constitute an admission by proposed respondents that the law has been
violated as alleged in the draft of complaint, or that the facts as
alleged in the draft complaint, other than jurisdictional facts, are
true.
10. This agreement contemplates that, if it is accepted by the
Commission, and if such acceptance is not subsequently withdrawn by the
Commission pursuant to the provisions of Sec. 2.34 of the Commission's
Rules, the Commission may, without further notice to the proposed
respondents, (1) issue its complaint corresponding in form and
substance with the draft of complaint here attached and its decision
containing the following order in disposition of the proceeding, and
(2) make information public with respect thereto. When so entered, the
order shall have the same force and effect and may be altered, modified
or set aside in the same manner and within the same time provided by
statute for other orders. The order shall become final upon service.
Delivery by the U.S. Postal Service of the complaint and decision
containing the agreed-to order to proposed respondents' addresses as
stated in this agreement shall constitute service. Proposed respondents
waive any right they may have to any other manner of service. The
complaint may be used in construing the terms of the order, and no
agreement, understanding, representation, or interpretation not
contained in the order or the agreement may be used to vary or
contradict the terms of the order.
11. Proposed respondents have read the proposed complaint and order
contemplated hereby. Proposed respondents understand that once the
order has been issued, they will be required to file one or more
compliance reports showing that they have fully complied with the
order. Proposed respondents further understand that they may be liable
for civil penalties in the amount provided by law for each violation of
the order after it becomes final.
12. Proposed respondents agree to be bound by all of the terms of
the Interim Agreement attached to this agreement and made a part hereof
as Appendix I, upon acceptance by the Commission of this agreement for
public comment. Proposed respondents agree to notify the Commission's
Bureau of Competition in writing, within 30 days of the date the
Commission accepts this agreement for public comment, of any and all
actions taken by the proposed respondents to comply with the Interim
Agreement and of any ruling or decision by the Internal Revenue Service
(``IRS'') concerning the Distribution of The Separate Company stock to
the holders of the Liberty Tracking Stock within two (2) business days
after service of the IRS Ruling.
13. The order's obligations upon proposed respondents are
contingent upon consummation of the Acquisition.

Order

As used in this Order, the following definitions shall apply:
(A) ``Acquisition'' means Time Warner's acquisition of Turner and
TCI's and LMC's acquisition of interest in Time Warner.
(B) ``Affiliated'' means having an Attributable Interest in a
Person.
(C) ``Agent'' or ``Representative'' means a Person that is acting
in a fiduciary capacity on behalf of a principal with respect to the
specific conduct or action under review or consideration.
(D) ``Attributable Interest'' means an interest as defined in 47
C.F.R. 76.501 (and accompanying notes), as that rule read on July 1,
1996.
(E) ``Basic Service Tier'' means the Tier of video programming as
defined in 47 C.F.R. 76.901(a), as that rule read on July 1, 1996.
(F) ``Buying Group'' or ``Purchasing Agent'' means any Person
representing the interests of more than one Person distributing
multichannel video programming that: (1) Agrees to be financially
liable for any fees due pursuant to a Programming Service Agreement
which it signs as a contracting party as a representative of its
members, or each of whose members, as contracting parties, agrees to be
liable for its portion of the fees due pursuant to the programming
service agreement; (2) agrees to uniform billing and standardized
contract provisions for individual members; and (3) agrees either
collectively or individually on reasonable technical quality standards
for the individual members of the group.
(G) ``Carriage Terms'' means all terms and conditions for sale,
licensing or delivery to an MVPD for a Video Programming Service and
includes, but is not limited to, all discounts (such as for volume,
channel position and Penetration Rate), local advertising
availabilities, marketing, and promotional support, and other terms and
conditions.
(H) ``CATV'' means a cable system, or multiple cable systems
Controlled by the same Person, located in the United States.
(I) ``Closing Date'' means the date of the closing of the
Acquisition.
(J) ``CNN'' means the Video Programming Service Cable News Network.
(K) ``Commission'' means the Federal Trade Commission.
(L) ``Competing MVPD'' means an Unaffiliated MVPD whose proposed or
actual service area overlaps with the actual service area of a Time
Warner CATV.
(M) ``Control,'' ``Controlled'' or ``Controlled by'' has the
meaning set forth in 16 CFR 801.1 as that regulation read on July 1,
1996, except that Time Warner's 50% interest in Comedy Central (as of
the Closing Date) and TCI's 50% interests in Bresnan Communications,
Intermedia Partnerships and Lenfest Communications (all as of the
Closing Date) shall not be deemed sufficient standing alone to confer
Control over that Person.
(N) ``Converted WTBS'' means WTBS once converted to a Video
Programming Service.
(O) ``Fully Diluted Equity of Time Warner'' means all Time Warner
common stock actually issued and outstanding plus the aggregate number
of shares of Time Warner common stock that would be issued and
outstanding assuming the exercise of all outstanding options, warrants
and rights (excluding shares that would be issued in the event a poison
pill is triggered) and the

[[Page 50303]]

conversion of all outstanding securities that are convertible into Time
Warner common stock.
(P) ``HBO'' means the Video Programming Service Home Box Office,
including multiplexed versions.
(Q) ``Independent Advertising-Supported News and Information Video
Programming Service'' means a National Video Programming Service (1)
that is not owned, Controlled by, or Affiliated with Time Warner; (2)
that is a 24-hour per day service consisting of current national,
international, sports, financial and weather news and/or information,
and other similar programming; and (3) that has national significance
so that, as of February 1, 1997, it has contractual commitments to
supply its service to 10 million subscribers on Unaffiliated MVPDs, or,
together with the contractual commitments it will obtain from Time
Warner, it has total contractual commitments to supply its service to
15 million subscribers. If no such Service has such contractual
commitments, then Time Warner may choose from among the two Services
with contractual commitments with Unaffiliated MVPDs for the largest
number of subscribers.
(R) ``Independent Third Party'' means (1) a Person that does not
own, Control, and is not Affiliated with or has a share of voting
power, or an Ownership Interest in, greater than 1% of any of the
following: TCI, LMC, or the Kearns-Tribune Corporation; or (2) a Person
which none of TCI, LMC, or the TCI Control Shareholders owns, Controls,
is Affiliated with, or in which any of them have a share of voting
power, or an Ownership Interest in, greater than 1%. Provided, however,
that an Independent Third Party shall not lose such status if, as a
result of a transaction between an Independent Third Party and The
Separate Company, such Independent Third Party becomes a successor to
The Separate Company and the TCI Control Shareholders collectively hold
an Ownership Interest of 5% or less and collectively hold a share of
voting power of 1% or less in that successor company.
(S) ``LMC'' means Liberty Media Corporation, all of its directors,
officers, employees, Agents, and Representatives, and also includes (1)
all of its predecessors, successors, assigns, subsidiaries, and
divisions, all of their respective directors, officers, employees,
Agents, and Representatives, and the respective successors and assigns
of any of the foregoing; and (2) partnerships, joint ventures, and
affiliates that Liberty Media Corporation Controls, directly or
indirectly.
(T) ``The Liberty Tracking Stock'' means Tele-Communications, Inc.
Series A Liberty Media Group Common Stock and Tele-Communications, Inc.
Series B Liberty Media Group Common Stock.
(U) ``Multichannel Video Programming Distributor'' or ``MVPD''
means a Person providing multiple channels of video programming to
subscribers in the United States for which a fee is charged, by any of
various methods including, but not limited to, cable, satellite master
antenna television, multichannel multipoint distribution, direct-to-
home satellite (C-band, Ku-band, direct broadcast satellite), ultra
high-frequency microwave systems (sometimes called LMDS), open video
systems, or the facilities of common carrier telephone companies or
their affiliates, as well as Buying Groups or Purchasing Agents of all
such Persons.
(V) ``National Video Programming Service'' means a Video
Programming Service that is intended for distribution in all or
substantially all of the United States.
(W) ``Ownership Interest'' means any right(s), present or
contingent, to hold voting or nonvoting interest(s), equity
interest(s), and/or beneficial ownership(s) in the capital stock of a
Person.
(X) ``Penetration Rate'' means the percentage of Total Subscribers
on an MVPD who receives a particular Video Programming Service.
(Y) ``Person'' includes any natural person, corporate entity,
partnership, association, joint venture, government entity or trust.
(Z) ``Programming Service Agreement'' means any agreement between a
Video Programming Vendor and an MVPD by which a Video Programming
Vendor agrees to permit carriage of a Video Programming Service on that
MVPD.
(AA) ``The Separate Company'' means a separately incorporated
Person, either existing or to be created, to take the actions provided
by Paragraph II and includes without limitation all of The Separate
Company's subsidiaries, divisions, and affiliates Controlled, directly
or indirectly, all of their respective directors, officers, employees,
Agents, and Representatives, and the respective successors and assigns
of any of the foregoing, other than any Independent Third Party.
(BB) ``Service Area Overlap'' means the geographic area in which a
Competing MVPD's proposed or actual service area overlaps with the
actual service area of a Time Warner CATV.
(CC) ``Similarly Situated MVPDs'' means MVPDs with the same or
similar number of Total Subscribers as the Competing MVPD has
nationally and the same or similar Penetration Rate(s) as the Competing
MVPD makes available nationally.
(DD) ``TCI'' means Tele-Communications, Inc., all of its directors,
officers, employees, Agents, and Representatives, and also includes (1)
all of its predecessors, successors, assigns, subsidiaries, and
divisions, all of their respective directors, officers, employees,
Agents, and Representatives, and the respective successors and assigns
of any of the foregoing; and (2) partnerships, joint ventures, and
affiliates that Tele-Communications, Inc. Controls, directly or
indirectly. TCI acknowledges that the obligations of subparagraphs
(C)(6), (8)-(9), (D)(1)-(2) of Paragraph II and of Paragraph III of
this order extend to actions by Bob Magness and John C. Malone, taken
in an individual capacity as well as in a capacity as an officer or
director, and agrees to be liable for such actions.
(EE) ``TCI Control Shareholders'' means the following Persons,
individually as well as collectively: Bob Magness, John C. Malone, and
the Kearns-Tribune Corporation, its Agents and Representatives, and the
respective successors and assigns of any of the foregoing.
(FF) ``TCI's and LMC's Interest in Time Warner'' means all the
Ownership Interest in Time Warner to be acquired by TCI and LMC,
including the right of first refusal with respect to Time Warner stock
to be held by R. E. Turner, III, pursuant to the Shareholders Agreement
dated September 22, 1995 with LMC or any successor agreement.
(GG) ``TCI's and LMC's Turner-Related Businesses'' means the
businesses conducted by Southern Satellite Systems, Inc., a subsidiary
of TCI which is principally in the business of distributing WTBS to
MVPDs.
(HH) ``Tier'' means a grouping of Video Programming Services
offered by an MVPD to subscribers for one package price.
(II) ``Time Warner'' means Time Warner Inc., all of its directors,
officers, employees, Agents, and Representatives, and also includes (1)
all of its predecessors, successors, assigns, subsidiaries, and
divisions, including, but not limited to, Turner after the Closing
Date, all of their respective directors, officers, employees, Agents,
and Representatives, and the respective successors and assigns of any
of the foregoing; and (2) partnerships, joint ventures, and affiliates
that Time Warner Inc. Controls, directly or

[[Page 50304]]

indirectly. Time Warner shall, except for the purposes of definitions
OO and PP, include Time Warner Entertainment Company, L.P., so long as
it falls within this definition.
(JJ) ``Time Warner CATV'' means a CATV which is owned or Controlled
by Time Warner. ``Non-Time Warner CATV'' means a CATV which is not
owned or Controlled by Time Warner. Obligations in this order
applicable to Time Warner CATVs shall not survive the disposition of
Time Warner's Control over them.
(KK) ``Time Warner National Video Programming Vendor'' means a
Video Programming Vendor providing a National Video Programming Service
which is owned or Controlled by Time Warner. Likewise, ``Non-Time
Warner National Video Programming Vendor'' means a Video Programming
Vendor providing a National Video Programming Service which is not
owned or Controlled by Time Warner.
(LL) ``TNT'' means the Video Programming Service Turner Network
Television.
(MM) ``Total Subscribers'' means the total number of subscribers to
an MVPD other than subscribers only to the Basic Service Tier.
(NN) ``Turner'' means Turner Broadcasting System, Inc., all of its
directors, officers, employees, Agents, and Representatives, and also
includes (1) all of its predecessors, successors (except Time Warner),
assigns (except Time Warner), subsidiaries, and divisions; and (2)
partnerships, joint ventures, and affiliates that Turner Broadcasting
System, Inc., Controls, directly or indirectly.
(OO) ``Turner Video Programming Services'' means each Video
Programming Service owned or Controlled by Turner on the Closing Date,
and includes (1) WTBS, (2) any such Video Programming Service and WTBS
that is transferred after the Closing Date to another part of Time
Warner (including TWE), and (3) any Video Programming Service created
after the Closing Date that Time Warner owns or Controls that is not
owned or Controlled by TWE, for so long as the Video Programming
Service remains owned or Controlled by Time Warner.
(PP) ``Turner-Affiliated Video Programming Services'' means each
Video Programming Service, whether or not satellite-delivered, that is
owned, Controlled by, or Affiliated with Turner on the Closing Date,
and includes (1) WTBS, (2) any such Video Programming Service and WTBS
that is transferred after the Closing Date to another part of Time
Warner (including TWE), and (3) any Video Programming Service created
after the Closing Date that Time Warner owns, Controls or is Affiliated
with that is not owned, Controlled by, or Affiliated with TWE, for so
long as the Video Programming Service remains owned, Controlled by, or
affiliated with Time Warner.
(QQ) ``TWE'' means Time Warner Entertainment Company, L.P., all of
its officers, employees, Agents, Representatives, and also includes (1)
all of its predecessors, successors, assigns, subsidiaries, divisions,
including, but not limited to, Time Warner Cable, and the respective
successors and assigns of any of the foregoing, but excluding Turner;
and (2) partnerships, joint ventures, and affiliates that Time Warner
Entertainment Company, L.P., Controls, directly or indirectly.
(RR) ``TWE's Management Committee'' means the Management Committee
established in Section 8 of the Admission Agreement dated May 16, 1993,
between TWE and U S West, Inc., and any successor thereof, and includes
any management committee in any successor agreement that provides for
membership on the management committee for non-Time Warner individuals.
(SS) ``TWE Video Programming Services'' means each Video
Programming Service owned or Controlled by TWE on the Closing Date, and
includes (1) any such Video Programming Service transferred after the
Closing Date to another part of Time Warner and (2) any Video
Programming Service created after the Closing Date that TWE owns or
Controls, for so long as the Video Programming Service remains owned or
Controlled by TWE.
(TT) ``TWE-Affiliated Video Programming Services'' means each Video
Programming Service, whether or not satellite-delivered, that is owned,
Controlled by, or Affiliated with TWE, and includes (1) any such Video
Programming Service transferred after the Closing Date to another part
of Time Warner and (2) any Video Programming Service created after the
Closing Date that TWE owns or Controls, or is Affiliated with, for so
long as the Video Programming Service remains owned, Controlled by, or
Affiliated with TWE.
(VV) ``Unaffiliated MVPD'' means an MVPD which is not owned,
Controlled by, or Affiliated with Time Warner.
(WW) ``United States'' means the fifty states, the District of
Columbia, and all territories, dependencies, or possessions of the
United States of America.
(XX) ``Video Programming Service'' means a satellite-delivered
video programming service that is offered, alone or with other
services, to MVPDs in the United States. It does not include pay-per-
view programming service(s), interactive programming service(s), over-
the-air television broadcasting, or satellite broadcast programming as
defined in 47 C.F.R. 76.1000(f) as that rule read on July 1, 1996.
(YY) ``Video Programming Vendor'' means a Person engaged in the
production, creation, or wholesale distribution to MVPDs of Video
Programming Services for sale in the United States.
(ZZ) ``WTBS'' means the television broadcast station popularly
known as TBS Superstation, and includes any Video Programming Service
that may be a successor to WTBS, including Converted WTBS.

