[Federal Register Volume 84, Number 80 (Thursday, April 25, 2019)]
[Notices]
[Pages 17425-17433]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-08373]
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DEPARTMENT OF JUSTICE
Antitrust Division
United States v. The Walt Disney Company, et al.; Response to
Public Comment
Notice is hereby given pursuant to the Antitrust Procedures and
Penalties Act, 15 U.S.C. Sec. 16(b)-(h), that one comment was received
concerning the proposed Final Judgment in this case, and that comment
together with the Response of the United States to Public Comment have
been filed with the United States District Court for the Southern
District of New York in United States of America v. The Walt Disney
Company, et al., Civil Action No. 1:18-cv-5800 (CM). Copies of the
comment and the United States' Response are available for inspection on
the Antitrust Division's website at http://www.justice.gov/atr and at
the Office of the Clerk of the United States District Court for the
Southern District of New York. Copies of these materials may be
obtained from the Antitrust Division upon request and payment of the
copying fee set by Department of Justice regulations.
Patricia A. Brink,
Director of Civil Enforcement.
UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK
United States of America, Plaintiff, v. The Walt Disney Company,
and Twenty-First Century Fox, Inc., Defendants.
18 Civ. 5800 (CM) (KNF)
RESPONSE OF PLAINTIFF UNITED STATES TO PUBLIC COMMENT ON THE PROPOSED
FINAL JUDGMENT
Pursuant to the requirements of the Antitrust Procedures and
Penalties Act (the ``APPA'' or ``Tunney Act''), 15 U.S.C. Sec. 16(b)-
(h), the United States hereby responds to the one public comment
received regarding the proposed Final Judgment in this case. After
careful consideration of the submitted comment, the United States
continues to believe that the proposed Final Judgment will provide an
effective and appropriate remedy for the antitrust violations alleged
in the Complaint. The United States will move the Court for entry of
the proposed Final Judgment after the public comment and this response
have been published pursuant to 15 U.S.C Sec. 16(d).
I. PROCEDURAL HISTORY
On December 13, 2017, The Walt Disney Company (``Disney'') entered
into an agreement to acquire certain assets and businesses from Twenty-
First Century Fox, Inc. (``Fox'') (collectively, ``Defendants''),
including Fox's ownership of, or interests in, its regional sports
networks (``RSNs''), FX cable networks, National Geographic cable
networks, television studio, Hulu, film studio, and international
television businesses (collectively, the ``Fox Sale Assets''). On June
20, 2018, the Defendants amended the agreement to increase Disney's
consideration for the Fox Sale Assets to approximately $71.3 billion.
On July 27, 2018, Disney's and Fox's respective shareholders voted to
approve the transaction.
On June 27, 2018, the United States filed a civil antitrust
Complaint, seeking to enjoin Disney from acquiring the Fox Sale Assets.
The Complaint alleges that the proposed acquisition by Disney of
certain cable sports programming assets from Fox, including Fox's
ownership of, or interest in, twenty-two RSNs, would violate Section 7
of the Clayton Act, 15 U.S.C. Sec. 18.
Simultaneously with the filing of the Complaint, the United States
filed a proposed Final Judgment and a Hold Separate Stipulation and
Order signed by Plaintiff and Defendants consenting to entry of the
proposed Final Judgment after compliance with the requirements of the
Tunney Act, 15 U.S.C. Sec. 16. Pursuant to those requirements, the
United States filed a Competitive Impact Statement (``CIS'') on August
7, 2018, describing the transaction and the proposed Final Judgment.
The United States published the Complaint, proposed Final Judgment, and
CIS in the Federal Register on August 15, 2018, see 83 Fed. Reg. 40,553
(2018), and caused summaries of the proposed Final Judgment and CIS,
together with directions for the submission of written comments related
to the proposed Final Judgment, to be published in The Washington Post
and The New York Times for seven days, from August 13, 2018 through
August 19, 2018. The 60-day public comment period required by the
Tunney Act, 15 U.S.C. Sec. 16(b) and (d), ended on October 18, 2018.
The United States received one comment concerning the allegations in
the Complaint (Exhibit 1).\1\
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\1\ In addition to the one comment, the United States also
received an email from an individual based in Bangalore, India on
the proxy voting procedure by which Disney and Fox shareholders
approved the transaction. See Exhibit 2. This email is unrelated to
the competitive concerns identified by the United States in the
Complaint, and it is unrelated to the issue before this Court:
whether the proposed Final Judgment is in the public interest. It is
well-settled that comments that are unrelated to the concerns
identified in the Complaint are beyond the scope of the court's
Tunney Act review. See, e.g., United States v. Apple, Inc., 889 F.
