US: Telecoms

In 2015, communications policymakers took bold measures to impose regulation on the internet. For decades, a fundamental goal of US telecommunications policy has been to transition from a regulated monopoly to a competitive market. Since the enforcement action of the United States Department of Justice’s Antitrust Division (DOJ) against the AT&T monopoly opened long-distance markets to competition,1 antitrust enforcement has played a vital role in this effort. In subsequent years, Congress wrote the policy of relying on market principles to promote the growth and development of modern telecommunications services, such as the internet, directly into the Communications Act of 1934,47 USC § 151, et seq (the Communications Act).2 Technology has indeed flourished, but the telecommunications market has also seen significant consolidation. US policymakers have struggled with how to ensure network providers maintain an environment that gives consumers access to all legal content and enables innovation from application developers and content providers while encouraging network provider investment in broadband deployment. This debate has assumed the monikers of ‘net neutrality’ or ‘open internet’. While some policymakers have advocated for applying an antitrust framework exclusively to net neutrality issues,3 others have argued for the FCC to impose regulations.4 In 2015, advocates for regulation won a significant victory that will impact the application and enforcement of the antitrust laws in the US telecommunications industry for the foreseeable future.

On 12 March 2015, the Federal Communications Commission (FCC) released its Open Internet Order (OIO).5 The FCC adopted regulations governing the provision of both fixed and mobile broadband internet access service. Specifically, the OIO adopted what it called ‘clear, bright-line rules’ for such services, including:     

  • no blocking – to ensure consumer access to all lawful internet destinations, the FCC prohibited the blocking of lawful content, applications, services or non-harmful devices;
  • no throttling – to prevent the degradation of lawful content, the FCC prohibited the impairment of degradation of lawful content, applications, services or non-harmful devices; and
  • no paid prioritisation – to prevent preferential treatment for the content of certain providers over others, the FCC prohibited preferential traffic management practices that are conducted in exchange for consideration or to favour an affiliated entity.6

On the one hand, the OIO can be interpreted as simply adopting more specific regulations than in the FCC’s 2010 net neutrality order that had been largely overturned by the DC Circuit in 2014.7 On the other hand, the FCC expanded its authority over the internet by making an important legal distinction.

The OIO reclassified the service of broadband providers from an ‘information service’ to a ‘telecommunications service’. This reclassification subjects broadband internet access services to common carrier regulation under Title II of the Communications Act and its gauntlet of statutory provisions and regulations. While the FCC exercised its authority to forbear from many of these obligations,8 the legal distinction has important implications for potential antitrust enforcement actions against broadband internet providers.

The open internet order abrogates the FTC’s authority over broadband internet service providers

The classification of broadband internet access services as telecommunications services regulated under Title II may eliminate the authority of the Federal Trade Commission (FTC) to regulate providers of broadband internet access services. Indeed, at least one FTC Commissioner has trumpeted the FTC’s expertise in applying US competition policy to the internet.9 The reclassification subjects broadband internet access services to common carrier regulation,10 and the FTC’s authority to regulate common carriers is limited. The common carrier exemption in section 5 of the Federal Trade Commission Act of 1914 (the FTC Act) excludes from the FTC’s jurisdiction all ‘common carriers subject to the Acts that regulate commerce’, including the Communications Act.11

In prior enforcement actions against telecommunications companies, the FTC has sought to cabin the common carrier exemption by arguing it applies only to the services provided, not the company that provides such services. For example, in 2014, the FTC sued AT&T alleging that the company had throttled the data service it had advertised and sold as ‘unlimited’ in violation of section 5 of the FTC Act’s prohibition against unfair or deceptive acts or practices.12 AT&T filed a motion to dismiss on the grounds that the federal district court lacked subject matter jurisdiction. Because AT&T is a common carrier, the company argued the exemption should deny the FTC regulatory authority over the alleged conduct. The FTC responded that AT&T’s argument was overbroad and that the exemption only applied to common carrier services – not to all services provided by companies that offered some common carrier services. AT&T’s mobile wireless voice services were subject to common carrier regulations, but the company’s mobile wireless data services were not and therefore were outside the common carrier exemption. The district court agreed with the FTC and denied the motion to dismiss,13 but certified the issue for immediate appeal to the Ninth Circuit.14