It is ordered that:
(A) TCI and LMC shall divest TCI's and LMC's Interest in Time
Warner and TCI's and LMC's Turner-Related Businesses to The Separate
Company by:
(1) combining TCI's and LMC's Interest in Time Warner Inc. and
TCI's and LMC's Turner-Related Businesses in The Separate Company;
(2) distributing The Separate Company stock to the holders of
Liberty Tracking Stock (``Distribution''); and
(3) using their best efforts to ensure that The Separate Company's
stock is registered or listed for trading on the Nasdaq Stock Market or
the New York Stock Exchange or the American Stock Exchange.
(B) TCI and LMC shall make all regulatory filings, including, but
not limited to, filings with the Federal Communications Commission and
the Securities and Exchange Commission that are necessary to accomplish
the requirements of Paragraph II(A).
(C) TCI, LMC, and The Separate Company shall ensure that:
(1) The Separate Company's by-laws obligate The Separate Company to
be bound by this order and contain provisions ensuring compliance with
this order;
(2) The Separate Company's board of directors at the time of the
Distribution are subject to the prior approval of the Commission;
(3) The Separate Company shall, within six (6) months of the
Distribution, call a shareholder's meeting for the purpose of electing
directors;
(4) No member of the board of directors of The Separate Company,
both at the time of the Distribution and pursuant to any election now
or at any time in the future, shall, at the time of his or her election
or while serving as

[[Page 50305]]

a director of The Separate Company, be an officer, director, or
employee of TCI or LMC or shall hold, or have under his or her
direction or Control, greater than one-tenth of one percent (0.1%) of
the voting power of TCI and one-tenth of one percent (0.1%) of the
Ownership Interest in TCI or greater than one-tenth of one percent
(0.1%) of the voting power of LMC and one-tenth of one percent (0.1%)
of the Ownership Interest in LMC;
(5) No officer, director or employee of TCI or LMC shall
concurrently serve as an officer or employee of The Separate Company.
Provided further, that TCI or LMC employees who are not TCI Control
Shareholders or directors or officers of either Tele-Communications,
Inc. or Liberty Media Corporation may provide to The Separate Company
services contemplated by the attached Transition Services Agreement;
(6) The TCI Control Shareholders shall promptly exchange the shares
of stock received by them in the Distribution for shares of one or more
classes or series of convertible preferred stock of The Separate
Company that shall be entitled to vote only on the following issues on
which a vote of the shareholders of The Separate Company is required: a
proposed merger; consolidation or stock exchange involving The Separate
Company; the sale, lease, exchange or other disposition of all or
substantially all of The Separate Company's assets; the dissolution or
winding up of The Separate Company; proposed amendments to the
corporate charter or bylaws of The Separate Company; proposed changes
in the terms of such classes or series; or any other matters on which
their vote is required as a matter of law (except that, for such other
matters, The Separate Company and the TCI Control Shareholders shall
ensure that the TCI Control Shareholders' votes are apportioned in the
exact ratio as the votes of the rest of the shareholders);
(7) No vote on any of the proposals listed in subparagraph (6)
shall be successful unless a majority of shareholders other than the
TCI Control Shareholders vote in favor of such proposal;
(8) After the Distribution, the TCI Control Shareholders shall not
seek to influence, or attempt to control by proxy or otherwise, any
other Person's vote of The Separate Company stock;
(9) After the Distribution, no officer, director or employee of TCI
or LMC, or any of the TCI Control Shareholders shall communicate,
directly or indirectly, with any officer, director, or employee of The
Separate Company. Provided, however, that the TCI Control Shareholders
may communicate with an officer, director or employee of The Separate
Company when the subject is one of the issues listed in subparagraph 6
on which TCI Control Shareholders are permitted to vote, except that,
when a TCI Control Shareholder seeks to initiate action on a subject
listed in subparagraph 6 on which the TCI Control Shareholders are
permitted to vote, the initial proposal for such action shall be made
in writing. Provided further, that this provision does not apply to
communications by TCI or LMC employees who are not TCI Control
Shareholders or directors or officers of either Tele-Communications,
Inc. or Liberty Media Corporation in the context of providing to The
Separate Company services contemplated by the attached Transition
Services Agreement or to communications relating to the possible
purchase of services from TCI's and LMC's Turner-Related Businesses;
(10) The Separate Company shall not acquire or hold greater than
14.99% of the Fully Diluted Equity of Time Warner. Provided, however,
that, if the TCI Control Shareholders reduce their collective holdings
in The Separate Company to no more than one-tenth of one percent (0.1%)
of the voting power of The Separate Company and one-tenth of one
percent (0.1%) of the Ownership Interest in The Separate Company or
reduce their collective holdings in TCI and LMC to no more than one-
tenth of one percent (0.1%) of the voting power of TCI and one-tenth of
one percent (0.1%) of the Ownership Interest in TCI and one-tenth of
one percent (0.1%) of the voting power of LMC and one-tenth of one
percent (0.1%) of the Ownership Interest in LMC, then The Separate
Company shall not be prohibited by this order from increasing its
holding of Time Warner stock beyond that figure; and
(11) The Separate Company shall not acquire or hold, directly or
indirectly, any Ownership Interest in Time Warner that is entitled to
exercise voting power except (a) a vote of one-one hundredth (\1/100\)
of a vote per share owned, voting with the outstanding common stock,
with respect to the election of directors and (b) with respect to
proposed changes in the charter of Time Warner Inc. or of the
instrument creating such securities that would (i) adversely change any
of the terms of such securities or (ii) adversely affect the rights,
power, or preferences of such securities. Provided, however, that any
portion of The Separate Company's stock in Time Warner that is sold to
an Independent Third Party may be converted into voting stock of Time
Warner. Provided, further, that, if the TCI Control Shareholders reduce
their collective holdings in The Separate Company to no more than one-
tenth of one percent (0.1%) of the voting power of The Separate Company
and one-tenth of one percent (0.1%) of the Ownership Interest in The
Separate Company or reduce their collective holdings in both TCI and
LMC to no more than one-tenth of one percent (0.1%) of the voting power
of TCI and one-tenth of one percent (0.1%) of the Ownership Interest in
TCI and one-tenth of one percent (0.1%) of the voting power of LMC and
one-tenth of one percent (0.1%) of the Ownership Interest in LMC, The
Separate Company's Time Warner stock may be converted into voting stock
of Time Warner.
(D) TCI and LMC shall use their best efforts to obtain a private
letter ruling from the Internal Revenue Service to the effect that the
Distribution will be generally tax-free to both the Liberty Tracking
Stock holders and to TCI under Section 355 of the Internal Revenue Code
of 1986, as amended (``IRS Ruling''). Upon receipt of the IRS Ruling,
TCI and LMC shall have thirty (30) days (excluding time needed to
comply with the requirements of any federal securities and
communications laws and regulations, provided that TCI and LMC shall
use their best efforts to comply with all such laws and regulations) to
carry out the requirements of Paragraph II (A) and (B). Pending the IRS
Ruling, or in the event that TCI and LMC are unable to obtain the IRS
Ruling,
(1) TCI, LMC, Bob Magness and John C. Malone, collectively or
individually, shall not acquire or hold, directly or indirectly, an
Ownership Interest that is more than the lesser of 9.2% of the Fully
Diluted Equity of Time Warner or 12.4% of the actual issued and
outstanding common stock of Time Warner, as determined by generally
accepted accounting principles. Provided, however, that day-to-day
market price changes that cause any such holding to exceed the latter
threshold shall not be deemed to cause the parties to be in violation
of this subparagraph; and
(2) TCI, LMC and the TCI Control Shareholders shall not acquire or
hold any Ownership Interest in Time Warner that is entitled to exercise
voting power except (a) a vote of one-one hundredth (\1/100\) of a vote
per share owned, voting with the outstanding common stock, with respect
to the election of directors and (b) with respect to proposed changes
in the charter of Time Warner Inc. or of the instrument creating such
securities that would (i) adversely change any of the terms of such

[[Page 50306]]

securities or (ii) adversely affect the rights, power, or preferences
of such securities. Provided, however, that any portion of TCI's and
LMC's Interest in Time Warner that is sold to an Independent Third
Party may be converted into voting stock of Time Warner.
In the event that TCI and LMC are unable to obtain the IRS Ruling,
TCI and LMC shall be relieved of the obligations set forth in
subparagraphs (A), (B) and (C).

III

It is further ordered that
After the Distribution, TCI, LMC, Bob Magness and John C. Malone,
collectively or individually, shall not acquire or hold, directly or
indirectly, any voting power of, or other Ownership Interest in, Time
Warner that is more than the lesser of 1% of the Fully Diluted Equity
of Time Warner or 1.35% of the actual issued and outstanding common
stock of Time Warner, as determined by generally accepted accounting
principles (provided, however, that such interest shall not vote except
as provided in Paragraph II(D)(2)), without the prior approval of the
Commission. Provided, further, that day-to-day market price changes
that cause any such holding to exceed the latter threshold shall not be
deemed to cause the parties to be in violation of this Paragraph.

It is further ordered that
(A) For six months after the Closing Date, TCI and Time Warner
shall not enter into any new Programming Service Agreement that
requires carriage of any Turner Video Programming Service on any analog
Tier of TCI's CATVs.
(B) Any Programming Service Agreement entered into thereafter that
requires carriage of any Turner Video Programming Service on TCI's
CATVs on an analog Tier shall be limited in effective duration to five
(5) years, except that such agreements may give TCI the unilateral
right(s) to renew such agreements for one or more five-year periods.
(C) Notwithstanding the foregoing, Time Warner, Turner and TCI may
enter into, prior to the Closing Date, agreements that require carriage
on an analog Tier by TCI for no more than five years for each of WTBS
(with the five year period to commence at the time of WTBS' conversion
to Converted WTBS) and Headline News, and such agreements may give TCI
the unilateral right(s) to renew such agreements for one or more five-
year periods.

It is further ordered that
Time Warner shall not, expressly or impliedly:
(A) refuse to make available or condition the availability of HBO
to any MVPD on whether that MVPD or any other MVPD agrees to carry any
Turner-Affiliated Video Programming Service;
(B) condition any Carriage Terms for HBO to any MVPD on whether
that MVPD or any other MVPD agrees to carry any Turner-Affiliated Video
Programming Service;
(C) refuse to make available or condition the availability of each
of CNN, WTBS, or TNT to any MVPD on whether that MVPD or any other MVPD
agrees to carry any TWE-Affiliated Video Programming Service; or
(D) condition any Carriage Terms for each of CNN, WTBS, or TNT to
any MVPD on whether that MVPD or any other MVPD agrees to carry any
TWE-Affiliated Video Programming Service.

It is further ordered that
(A) For subscribers that a Competing MVPD services in the Service
Area Overlap, Time Warner shall provide, upon request, any Turner Video
Programming Service to that Competing MVPD at Carriage Terms no less
favorable, relative to the Carriage Terms then offered by Time Warner
for that Service to the three MVPDs with the greatest number of
subscribers, than the Carriage Terms offered by Turner to Similarly
Situated MVPDs relative to the Carriage Terms offered by Turner to the
three MVPDs with the greatest number of subscribers for that Service on
July 30, 1996. For Turner Video Programming Services not in existence
on July 30, 1996, the pre-Closing Date comparison will be to relative
Carriage Terms offered with respect to any Turner Video Programming
Service existing as of July 30, 1996.
(B) Time Warner shall be in violation of this Paragraph if the
Carriage Terms it offers to the Competing MVPD for those subscribers
outside the Service Area Overlap are set at a higher level compared to
Similarly Situated MVPDs so as to avoid the restrictions set forth in
subparagraph (A).

VII

It is further ordered that
(A) Time Warner shall not require a financial interest in any
National Video Programming Service as a condition for carriage on one
or more Time Warner CATVs.
(B) Time Warner shall not coerce any National Video Programming
Vendor to provide, or retaliate against such a Vendor for failing to
provide exclusive rights against any other MVPD as a condition for
carriage on one or more Time Warner CATVs.
(C) Time Warner shall not engage in conduct the effect of which is
to unreasonably restrain the ability of a Non-Time Warner National
Video Programming Vendor to compete fairly by discriminating in video
programming distribution on the basis of affiliation or nonaffiliation
of Vendors in the selection, terms, or conditions for carriage of video
programming provided by such Vendors.

VIII

It is further ordered that
(A) Time Warner shall collect the following information, on a
quarterly basis:
(1) for any and all offers made to Time Warner's corporate office
by a Non-Time Warner National Video Programming Vendor to enter into or
to modify any Programming Service Agreement for carriage on an Time
Warner CATV, in that quarter:
(a) the identity of the National Video Programming Vendor;
(b) a description of the type of programming;
(c) any and all Carriage Terms as finally agreed to or, when there
is no final agreement but the Vendor's initial offer is more than three
months old, the last offer of each side;
(d) any and all commitment(s) to a roll-out schedule, if
applicable, as finally agreed to or, when there is no final agreement
but the Vendor's initial offer is more than three months old, the last
offer of each side;
(e) a copy of any and all Programming Service Agreement(s) as
finally agreed to or, when there is no final agreement but the Vendor's
initial offer is more than three months old, the last offer of each
side; and
(2) on an annual basis for each National Video Programming Service
on Time Warner CATVs, the actual carriage rates on Time Warner CATVs
and
(a) the average carriage rates on all Non-Time Warner CATVs for
each National Video Programming Service that has publicly-available
information from which Penetration Rates can be derived; and
(b) the carriage rates on each of the fifty (50) largest (in total
number of subscribers) Non-Time Warner CATVs for each National Video
Programming Service that has publicly-available information from which
Penetration Rates can be derived.
(B) The information collected pursuant to subparagraph (A) shall be

[[Page 50307]]

provided to each member of TWE's Management Committee on the last day
of March, June, September and December of each year. Provided, however,
that, in the event TWE's Management Committee ceases to exist, the
disclosures required in this Paragraph shall be made to any and all
partners in TWE; or, if there are no partners in TWE, then the
disclosures required in this Paragraph shall be made to the Audit
Committee of Time Warner.
(C) The General Counsel within TWE who is responsible for CATV
shall annually certify to the Commission that it believes that Time
Warner is in compliance with Paragraph VII of this order.
(D) Time Warner shall retain all of the information collected as
required by subparagraph (A), including information on when and to whom
such information was communicated as required herein in subparagraph
(B), for a period of five (5) years.

It is further ordered that
(A) By February 1, 1997, Time Warner shall execute a Programming
Service Agreement with at least one Independent Advertising-Supported
News and Information National Video Programming Service, unless the
Commission determines, upon a showing by Time Warner, that none of the
offers of Carriage Terms are commercially reasonable.
(B) If all the requirements of either subparagraph (A) or (C) are
met, Time Warner shall carry an Independent Advertising-Supported News
and Information Video Programming Service on Time Warner CATVs at
Penetration Rates no less than the following:
(1) If the Service is carried on Time Warner CATVs as of July 30,
1996, Time Warner must make the Service available:
(a) By July 30, 1997, so that it is available to 30% of the Total
Subscribers of all Time Warner CATVs at that time; and
(b) By July 30, 1999, so that it is available to 50% of the Total
Subscribers of all Time Warner CATVs at that time.
(2) If the Service is not carried on Time Warner CATVs as of July
30, 1996, Time Warner must make the Service available:
(a) By July 30, 1997, so that it is available to 10% of the Total
Subscribers of all Time Warner CATVs at that time;
(b) By July 30, 1999, so that it is available to 30% of the Total
Subscribers of all Time Warner CATVs at that time; and
(c) By July 30, 2001, so that it is available to 50% of the Total
Subscribers of all Time Warner CATVs at that time.
(C) If, for any reason, the Independent Advertising-Supported News
and Information National Video Programming Service chosen by Time
Warner ceases operating or is in material breach of its Programming
Service Agreement with Time Warner at any time before July 30, 2001,
Time Warner shall, within six months of the date that such Service
ceased operation or the date of termination of the Agreement because of
the material breach, enter into a replacement Programming Service
Agreement with a replacement Independent Advertising-Supported News and
Information National Video Programming Service so that replacement
Service is available pursuant to subparagraph (B) within three months
of the execution of the replacement Programming Service Agreement,
unless the Commission determines, upon a showing by Time Warner, that
none of the Carriage Terms offered are commercially reasonable. Such
replacement Service shall have, six months after the date the first
Service ceased operation or the date of termination of the first
Agreement because of the material breach, contractual commitments to
supply its Service to at least 10 million subscribers on Unaffiliated
MVPDs, or, together with the contractual commitments it will obtain
from Time Warner, total contractual commitments to supply its Service
to 15 million subscribers; if no such Service has such contractual
commitments, then Time Warner may choose from among the two Services
with contractual commitments with Unaffiliated MVPDs for the largest
number of subscribers.

It is further ordered that:
(A) Within sixty (60) days after the date this order becomes final
and every sixty (60) days thereafter until respondents have fully
complied with the provisions of Paragraphs IV(A) and IX(A) of this
order and, with respect to Paragraph II, until the Distribution,
respondents shall submit jointly or individually to the Commission a
verified written report or reports setting forth in detail the manner
and form in which they intend to comply, are complying, and have
complied with Paragraphs II, IV(A) and IX(A) of this order.
(B) One year (1) from the date this order becomes final, annually
for the next nine (9) years on the anniversary of the date this order
becomes final, and at other times as the Commission may require,
respondents shall file jointly or individually a verified written
report or reports with the Commission setting forth in detail the
manner and form in which they have complied and are complying with each
Paragraph of this order.

It is further ordered that respondents shall notify the Commission
at least thirty (30) days prior to any proposed change in respondents
(other than this Acquisition) such as dissolution, assignment, sale
resulting in the emergence of a successor corporation, or the creation
or dissolution of subsidiaries or any other change in the corporation
that may affect compliance obligations arising out of the order.