Supp. 2d 623, 642 (S.D.N.Y. 2012); United States v. SBC Commc'ns,
Inc., 489 F. Supp. 2d 1, 14 (D.D.C. 2007) (quoting United States v.
Microsoft Corp., 56 F.3d 1448, 1459 (D.C. Cir. 1995)); see also
United States v. U.S. Airways Group, Inc., 38 F. Supp. 3d 69, 76
(D.D.C. 2014) (quoting Microsoft, 56 F.3d at 1459).
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[[Page 17426]]
II. THE COMPLAINT AND THE PROPOSED FINAL JUDGMENT
The Complaint alleged that Disney's acquisition of the Fox RSNs
would lessen competition in the licensing of cable sports programming
to distributors in local markets where Disney and Fox compete. The
proposed Final Judgment remedies this concern by requiring Disney to
divest the twenty-two Fox RSNs it would have acquired as part of the
Fox Sale Assets.
Disney's acquisition of the Fox Sale Assets would have combined two
of the most valuable cable sports television networks: Fox's twenty-two
RSNs and Disney's ESPN franchise of networks. Cable sports television
networks compete to be carried in the programming packages that
distributors, such as cable companies (e.g., Charter Communications and
Comcast), direct broadcast satellite services (e.g., DISH Network and
AT&T's DirecTV), fiber optic networks services (e.g., Verizon's Fios
and CenturyLink's Prism TV), and online distributors of linear cable
programming (e.g., Hulu Live and DISH's Sling TV), offer to their
subscribers. For RSNs, the carriage license typically is limited to the
Designated Market Area (``DMA'') comprising the ``home'' territory of
the team or teams carried on the RSN; whereas, licenses for national
television networks, such as ESPN, typically comprise all DMAs in a
distributor's footprint. Disney's and Fox's cable sports television
programming compete head-to-head to be carried by distributors in each
DMA that is the home territory of Fox's RSNs: Phoenix, AZ; Los Angeles,
CA; San Diego, CA; Miami, FL; Orlando, FL; Tampa, FL; Atlanta, GA;
Indianapolis, IN; Kansas City, KS; New Orleans, LA; Detroit, MI;
Minneapolis, MN; St. Louis, MO; New York, NY; Charlotte, NC; Raleigh-
Durham, NC; Cincinnati, OH; Cleveland, OH; Columbus, OH; Oklahoma City,
OK; Nashville, TN; Memphis, TN; Dallas, TX; San Antonio, TX; and
Milwaukee, WI (collectively, the ``DMA Markets'').
After Disney announced its plans to acquire the Fox Sale Assets,
the United States conducted an investigation into the competitive
effects of the proposed transaction. The United States considered the
potential competitive effects of the transaction on cable sports
programming in DMAs throughout the United States. As a part of its
investigation, the United States obtained documents and information
from the merging parties and others and conducted interviews with
customers, competitors, and other individuals knowledgeable about the
industry.
Based on the evidence gathered during its investigation, the United
States concluded that Disney's acquisition of Fox's RSNs would likely
(1) substantially lessen competition in the licensing of cable sports
programming in each of the DMA Markets; (2) eliminate actual and
potential competition among Disney and Fox in the licensing of cable
sports programming in each of the DMA Markets; and (3) cause prices for
cable sports programming in each of the DMA Markets to increase.
At the same time the Complaint was filed, the United States filed a
Hold Separate Stipulation and Order (``Hold Separate'') and proposed
Final Judgment, which are designed to eliminate the likely
anticompetitive effects of the Transaction. Under the proposed Final
Judgment, Disney is required to divest all of Fox's interests in the
Fox RSNs, including all assets necessary for the operation of each Fox
RSN as a viable, ongoing cable sports programming network, to one or
more buyers acceptable to the United States in its sole discretion.
Under the terms of the Hold Separate, Disney and Fox have taken certain
steps to ensure that each Fox RSN continues to operate as an ongoing,
economically viable, competitive cable sports programming network that
will remain independent and uninfluenced by the consummation of the
Transaction, and that competition is maintained during the pendency of
the ordered divestiture.
The United States and Defendants have stipulated that the proposed
Final Judgment may be entered after compliance with the APPA. Entry of
the proposed Final Judgment would terminate this action, except the
Court would retain jurisdiction to construe, modify, or enforce the
provisions of the proposed Final Judgment and to punish violations
thereof. Nothing in the APPA or the parties' filings in this case
prohibit Defendants from closing and consummating the Transaction
during the pendency of the Tunney Act proceedings or prior to the
Court's entry of the proposed Final Judgment. See 15 U.S.C. Sec.
