In a decision issued Tuesday, Judge Richard Leon of the U.S. District Court for the District of Columbia approved the proposed merger of AT&T and Time Warner. In doing so, he rejected the “must-have” programming theory that was the core of the government’s antitrust case seeking to block the merger. The “must-have” programming theory asserts that multi-channel video programming distributors cannot succeed without access to certain television programming (in this case, Time Warner’s popular cable channels such as HBO, TNT, TBS, CNN, etc.), and that if owners of such “must have” programming deny a distributor access to that programming on competitive terms, that would destroy the distributor and deeply harm competition in the video marketplace.
That theory was rejected on Tuesday when Judge Leon ruled that the merger would not violate antitrust principles. But, this was not the first venue where the “must-have” programming theory failed: cable TV and satellite operators have asserted the theory for years in proceedings at the FCC, in an attempt to regain some leverage against TV stations in retransmission consent negotiations, but the FCC never endorsed it. Tuesday’s court decision may be the final blow to the “must-have” programming theory, but if so, the theory was ultimately killed by recent changes in the video marketplace, particularly Internet distribution of diverse and smaller programming packages.
In rejecting the government’s antitrust claims, Judge Leon first noted the importance of the recent rise of Internet-distributed “over-the-top” video programming packages, including “lower-cost, better-tailored programming content … of leading [subscription video on demand providers – “SVODs”] in particular, including Netflix, Hulu, and Amazon Prime ….” Judge Leon also pointed to the growth of “cord cutting” and “cord shaving,” that is, when a household “departs a traditional [multi-channel video distributor—“MVPD” such as a cable TV or satellite operator] for one of the many virtual MVPDs, which … typically carry smaller bundles of networks at lower price points.”
Judge Leon then laid out the government’s theory of market harm from a merger: that when Time Warner negotiates with rivals of AT&T’s MVPDs (DirecTV, DirecTVNow and AT&T U-Verse), it would have anti-competitive leverage over the rivals allowing it to either charge supra-competitive rates or to withhold the programming from the rivals entirely. Any lost fees to Time Warner from withholding programming would be, according to the government, offset by new benefits to AT&T: “1) some of the rival distributor’s customers would depart or fail to join the distributor due to the missing [Time Warner] content; 2) some portion of those lost customers would choose to sign up with AT&T’s video distributors (which would have [Time Warner programming]) and; 3) AT&T would profit from those gained subscribers.” Judge Leon concluded, however, that the evidence produced in the trial did not support that scenario. Rather, he pointed to evidence that some distributors, such as Dish’s virtual MVPD Sling, offer packages without “must-have” programming from broadcast TV network affiliates, and competitive distributors such as Comcast testified that they saw no such risk from a Time Warner-AT&T merger. Judge Leon also noted that “the ‘must have’ status of [Time Warner] content varies based on whether the content is available for viewing through other means, such as over the internet…” and pointed to consumer direct access to March Madness basketball games and HBO via Internet streaming. Judge Leon also addressed the impact of the growing market for Internet distribution of smaller, less expensive “skinny bundles” of video programming to personal mobile wireless devices from Sony’s Playstation Vue, Hulu Live, Google’s YouTube TV, etc. ̶ holding that the evidence showed that AT&T intends to embrace these providers to increase profits from Time Warner programming.
This is not the first time, though, that the “must-have” programming theory has failed to gain traction. For many years, MVPDs complained to the FCC that in retransmission consent negotiations, broadcast TV network affiliates have leveraged such programming to extract supra-competitive fees as well as carriage of allegedly extraneous multicast or cable-only channels. In 2015, at the direction of Congress, the FCC released a Notice of Proposed Rulemaking (NPRM), seeking comments on criteria for evaluating whether parties are fulfilling their requirements to negotiate retransmission agreements “in good faith.” That NPRM stated that “MVPDs that face competition have stronger incentives to negotiate retransmission consent agreements with broadcast stations because much broadcast network television programming continues to be “must-have” programming for MVPDs and an MVPD that is unable to reach a retransmission consent agreement with a broadcast station may permanently lose subscribers to rival MVPDs – including subscribers to its associated voice and broadband services.” The NPRM specifically sought comment on “whether and to what extent a broadcaster’s insistence on bundling a local broadcast signal with specific types of programming such as regional sports networks (or other “must have” programming), multicast programming, duplicative stations, and/or significantly viewed stations should factor into our assessment of whether the broadcaster has negotiated in good faith under the totality of the circumstances test.”
MVPDs filed comments supporting the “must-have” programming theory and seeking relief in retransmission consent negotiations. Broadcasters opposed any such relief. In July 2016, then-FCC Chairman Tom Wheeler announced in a blog post that the Commission was not going to take any action to modify its retransmission consent rules at that time. That announcement, however, did not constitute formal FCC action, so technically the rulemaking proceeding remains open and could be revived by a later Chairman.
The most recent iteration of this argument at the FCC came in the 2017 proceeding to adopt rules for the transition to the next generation TV standard – ATSC 3.0. MVPDs had mixed feelings when the FCC ruled that “Next Gen TV broadcasters will have mandatory carriage rights for their 1.0 signals and not their 3.0 signals …. Thus, a Next Gen TV broadcaster will choose between must carry or retransmission consent for its ATSC 1.0 signal, but may only pursue carriage via retransmission consent for its ATSC 3.0 signal.” The MVPDs had raised the spectre of use of “must have” programming as leverage to extract carriage of ATSC 3.0 signals, and requested that the FCC enact a rule requiring parties to negotiate for carriage of 3.0 signals separately from carriage of 1.0 signals. However, the FCC’s Order explicitly declined “at this time,” to adopt any rules for carriage of ATSC 3.0 signals pursuant to retransmission consent. It chose instead to “allow these issues at the outset to be addressed through marketplace negotiations. We make clear, however, that MVPDs are under no statutory or regulatory obligation to carry any 3.0 signals and remind parties of the statutory requirement that they negotiate in good faith.” So, the FCC could be seen as at least implicitly recognizing some validity to the “must-have” programming theory, but not affording it enough weight to justify enacting specific rules. The MVPDs were pleased with the limitation of must-carry rights to ATSC 1.0, but filed petitions for reconsideration of the holding that broadcast stations could seek carriage of ATSC 3.0 through retransmission consent negotiations that also included their ATSC 1.0 signals. We shall see how the FCC responds, particularly in light of the District Court’s rejection of the “must have” programming theory.
So, if not officially dead, the “must-have” programming theory is not doing well, in court or at the FCC. The District Court decision might be appealed, but that doesn’t mean that an appellate court would rejuvenate the theory. The FCC has been asked to look at it again in the ATSC 3.0 context, but the current FCC likely has no desire to inject itself into what can be seen as purely private negotiations between programmers and distributors. Ultimately, though, changes in technology, and consumer demand for “skinny bundles” of programming, may harken the death knell for the idea of “must-have” programming entirely.
Fletcher, Heald and Hildreth has deep experience in retransmission consent negotiations and all types of programming carriage issues. Please call us if you have questions or if we can be of assistance.