XII

It is further ordered that, for the purpose of determining or
securing compliance with this order, and subject to any legally
recognized privilege, upon written request, respondents shall permit
any duly authorized representative of the Commission:
1. Access, during regular business hours upon reasonable notice and
in the presence of counsel for respondents, to inspect and copy all
books, ledgers, accounts, correspondence, memoranda and other records
and documents in the possession or under the control of respondents
relating to any matters contained in this order; and
2. Upon five days' notice to respondents and without restraint or
interference from it, to interview officers, directors, or employees of
respondents, who may have counsel present, regarding such matters.

XIII

It is further ordered that this order shall terminate ten (10)
years from the date this order becomes final.

Appendix I

Interim Agreement

This Interim Agreement is by and between Time Warner Inc. (``Time
Warner''), a corporation organized, existing, and doing business under
and by virtue of the law of the State of Delaware, with its office and
principal place of business at New York, New York; Turner Broadcasting
System, Inc. (``Turner''), a corporation organized, existing, and doing
business under and by virtue of the law of the State of Georgia with
its office and principal place of business at Atlanta, Georgia; Tele-
Communications, Inc. (``TCI''), a corporation organized, existing, and
doing business under and by virtue of

[[Page 50308]]

the law of the State of Delaware, with its office and principal place
of business located at Englewood, Colorado; Liberty Media Corp.
(``LMC''), a corporation organized, existing and doing business under
and by virtue of the law of the State of Delaware, with its office and
principal place of business located at Englewood, Colorado; and the
Federal Trade Commission (``Commission''), an independent agency of the
United States Government, established under the Federal Trade
Commission Act of 1914, 15 U.S.C. 41 et seq.
Whereas Time Warner entered into an agreement with Turner for Time
Warner to acquire the outstanding voting securities of Turner, and TCI
and LMC proposed to acquire stock in Time Warner (hereinafter ``the
Acquisition'');
Whereas the Commission is investigating the Acquisition to
determine whether it would violate any statute enforced by the
Commission;
Whereas TCI and LMC are willing to enter into an Agreement
Containing Consent Order (hereafter ``Consent Order'') requiring them,
inter alia, to divest TCI's and LMC's Interest in Time Warner and TCI's
and LMC's Turner-Related Businesses, by contributing those interests to
a separate corporation, The Separate Company, the stock of which will
be distributed to the holders of Liberty Tracking Stock (``the
Distribution''), but, in order to fulfill paragraph II(D) of that
Consent Order, TCI and LMC must apply now to receive an Internal
Revenue Service ruling as to whether the Distribution will be generally
tax-free to both the Liberty Tracking Stock holders and to TCI under
Section 355 of the Internal Revenue Code of 1986, as amended (``IRS
Ruling'');
Whereas ``TCI's and LMC's Interest in Time Warner`` means all of
the economic interest in Time Warner to be acquired by TCI and LMC,
including the right of first refusal with respect to Time Warner stock
to be held by R. E. Turner, III, pursuant to the Shareholders Agreement
dated September 22, 1995 with LMC or any successor agreement;
Whereas ``TCI's and LMC's Turner-Related Businesses'' means the
businesses conducted by Southern Satellite Systems, Inc., a subsidiary
of TCI which is principally in the business of distributing WTBS to
MVPDs;
Whereas ``Liberty Tracking Stock'' means Tele-Communications, Inc.
Series A Liberty Media Group Common Stock and Tele-Communications, Inc.
Series B Liberty Media Group Common Stock;
Whereas Time Warner, Turner, TCI, and LMC are willing to enter into
a Consent Order requiring them, inter alia, to forego entering into
certain new programming service agreements for a period of six months
from the date that the parties close this Acquisition (``Closing
Date''), but, in order to comply more fully with that requirement, they
must cancel now the two agreements that were negotiated as part of this
Acquisition: namely, (1) the September 15, 1995, program service
agreement between TCI's subsidiary, Satellite Services, Inc. (``SSI''),
and Turner and (2) the September 14, 1995, cable carriage agreement
between SSI and Time Warner for WTBS (hereafter ``Two Programming
Service Agreements'');
Whereas if the Commission accepts the attached Consent Order, the
Commission is required to place the Consent Order on the public record
for a period of at least sixty (60) days and may subsequently withdraw
such acceptance pursuant to the provisions of Rule 2.34 of the
Commission's Rules of Practice and Procedure, 16 C.F.R. 2.34;
Whereas the Commission is concerned that if the parties do not,
before this order is made final, apply to the IRS for the IRS Ruling
and cancel the Two Programming Service Agreements, compliance with the
operative provisions of the Consent Order might not be possible or
might produce a less than effective remedy;
Whereas Time Warner, Turner, TCI, and LMC's entering into this
Agreement shall in no way be construed as an admission by them that the
Acquisition is illegal;
Whereas Time Warner, Turner, TCI, and LMC understand that no act or
transaction contemplated by this Agreement shall be deemed immune or
exempt from the provisions of the antitrust laws or the Federal Trade
Commission Act by reason of anything contained in this Agreement;
Now, therefore, upon understanding that the Commission has not yet
determined whether the Acquisition will be challenged, and in
consideration of the Commission's agreement that, unless the Commission
determines to reject the Consent Order, it will not seek further relief
from Time Warner, Turner, TCI, and LMC with respect to the Acquisition,
except that the Commission may exercise any and all rights to enforce
this Agreement and the Consent Order to which this Agreement is annexed
and made a part thereof, the parties agree as follows:
1. Within thirty (30) days of the date the Commission accepts the
attached Consent Order for public comment, TCI and LMC shall apply to
the IRS for the IRS Ruling.
2. On or before the Closing Date, Time Warner, Turner and TCI shall
cancel the Two Programming Service Agreements.
3. This Agreement shall be binding when approved by the Commission.

Analysis of Proposed Consent Order to Aid Public Comment

I. Introduction
The Federal Trade Commission has accepted for public comment from
Time Warner Inc. (``Time Warner''), Turner Broadcasting System, Inc.
(``Turner''), Tele-Communications, Inc. (``TCI''), and Liberty Media
Corporation (``LMC'') (collectively ``the proposed respondents'') an
Agreement Containing Consent Order (``the proposed consent order'').
The Commission has also entered into an Interim Agreement that requires
the proposed respondents to take specific action during the public
comment period.
The proposed consent order is designed to remedy likely antitrust
effects arising from Time Warner's acquisition of Turner as well as
related transactions, including TCI's proposed ownership interest in
Time Warner and long-term cable television programming service
agreements between Time Warner and TCI for post-acquisition carriage by
TCI of Turner programming.
II. Description of the Parties, the Acquisition and Related
Transactions
Time Warner is a leading provider of cable networks and a leading
distributor of cable television. Time Warner Entertainment (``TWE''), a
partnership in which Time Warner holds the majority interest, owns HBO
and Cinemax, two premium cable networks. Time Warner and Time Warner
Cable, a subsidiary of TWE, are collectively the nation's second
largest distributor of cable television and serve approximately 11.5
million cable subscribers or approximately 17 percent of U.S. cable
television households.
Turner is a leading provider of cable networks. Turner owns the
following ``marquee'' or ``crown jewel'' cable networks: Cable News
Network (``CNN''), Turner Network Television (``TNT''), and TBS
SuperStation (referred to as ``WTBS''). Turner also owns Headline News
(``HLN''), Cartoon Network, Turner Classic Movies, CNN International
USA and CNN Financial Network.
TCI is the nation's largest operator of cable television systems,
serving approximately 27 percent of all U.S. cable television
households. LMC, a subsidiary of TCI, is a leading provider of cable
programming. TCI also owns interests in a large number of cable
networks.

[[Page 50309]]

In September 1995, Time Warner and Turner entered into an agreement
for Time Warner to acquire the approximately 80 percent of the
outstanding shares in Turner that it does not already own. TCI and LMC
have an approximately 24 percent existing interest in Turner. By
trading their interest in Turner for an interest in Time Warner, TCI
and LMC would acquire approximately a 7.5 percent interest in the fully
diluted equity of Time Warner as well as the right of first refusal on
the approximately 7.4 percent interest in Time Warner that R. E.
Turner, III, chairman of Turner, would receive as a result of this
acquisition. Although Time Warner has a `poison pill' that would
prevent TCI from acquiring more than a certain amount of stock without
triggering adverse consequences, that poison pill would still allow TCI
to acquire approximately 15 percent of the Fully Diluted Equity, and if
the poison pill were to be altered or waived, TCI could acquire more
than 15 percent of the fully diluted equity of Time Warner. Also in
September 1995, Time Warner entered into two long-term mandatory
carriage agreements referred to as the Programming Service Agreements
(PSAs). Under the terms of these PSAs, TCI would be required, on
virtually all of its cable television systems, to carry CNN, HLN, TNT
and WTBS for a twenty-year period.
III. The Complaint
The draft complaint accompanying the proposed consent order and the
Interim Agreement alleges that the acquisition, along with related
transactions, would allow Time Warner unilaterally to raise the prices
of cable television programming and would limit the ability of cable
television systems that buy such programming to take responsive action
to avoid such price increases. It would do so, according to the draft
complaint, both through horizontal combination in the market for cable
programming (in which Time Warner, after the acquisition, would control
about 40% of the market) and through higher entry barriers into that
market as a result of the vertical integration (by merger and contract)
between Turner's programming interests and Time Warner's and TCI's
cable distribution interests. The complaint alleges that TCI and Time
Warner, respectively, operate the first and second largest cable
television systems in the United States, reaching nearly half of all
cable households; that Time Warner would gain the power to raise prices
on its own and on Turner's programming unilaterally; that TCI's
ownership interest in Time Warner and concurrent long term contractual
obligations to carry Turner programming would undermine TCI's incentive
to sign up better or less expensive non-Time Warner programming,
preventing rivals to the combined Time Warner and Turner from achieving
sufficient distribution to realize economies of scale and thereby to
erode Time Warner's market power; that barriers to entry into
programming and into downstream retail distribution markets would be
raised; and that substantial increases in wholesale programming costs
for both cable systems and alternative service providers--including
direct broadcast satellite service and other forms of non-cable
distribution--would lead to higher service prices and fewer
entertainment and information sources for consumers.
The Commission has reason to believe that the acquisition and
related transactions, if successful, may have anticompetitive effects
and be in violation of Section 7 of the Clayton Act and Section 5 of
the Federal Trade Commission Act.
IV. Terms of the Proposed Consent Order
The proposed consent order would resolve the alleged antitrust
concerns by breaking down the entry barriers that would otherwise be
erected by the transaction. It would do so by: (1) Requiring TCI to
divest all of its ownership interests in Time Warner or, in the
alternative, capping TCI's ownership of Time Warner stock and denying
TCI and its controlling shareholders the right to vote any such Time
Warner stock; (2) canceling the PSAs; (3) prohibiting Time Warner from
bundling Time Warner's HBO with any Turner networks and prohibiting the
bundling of Turner's CNN, TNT, and WTBS with any Time Warner networks;
(4) prohibiting Time Warner from discriminating against rival
Multichannel Video Programming Distributors (``MVPDs'') in the
provision of Turner programming; (5) prohibiting Time Warner from
foreclosing rival programmers from access to Time Warner's
distribution; and (6) requiring Time Warner to carry a 24-hour all news
channel that would compete with Turner's CNN. The following sections
discuss the primary provisions of the proposed consent order in more
detail.
A. TCI Will Divest Its Interest in Time Warner or Accept a Capped
Nonvoting Interest. The divestiture provision of the proposed consent
order (Paragraph II) requires TCI and LMC to divest their collective
ownership of approximately 7.5 percent of the fully diluted shares in
Time Warner - the amount they will obtain from Time Warner in exchange
for their 24 percent ownership interest in Turner--to a different
company (``The Separate Company'') that will be spun off by TCI and
LMC. The stock of The Separate Company would be distributed to all of
the shareholders of TCI's LMC subsidiary. Because that stock would be
freely tradeable on an exchange, the ownership of The Separate Company
would diverge over time from the ownership of the Liberty Media
Tracking Stock (and would, at the outset, be different from the
ownership of TCI). TCI would therefore breach its fiduciary duty to its
shareholders if it forestalled programming entry that could benefit TCI
as a cable system operator in order to benefit Time Warner's interests
as a programmer.
In addition to the divestiture provisions ensuring that TCI will
have no incentive to forgo its own best interests in order to favor
those of Time Warner, the proposed consent order contains provisions to
ensure that the transaction will not leave TCI or its management in a
position to influence Time Warner to alter its own conduct in order to
benefit TCI's interests. Absent restrictions in the consent order, the
TCI Control Shareholders (John C. Malone, Bob Magness, and Kearns-
Tribune Corporation) would have a controlling share of the voting power
of The Separate Company. To prevent those shareholders from having
significant influence over Time Warner's conduct, the proposed consent
order contains the following provisions that will wall off the TCI
Control Shareholders from influencing the officers, directors, and
employees of The Separate Company and its day-to-day operations:
The Commission must approve the initial board of directors
of The Separate Company;
Within six months of the distribution of The Separate
Company's stock, the stockholders (excluding the TCI Control
Shareholders) of The Separate Company must elect new directors;
Members of the board of directors of The Separate Company
are prohibited from serving as officers, directors, or employees of TCI
or LMC, or holding or controlling greater than one-tenth of one percent
(0.1%) of the ownership in or voting power of TCI or LMC;
Officers, directors or employees of TCI or LMC are
prohibited from concurrently serving as officers, directors, or
employees of The Separate Company, with a narrow exception so that TCI
or LMC employees may provide limited operational services to The
Separate Company;

[[Page 50310]]

The TCI Control Shareholders are prohibited from voting
(other than a de minimis voting share necessary for tax purposes) any
stock of The Separate Company to elect the board of directors or on
other matters. There are limited exceptions for voting on major issues
such as a proposed merger or sale of The Separate Company, the
disposition of all or substantially all of The Separate Company's
assets, the dissolution of The Separate Company, or proposed changes in
the corporate charter or bylaw of The Separate Company. However, no
vote on any of these excepted issues would be successful unless a
majority of shareholders other than the TCI Control Shareholders vote
in favor of such proposal;
The TCI Control Shareholders are prohibited from seeking
to influence, or attempting to control by proxy or otherwise, any other
person's vote of The Separate Company's stock;
Officers, directors, and employees of TCI or LMC, or any
of the TCI Control Shareholders are prohibited from communicating with
any officer, director, or employee of The Separate Company except on
the limited matters on which they are permitted to vote. Further
restrictions require that, in order for a TCI Control Shareholder to
seek to initiate action on an issue on which they are entitled to vote,
they must do so in writing;
The Separate Company is prohibited from acquiring more
than 14.99% of the fully diluted equity shares of Time Warner, with
exceptions in the event that the TCI Control Shareholders sell their
stock in The Separate Company or in TCI and LMC; and
The Separate Company is prohibited from voting its shares
(other than a de minimis voting share necessary for tax purposes) in
Time Warner, except that such shares can become voting if The Separate
Company sells them to an Independent Third Party or in the event that
the TCI Control Shareholders sell their stock in The Separate Company
or in TCI and LMC.
The Commission has reason to believe that the divestiture of TCI's
and LMC's interest in Time Warner to The Separate Company is in the
public interest. The required divestiture of the Time Warner stock by
TCI and LMC and the ancillary restrictions outlined above are
beneficial to consumers because (1) they would restore TCI's otherwise
diminished incentives to carry cable programming that would compete
with Time Warner's cable programming; and (2) they would eliminate
TCI's and LMC's ability to influence the operations of Time Warner.
The proposed consent order also requires TCI and LMC to apply to
the Internal Revenue Service (``IRS'') for a ruling that the
divestiture of TCI's and LMC's interest in Time Warner to The Separate
Company would be generally tax-free. Upon receipt of the IRS Ruling,
TCI and LMC has thirty days to transfer its Time Warner stock to The
Separate Company. After TCI and LMC divest this interest in Time Warner
to The Separate Company, TCI, LMC, Magness and Malone are prohibited
from acquiring any stock in Time Warner, above a collective de minimis
nonvoting amount, without the prior approval of the Commission.
Pending the ruling by the IRS, or in the event that the TCI and LMC
are unable to obtain such an IRS ruling, (1) TCI, LMC, John C. Malone
and Bob Magness, collectively and individually, are capped at level no
more than the lesser of 9.2 percent of the fully diluted equity of Time
Warner or 12.4% of the actual issued and outstanding common stock of
Time Warner, as determined by generally accepted accounting principles;
and (2) TCI, LMC and the TCI Control Shareholders' interest in Time
Warner must be nonvoting (other than a de minimis voting share
necessary for tax purposes), unless the interest is sold to an
Independent Third Party. This nonvoting cap is designed to restore
TCI's otherwise diminished incentives to carry cable programming that
would compete with Time Warner's cable programming as well as to
prevent TCI from seeking to influence Time Warner's competitive
behavior.
B. TCI's Long-Term Carriage Agreement With Turner Is Canceled. As
part of the transaction, Time Warner and TCI entered into PSAs that
required TCI to carry Turner programming for the next twenty years, at
a price set at the lesser of 85% of the industry average price or the
lowest price given to any distributor. According to the complaint, the
PSAs would tend to prevent Time Warner's rivals from achieving
sufficient distribution to threaten Time Warner's market power by
locking up scarce TCI channel space for an extended period of time. By
negotiating this arrangement as part of the Turner acquisition, and not
at arms length, Time Warner was able to compensate TCI for helping to
achieve this result. Under the Interim Agreement, TCI and Time Warner
are obligated to cancel the PSAs. Following cancellation of the PSAs,
there would be a six month ``cooling off'' period during which Time
Warner and TCI could not enter into new mandatory carriage requirements
on an analog tier for Turner programming.^{1 This cooling off period
will ensure that such agreements are negotiated at arm's length.
Thereafter, the parties cannot enter into any agreement that would
secure Time Warner guaranteed mandatory carriage rights on TCI analog
channel capacity for more than five-year periods. This restriction
would not prevent TCI from having renewal options to extend for
additional five-year periods, but would prohibit Time Warner from
obligating TCI to carry a Time Warner channel for more than five years.
The only exceptions to the cooling off period for Time Warner/TCI
carriage agreements would relate to WTBS and HLN on which there are no
existing contracts. Any such carriage agreements for those services
would also be limited to five years.
---------------------------------------------------------------------------