16(b)-(h).
III. STANDARD OF JUDICIAL REVIEW
The Clayton Act, as amended by the APPA, requires that proposed
consent judgments in antitrust cases brought by the United States be
subject to a 60-day comment period, after which the court shall
determine whether entry of the proposed Final Judgment ``is in the
public interest.'' 15 U.S.C. Sec. 16(e)(1). In making that
determination, the court, in accordance with the statute as amended in
2004, is required to consider:
(A) the competitive impact of such judgment, including termination
of alleged violations, provisions for enforcement and modification,
duration of relief sought, anticipated effects of alternative remedies
actually considered, whether its terms are ambiguous, and any other
competitive considerations bearing upon the adequacy of such judgment
that the court deems necessary to a determination of whether the
consent judgment is in the public interest; and
(B) the impact of entry of such judgment upon competition in the
relevant market or markets, upon the public generally and individuals
alleging specific injury from the violations set forth in the complaint
including consideration of the public benefit, if any, to be derived
from a determination of the issues at trial.
15 U.S.C. Sec. 16(e)(1)(A) & (B). In considering these statutory
factors, the court's inquiry is necessarily a limited one as the
government is entitled to ``broad discretion to settle with the
defendant within the reaches of the public interest.'' United States v.
Microsoft Corp., 56 F.3d 1448, 1461 (D.C. Cir. 1995); United States v.
Keyspan Corp., 763 F. Supp. 2d 633, 637-38 (S.D.N.Y. 2011); see SEC v.
Citigroup Global Markets Inc., 673 F.3d 158, 168 (2d Cir. 2012) (``We
are bound in such matters to give deference to an executive agency's
assessment of the public interest.''). See generally United States v.
SBC Commc'ns, Inc., 489 F. Supp. 2d 1 (D.D.C. 2007) (assessing public-
interest standard under the Tunney Act); United States v. U.S. Airways
Group, Inc., 38 F. Supp. 3d 69, 75 (D.D.C. 2014) (explaining that the
``court's inquiry is limited'' in Tunney Act settlements); United
States v. InBev N.V./S.A., No. 08-1965 (JR), 2009 U.S. Dist. LEXIS
84787, at *3 (D.D.C. Aug. 11, 2009) (noting that the court's review of
a consent judgment is limited and only inquires ``into whether the
government's determination that the proposed remedies will cure the
antitrust violations alleged in the complaint was reasonable, and
whether the mechanisms to enforce the final judgment are clear and
manageable'').
As this Court has held, under the APPA a court considers, among
other things, ``the relationship between the complaint and the remedy
secured, the decree's clarity, whether there are any
[[Page 17427]]
foreseeable difficulties in implementation, and whether the decree
might positively injure third parties.'' United States v. Apple, Inc.,
889 F. Supp. 2d 623, 631 (S.D.N.Y. 2012) (citing Microsoft, 56 F.3d at
1458, 1461-62). With respect to the adequacy of the relief secured by
the decree, a court may not ``engage in an unrestricted evaluation of
what relief would best serve the public.'' United States v. BNS, Inc.,
858 F.2d 456, 462 (9th Cir. 1988) (quoting United States v. Bechtel
Corp., 648 F.2d 660, 666 (9th Cir. 1981)); see also Microsoft, 56 F.3d
at 1460-62; Apple, 889 F. Supp. 2d at 631. Instead:
[t]he balancing of competing social and political interests
affected by a proposed antitrust consent decree must be left, in the
first instance, to the discretion of the Attorney General. The court's
role in protecting the public interest is one of insuring that the
government has not breached its duty to the public in consenting to the
decree. The court is required to determine not whether a particular
decree is the one that will best serve society, but whether the
settlement is ``within the reaches of the public interest.'' More
elaborate requirements might undermine the effectiveness of antitrust
enforcement by consent decree.
Bechtel, 648 F.2d at 666 (emphasis added) (citations omitted).\2\
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\2\ See also BNS, 858 F.2d at 464 (holding that the court's
``ultimate authority under the [APPA] is limited to approving or
disapproving the consent decree''); United States v. Gillette Co.,
406 F. Supp. 713, 716 (D. Mass. 1975) (noting that, in this way, the
court is constrained to ``look at the overall picture not
hypercritically, nor with a microscope, but with an artist's
reducing glass'').