\1\Analog technology is currently used for cable programming
distribution and places significant limitations on the addition of
new channels. Digital technology, which is still in its infancy and
not currently a competitive factor in video distribution, has the
potential to expand capacity sixfold, thereby substantially
alleviating capacity constraints on the digital tier.
---------------------------------------------------------------------------

In requiring the cancellation of the PSAs and prescribing shorter
renewal option periods, the Commission has not concluded that any such
long-term programming agreements are anticompetitive in and of
themselves or would violate the antitrust laws standing alone. Rather,
the Commission has concluded that the PSAs are anticompetitive in the
context of the entire transaction arising from the merger and ownership
of Time Warner stock by TCI and in light of those two companies'
significant market shares in both programming and cable service. The
divestiture and rescission requirements would therefore sever
complementary ownership and long-term contractual links between TCI and
Time Warner. This would restore incentives for TCI, a cable operator
serving nearly a third of the nation's cable households, to place non-
Time Warner programming on its cable systems, in effect disciplining
any market power resulting from a combination of Time Warner and Turner
programming.
C. Time Warner is Barred From Bundling HBO with any Turner
Programming and CNN, TNT and WTBS with Time Warner Programming.
Paragraph V bars Time Warner from bundling HBO with Turner channels--
that is, making HBO available, or available on more favorable terms,
only if the purchaser agrees to take the Turner channels. Time Warner
is also barred from bundling CNN, TNT, or

[[Page 50311]]

WTBS with Time Warner channels. This provision applies to new
programming as well as existing programming. This provision is designed
to address concerns that the easiest way the combined firm could exert
substantially greater negotiating leverage over cable operators is by
combining all or some of such ``marquee'' services and offering them as
a package or offering them along with unwanted programming. Because the
focus of the provision is on seeking to prevent the additional market
power arising from this combination of programming, this provision does
not prevent bundling engaged in pre-merger--that is, Turner channels
with Turner channels and pre- merger Time Warner channels with Time
Warner channels. Rather, it is narrowly targeted at Time Warner's use
of its newly-acquired stable of ``marquee'' channels to raise prices by
bundling.
The Commission emphasizes that, in general, bundling often benefits
customers by giving firms an incentive to increase output and serve
buyers who would otherwise not obtain the product or service. The
Commission, however, believes that, in the context of this transaction,
the limited bar on bundling is a prudent measure that will prevent
actions by Time Warner that are likely to harm competition.
D. Time Warner is Barred from Price Discrimination Against Rival
MVPDs. Paragraph VI is designed to prevent Time Warner from using its
larger stable of programming interests to disadvantage new entrants
into the distribution of cable programs such as Direct Broadcast
Services, wireless systems, and systems created by telephone companies.
The complaint alleges that, as a programmer that does not own its own
distribution, Turner pre- merger had no incentive to and did not
generally charge significantly higher prices to new MVPD entrants
compared to the prices offered to established MVPDs. Under the terms of
Paragraph VI, the preacquisition range of pricing offered by Turner is
used as a benchmark to prevent Time Warner from discriminating against
the rival distributors of programming in its service areas, and Time
Warner may not increase the range of pricing on Turner programming
services between established MVPDs and new entrants any more than
Turner had pre-merger. Because Time Warner's incentive to discriminate
against MVPDs stems from an incentive to protect its own cable company
from those in or entering its downstream distribution areas, this
provision only covers competitors in Time Warner's distribution areas.
Because the price charged by Time Warner as a programmer to Time
Warner's cable systems is, to some extent, an internal transfer price,
the proposed consent order uses as a benchmark the price charged to the
three largest cable system operators nationwide rather than the price
charged to Time Warner. This provision, therefore, compares the price
charged to Time Warner's competitors in the overlap areas with the
price charged to the three largest cable system operators, and asks
whether the spread between the two is any greater than the pre-merger
spread between a similarly situated MVPD and the three largest cable
system operators. It thus focuses on the greater possibility for price
discrimination against new MVPD entrants arising directly as a result
of this merger. It both ensures that Time Warner's additional market
power as a result of this merger does not result in higher prices to
new MVPD entrants, while it narrowly protects only those new entrants
that Time Warner may have an incentive to harm.
E. Conduct and Reporting Requirements Designed to Ensure that Time
Warner Cable Does Not Discriminatorily Deny Carriage to Unaffiliated
Programmers. The order has two main provisions designed to address
concerns that this combination increases Time Warner's incentives to
disadvantage unaffiliated programmers in making carriage decisions for
its own cable company. Paragraph VII, drawn from statutory provisions
in the 1992 Cable Act, is designed to prevent Time Warner from
discriminating in its carriage decisions so as to exclude or
substantially impair the ability of an unaffiliated national video
programmer to enter into or to compete in the video programming market.
The Commission views these provisions as working in tandem with the
collection and reporting requirements contained in Paragraph VIII.
Under that paragraph, Time Warner is required to collect and maintain
information about programming offers received and the disposition of
those offers as well as information comparing Time Warner cable
systems' carriage rates to carriage rates on other MVPDs for national
video programming services. Such information would be reported on a
quarterly basis to the management committee of TWE. TWE's management
committee includes representatives of U S West since U S West is a
minority partner in TWE. TWE owns or operates all of Time Warner's
cable systems. Because U S West's incentives would be to maximize
return to TWE's cable systems rather than to Time Warner's wholly owned
programming interests, it would have strong incentives to alert the
Commission to actions by Time Warner that favored Time Warner's wholly
owned programming interests at the expense of Time Warner cable
systems' profitability. Such information would also be available for
inspection independently by the Commission. Furthermore, Time Warner's
General Counsel responsible for cable systems is required to certify
annually to the Commission its compliance with the substantive
prohibitions in Paragraph VII.
F. Time Warner Cable Agrees to Carry CNN Rival. Of the types of
programming in which the post-merger Time Warner will have a leading
position, the one with the fewest existing close substitutes is the
all-news segment, in which CNN is by far the most significant player.
There are actual or potential entrants that could in the future erode
CNN's market power, but their ability to do so is partly dependent on
their ability to secure widespread distribution. Without access to Time
Warner's extensive cable holdings, such new entry may not be
successful. Time Warner's acquisition of CNN gives it both the ability
and incentive to make entry of competing news services more difficult,
by denying them access to its extensive distribution system. To remedy
this potential anticompetitive effect, Time Warner would be required to
place a news channel on certain of its cable systems under Paragraph IX
of the proposed agreement. The rate of roll-out and the final
penetration rate is set at levels so as not to interfere with Time
Warner's carriage of other programming. It is set at such a level that
Time Warner may continue carrying any channel that it is now carrying,
may add any channel that it is contractually committed to carry in the
future, and may continue any plans it has to carry unaffiliated
programming in the future. It limits only Time Warner's ability to give
effect to its incentive to deny access even to a news channel that does
not interfere with such commitments or plans. Time Warner has committed
to achieve penetration of 50% of total basic subscribers by July 30,
1999, if it seeks to fulfill this provision by increasing carriage for
an existing channel, or to achieve penetration of 50% of total basic
subscribers by July 30, 2001, if it seeks to fulfill this provision by
carrying a channel not currently carried by Time Warner. This shorter
period is possible in the former case because, to the extent that Time
Warner is already committed to carry the channel on a portion of Time
Warner's systems, less additional

[[Page 50312]]

capacity would need to be found in order to achieve the required
penetration. On the other hand, the longer period if a new news service
is selected assures that an existing news service or other service need
not be displaced to make room for the new service.
This provision was crafted so as to give Time Warner flexibility in
choosing a new news channel, without undermining the Commission's
competitive concern that the chosen service have the opportunity to
become a strong competitor to CNN. To ensure that the competing news
channel is competitively significant, the order obligates Time Warner
to choose a news service that will have contractual commitments with
unaffiliated cable operators to reach 10 million subscribers by
February 1, 1997. Together with Time Warner's commitments required by
the proposed order, such a service would have commitments for a total
of approximately 15 million subscribers. In the alternative, Time
Warner could take a service with a smaller unaffiliated subscriber
base, if it places the service on more of its own systems in order to
assure that the service's total subscribers would reach 15 million. In
order to attract advertisers and become a competitive force, a news
service must have a critical mass of subscribers. The thresholds
contained in this order give Time Warner flexibility while ensuring
that the service selected has enough subscribers to have a credible
opportunity to become an effective competitor. The February 1, 1997,
date was selected so as to give competitive news services an
opportunity to achieve the required number of subscribers.
Accordingly, this provision should not interfere with Time Warner's
plans to carry programming of its choosing or unduly involve the
Commission in Time Warner's choice of a new service. It is analogous to
divestiture of one channel on some cable systems and is thus far less
burdensome to Time Warner than the typical antitrust remedy which would
require that Time Warner divest some or all of cable systems in their
entirety. The Commission, however, recognizes that this provision is
unusual and invites public comment on the appropriateness of such a
requirement.
V. Opportunity for Public Comment
The proposed consent order has been placed on the public record for
60 days for reception of comments from interested persons. Comments
received during this period will become part of the public record.
After 60 days, the Commission will again review the agreement and
comments received, and will decide whether it should withdraw from the
agreement or make final the order contained in the agreement.
By accepting the consent order subject to final approval, the
Commission anticipates that the competitive problems alleged in the
complaint will be resolved. The purpose of this analysis is to invite
and facilitate public comment concerning the consent order. It is not
intended to constitute an official interpretation of the agreement and
proposed order or in any way to modify their terms.
Benjamin I. Berman,
Acting Secretary.

Separate Statement of Chairman Pitofsky, and Commissioners Steiger and
Varney In the Matter of Time Warner Inc., File No. 961-0004

The proposed merger and related transactions among Time Warner,
Turner, and TCI involve three of the largest firms in cable programming
and delivery--firms that are actual or potential competitors in many
aspects of their businesses. The transaction would have merged the
first and third largest cable programmers (Time Warner and Turner). At
the same time it would have further aligned the interests of TCI and
Time Warner, the two largest cable distributors. Finally, the
transaction as proposed would have greatly increased the level of
vertical integration in an industry in which the threat of foreclosure
is both real and substantial.^{1 While the transaction posed
complicated and close questions of antitrust enforcement, the
conclusion of the dissenters that there was no competitive problem at
all is difficult to understand.
---------------------------------------------------------------------------

\1\ Both Congress and the regulators have identified problems
with the effects of vertical foreclosure in this industry. See
generally James W. Olson and Lawrence J. Spiwak, Can Short-term
Limits on Strategic Vertical Restraints Improve Long-term Cable
industry Market Performance?, 13 Cardozo Arts & Entertainment Law
Journal 283 (1995). Enforcement action in this case is wholly
consistent with the goals of Congress in enacting the 1992 Cable
Act: providing greater access to programming and promoting
competition in local cable markets.
---------------------------------------------------------------------------

Many of the concerns raised in the dissenting Commissioners
statements are carefully addressed in the analysis to aid public
comment. We write to clarify our views on certain specific issues
raised in the dissents.
Product market. The dissenting Commissioners suggest that the
product market alleged, ``the sale of Cable Television Programming
Services to MVPDs (Multichannel Video Programming Distributors),''
cannot be sustained. The facts suggest otherwise. Substantial evidence,
confirmed in the parties' documents and testimony, as well as documents
and sworn statements from third-parties, indicated the existence of an
all cable television market. Indeed, there was significant evidence of
competitive interaction in terms of carriage, promotions and marketing
support, subscriber fees, and channel position between different
segments of cable programming, including basic and premium channel
programming. Cable operators look to all types of cable programming to
determine the proper mix of diverse content and format to attract a
wide range of subscribers.
Although a market that includes both CNN and HBO may appear
somewhat unusual on its face, the Commission was presented here with
substantial evidence that MVPDs require access to certain ``marquee''
channels, such as HBO and CNN, to retain existing subscribers or expand
their subscriber base. Moreover, we can not concur that evidence in the
record supports Commissioner Azcuenaga's proposed market definition,
which would segregate offerings into basic and premium cable
programming markets.
Entry. Although we agree that entry is an important factor, we
cannot concur with Commissioner Azcuenaga's overly generous view of
entry conditions in this market. While new program channels have
entered in the past few years, these channels have not become
competitively significant. None of the channels that has entered since
1991 has acquired more than a 1% market share.
Moreover, the anticompetitive effects of this acquisition would
have resulted from one firm's control of several marquee channels. In
that aspect of the market, entry has proven slow and costly. The
potential for new entry in basic services cannot guarantee against
competitive harm. To state the matter simply, the launch of a new
``Billiards Channel,'' ``Ballet Channel,'' or the like will barely make
a ripple on the shores of the marquee channels through which Time
Warner can exercise market power.
Technology. Commissioner Azcuenaga also seems to suggest that the
Commission has failed to recognize the impact of significant
technological changes in the market, such as the emergence of new
delivery systems such as direct broadcast satellite networks
(``DBS'').^{2 We agree that these alternative technologies may
someday become a significant competitive force

[[Page 50313]]

in the market. Indeed, that prospect is one of the reasons the
Commission has acted to prevent Time Warner from being able to
disadvantage these competitors by discriminating in access to
programming.
---------------------------------------------------------------------------

\2\ DBS providers are included as participants in the relevant
product market.
---------------------------------------------------------------------------

But to suggest that these technologies one day may become more
widespread does not mean they currently are, or in the near future will
be, important enough to defeat anticompetitive conduct. Alternative
technologies such as DBS have only a small foothold in the market,
perhaps a 3% share of total subscribers. Moreover, DBS is more costly
and lacks the carriage of local stations. It seems rather unlikely that
the emerging DBS technology is sufficient to prevent the competitive
harm that would have arisen from this transaction.
Horizontal competitive effects. Although Commissioner Starek
presents a lengthy argument on why we need not worry about the
horizontal effects of the acquisition, the record developed in this
investigation strongly suggests anticompetitive effects would have
resulted without remedial action. This merger would combine the first
and third largest providers of cable programming, resulting in a merged
firm controlling over 40% of the market, and several of the key marquee
channels including HBO and CNN. The horizontal concerns are
strengthened by the fact that Time Warner and TCI are the two largest
MVPDs in the country. The Commission staff received an unprecedented
level of concern from participants in all segments of the market about
the potential anticompetitive effects of this merger.
One of the most frequent concerns expressed was that the merger
heightens the already formidable entry barriers into programming by
further aligning the incentives of both Time Warner and TCI to deprive
entrants of sufficient distribution outlets to achieve the necessary
economies of scale. The proposed order addresses the impact on entry
barriers as follows. First, the prohibition on bundling would deter
Time Warner from using the practice to compel MVPDs to accept unwanted
channels which would further limit available channel capacity to non-
Time Warner programmers. Second, the conduct and reporting requirements
in paragraphs VII and VIII provide a mechanism for the Commission to
become aware of situations where Time Warner discriminates in handling
carriage requests from programming rivals.
Third, the proposed order reduces entry barriers by eliminating the
programming service agreements (PSAs), which would have required TCI to
carry certain Turner networks until 2015, at a price set at the lower
of 85% of the industry average price or the lowest price given to any
other MVPD. The PSAs would have reduced the ability and incentives of
TCI to handle programming from Time Warner's rivals. Channel space on
cable systems is scarce. If the PSAs effectively locked up significant
channel space on TCI, the ability of rival programmers to enter would
have been harmed. This effect would have been exacerbated by the
unusually long duration of the agreement and the fact that TCI would
have received a 15% discount over the most favorable price given to any
other MVPD. Eliminating the twenty-year PSAs and restricting the
duration of future contracts between TCI and Time Warner would restore
TCI's opportunities and incentives to evaluate and carry non-Time
Warner programming.
We believe that this remedy carefully restricts potential
anticompetitive practices, arising from this acquisition, that would
have heightened entry barriers.
Vertical foreclosure. The complaint alleges that post-acquisition
Time Warner and TCI would have the power to: (1) Foreclose unaffiliated
programming from their cable systems to protect their programming
assets; and (2) disadvantage competing MVPDs, by engaging in price
discrimination. Commissioner Azcuenaga contends that Time Warner and
TCI lack the incentives and the ability to engage in either type of
foreclosure. We disagree.
First, it is important to recognize the degree of vertical
integration involved. Post-merger Time Warner alone would control more
than 40% of the programming assets (as measured by subscriber revenue
obtained by MVPDs). Time Warner and TCI, the nation's two largest
MVPDs, control access to about 44% of all cable subscribers. The case
law have found that these levels of concentration can be
problematic.^{3
---------------------------------------------------------------------------

\3\ See Ash Grove Cement Co. v. FTC, 577 F2d 1368 (9th Cir.
1978); Mississippi River Corp. v. FTC, 454 F.2d 1083 (8th Cri.
1972); United States Steel Corp. v. FTC, 426 F.2d 592 (6th Cir.
1970); see generally Herbert Hovenkamp, Federal Antitrust Policy
Sec. 9.4 (1994).
---------------------------------------------------------------------------

Second, the Commission received evidence that these foreclosure
threats were real and substantial. There was clearly reason to believe
that this acquisition would increase the incentives to engage in this
foreclosure without remedial action. For example, the launch of a new
channel that could achieve marquee status would be almost impossible
without distribution on either the Time Warner or TCI cable systems.
Because of the economies of scale involved, the successful launch of
any significant new channel usually requires distribution on MVPDs that
cover 40-60% of subscribers.
Commissioner Starek suggests that we need not worry about
foreclosure because there are sufficient number of unaffiliated
programmers and MVPDs so that each can survive by entering into
contracts. With all due respect, this view ignores the competitive
realities of the marketplace. TCI and Time Warner are the two largest
MVPDs in the U.S. with market shares of 27% and 17% respectively.^{4
Carriage on one or both systems is critical for new programming to
achieve competitive viability. Attempting to replicate the coverage of
these systems by lacing together agreements with the large number of
much smaller MVPDs is costly and time consuming.^{5 The Commission
was presented with evidence that denial of coverage on the Time Warner
and TCI systems could further delay entry of potential marquee channels
for several years.
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\4\ They are substantially larger than the next largest MVPD,
Continental, which has an approximately 6% market share.
\5\ See U.S. Department of Justice Horizontal Merger Guidelines,
para. 13,103 Trade Cas. (CCH) at 20,565-66, Secs. 4.2 4,21(June 14,
1984), incorporation in U.S. Department of Justice and Federal Trade
Commission Horizontal Merger Guidelines, para. 13,104 Trade Cas.
(CCH) (Apirl 7, 1992).
---------------------------------------------------------------------------

TCI ownership of Time Warner. Commissioner Azcuenaga suggests that
TCI's potential acquisition of a 15% interest in Time Warner, with the
prospect of acquiring up to 25% without further antitrust review, does
not pose any competitive problem. We disagree. Such a substantial
ownership interest, especially in a highly concentrated market with
substantial vertically interdependent relationships and high entry
barriers, poses significant competitive concerns.^{6 In particular,
the interest would give TCI greater incentives to disadvantage
programmer competitors of Time Warner; similarly it would increase Time
Warner's incentives to disadvantage MVPDs that compete with TCI. The
Commission's remedy would eliminate these incentives to act
anticompetitively by making TCI's interest truly passive.
---------------------------------------------------------------------------

\6\ See United States v. dupont de Nemours & Co., 353 U.S. 586
(1957); F&M Schaefer Corp v. C. Schmidt & Sons, Inc., 597 F.2d 814,
818-19 (2d Cir. 1979); Gulf & Western Indus. v. Great Atlantic &
Pacific Tea Co., 476 F.2d 687 (2d Cir. 1973).
---------------------------------------------------------------------------

Efficiencies. Finally, Commissioner Azcuenaga seems to suggest that
the acquisition may result in certain efficiencies in terms of ``more
and better programming options'' and ``reduced

[[Page 50314]]

transactions costs.'' There was little or no evidence presented to the
Commission to suggest that these efficiencies were likely to occur.

Dissenting Statement of Commissioner Mary L. Azcuenaga in Time Warner
Inc., File No. 961-0004

The Commission today accepts for public comment a proposed consent
agreement to settle allegations that the proposed acquisition by Time
Warner Inc. (Time Warner) of Turner Broadcasting System, Inc. (Turner),
and related agreements with Tele-Communications, Inc. (TCI),^{1
would be unlawful. Alleging that this transaction violates the law is
possible only by abandoning the rigor of the Commission's usual
analysis under Section 7 of the Clayton Act. To reach this result, the
majority adopts a highly questionable market definition, ignores any
consideration of efficiencies and blindly assumes difficulty of entry
in the antitrust sense in the face of overwhelming evidence to the
contrary. The decision of the majority also departs from more general
principles of antitrust law by favoring competitors over competition
and contrived theory over facts.
---------------------------------------------------------------------------

\1\ Liberty Media Corporation, a wholly-owned subsidiary of TCI,
also is named in the complaint and order. For simplicity, references
in this statement to TCI include Liberty.
---------------------------------------------------------------------------

The usual analysis of competitive effects under the law, unlike the
apparent analysis of the majority, would take full account of the
swirling forces of innovation and technological advances in this
dynamic industry. Unfortunately, the complaint and the underlying
theories on which the proposed order is based do not begin to satisfy
the rigorous standard for merger analysis that this agency has applied
for years. Instead, the majority employs a looser standard for
liability and a regulatory order that threatens the likely efficiencies
from the transaction. Having found no reason to relax our standards of
analysis for this case, I cannot agree that the order is warranted.
Product Market
We focus in merger analysis on the likelihood that the transaction
will create or enhance the ability to exercise market power, i.e.,
raise prices. The first step usually is to examine whether the merging
firms sell products that are substitutes for one another to see if
there is a horizontal competitive overlap. This is important in a case
based on a theory of unilateral anticompetitive effects, as this one
is, because according to the merger guidelines, the theory depends on
the factual assumption that the products of the merging firms are the
first and second choices for consumers.^{2
---------------------------------------------------------------------------

\2\ 1992 Horizontal Merger Guidelines para. 2.2. The theory is
that when the post-merger firm raises the price on product A or on
products A and B, sales lost due to the price increase on the first-
choice product (A) will be diverted to the second-choice product
(B). The price increase is unlikely to be profitable unless a
significant share of consumers regard the products of the merged
firm as their first and second choices.
---------------------------------------------------------------------------

In this case, it could be argued that from the perspective of cable
system operators and other multichannel video program distributors
(MVPDs), who are purchasers of programming services, all network
services are substitutes. This is the horizontal competitive overlap
that is alleged in the complaint.^{3
---------------------------------------------------------------------------

\3\ Complaint para. 24.
---------------------------------------------------------------------------

One problem with the alleged all-programming market is that basic
services (such as Turner's CNN) and premium services (such as Time
Warner's HBO) are not substitutes along the usual dimensions of
competition. Most significantly, they do not compete on price. CNN is
sold to MVPDs for a fee per subscriber that is on average less than
one-tenth of the average price for HBO, and it is resold as part of a
package of basic services for an inclusive fee. HBO is sold at
wholesale for more than ten times as much; it is resold to consumers on
an a la carte basis or in a package with other premium services, and a
subscription to basic service usually is a prerequisite. It is highly
unlikely that a cable operator, to avoid a price increase, would drop a
basic channel and replace it with a significantly more expensive
premium channel. Furthermore, cable system operators tell us that when
the price for basic cable services increases, consumers drop pay
services, suggesting that at least at the retail level these goods are
complementary, rather than substitutes for one another.
Another possible argument is that CNN and HBO should be in the same
product market because, from the cable operator's perspective, each is
``necessary to attract and retain a significant percentage of their
subscribers.'' ^{4 If CNN and HBO were substitutes in this sense, we
would expect to see cable system operators playing them against one
another to win price concessions in negotiations with programming
sellers, but there is no evidence that they have been used this way,
and cable system operators have told us that basic and premium channels
do not compete on price.^{5 There are closer substitutes, in terms
of price and content, for CNN (in the basic tier) and for HBO (in the
premium tier).
---------------------------------------------------------------------------

\4\ Complaint Paras. II.4 & III.9. To the extent that each
network (CNN and HBO) is viewed as ``necessary'' to attract
subscribers, as alleged in the complaint, each would appear to have
market power quite independent of the proposed transaction and of
each other.
\5\ If the market includes premium cable channels, it probably
ought also to include video cassette rentals, which constrain the
pricing of premium channels. Federal Communications Commission,
Second Annual Report on the Status of Competition in the Market for
the Delivery of Video Programming para. 121 (Dec. 7, 1995)
(hereafter ``FCC Report''). If the theory is that HBO and CNN
compete for channel space, the market probably should include over-
the-air broadcast networks, at least to the extent that they can
obtain cable channel space as the price for retransmission rights.
---------------------------------------------------------------------------

I am not persuaded that the product market alleged in the complaint
could be sustained. The products of Time Warner and Turner are not the
first and second choices for consumers (or cable system operators or
other MVPDs), and there are no other horizontal overlaps warranting
enforcement action in any other cable programming market.^{6 Under
these circumstances, it would seem appropriate to withdraw the proposed
complaint.
---------------------------------------------------------------------------

\6\ In the two product markets most likely to be sustained under
the law, basic cable services and premium cable services, the
transaction falls within safe harbors described in the 1992 Merger
Guidelines.
---------------------------------------------------------------------------

Entry
The proposed complaint alleges that entry is difficult and
unlikely.^{7 This is an astonishing allegation, given the amount of
entry in the cable programming market. The number of cable programming
services increased from 106 to 129 in 1995, according to the FCC.^{8
One source reported thirty national 24-hour channels expected to launch
this year,^{9 and another recently identified seventy-three networks
``on the launch pad'' for 1996.^{10 That adds up to between fifty-
three and ninety-six new and announced networks in two years. Another
source listed 141 national 24-hour cable networks launched or announced
between January 1993 and March 1996.^{11
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\7\ Complaint Paras. 33-35.
\8\ FCC Report para. 10.
\9\ National Cable Television Association, Cable Television
Developments 103-17 (Fall 1995).
\10\ ``On the Launch Pad,'' Cable World, April 29, 1996, at 143;
see also Cablevision, Jan. 22, 1996, at 54 (98 announced services
with expected launches in 1996).
\11\ ``A Who's Who of New Nets,'' Cablevision, April 15, 1996
(Special Supp.) at 27A-44A (as of March 28, 1996, 163 new networks
when regional, pay-per-view and interactive services are included).
---------------------------------------------------------------------------

This does not mean that entry is easy or inexpensive. Not all the
channels that have announced will launch a service, and not all those
that launch will succeed.^{12 But some of them will. Some

[[Page 50315]]

recent entrants include CNNfn (December 1995), Nick at Nite (April
1996), MS/NBC (July 1996) and the History Channel (January
1995).^{13 The Fox network plans to launch a third 24-hour news
channel, and Westinghouse and CBS Entertainment recently announced that
they will launch a new entertainment and information cable channel, Eye
on People, in March 1997.^{14 The fact of so much ongoing entry
indicates that entry should be regarded as virtually immediate.
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\12\ ``The stamina and pocket-depth of backers of new players
[networks] still remain key factors for survival. However,
distribution is still the name of the game.'' Cablevision, April 15,
1996 (Special Supp.), at 3A.
\13\ Carter, ``For History on Cable, the Time Has Arrived,''
N.Y. Times, May 20, 1996, at D1. The article reported that the
History Channel began in January 1995 with one million subscribers,
reached 8 million subscribers by the end of the year and by May 1996
was seen in 18 million homes.
\14\ Carmody, ``The TV channel,'' The Washington Post, Aug. 21,
1996, at D12.
---------------------------------------------------------------------------

New networks need not be successful or even launched before they
can exert significant competitive pressure. Announced launches can
affect pricing immediately. The launch of MS/NBC and the announcement
of Fox's cable news channel already may have affected the incumbent
all-news channel, CNN, because cable system operators can credibly
threaten to switch to one of the new news networks in negotiations to
renew CNN.^{15
---------------------------------------------------------------------------

\15\ This is the kind of competition we would expect to see
between cable networks that are substitutes for one another and the
kind of competition that is non-existent between CNN and HBO.
---------------------------------------------------------------------------

Any constraint on cable channel capacity does not appear to be
deterring entry of new networks. Indeed, the amount of entry that is
occurring apparently reflects confidence that channel capacity will
expand, for example, by digital technology. In addition, alternative
MVPDs, such as Direct Broadcast Satellite (DBS), may provide a
launching pad for new networks.^{16 For example, CNNfn was launched
in 1995 with 4 to 5 million households, divided between DBS and cable.
---------------------------------------------------------------------------

\16\ The entry of alternative MVPD technologies may put
competitive pressure on cable system operators to expand capacity
more quickly. See ``The Birth of Networks,'' Cablevision (Special
Supp. April 15, 1996), at 8A (cable system operators ``don't want
DBS and the telcos to pick up the services of tomorrow while they
are being overly arrogant about their capacity'').
---------------------------------------------------------------------------

Nor should we ignore significant technological changes in video
distribution that are affecting cable programming. One such change is
the development and commercialization of new distribution methods that
can provide alternatives for both cable programmers and subscribers.
DBS is one example. With digital capability, DBS can provide hundreds
of channels to subscribers. By September 1995, DBS was available in all
forty-eight contiguous states and Alaska.^{17 In April 1996, DBS had
2.4 million customers; in August 1996, DBS had 3.34 million subscribers
^{18 (compared to 62 million cable customers in the U.S.). AT&T
recently invested $137.5 million in DirecTV, a DBS provider, began to
sell satellite dishes and programming to its long distance customers in
four markets, and reportedly plans to expand to the rest of the country
in September 1996.^{19 EchoStar and AlphaStar both have launched new
DBS services, and MCI Communication and News Corp. have announced a
partnership to enter DBS.^{20 Some industry analysts predict that
DBS will serve 15 million subscribers by 2000.^{21
---------------------------------------------------------------------------

\17\ FCC Report para. 49.
\18\ DBS Digest, Aug. 22, 1996 (http://www.dbsdish.com/
dbsdata,html (Sept. 5, 1996)).
\19\ See Breznick, ``Crowded Skies,'' Cable World (April 29,
1996) (http://www.mediacentral.com/magazines/Cable Worls/News96/
1996042913.htm/539128 (Setp. 3, 1996); see also N.Y. Times, JUly 14,
1996, at 23 (AT&T full page ad for digital satellite system DirecTV
and USSB); USA Today, Aug. 20, 1996, at 5D (DISH Network full page
ad for digital satellite system and channels).
\20\ Breznick, ``Crowded Skies,'' Cable World, April 29, 1996
(http://www.mediacentral.com/magazines/Cable World/news96/
1996042913.htm/539128 (Sept. 3, 1996)).
\21\ See id.
---------------------------------------------------------------------------

Digital technology, which would expand cable capacity to as many as
500 channels, is another important development. DBS already uses
digital technology, and some cable operators plan to begin providing
digital service later this year. Discovery Communications (The
Discovery Channel) has announced that it will launch four new
programming services designed for digital boxes in time for TCI's
``digital box rollout'' this fall.^{22 (Even without digital
service, cable systems have continued to upgrade their capacity; in
1994, about 64% of cable systems offered thirty to fifty-three
channels, and more than 14% offered fifty-four or more
channels.^{23) Local telephone companies have entered as
distributors via video dialtone, MMDS ^{24 and cable systems, and
the telcos are exploring additional ways to enter video distribution
markets. Digital compression and advanced television technologies could
make it possible for multiple programs to be broadcast over a single
over-the-air broadcast channel.^{25 When these developments will be
fully realized is open to debate, but it is clear that they are on the
way and affecting competition. According to one trade association
official, cable operators are responding to competition by ``upgrading
their infrastructures with fiber optics and digital compression
technologies to boost channel capacity. * * * What's more, cable
operators are busily trying to polish their images with a public that
has long registered gripes over pricing, customer service and
programming choice.'' ^{26
---------------------------------------------------------------------------

\22\ Katz, ``Discovery Goes Digital,'' Multichannel News Digest,
Sept. 3, 1996 (``The new networks * * * will launch Oct. 22 in order
to be included in Tele-Communications Inc.'s digital box rollout in
Hartford, Conn.'') (http://www.multichannel.com/digest.htm (Sept. 5,
1996)).
\23\ FCC Report at B-2 (Table 3).
\24\ MMDS stands for multichannel multipoint distribution
service, a type of wireless cable See FCC Report at Paras. 68.85.
Industry observers project that MMDS will serve more than 2 million
subscribers in 1997 and grow more than 280% between 1995 and 1998.
FCC Report para. 71.
\25\ FCC Report para. 116.
\26\ Pendleton, ``Keeping Up With Cable Competition,'' Cable
World, April 29, 1996, at 158.
---------------------------------------------------------------------------