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In determining whether a proposed settlement is in the public
interest, a district court ``is not permitted to reject the proposed
remedies merely because the court believes other remedies are
preferable.'' United States v. Morgan Stanley, 881 F. Supp. 2d 563, 567
(S.D.N.Y. 2012) (quoting United States v. Abitibi-Consol. Inc., 584 F.
Supp. 2d 162, 165 (D.D.C. 2008)); SBC Commc'ns, 489 F. Supp. 2d at 17
(``[a district court] must accord deference to the government's
predictions about the efficacy of its remedies, and may not require
that the remedies perfectly match the alleged violations''); see also
U.S. Airways, 38 F. Supp. 3d at 74-75 (noting that a court should not
reject the proposed remedies because it believes others are preferable
and that room must be made for the government to grant concessions in
the negotiation process for settlements); Microsoft, 56 F.3d at 1461
(noting the need for courts to be ``deferential to the government's
predictions as to the effect of the proposed remedies''); United States
v. Archer-Daniels-Midland Co., 272 F. Supp. 2d 1, 6 (D.D.C. 2003)
(noting that the court should grant ``due respect to the government's
prediction as to the effect of proposed remedies, its perception of the
market structure, and its views of the nature of the case''). The
ultimate question is whether ``the remedies [obtained in the decree
are] so inconsonant with the allegations charged as to fall outside of
the `reaches of the public interest.''' Microsoft, 56 F.3d at 1461. To
meet this standard, the United States need only provide ``a factual
foundation for the government's decisions such that its conclusions
regarding the proposed settlement are reasonable.'' Morgan Stanley, 881
F. Supp. 2d at 567 (quoting Abitibi-Consol., 584 F. Supp. 2d at 165);
see also SBC Commc'ns, 489 F. Supp. 2d at 17.
Moreover, under Microsoft, the court's role under the APPA is
limited to reviewing the remedy in relationship to the violations that
the United States has alleged in its complaint, and does not authorize
the court to ``construct [its] own hypothetical case and then evaluate
the decree against that case.'' Microsoft, 56 F.3d at 1459; United
States v. Keyspan Corp., 763 F. Supp. 2d 633 637-38 (S.D.N.Y. 2011)
(``The Court's function is not to determine whether the proposed
[d]ecree results in the balance of rights and liabilities that is the
one that will best serve society, but only to ensure that the resulting
settlement is `within the reaches of the public interest.''' (quoting
United States v. Alex. Brown & Sons, Inc., 963 F. Supp. 235, 238
(S.D.N.Y. 1997))); see also InBev, 2009 U.S. Dist. LEXIS 84787, at *20
(``the `public interest' is not to be measured by comparing the
violations alleged in the complaint against those the court believes
could have, or even should have, been alleged''). Because the ``court's
authority to review the decree depends entirely on the government's
exercising its prosecutorial discretion by bringing a case in the first
place,'' it follows that ``the court is only authorized to review the
decree itself,'' and not to ``effectively redraft the complaint'' to
inquire into other matters that the United States did not pursue.
Microsoft, 56 F.3d at 1459-60; see also United States v. Fokker Servs.,
818 F.3d 733, 738 (D.C. Cir. 2016) (recognizing the ``long-settled
understandings about the independence of the Executive with regard to
charging decisions''); Heckler v. Chaney, 470 U.S. 821, 832 (1985)
(quoting U.S. Const. art. II, Sec. 3) (recognizing that the decision
about which claims to bring ``has long been regarded as the special
province of the Executive Branch.'').
Finally, in the 2004 amendments to the APPA, Congress addressed the
Tunney Act review process, adding the unambiguous instruction that
``[n]othing in this section shall be construed to require the court to
conduct an evidentiary hearing or to require the court to permit anyone
to intervene.'' 15 U.S.C. Sec. 16(e)(2); see also U.S. Airways, 38 F.
Supp. 3d at 76 (indicating that a court is not required to hold an
evidentiary hearing or to permit intervenors as part of its review
under the Tunney Act). This language explicitly wrote into the statute
what Congress intended when it first enacted the Tunney Act in 1974. As
Senator Tunney explained: ``[t]he court is nowhere compelled to go to
trial or to engage in extended proceedings which might have the effect
of vitiating the benefits of prompt and less costly settlement through
the consent decree process.'' 119 Cong. Rec. 24,598 (1973) (statement
of Sen. Tunney). Rather, the procedure for the public-interest
determination is left to the discretion of the court, with the
recognition that the court's ``scope of review remains sharply
proscribed by precedent and the nature of Tunney Act proceedings.'' SBC
Commc'ns, 489 F. Supp. 2d at 11; see also Apple, 889 F. Supp. 2d at
632. A court can make its public-interest determination based on the
competitive impact statement and response to public comments alone.