Ongoing entry in programming suggests that no program seller could
maintain an anticompetitive price increase and, therefore, there is no
basis for liability under Section 7 of the Clayton Act. Changes in the
video distribution market will put additional pressure on both cable
systems and programming providers to be competitive by providing
quality programming at reasonable prices. The quality and quantity of
entry in the industry warrants dismissal of the complaint.
Horizontal Theory of Liability
The proposed complaint alleges that Time Warner will be able to
exploit its ownership of HBO and the Turner basic channels by
``bundling'' Turner networks with HBO, that is, by selling them as a
package.^{27 As a basis for liability in a merger case, this appears
to be without precedent.^{28 Bundling is not always anticompetitive,
and one problem with the theory is that we cannot predict when it will
be anticompetitive.^{29 Bundling can be used to transfer market
power from the ``tying'' product to the ``tied'' product, but it also
is used in many industries as a means of discounting. Popular cable
networks, for example, have been sold in a package at a discount from
the single product price. This can be a way for a programmer to
encourage cable system operators to carry multiple

[[Page 50316]]

networks and achieve cross-promotion among the networks in the package.
Even if it seemed more likely than not that Time Warner would bundle
HBO with Turner networks after the merger, we could not a priori
identify this as an anticompetitive effect.
---------------------------------------------------------------------------

\27\ Complaint para. 38a.
\28\ Cf. Heublein, Inc., 96 F.T.C. 385, 596-99 (1980) (rejecting
a claim of violation based on leveraging).
\29\ See Whinston, ``Tying, Foreclosure, and Exclusion,'' 80 Am.
Econ. Rev. 837, 855-56 (1990) (tying can be exclusionary, but ``even
in the simple models considered [in the article], which ignore a
number of other possible motivations for the practice, the impact of
this exclusion on welfare is uncertain. This fact, combined with the
difficulty of sorting out the leverage-based instances of tying from
other cases, makes the specification of a practical legal standard
extremely difficult.'').
---------------------------------------------------------------------------

The alleged violation rests on a theory that the acquisition raises
the potential for unlawful tying. To the best of my knowledge, Section
7 of the Clayton Act has never been extended to such a situation. There
are two reasons not to adopt the theory here. First, challenging the
mere potential to engage in such conduct appears to fall short of the
``reasonable probability'' standard under Section 7 of the Clayton Act.
We do not seek to enjoin mergers on the mere possibility that firms in
the industry may later choose to engage in unlawful conduct. It is
difficult to imagine a merger that could not be enjoined if ``mere
possibility'' of unlawful conduct were the standard. Here, the
likelihood of anticompetitive effects is even more removed, because
tying, the conduct that might possibly occur, in turn might or might
not prove to be unlawful. Second, anticompetitive tying is unlawful,
and Time Warner would face private law suits and agency enforcement
action for such conduct.
The proposed remedy for the alleged bundling is to prohibit
it,^{30 with no attempt to distinguish efficient bundling from
anticompetitive bundling.^{31 Assuming liability on the basis of an
anticompetitive horizontal overlap, the obvious remedy would be to
enjoin the transaction or require the divestiture of HBO. Divestiture
is a simple, easily reviewable and complete remedy for an
anticompetitive horizontal overlap. The weakness of the Commission's
case seems to be the only impediment to imposing that remedy here.
---------------------------------------------------------------------------

\30\ Order para. V.
\31\ Although the proposed order would permit any bundling that
Time Warner or Turner could have implemented independently before
the merger, the reason for this distinction appears unrelated to
distinguishing between pro- and anti-competitive bundling.
---------------------------------------------------------------------------

Vertical Theories
The complaint also alleges two vertical theories of competitive
harm. The first is foreclosure of unaffiliated programming from Time
Warner and TCI cable systems.^{32 The second is anticompetitive
price discrimination against competing MVPDs in the sale of cable
programming.^{33 Neither of these alleged outcomes appears
particularly likely.
---------------------------------------------------------------------------

\32\ Complaint para. 38b.
\33\ Complaint para. 38c.
---------------------------------------------------------------------------

Foreclosure
Time Warner cannot foreclose the programming market by refusing
carriage on its cable system, because Time Warner has less than 20% of
cable subscribers in the United States. Even if TCI were willing to
join in an attempt to barricade programming produced by others from
distribution, TCI and Time Warner together control less than 50% of the
cable subscribers in the country. In that case, entry of programming
via cable might be more expensive (because of the costs of obtaining
carriage on a number of smaller systems), but it need not be
foreclosed. And even if Time Warner and TCI together controlled a
greater share of cable systems, the availability of alternative
distributors of video programming and the technological advances that
are expanding cable channel capacity make foreclosure as a result of
this transaction improbable.
The foreclosure theory also is inconsistent with the incentives of
the market. Cable system operators want more and better programming, to
woo and win subscribers. To support their cable systems, Time Warner
and TCI must satisfy their subscribers by providing programming that
subscribers want at reasonable prices. Given competing distributors and
expanding channel capacity, neither of them likely would find it
profitable to attempt to exclude new programming.
TCI as a shareholder of Time Warner, as the transaction has been
proposed to us (with a minority share of less than 10%), would have no
greater incentive than it had as a 23% shareholder of Turner to protect
Turner programming from competitive entry. Indeed, TCI's incentive to
protect Turner programming would appear to be diminished.^{34 If
TCI's interest in Time Warner increased, it stands to reason that TCI's
interest in the well-being of the Turner networks also would increase.
But it is important to remember that TCI's principal source of income
is its cable operations, and its share of Time Warner profits from
Turner programming would be insufficient incentive for TCI to
jeopardize its cable business.^{35 It may be that TCI could acquire
an interest in Time Warner that could have anticompetitive
consequences, but the Commission should analyze that transaction when
and if TCI increases its holdings. The divestiture requirement imposed
by the order ^{36 is not warranted at this time.
---------------------------------------------------------------------------

\34\ Turner programming would account for only part of TCI's
interest in Time Warner.
\35\ Even if its share of Time Warner were increased to 18%,
TCI's interest in the combined Time Warner/Turner cash flow would be
only slightly greater than TCI's pre-transaction interest in Turner
cash flow, and it would still amount to only an insignificant
fraction of the cash flow generated by TCI's cable operations.
\36\ Order Paras. II & III.
---------------------------------------------------------------------------

Another aspect of the foreclosure theory alleged in the complaint
is a carriage agreement (programming service agreement or PSA) between
TCI and Turner. Under the PSA, TCI would carry certain Turner networks
for twenty years, at a discount from the average price at which Time
Warner sells the Turner networks to other cable operators. The
complaint alleges that TCI's obligations under the PSA would diminish
its incentives and ability to carry programming that competes with
Turner programming,^{37 which in turn would raise barriers to entry
for unaffiliated programming. The increased difficulty of entry, so the
theory goes, would in turn enable Time Warner to raise the price of
Turner programming sold to cable operators and other MVPDs. It is hard
to see that the PSA would have anticompetitive effects. TCI already has
contracts with Turner that provide for mandatory carriage of CNN and
TNT, and TCI is likely to continue to carry these programming networks
for the foreseeable future.^{38 The current agreements do not raise
antitrust issues, and the PSA raises no new ones. Any theoretical
bottleneck on existing systems would be even further removed by the
time the carriage requirements under the PSA would have become
effective (when existing carriage commitments expire), because
technological changes will have expanded cable channel capacity and
alternative MVPDs will have expanded their subscribership. The PSA
could even give TCI incentives to encourage the entry of new
programming to compete with Time Warner's programming and keep TCI's
costs down.^{39 The PSA would have afforded Time Warner long term
carriage for the Turner networks, given TCI long term programming
commitments with some price protection, and eliminated the costs of
renegotiating a number of existing Turner/TCI carriage agreements as
they expire. These are efficiencies. No compelling reason has been

[[Page 50317]]

advanced for requiring that the carriage agreement be cancelled.^{40
---------------------------------------------------------------------------

\37\ Complaint para. 38b(2).
\38\ Cable system operators like to keep their subscribers
happy, and subscribers do not like to have popular programming
cancelled.
\39\ Under the ``industry average price'' provision of the PSA,
Time Warner could raise price to TCI by increasing the price it
charges other MVPDs. TCI could encourage entry to defeat any attempt
by Time Warner to increase price.
\40\ See Order para. IV. There would appear to be even less
justification for cancelling the PSA after ECI has been required
either to divest or to cap its shareholdings in Time Warner.
---------------------------------------------------------------------------

In addition to divestiture by TCI of its Time Warner shares and
cancellation of the TCI/Turner carriage agreement, the proposed
remedies for the alleged foreclosure include: (1) Antidiscrimination
provisions by which Time Warner must abide in dealing with program
providers; ^{41 (2) recordkeeping requirements to police compliance
with the antidiscrimination provision; ^{42 and (3) a requirement
that Time Warner carry ``at least one Independent Advertising-Supported
News and Information National Video Programming Service.'' ^{43
These remedial provisions are unnecessary, and they may be harmful.
---------------------------------------------------------------------------

\41\ Order para. VII.
\42\ Order para. VIII.
\43\ Order para. IX.
---------------------------------------------------------------------------

Paragraph VII of the proposed order, the antidiscrimination
provision, seeks to protect unaffiliated programming vendors from
exploitation and discrimination by Time Warner. The order provision is
taken almost verbatim from a regulation of the Federal Communications
Commission.^{44 It is highly unusual, to say the least, for an order
of the FTC to require compliance with a law enforced by another federal
agency, and it is unclear what expertise we might bring to the process
of assuring such compliance. Although a requirement to obey existing
law and FCC regulations may not appear to burden Time Warner unduly,
the additional burden of complying with the FTC order may be costly for
both Time Warner and the FTC. In addition to imposing extensive
recordkeeping requirements,^{45 the order apparently would create
another forum for unhappy programmers, who could seek to instigate an
FTC investigation of Time Warner's compliance with the order, instead
of or in addition to citing the same conduct in a complaint filed with
and adjudicated by the FCC.^{46 The burden of attempting to enforce
compliance with FCC regulations is one that this agency need not and
should not assume.
---------------------------------------------------------------------------

\44\ See 47 CFR 76.1301(a)-(c).
\45\ The recordkeeping requirement may simply replicate an FCC
requirement and perhaps impose no additional costs on Time Warner.
\46\ See 47 CFR 76.1302. The FCC may mandate carriage and impose
prices, terms and other conditions of carriage.
---------------------------------------------------------------------------

Paragraph IX of the proposed order requires Time Warner to carry an
independent all-news channel (presumably MS/NBC or the anticipated Fox
all-news channel). This requirement is entirely unwarranted. A duty to
deal might be appropriate on a sufficient showing if Time Warner were a
monopolist. But with less than 20% of cable subscribers in the United
States, Time Warner is neither a monopolist nor an ``essential
facility'' in cable distribution.^{47 CNN, the apparent target of
the FTC-sponsored entry, also is not a monopolist but is one of many
cable programming services in the all-programming market alleged in the
complaint. Clearly, CNN also is one of many sources of news and
information readily available to the public, although this is not a
market alleged in the complaint. Antitrust law, properly applied,
provides no justification whatsoever for the government to help
establish a competitor for CNN. Nor is there any apparent reason, other
than the circular reason that it would be helpful to them, why
Microsoft, NBC, or Rupert Murdoch's Fox needs a helping hand from the
FTC in their new programming endeavors. CNN and other program networks
did not obtain carriage mandated by the FTC when they launched; why
should the Commission now tilt the playing field in favor of other
entrants?
---------------------------------------------------------------------------

\47\ Even in New York City, undoubtedly an important media
market, available data indicate that Time Warner apparently serves
only about one-quarter of cable households. See Cablevision, May 13,
1996, at 57; April 29, 1996, at 131 (Time Warner has about 1.1
million subscribers in New York, which has about 4.5 million cable
households). We do not have data about alternative MVPD subscribers
in the New York area.
---------------------------------------------------------------------------

Price Discrimination
The complaint alleges that Time Warner could discriminatory raise
the prices of programming services to its MVPD rivals,^{48
presumably to protect its cable operations from competition. This
theory assumes that Time Warner has market power in the all-cable
programming market. As discussed above, however, there are reasons to
think that the alleged all-cable programming market would not be
sustained, and entry into cable programming is widespread and, because
of the volume of entry, immediate. Under those circumstances, it
appears not only not likely but virtually inconceivable that Time
Warner could sustain any attempt to exercise market power in the all-
cable programming market.
---------------------------------------------------------------------------

\48\ Complaint para. 38c.
---------------------------------------------------------------------------

Whatever the merits of the theory in this case, however,
discrimination against competing MVPDs in price or other terms of sale
of programming is prohibited by federal statute ^{49 and by FCC
regulations,^{50 and the FCC provides a forum to adjudicate
complaints of this nature. Unfortunately, the majority is not content
to leave policing of telecommunications to the FCC.
---------------------------------------------------------------------------

\49\ 47 U.S.C.A. 548.
\50\ CFR 76.1000-76.1002.
---------------------------------------------------------------------------

Paragraph VI of the proposed order addresses the alleged violation
in the following way: (1) It requires Time Warner to provide Turner
programming to competing MVPDs on request; and (2) it establishes a
formula for determining the prices that Time Warner can charge MVPDs
for Turner programming in areas in which Time Warner cable systems and
the MVPDs compete. The provision is inconsistent with two antitrust
principles: Antitrust traditionally does not impose a duty to deal
absent monopoly, which does not exist here, and antitrust traditionally
has not viewed price regulation as an appropriate remedy for market
power. Indeed, price regulation usually is seen as antithetical to
antitrust.
Although Paragraph VI ostensibly has the same nondiscrimination
goal as federal telecommunications law and FCC regulations, the bright
line standard in the proposed order for determining a nondiscriminatory
price fails to take account of the circumstances Congress has
identified in which price differences could be justified, such as, for
example, cost differences, economies of scale or ``other direct and
legitimate economic benefits reasonably attributable to the number of
subscribers serviced by the distributor.'' ^{51 These are
significant omissions, particularly for an agency that has taken pride
in its mission to prevent unfair methods of competition. There is no
apparent reason or authority for creating this exception to a
congressional mandate. To the extent that the proposed order creates a
regulatory scheme different from that afforded by the FCC, disgruntled
MVPDs may find it to their advantage to seek sanctions against Time
Warner at the FTC.^{52 This is likely to be costly for the FTC and
for Time Warner, and the differential scheme of regulation also could
impose other, unforeseen costs on the industry.
---------------------------------------------------------------------------

\51\ U.S.C.A. 548(c)(B)(i)-(iii)
\52\ Most people outside the FTC and the FCC already confuse the
two agencies. Surely we do not want to contribute to this confusion.
---------------------------------------------------------------------------

Efficiencies
As far as I can tell, the proposed consent order entirely ignores
the likely efficiencies of the proposed transaction. The potential
vertical efficiencies include more and better programming options for
consumers and reduced transaction costs for the merging firms.

[[Page 50318]]

The potential horizontal efficiencies include savings from the
integration of overlapping operations and of film and animation
libraries. For many years, the Commission has devoted considerable time
and effort to identifying and evaluating efficiencies that may result
from proposed mergers and acquisitions. Although cognizable
efficiencies occur less frequently than one might expect, the
Commission has not stinted in its efforts to give every possible
consideration to efficiencies. That makes the apparent disinterest in
the potential efficiencies of this transaction decidedly odd.
Industry Complaints
We have heard many expressions of concern about the proposed
transaction. Cable system operators and alternative MVPDs have been
concerned about the price and availability of programming from Time
Warner after the acquisition. Program providers have been concerned
about access to Time Warner's cable system. These are understandable
concerns, and I am sympathetic to them. To the extent that these
industry members want assured supply or access and protected prices,
however, this is the wrong agency to help them. Because Time Warner
cannot foreclose either level of service and is neither a monopolist
nor an ``essential facility'' in the programming market or in cable
services, there would appear to be no basis in antitrust for the access
requirements imposed in the order.
The Federal Communications Commission is the agency charged by
Congress with regulating the telecommunications industry, and the FCC
already has rules in place prohibiting discriminatory prices and
practices. While there may be little harm in requiring Time Warner to
comply with communications law, there also is little justification for
this agency to undertake the task. To the extent that the proposed
consent order offers a standard different from that promulgated by
Congress and the FCC, it arguably is inconsistent with the will of
Congress. To the extent that the proposed consent order would offer a
more attractive remedy for complaints from disfavored competitors and
customers of Time Warner, they are more likely to turn to us than to
the FCC. There is much to be said for having the FTC confine itself to
FTC matters, leaving FCC matters to the FCC.
The proposed order should be rejected.

Dissenting Statement of Commissioner Roscoe B. Starek, III, in the
Matter of Time Warner Inc., et al. File No. 961-0004

I respectfully dissent from the Commission's decision to accept a
consent agreement with Time Warner Inc. (``TW''), Turner Broadcasting
System, Inc. (``TBS''), Tele-Communications, Inc. (``TCI''), and
Liberty Media Corporation. The proposed complaint against these
producers and distributors of cable television programming alleges
anticompetitive effects arising from (1) The horizontal integration of
the programming interests of TW and TBS and (2) the vertical
integration of the TBS's programming interests with TW's and TCI's
distribution interests. I am not persuaded that either the horizontal
or the vertical aspects of this transaction are likely ``substantially
to lessen competition'' in violation of Section 7 of the Clayton Act,
15 U.S.C. 18, or otherwise to constitute ``unfair methods of
competition'' in violation of Section 5 of the Federal Trade Commission
Act, 15 U.S.C. 45. Moreover, even if one were to assume the validity of
one or more theories of violation underlying this action, the proposed
order does not appear to prevent the alleged effects and may instead
create inefficiency.
Horizontal Theories of Competitive Harm
This transaction involves, inter alia, the combination of TW and
TBS, two major suppliers of programming to multichannel video program
distributors (``MVPDs''). Accordingly, there is a straightforward
theory of competitive harm that merits serious consideration by the
Commission. In its most general terms, the theory is that cable
operators regard TW programs as close substitutes for TBS programs.
Therefore, the theory says, TW and TBS act as premerger constraints on
each other's ability to raise program prices. Under this hypothesis,
the merger eliminates this constraint, allowing TW--either unilaterally
or in coordination with other program vendors--to raise prices on some
or all of its programs.
Of course, this story is essentially an illustration of the
standard theory of competitive harm set forth in Section 2 of the 1992
Horizontal Merger Guidelines.^{1 Were an investigation pursuant to
this theory to yield convincing evidence that it applies to the current
transaction, under most circumstances the Commission would seek
injunctive relief to prevent the consolidation of the assets in
question. The Commission has eschewed that course of action, however,
choosing instead a very different sort of ``remedy'' that allows the
parties to proceed with the transaction but restricts them from
engaging in some (but not all) ``bundled'' sales of programming to
unaffiliated cable operators.^{2 Clearly, this choice of relief
implies an unusual theory of competitive harm from what ostensibly is a
straightforward horizontal transaction. The Commission's remedy does
nothing to prevent the most obvious manifestation of postmerger market
power--an across-the-board price increase for TW and TBS programs. Why
has the Commission forgone its customary relief directed against its
conventional theory of harm?
---------------------------------------------------------------------------

\1\ U.S. Department of Justice and Federal Trade Commission,
Horizontal Merger Guidelines, Sec. 2 (1992), 4 Trade Reg. Rep. (CCH)
para. 13,104 at 20,573-6 et seq.
\2\ In the Analysis of Proposed consent Order to Aid Public
Comment (Sec. IV.C), the Commission asserts that ``the easiest way
the combined firm could exert substantially greater negotiating
leverage over cable operators is by combining all or some of such
`marquee' services and offering them as a package or offering them
along with unwanted programming.'' As I note below, it is far from
obvious why this bundling strategy represents the ``easiest'' way to
exercise market power against cable operators. The easiest way to
exercise any newly-created market power would be simply to announce
higher programming prices.
---------------------------------------------------------------------------

The plain answer is that there is little persuasive evidence that
TW's programs constrain those of TBS (or vice-versa) in the fashion
described above. In a typical FTC horizontal merger enforcement action,
the Commission relies heavily on documentary evidence establishing the
substitutability of the parties' products or services.^{3 For
example, it is

[[Page 50319]]

standard to study the parties' internal documents to determine which
producers they regard as their closest competitors. This assessment
also depends frequently on internal documents supplied by customers
that show them playing off one supplier against another--via credible
threats of supplier termination--in an effort to obtain lower prices.
---------------------------------------------------------------------------

\3\ The Merger Guidelines emphasize the importance of such
evidence. Section 1.11 specifically identifies the following two
types of evidence as particularly informative: ``(1) Evidence that
buyers have shifted or have considered shifting purchases between
products in response to relative changes in price or other
competitive variables [and] (2) evidence that sellers base business
decisions on the prospect of buyer substitution between products in
response to relative changes in price or other competitive
variables.''
To illustrate, in Coca-Cola Bottling Co. of the Southwest,
Docket No. 9215, complaint counsel argued in favor of a narrow
product market consisting of ``all branded carbonated soft drinks''
(``CSDs''), while respondent argued for a much broader market. In
determining that all branded CSDs constituted the relevant market,
the Commission place great weight on internal documents from local
bottlers of branded CSDs showing that those bottlers ``[took] into
account only the prices of other branded CSD products [and not the
prices of private label or warehouse-delivered soft drinks] in
deciding on pricing for their own branded CSD products.'' 5 Trade
Reg. Rep. (CCH) para.23,681 at 23,413 (Aug. 31, 1994), vacated and
remanded on other grounds, Coca-Cola Bottling Co. of the Southwest
v. FTC, No. 94-41224 (5th Cir., June 10, 1996). (The Commission
dismissed its complaint on September 6, 1996.)
---------------------------------------------------------------------------

In this matter, however, documents of this sort are conspicuous by
their absence. Notwithstanding a voluminous submission of materials
from the respondents and third parties (and the considerable incentives
of the latter--especially other cable operators--to supply the
Commission with such documents), there are no documents that reveal
cable operators threatening to drop a TBS ``marquee'' network (e.g.,
CNN) in favor of a TW ``marquee'' network (e.g., HBO). There also are
no documents from, for instance, TW suggesting that it sets the prices
of its ``marquee'' networks in reference to those of TBS, taking into
account the latter's likely competitive response to unilateral price
increases or decreases. Rather, the evidence supporting any prediction
of a postmerger price increase consists entirely of customers'
contentions that program prices would rise following the acquisition.
Although customers' opinions on the potential effects of a transaction
often are important, they seldom are dispositive. Typically the
Commission requires substantial corroboration of these opinions from
independent information sources.^{4
---------------------------------------------------------------------------

\4\ For example, in R.R. Donnelley Sons & Co., et al., Docket
No. 9243, the Administrative Law Judge's decision favoring complaint
counsel rested in part on his finding that ``[a]s soon as the
Meredith/Burda acquisition was announced, customers expressed
concern to the FTC and the parties about the decrease in competition
that might result.'' (Initial Decision Finding 404.) In overturning
the ALJ's decision, the Commission cautioned: ``There is some danger
in relying on these customer complaints to draw any general
conclusions about the likely effects of the acquisition or about the
analytical premises for those conclusions. The complaints are
consistent with a variety of effects, and many--including those the
ALJ relied upon--directly contradict [c]omplaint [c]ounsel's
prediction of unilateral price elevation.'' 5 Trade Reg. Rep. (CCH)
para.23,876 at 23,660 n. 189 (July 21, 1995).
Also, in several instances involving hospital mergers in
concentrated markets, legions of third parties came forth to attest
to the transaction's efficiency. The Commission has discounted this
testimony, however, when these third parties could not articulate or
document the source of the claimed efficiency, or when the testimony
lacked corroboration from independent information sources. I believe
that the Commission should apply the same evidentiary standards to
the third-party testimony in the current matter.
---------------------------------------------------------------------------

Independent validation of the anticompetitive hypothesis becomes
particularly important when key elements of the story lack credibility.
For a standard horizontal theory of harm to apply here, one key element
is that, prior to the acquisition, a MVPD could credibly threaten to
drop a marquee network (e.g., CNN), provided it had access to another
programmer's marquee network (e.g., HBO) that it could offer to
potential subscribers. This threat would place the MVPD in a position
to negotiate a better price for the marquee networks than if those
networks were jointly owned.
Here, the empirical evidence gathered during the investigation
reveals that such threats would completely lack credibility. Indeed,
there appears to be little, if any, evidence that such threats ever
have been made, let alone carried out. CNN and HBO are not substitutes,
and both are carried on virtually all cable systems nationwide. If, as
a conventional horizontal theory of harm requires, these program
services are truly substitutes--if MVPDs regularly play one off against
the other, credibly threatening to drop one in favor of another--then
why are there virtually no instances in which an MVPD has carried out
this threat by dropping one of the marquee services? The absence of
this behavior by MVPDs undermines the empirical basis for the asserted
degree of substitutability between the two program services.^{5
---------------------------------------------------------------------------

\5\ In virtually any case involving less pressure to come up
with something to show for the agency's strenuous investigative
efforts, the absence of such evidence would lead the Commission to
reject a hypothesized product market that included both marquee
services. Suppose that two producers of product A proposed to merge
and sought to persuade the Commission that the relevant market also
included product B, but they could not provide any examples of
actual substitution of B for A, or any evidence that threats of
substitution of B for A actually elicited price reductions from
sellers of A. In the usual run of cases, this lack of
substitutability would almost surely lead the Commission to reject
the expanded market definition. But not so here.
---------------------------------------------------------------------------

Faced with this pronounced lack of evidence to support a
conventional market power story and a conventional remedy, the
Commission has sought refuge in what appears to be a very different
theory of postmerger competitive behavior. This theory posits an
increased likelihood of program ``bundling'' as a consequence of the
transaction.^{6 But there are two major problems with this theory as
a basis for an enforcement action. First, there is no strong
theoretical or empirical basis for believing that an increase in
bundling of TW and TBS programming would occur postmerger. Second, even
if such bundling did occur, there is no particular reason to think that
it would be competitively harmful.
---------------------------------------------------------------------------

\6\ As I noted earlier, a remedy that does nothing more than
prevent ``bundling'' of different programs would fail completely to
prevent the manifestations of market power--such as across-the-board
price increases--most consistent with conventional horizontal
theories of competitive harm.
---------------------------------------------------------------------------

Given the lack of documentary evidence to show that TW intends to
bundle its programming with that of TBS, I do not understand why the
majority considers an increase in program bundling to be a likely
feature of the postmerger equilibrium, nor does economic theory supply
a compelling basis for this prediction. Indeed, the rationale for this
element of the case (as set forth in the Analysis to Aid Public
Comment) can be described charitably as ``incomplete.'' According to
the Analysis, unless the FTC prevents it, TW would undertake a bundling
strategy in part to foist ``unwanted programming'' upon cable
operators.^{7 Missing from the Analysis, however, is any sensible
explanation of why TW should wish to pursue this strategy, because the
incentives to do so are not obvious.^{8
---------------------------------------------------------------------------

\7\ As I have noted, supra n. 2, the Analysis also claims that
TW could obtain ``substantially greater negotiating leverage over
cable operator * * * by combining all or some of [the merged firm's]
`marquee' services and offering them as a package * * *'' If the
Analysis uses the term ``negotiating leverage'' to mean ``market
power'' as the latter is conventionally defined, then it confronts
three difficulties: (1) The record fails to support the proposition
that the TW and TBS ``marquee'' channels are close substitutes for
each other; (2) even assuming that those channels are close
substitutes, there are more straightforward ways for TW to exercise
postmerger market power; and (3) the remedy does nothing to prevent
these more straightforward exercises of market power. See discussion
supra.
\8\ In ``A Note on Block Booking'' in The Organization of
Industry (1968), George Stigler analyzed the practice of ``block
booking''--or, in current parlance, ``bundling''--``marquee'' motion
pictures with considerably less popular films. Some years earlier,
the United States Supreme Court had struck this practice down as an
anticompetitive ``leveraging'' of market power from desirable to
undesirable films. United States v. Loew's Inc., 371 U.S. 38 (1962).
As Stigler explained (at 165), it is not obvious why distributors
should wish to force exhibitors to take the inferior film:
Consider the following simple example. One film, Justice
Goldberg cited Gone with the Wind, is worth $10,000 to the buyer,
while a second film, the Justice cited Getting Gertie's Garter, is
worthless to him. The seller could sell the one for $10,000, and
throw away the second, for no matter what its cost, bygones are
forever bygones. Instead the seller compels the buyer to take both.
But surely he can obtain no more than $10,000, since by hypothesis
this is the value of both films to the buyer. Why not, in short, use
his monopoly power directly on the desirable film? It seems no more
sensible, on this logic, to block book the two films than it would
be to compel the exhibitor to buy Gone with the Wind and seven Ouija
boards, again for $10,000.
---------------------------------------------------------------------------

A possible anticompetitive rationale for ``bundling'' might run as
follows: by requiring cable operators to purchase a bundle of TW and
TBS programs that contains substantial amounts of ``unwanted''
programming, TW can tie

[[Page 50320]]

up scarce channel capacity and make entry by new programmers more
difficult. But even if that strategy were assumed arguendo to be
profitable,^{9 the order would have only a trivial impact on TW's
ability to pursue it. The order prohibits only the bundling of TW
programming with TBS programming; TW remains free under the order to
create new ``bundles'' comprising exclusively TW, or exclusively TBS,
programs. Given that many TW and TBS programs are now sold on an
unbundled basis--a fact that calls into question the likelihood of
increased postmerger bundling ^{10--and given that, under the
majority's bundling theory, any TW or TBS programming can tie up a
cable channel and thereby displace a potential entrant's programming,
the order hardly would constrain TW's opportunities to carry out this
``foreclosure'' strategy.
---------------------------------------------------------------------------

\9\ The argument here basically is a variant of the argument
often used to condemn exclusive dealing as a tool for monopolizing a
market. Under this argument, an upstream monopolist uses its market
power to obtain exclusive distribution rights from its distributors,
thereby foreclosing potential manufacturing entrants and obtaining
additional market power. But there is problem with this argument, as
Bork explains in The Antitrust Paradox (1978):
[The monopolist can extract in the prices it charges retailers
all that the uniqueness of its line is worth. It cannot charge the
retailers that full worth in money and then charge it again in
exclusively the retailer does not wish to grant. To suppose that it
can is to commit the error of double counting. If [the firm] must
forgo the higher prices it could have demanded in order to get
exclusivity, then exclusivity is not an imposition, it is a
purchase. Id. at 306; see also id. at 140-43.
Although modern economic theory has established the theoretical
possibility that a monopolist might, under very specific
circumstances, outbid an entrant for the resources that would allow
entry to occur (thus preserving the monopoly), modern theory also
has shown that this is not a generally applicable result. It breaks
down, for example, when (as is likely in MVPD markets) many units of
new capacity are likely to become available sequentially. See, e.g.,
Krishna, ``Auctions with Endogenous Valuations: The Persistence of
Monopoly Revisited,'' 83 Am. Econ. Rev. 147 (1993); Malueg and
Schwartz, ``Preemptive investment, toehold entry, and the mimicking
principle,'' 22 RAND J. Econ. 1 (1991).
\10\ If bundling is profitable for anticompetitive reasons, why
do we not observe TW and TBS now exploiting all available
opportunities to reap these profits?
---------------------------------------------------------------------------

Finally, all of the above analysis implicitly assumes that the
bundling of TW and TBS programming, if undertaken, would more likely
than not be anticompetitive. The Analysis to Aid Public Comment,
however, emphasizes that bundling programming in many other instances
can be procompetitive. There seems to be no explanation of why the
particular bundles at issue here would be anticompetitive, and no
articulation of the principles that might be used to differentiate
welfare-enhancing from welfare-reducing bundling.^{11
---------------------------------------------------------------------------

\11\ Perhaps this reflects the fact that the economics
literature does not provide clear guidance on this issue. See, e.g.,
Adams and Yellen, ``Commodity Bundling and the Burden of Monopoly,''
90 Q.J. Econ. 475 (1976). Adams and Yellen explain how a monopolist
might use bundling as a method of price discrimination. (This also
was Stigler's explanation, supra n. 8.) As Adams and Yellen note,
``public policy must take account of the fact that prohibition of
commodity bundling without more may increase the burden of monopoly
* * * [M]onopoly itself must be eliminated to achieve high levels of
social welfare.'' 90 Q.J. Econ. at 498. Adams and Yellen's
conclusion is apposite here: if the combination of TW and TBS
creates (or enhances) market power, then the solution is to enjoin
the transaction rather than to proscribe certain types of bundling,
since the latter ``remedy'' may actually make things worse. And if
the acquisition does not create or enhance market power, the basis
for the bundling proscription is even harder to discern.
---------------------------------------------------------------------------

Thus, I am neither convinced that increased program bundling is a
likely consequence of this transaction nor persuaded that any such
bundling would be anticompetitive. Were I convinced that
anticompetitive bundling is a likely consequence of this transaction, I
would find the proposed remedy inadequate.
Vertical Theories of Competitive Harm
The proposed consent order also contains a number of provisions
designed to alleviate competitive harm purportedly arising from the
increased degree of vertical integration between program suppliers and
program distributors brought about by this transaction.^{12 I have
previously expressed my skepticism about enforcement actions predicated
on theories of harm from vertical relationships.^{13 The current
complaint and proposed order only serve to reinforce my doubts about
such enforcement actions and about remedies ostensibly designed to
address the alleged competitive harms.
---------------------------------------------------------------------------