U.S. Airways, 38 F. Supp. 3d at 76; see also United States v. Enova
Corp., 107 F. Supp. 2d 10, 17 (D.D.C. 2000) (noting that the ``Tunney
Act expressly allows the court to make its public interest
determination on the basis of the competitive impact statement and
response to comments alone''); S. Rep. No. 93-298 93d Cong., 1st Sess.,
at 6 (1973) (``Where the public interest can be meaningfully evaluated
simply on the basis of briefs and oral arguments, that is the approach
that should be utilized.'').
IV. PUBLIC COMMENT AND THE UNITED STATES' RESPONSE
During the 60-day comment period, the United States received only
one comment from the American Cable Association (``ACA''), an
organization that represents more than 700 small and medium-sized cable
operators (Exhibit 1). Upon review, the United States believes that
nothing in the comment warrants a change to the proposed Final Judgment
or supports an inference that the proposed Final Judgment is not in the
public interest. As required by the APPA, the comment and the United
[[Page 17428]]
States' response will be published in the Federal Register.
In its comment, the ACA commends the proposed Final Judgment,
noting that it ``solves one significant antitrust problem . . . by
requiring Disney to divest the Fox RSNs.'' Exhibit 1 at 1. However, it
warns that a divestiture to a same-market, big-four broadcaster or a
same-market distributor ``threatens to create a new and equally
significant antitrust problem.'' Id. While noting that the proposed
Final Judgment gives the United States sole discretion to determine
that the divestiture will preserve competition in the relevant markets,
id. at 2; see Proposed Final Judgment, United States v. The Walt Disney
Co., 1:18-cv-5800 at IV.J (S.D.N.Y. June 27, 2018), the ACA requests
the Final Judgment to be modified to expressly prohibit divestitures to
a same-market broadcaster or same-market distributor. Exhibit 1 at 2.
The United States considers the existing terms of the proposed
Final Judgment--which require the sale of the Fox RSNs ``to one or more
Acquirers acceptable to the United States, in its sole discretion,''
Proposed Final Judgment, Disney, 1:18-cv-5800 at IV.A--sufficient to
ensure that competition will be preserved in all affected markets. In
exercising its sole discretion to approve buyers, the United States has
a duty to ensure that the remedy addresses the harm arising from the
merger and preserves competition. The Antitrust Division employs three
fundamental tests when reviewing proposed divestiture buyers: 1)
divestiture of the assets to the proposed purchaser must not itself
cause competitive harm, 2) the Division must be certain that the
purchaser has the incentive to use the divestiture assets to compete in
the relevant market, and 3) the Division will perform a ``fitness''
test to ensure that the purchaser has sufficient acumen, experience,
and financial capability to compete effectively in the market over the
long term. As required by the first fundamental test, the Antitrust
Division will review whether divesting the Fox RSNs to Disney's
proposed buyer(s) would itself cause competitive harm. Moreover, the
second and third fundamental tests go further--requiring the Antitrust
Division to assess both the incentive and ability of the buyer to
actively compete with the Fox RSNs.
The Court should reject the ACA's invitation to substitute its
judgment for the United States' judgment of the acceptability of
divestiture buyers and the overall effect of the divestitures on
competition. Approving divestiture buyers is the type of action that is
properly within the United States' discretion. See InBev N.V./S.A.,
2009 U.S. Dist. LEXIS 84787 at *23 (questioning the court's role in
monitoring the reasonableness of the United States' approval of a
divestiture buyer); Morgan Stanley, 881 F. Supp. 2d at 568; Microsoft,
56 F.3d at 1461; Citigroup Global Markets, Inc., 673 F.3d at 163-64.
ACA cites no legal basis for its proposed restriction of the United
States' discretion. Nor does the ACA claim that the factual foundation
underpinning the proposed Final Judgment renders the proposed
settlement unreasonable. See Exhibit 1. In Tunney Act proceedings,
courts routinely enter final judgments that provide the United States
with the sole discretion to assess the acceptability of divestiture
buyers. See, e.g., Final Judgment, United States v. Marquee Holdings,
Inc., 5-cv-10722 (S.D.N.Y. Jan. 9, 2006); Final Judgment, United States
v. AMC Entertainment Holdings, Inc., 16-cv-2475-RDM (D.D.C. Mar. 7,
2017); Final Judgment, United States v. United Technologies Corp.,
1:12-cv-1230-KBJ (D.D.C. May 29, 2013); Final Judgment, United States
v. Dean Foods Co., 10-cv-59 (E.D. Wis. July 29, 2011); Final Judgment,
United States v. AT&T Inc., 1:09-cv-1932-HHK (D.D.C. Feb. 10, 2010);
Final Judgment, United States v. Sony Corp. of America, 98-cv-2716
(S.D.N.Y. Nov. 16, 1998). There is no justification here to depart from
the ordinary course and fetter the United States' discretion.