\12\ Among other things, the order (1) constrains the ability of
TW and TCI to enter into long-term carriage agreements (para. IV);
(2) compels TW to sell Turner programming to downstream MVPD
entrants at regulated prices (para. VI); (3) prohibits TW from
unreasonably discriminating against non-TW programmers seeking
carriage on TW cable systems (para. VII(C)); and (4) compels TW to
carry a second 24-hour news service (i.e., in addition to CNN)
(para. IX).
\13\ Dissenting Statement of Commissioner Roscoe B. Starek, III,
in Waterous Company, Inc./Hale Products, Inc., File No. 901 0061, 5
Trade Reg. Rep. (CCH) para. 24,076 at 23,888-90; Dissenting
Statement of Commissioner Roscoe B. Starek, III, in Silicon
Graphics, Inc. (Alias Research, Inc., and Wavefront Technologies,
Inc.), Docket No. C-3626 (Nov. 14, 1995), 61 Fed. Reg. 16797 (Apr.
17, 1996); Remarks of Commissioner Roscoe B. Starek, III.
``Reinventing Antitrust Enforcement? Antitrust at the FTC in 1995
and Beyond,'' remarks before a conference on ``A New Age of
Antitrust Enforcement: Antitrust in 1995'' (Marina Del Rey,
California, Feb. 24, 1995) [available on the Commission's World Wide
Web site at http://www.ftc.gov].
---------------------------------------------------------------------------

The vertical theories of competitive harm posited in this matter,
and the associated remedies, are strikingly similar to those to which I
objected in Silicon Graphics, Inc. (``SGI''), and the same essential
criticisms apply. In SGI, the Commission's complaint alleged
anticompetitive effects arising from the vertical integration of SGI--
the leading manufacturer of entertainment graphics workstations--with
Alias Research, Inc., and Wavefront Technologies, Inc.--two leading
suppliers of entertainment graphics software. Although the acquisition
seemingly raised straightforward horizontal competitive problems
arising from the combination of Alias and Wavefront, the Commission
inexplicably found that the horizontal consolidation was not
anticompetitive on net.^{14 Instead, the order addressed only the
alleged vertical problems arising from the transaction. The Commission
alleged, inter alia, that the acquisitions in SGI would reduce
competition through two types of foreclosure: (1) Nonintegrated
software vendors would be excluded from the SGI platform, thereby
inducing their exit (or deterring their entry); and (2) rival hardware
manufacturers would be denied access to Alias and Wavefront software,
without which they could not effectively compete against SGI.
Similarly, in this case the Commission alleges (1) that nonintegrated
program vendors will be excluded from TW and TCI cable systems and (2)
that potential MVPD entrants into TW's cable markets will be denied
access to (or face supracompetitive prices for) TW and TBS
programming--thus lessening their ability to effectively compete
against TW's cable operations. The complaint further charges that the
exclusion of nonintegrated program vendors from TW's and TCI's cable
systems will deprive those vendors of scale economies, render them
ineffective competitors vis-a-vis the TW/Turner programming services,
and thus confer market power on TW as a seller of programs to MVPDs in
non-TW/non-TCI markets.
---------------------------------------------------------------------------

\14\ I say ``inexplicably'' not because I necessarily believed
this horizontal combination should have been enjoined, but because
the horizontal aspect of the transaction would have exacerbated the
upstream market power that would have had to exist for the vertical
theories to have had any possible relevance.
---------------------------------------------------------------------------

My dissenting statement in SGI identified the problems with this
kind of analysis. For one thing, these two types of foreclosure--
foreclosure of independent program vendors from the TW and TCI cable
systems, and foreclosure of independent MVPD firms from TW and TBS
programming--tend

[[Page 50321]]

to be mutually exclusive. The very possibility of excluding independent
program vendors from TW and TCI cable systems suggests the means by
which MVPDs other than TW and TCI can avoid foreclosure. The
nonintegrated program vendors surely have incentives to supply the
``foreclosed'' MVPDs, and each MVPD has incentives to induce
nonintegrated program suppliers to produce programming for it.^{15
---------------------------------------------------------------------------

\15\ Moreover, as was also true in SGI, the proposed complaint
in the present case characterizes premerger entry conditions in a
way that appears to rule out significant anticompetitive foreclosure
of nonintegrated upstream producers as a consequence of the
transaction. Paragraphs 33, 34, and 36 of the complaint allege in
essence that there are few producters of ``marquee'' programming
before the merger (other than TW and TBS), in large part because
entry into ``marquee'' programming is so very difficult (stemming
form, e.g., the substantial irreversible investments that are
required). If that is true--i.e., if the posited programming market
already was effectively foreclosed before the merger--then, as in
SGI, TW's acquistion of TBS could not cause substantial postmerger
foreclosure of competitively significant alternatives to TW/TBS
programming.
---------------------------------------------------------------------------

In response to this criticism, one might argue--and the complaint
alleges ^{16--that pervasive scale economies in programming,
combined with a failure to obtain carriage on the TW and TCI systems,
would doom potential programming entrants (and ``foreclosed'' incumbent
programmers) because, without TW and/or TCI carriage, they would be
deprived of the scale economies essential to their survival. In other
words, the argument goes, the competitive responses of ``foreclosed''
programmers and ``foreclosed'' distributors identified in the preceding
paragraph never will materialize. There are, however, substantial
conceptual and empirical problems with this argument, and its
implications for competition policy have not been fully explored.
---------------------------------------------------------------------------

\16\ See Paragraph 38.b of the proposed complaint.
---------------------------------------------------------------------------

First, if one believes that programming is characterized by such
substantial scale economies that the loss of one large customer results
in the affected programmer's severely diminished competitive
effectiveness (in the limit, that programmer's exit), then this
essentially is an argument that the number of program producers that
can survive in equilibrium (or, perhaps more accurately, the number of
program producers in a particular program ``niche'') will be small--
with perhaps only one survivor. Under the theory of the current case,
this will result in a supracompetitive price for that program. Further,
this will occur irrespective of the degree of vertical integration
between programmers and distributors. Indeed, under these
circumstances, there is a straightforward reason why vertical
integration between a program distributor and a program producer would
be both profitable and procompetitive (i.e., likely to result in lower
prices to consumers): Instead of monopoly markups by both the program
producer and the MVPD, there would be only one markup by the vertically
integrated firm.^{17
---------------------------------------------------------------------------

\17\ See, e.g., Tirole, The Theory of Industrial Organization
174-76 (1988). The program price reductions would be observed only
in those geographic markets where TW owned cable systems. Thus, the
greater the number of cable subscribers served by TW, the more
widespread would be the efficiencies. According to the proposed
complaint (para. 32), TW cable systems serve only 17 percent of
cable subscribers nationwide, so one might argue that the
efficiencies are accordingly limited. But this, of course, leaves
the Commission in the uncomfortable position of arguing that TW's
share of total cable subscribership is too small to yield
significant efficiencies, yet easily large enough to generate
substantial ``foreclosure'' effects.
---------------------------------------------------------------------------

Second, and perhaps more important, if the reasoning of the
complaint is carried to its logical conclusion, it constitutes a basis
for challenging any vertical integration by large cable operators or
large programmers--even if that vertical integration were to occur via
de novo entry by an operator into the programming market, or by de novo
entry by a programmer into distribution. Consider the following
hypothetical: A large MVPD announces both that it intends to enter a
particular program niche and that it plans to drop the incumbent
supplier of that type of programming. According to the theory
underlying the proposed complaint, the dropped program would suffer
substantially from lost scale economies, severely diminishing its
competitive effectiveness, which in turn would confer market power on
the vertically integrated entrant in its program sales to other MVPDs.
Were the Commission to apply its current theory of competitive harm
consistently, it evidently would have to find this de novo entry into
programming by this large MVPD competitively objectionable.
I suspect, of course, that virtually no one would be comfortable
challenging such integration, since there is a general predisposition
to regard expansions of capacity as procompetitive.^{18
Consequently, one might attempt to reconcile the differential treatment
of the two forms of vertical integration by somehow distinguishing them
from each other.^{19 But in truth, the situations actually merit
similar treatment--albeit not the treatment prescribed by the proposed
order. In neither case should an enforcement action be brought, because
any welfare loss flowing from either scenario derives from the
structure of the upstream market, which in turn is determined primarily
by the size of the market and by technology, not by the degree of
vertical integration between different stages of production.
---------------------------------------------------------------------------

\18\ This would appear true especially when, as posited here,
there is substantial premerger market power upstream because, under
such circumstances, vertical integration is a means by which a
downstream firm can obtain lower input prices. As noted earlier
(supra n.17 and accompanying text), this integration can be
procompetitive whether it occurs via merger or internal expansion.
\19\ One might attempt to differentiate my hypothetical from a
situation involving an MVPD's acquisition of a program supplier by
arguing that the former would yield two suppliers of the relevant
type of programming, but the latter only one. But this conclusion
would be incorrect. If we assume that the number of suppliers that
can survive in equilibrium is determined by the magnitude of scale
economies relative to the size of the market, and that the pre-entry
market structure represented an equilibrium, then the existence of
two program suppliers will be only a transitory phenomenon, and the
market will revert to the equilibrium structure dictated by these
technological considerations--that is, one supplier. Upstream
integration by the MVPD merely replaces one program monopolist with
another; but as noted above, under these circumstances vertical
integration can yield substantial efficiencies.
---------------------------------------------------------------------------

Third, it is far from clear that TCI's incentives to preclude entry
into programming are the same as TW's.^{20 As an MVPD, TCI is harmed
by the creation of entry barriers to new programming. Even if TW
supplies it with TW programming at a competitive price, TCI is still
harmed if program variety or innovation is diminished. On the other
hand, as a part owner of TW, TCI benefits if TW's programming earns
supracompetitive returns on sales to other MVPDs. TCI's net incentive
to sponsor new programming depends on which factor dominates--its
interest in program quality and innovation, or its interest in
supracompetitive returns on TW programming. All of the analyses of
which I am aware concerning this tradeoff show that TCI's ownership
interest in TW would have to increase substantially--far beyond what
the current transaction contemplates, or what would be possible without
a significant modification of TW's internal governance structure
^{21--for TCI to have an incentive to deter entry by independent
programmers. TCI's incentive to encourage programming

[[Page 50322]]

entry is intensified, moreover, by the fact that it has undertaken an
ambitious expansion program to digitize its system and increase
capacity to 200 channels. Because this appears to be a costly process,
and because not all cable customers can be expected to purchase digital
service, the cost per buyer--and thus the price--of digital services
will be fairly high. How can TCI expect to induce subscribers to buy
this expensive service if, through programming foreclosure, it has
restricted the quantity and quality of programming that would be
available on this service tier? ^{22
---------------------------------------------------------------------------

\20\ Even TW has mixed incentives to preclude programming entry.
As a programmer allegedly in possession of market power, TW would
wish to deter programming entry to protect this market power. But as
a MVPD, TW--like any other MVPD--benefits from the creation of
valuable new programming servics that it can sell to its
subscribers. On net, however, it appears true that TW's incentives
balance in favor of wishing to prevent entry.
\21\ TW has a ``poison pill'' provision that would make it
costly for TCI to increase its ownership of TW above 18 percent.
\22\ Note too that there is an inverse relationship between
TCI's ability to prevent programming entry and its incentives to do
so. Much of the analysis in this case has emphasized that TCI's size
(27 percent of cable households) gives it considerably ability to
determine which programs succeed and which fail, and the logic of
the proposed complaint is that TCI will exercise this ability so as
to protect TW's market power in program sales to non-TCI MVPDs. But
although increases in TCI's size may increase its ability to
preclude entry into programming, at the same time such increases
reduce TCI's incentives to do so. The reasoning is simple: as the
size of the non-TW/non-TCI cable market shrinks, the
supracompetitive profits obtained from sales of programming to this
sector also shrink. Simultaneously, the harm from TCI (as a MVPD)
from precluding the entry of new programmers increases with TCI's
subscriber share. (In the limit--i.e., if TCI and TW controlled all
cable households--there would be non non-TW/non-TCI MVPDs, no sales
of programming to such MVPDs, and thus no profits to be obtained
from such sales.) Any future increases in TCI's subscriber share
would, other things held constant, reduce is incentives to
``foreclose;'' entry by independent programmers.
---------------------------------------------------------------------------

The foregoing illustrates why foreclosure theories fell into
intellectual disrepute: because of their inability to articulate how
vertical integration harms competition and not merely competitors. The
majority's analysis of the Program Service Agreement (``PSA'')
illustrates this perfectly. The PSA must be condemned, we are told,
because a TCI channel slot occupied by a TW program is a channel slot
that cannot be occupied by a rival programmer. As Bork noted, this is a
tautology, not a theory of competitive harm.^{23 It is a theory of
harm to competitors--competitors that cannot offer TCI inducements
(such as low prices) sufficient to cause TCI to patronize them rather
than TW.
---------------------------------------------------------------------------

\23\ /Bork, The Antitrust Paradox, supra n.9, at 304.
---------------------------------------------------------------------------

All of the majority's vertical theories in this case ultimately can
be shown to be theories of harm to competitors, not to competition.
Thus, I have not been persuaded that the vertical aspects of this
transaction are likely to diminish competition substantially. Even were
I to conclude otherwise, however, I could not support the
extraordinarily regulatory remedy contained in the proposed order, two
of whose provisions merit special attention: (1) The requirement that
TW sell programming to MVPDs seeking to compete with TW cable systems
at a price determined by a formula contained in the order; and (2) the
requirement that TW carry at least one ``Independent Advertising-
Supported News and Information National Video Programming Service.''
Under Paragraph VI of the proposed order, TW must sell Turner
programming to potential entrants into TW cable markets at prices
determined by a ``most favored nation'' clause that gives the entrant
the same price--or, more precisely, the same ``carriage terms''--that
TW charges the three largest MVPDs currently carrying this programming.
As is well known, most favored nation clauses have the capacity to
cause all prices to rise rather than to fall.^{24 But even putting
this possibility aside, this provision of the order converts the
Commission into a de facto price regulator--a task, as I have noted on
several previous occasions, to which we are ill-suited.^{25 During
the investigation third parties repeatedly informed me of the
difficulty that the Federal Communications Commission has encountered
in attempting to enforce its nondiscrimination regulations. The FTC's
regulatory burden would be lighter only because, perversely, our
pricing formula would disallow any of the efficiency-based rationales
for differential pricing recognized by the Congress and the FCC.^{26
---------------------------------------------------------------------------

\24\ See, e.g., RxCare of Tennessee, Inc., et al., Docket No. C-
3664, 5 Trade Reg. Rep. (CCH) para. 23,957 (June 10, 1996); see also
Cooper and Fries, ``The most-favored-nation pricing policy and
negotiated prices,'' 9 int'l J. Ind. Org. 209 (1991). The logic is
straightforward: if by cutting price to another (noncompeting) MVPD
TW is compelled also to cut price to downstream competitors, the
incentives to make this price cut is diminished. Although this
effect might be small in the early years of the order (when the
gains to TW from cutting price to a large independent MVPD might
swamp the losses from cutting price to its downstream competitors)
its magnitude will grow over the order's 10-year duration, as TW
cable systems confront greater competition.
\25\ See my dissenting statements in Silicon Graphics and
Waterous/Hale, supra n.13.
\26\ Mirroring the applicable statute, the FCC rules governing
the sale of cable programming by vertically integrated programmers
to nonaffiliated MVPDs allow for price differentials reflecting,
inter alia, ``economies of scale, cost savings, or other direct and
legitimate economic benefits reasonably attributable to the number
of subscribers served by the distributor.'' 47 U.S.C.
Sec. 548(c)(2)(B)(iii); 47 C.F.R. 76.1002(b)(3).
---------------------------------------------------------------------------

Most objectionable is Paragraph IX of the order, the ``must carry''
provision that compels TW to carry an additional 24-hour news service.
I am baffled how the Commission has divined that consumers would prefer
that a channel of supposedly scarce cable capacity be used for a second
news service, instead of for something else. More generally, although
remedies in horizontal merger cases sometimes involve the creation of a
new competitor to replace the competition eliminated by the
transaction, no competitor has been lost in the present case. Indeed,
there is substantial entry already occurring in this segment of the
programming market, notwithstanding the severe ``difficulty'' of
entering the markets alleged in the complaint.^{27 Obviously, the
incentives to buy programming from an independent vendor are diminished
(all else held constant) when a distributor integrates vertically into
programming. This is true whether the integration is procompetitive or
anticompetitive on net, and whether the integration occurs via merger
or via de novo entry.^{28 I could no more support a must-carry
provision for TW as a result of its acquisition of CNN than I could
endorse a similar requirement to remedy the ``anticompetitive
consequences'' of de novo integration by TW into the news business.
---------------------------------------------------------------------------

\27\ The Microsoft/NBC joint venture, MSNBC, already is in
service; the Fox entry apparently will also be operational shortly.
\28\ The premise inherent in this provision of the order is that
TW can ``foreclose'' independent programming entry in independently
(i.e., without the cooperation of TCI, whose incentives to sponsor
independent programming are ostensibly preserved by the stock
ownership cap contained in Paragraphs II and III of the order).
Given that TW has only 17 percent of total cable subscribership, I
find this proposition fanciful.
---------------------------------------------------------------------------

[FR Doc. 96-24599 Filed 9-24-96; 8:45 am]
BILLING CODE 6750-01-P}}}}}}}}}}}}}}}}}}}}}}}}}}}}}}}}}}}}}}}}}}}}}}}}}}}}}}}}}}}}}}}}}}}}}}}}}}}}}}}}}}}}}}}