CONCLUSION
After reviewing the public comment, the United States continues to
believe that the proposed Final Judgment, as drafted, provides an
effective and appropriate remedy for the antitrust violations alleged
in the Complaint, and is therefore in the public interest. The United
States will move this Court to enter the proposed Final Judgment after
the comment and this response are published in the Federal Register.
Dated: April 5, 2019
Respectfully submitted,
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Lauren G.S. Riker,
United States Department of Justice, Antitrust Division, 450 Fifth
Street NW, Suite 4000, Washington, DC 20530, Tel: 202-598-2812,
[email protected].
Counsel for the United States
EXHIBIT 1 TO RESPONSE
HWG [verbarlm]Harris, Wiltshire & Grannis LLP
October 15, 2018
BY ELECTRONIC MAIL
Owen M. Kendler, Esq., Chief, Media, Entertainment, and Professional
Services Section Antitrust Division, Department of Justice, Washington,
DC 20530, [email protected]
Re: ACA Tunney Act Comments on United States v. Walt Disney Proposed
Final Judgment
Dear Mr. Kendler:
The American Cable Association, which represents more than 700
small and medium-sized cable operators, hereby submits its Tunney Act
comments regarding the proposed Final Judgment filed in United States
v. Walt Disney.\3\ The proposed Final Judgment solves one significant
antitrust problem--the combination of Disney's ESPN with Fox's regional
sports networks (``RSNs'')--by requiring Disney to divest the Fox RSNs.
Such divestiture, however, threatens to create a new and equally
significant antitrust problem.\4\
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\3\ Antitrust Procedures and Penalties Act 15 U.S.C.
Sec. [thinsp]16(b)-(h); United States v. Walt Disney Co., Proposed
Final Judgment and Competitive Impact Statement, 83 Fed. Reg. 40553
(rel. Aug. 15, 2018) (``Proposed Final Judgment'').
\4\ See Antitrust Division Policy Guide to Merger Remedies at 28
(describing as a ``fundamental test[]'' of divestiture approval that
the ``divestiture of the assets to the proposed purchaser [does] not
itself cause competitive harm.'').
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More specifically, it would be contrary to the public interest to
permit the divestiture of the Fox RSNs either to a same-market, big-
four broadcaster or to a same-market multichannel video programming
distributor (``MVPD''):
Permitting such a broadcaster to purchase a Fox RSN would
create the very problem the Antitrust Division identified here. It
would allow a single firm to threaten to withhold two sets of must-have
programming, thereby leading to increased MVPD licensing fees.
Permitting such an MVPD to purchase an RSN would create
the ``vertical integration'' problem the Division identified in
blocking the AT&T-Time Warner merger. The combined entity would have
greater leverage to threaten to withhold RSN programming from rival
MVPDs than would a stand-alone RSN owner, thereby leading to increased
MVPD licensing fees.
The proposed Final Judgment already provides the Division with the
``sole discretion'' \5\ to approve a divestiture
[[Page 17429]]
party for Fox's RSNs. But the Final Judgment should make clear
beforehand that the Division will not permit any divestiture to a same-
market broadcaster or same-market MVPD. A settlement permitting any
such divestiture would not be in the public interest.
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\5\ Proposed Final Judgment, 83 Fed. Reg. at 40557 Sec. IV.A
(requiring Fox to divest its RSNs ``in a manner consistent with this
Final Judgment to one or more Acquirers acceptable to the United
States, in its sole discretion'').
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I. The Division Should Not Permit Disney to Divest Fox's RSNs to a
Same-Market Broadcaster.
The Competitive Impact Statement described the problem that an ACA
member would face in negotiating with a newly combined ESPN-Fox RSN--
losing both sets of programming simultaneously is far worse than losing
each set of programming individually:
Prior to the Transaction, an MVPD's failure to reach a licensing
agreement with Disney would result in the blackout of Disney's
networks, including ESPN, and threaten some subscriber loss for the
MVPD, including those subscribers that value ESPN's content. But
because the MVPD still would be able to offer its subscribers the local
Fox RSN, many MVPD subscribers simply would watch the local RSN instead
of cancelling their MVPD subscriptions. In the event of a Fox RSN
blackout, many subscribers likely would switch to watching ESPN. After
the Transaction, an MVPD negotiating with Disney would be faced with
the prospect of a dual blackout of significant cable sports
programming, a result more likely to cause the MVPD to lose incremental
subscribers (that it would not have lost in a pre-transaction blackout
of only ESPN or the Fox RSN) and therefore accede to Disney's demand
for higher licensing fees. For these reasons, the loss of competition
between ESPN and the Fox RSN in each DMA Market would likely lead to an
increase in MVPD licensing fees in those markets. Some of these
increased programming costs likely would be passed onto consumers,
resulting in higher MVPD subscription fees for millions of U.S.
households.\6\
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\6\ Id., 83 Fed. Reg. at 40564 Sec. B.2.
An ACA member would face this exact problem in negotiating
simultaneously with a Fox RSN and a same-market, big-four
broadcaster,\7\ which invariably controls sports rights at least as
important as those controlled by ESPN. Absent the combination, failure
to reach an agreement with the RSN would result in some subscriber
loss--but other subscribers would watch the broadcaster's programming
instead. With the combination, the ACA member would be faced with the
prospect of a dual blackout, making it more likely that it would lose
incremental subscribers.\8\ It would thus be more likely to accede to
demands for higher fees. This may be because the broadcaster's sports
programming constitutes a partial substitute for the RSN's
programming--a conclusion not inconsistent with the Division's original
conclusion that broadcast programming is not a sufficiently strong
substitute to prevent harms from the Fox RSN-ESPN combination.\9\ Or it
may be true regardless of substitutability.\10\ Regardless of the
theory, the best empirical analysis, conducted by the FCC's economists,
suggests that RSN-broadcast combinations lead to higher prices.\11\ The
Final Judgment should reflect that fact here.
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\7\ By ``same-market broadcaster,'' we refer to a television
station located in a designated market area served by the RSN at
issue. Thus, for example, WTTG-5 is in the Washington DC DMA, which
is also served by Comcast's NBC SportsNet Washington, an RSN. So
WTTG would be a ``same-market broadcaster'' with respect to NBC
SportsNet Washington. (Please note that RSNs often cover multiple
markets. NBC SportsNet Washington, for example, covers both
Washington and Baltimore. So WBFF-45 in Baltimore would be a ``same
market broadcaster'' with respect to NBC SportsNet Washington as
well.) By ``big four'' broadcaster, we refer to stations affiliated
with the ABC, NBC, CBS, and FOX networks, each of which offers
``must have'' sports programming.
\8\ We note that Sinclair appears to have expressed interest in
obtaining Fox's RSNs. Gerry Smith, Sinclair Considers Tapping
Private Equity to Buy Fox Sports Networks, Bloomberg (Oct. 2, 2018),
available at https://www.bloomberg.com/news/articles/2018-10-02/sinclair-mulls-tapping-private-equity-to-buy-fox-sports-networks. By
our calculations, Sinclair's broadcast stations overlap Fox's RSNs
to a greater extent than do Fox's own broadcast stations.
\9\ Proposed Final Judgment, 83 Fed. Reg. at 40563 Sec. II.B.
\10\ For example, it may be that increased size permits a
broadcaster to claim a larger share of the joint gains from
agreement--what economists call ``bargaining power'' or ``bargaining
skill.'' Or it may be that MVPDs are risk averse, and their marginal
disutility from lost income increases in the amount of income lost.
Or, in certain circumstances, combining negotiations for two sets of
``must-have'' programming could make the demand for each type of
programming less sensitive to price. See, e.g., Comments of the
American Cable Association at 26 et seq. and Attachment 1, FCC
Docket No. 15-216 (filed Dec. 1, 2015) (containing submission by
Michael H. Riordan, Professor of Economics at Columbia University).
\11\ See Comcast Corporation, General Electric Company and NBC
Universal, Inc., 26 FCC Rcd. 4238, ] 137 (2011) (finding that ``an
analysis of the relevant data, presented in the Technical Appendix,
suggests that joint ownership of an RSN and broadcast station in the
same region may lead to substantially higher prices for the jointly
owned programming relative to what would be observed if the networks
were under separate ownership'').
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II. The Division Should Not Permit Disney to Divest Fox's RSNs to a
Same-Market MVPD.
While divestiture of Fox's RSNs to a broadcaster would replicate
the problem that the Division identified in this proceeding,
divestiture to a same-market MVPD \12\ would replicate the problem the
Division identified in seeking to block the AT&T-Time Warner merger--a
vertical combination of Fox's RSN programming and MVPD distribution
will lead to price increases.\13\ Here is how the government explained
its concerns about vertical integration:
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\12\ By ``same-market MVPD,'' we mean an MVPD offering service
within the RSN's service area. Please note that AT&T and DISH both
provide service nationwide, and would thus be ``same-market MVPDs''
with respect to all Fox RSNs.
\13\ The Division has identified this concern previously. See
United States v. Comcast Corp., No. 11-cv-00106 (D.D.C. 2011), Sec.
II.D.2.A. So too has the Federal Communications Commission. See,
e.g., Adelphia Commc'n Corp., and Time Warner Cable, 21 FCC Rcd.
8203, ]] 122-65 (2006) (``Adelphia Order'').
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Pre-merger, a blackout of Turner programming on Charter (for
example) cost Time Warner license fees from Charter and advertising
revenue from reduced viewership, and it cost Charter current and
potential customers because its service is less attractive without the
desirable Turner programming. Crucially, post-merger, that same
blackout is less costly to AT&T than it had been to Time Warner alone
because some Charter subscribers will switch to AT&T's DirecTV or
UVerse. . . . It is precisely because of this diversion to DirecTV
(which would have the competitively valuable Turner content) that the
costs of blackouts to the merged entity would be lower than absent the
merger. Because--solely as a result of the merger--the costs of not
reaching a deal are reduced, Time Warner will have increased leverage
to negotiate better terms with rival distributors. Exercising that
leverage will result in increased programming fees for those rival
distributors--lessening competition among DirecTV and its rivals--and
ultimately increasing prices for millions of American consumers.\14\
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\14\ Proof Brief of Appellant at 33-34, United States v. AT&T
Inc., No. 17-2511 (D.C. Cir. 2018).
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So too if Fox RSNs are divested to a same-market MVPD.\15\ Today,
if Fox fails to reach agreement with an ACA member, it loses license
fees and advertising revenue. If combined with an MVPD that competes
with the ACA member, however, the calculus changes. The RSN loses
license fees from the ACA member and advertising revenue. But the
competing MVPD gains new fees from subscribers who switch to it from
the ACA member in order to retain their
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RSN programming. There is, in other words, a ``silver lining'' for the
combined RSN/MVPD if it fails to reach a deal. This gives the combined
entity additional leverage--which means that prices will increase.\16\
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\15\ See Mike Farrell, ``It's Game On for Fox RSN Sell-Off,''
Multichannel News (Aug. 28, 2018) (listing as potential suitors John
Malone; Liberty Media; Madison Square Garden's ruling Dolan family
or Dolan-controlled entities such as MSG Networks; AT&T; Verizon;
and Comcast), available at https://www.multichannel.com/news/its-game-on-for-fox-rsn-sell-off.
\16\ See Amicus Brief of William Rogerson and the American Cable
Association at 11-12, United States v. AT&T Inc., No. 17-2511 (D.C.
Cir. 2018).
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Of course, as the AT&T-Time Warner litigation has made clear, a key
factor in determining the magnitude of concern about vertical
integration is the so-called ``diversion rate''--that is, how many
subscribers will switch providers in order to retain particular
programming. This, in turn, depends on the importance of the
programming itself. In this regard, we would note that the AT&T-Time
Warner merger did not involve RSNs at all. And the Federal
Communications Commission has considered RSNs paradigmatic ``must
have'' programming--the kind of programming for which subscribers will
switch providers--for at least fifteen years.\17\ Vertical integration
involving RSNs, in other words, should concern the Division at least as
much as does any other type of vertical integration.
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\17\ Gen. Motors Corp. & Hughes Elecs. Corp., 19 FCC Rcd. 473, ]
147 (2004); News Corp., DIRECTV Group, Inc., and Liberty Media
Corp., 23 FCC Rcd 3265, ] 87 (2008); Adelphia Order ] 128.
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* * * * *
Again, we very much appreciate the Division's efforts to address
concerns related to the combination of Fox's RSN assets and Disney's
ESPN.\18\ But it would not be in the public interest to permit the
divestiture of Fox's RSNs to a same-market, big-four broadcaster or to
a same-market MVPD. Moreover, since the antitrust problems raised by
these kind of divestitures are evident before the fact, the Division
need not expend the resources to examine such divestitures individually
or after the fact.
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\18\ Press Release: ``ACA Applauds DOJ For Requiring Disney To
Divest 22 Fox Regional Sports Networks'' (June 27, 2018), available
at http://www.americancable.org/aca-applauds-doj-for-requiring-disney-to-divest-22-fox-regional-sports-networks/.
Respectfully submitted,
Michael Nilsson
Mark Davis
Counsel to the American Cable Association
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