The OIO has expanded the application of the common carrier exemption. Both mobile and fixed broadband internet access services are now subject to common carrier regulation, and the AT&T Mobility court’s reasoning would not apply in a subsequent FTC enforcement action brought against a broadband internet access provider. The expanded application of the common carrier exemption would impact competition policy on the internet in at least two ways. First, the DOJ would assume unquestioned authority to enforce the antitrust laws against broadband internet access providers, which include not only traditional telecommunications carriers like AT&T and Verizon but traditional cable companies like Comcast or Charter. Second, because of the DOJ’s lack of consumer protection authority, enforcement against unfair acts and practices would be left to the FCC.15 Absent a statutory repeal of the common carrier exemption, for which the FTC has already advocated,16 the FTC’s role in competition policy on the internet has been significantly diminished.

The remaining role for antitrust enforcement in broadband internet access services

The OIO expressly reserved a role for antitrust. The FCC stated that its regulations were ‘complementary to vigorous antitrust enforcement’ and that the DOJ should continue to ‘carefully monitor, review, and where appropriate, take action against any anti-competitive mergers, acquisitions, agreements or conduct’.17 Given the broad coverage of the OIO, however, there is an open question of what that role might be.

Proponents of applying an antitrust framework to net neutrality have characterised the concerns of the proponents of regulation as vertical leveraging and vertical foreclosure.18 In the net neutrality context, this might manifest itself with a broadband service provider with market power imposing a vertical restraint against a rival content or application provider to gain an advantage in the content market.19 Under modern antitrust standards, a claim premised on such a theory would be difficult to prove. In the past decade, Supreme Court decisions have limited the scope of potential cases against the unilateral conduct of network providers20 To satisfy the elements of a Sherman Act Section 2 monopolisation claim,21 the plaintiff would have to show not only that the broadband service provider possessed monopoly power, but that the discriminatory conduct was exclusionary and resulted in an anti-competitive effect such as driving applications from the market, preventing new entry or denying competitors minimum efficient scale.22

The broadband internet access service market does not seem conducive to such a showing. While the sales of the service are made locally to subscribers, the upstream market for applications and content is likely national, quite competitive and typified by low entry barriers and low marginal costs. Accordingly, demonstrating that any one internet service provider’s vertical restraint could harm competition would require proof that denial of access to one ISP’s customers was sufficient to prevent a rival from achieving minimum efficient scale or dissuade the provider from entering. With at least six major broadband ISPs23 nationwide that often compete head-to-head in local markets, this would be a very difficult showing.

The regulations introduced in the OIO rules make antitrust enforcement less likely. The order prohibits a significant number of potential vertical restraints altogether – regardless of their impact on competition. A potential plaintiff may find relief easier to obtain by filing a formal complaint with the FCC rather than advocating for DOJ enforcement action, or bringing its own antitrust complaint as a private plaintiff where it would carry the burden of proving an anti-competitive effect. The OIO’s reclassification of broadband service under Title II also opens the door to more regulation of the internet in the years ahead.

The OIO did reserve a role for merger enforcement, and we already have evidence that this enforcement will be aggressive.

Opposition to the Comcast–Time Warner Cable merger

If any issue consumed more attention of telecommunications lawyers during the past year than the OIO, it was the proposed transaction merger between Comcast and Time Warner Cable. Announced in February 2014, the US$45 billion combination would have created the single largest provider of pay-TV services serving 30 million (approximately 30 per cent) of multichannel video subscribers. The transaction presented no geographic overlaps in markets for pay-TV or internet access services sold to consumers. But the parties foresaw potential vertical concerns and proactively proposed to divest systems serving 3 million video subscribers. The parties argued that courts had previously concluded that the combined firm’s 30 per cent share among multichannel video programming distributors (MVPDs) rendered concerns about the anti-competitive foreclosure of unaffiliated programmers implausible.24

But the pay-TV market ended up not being the government’s primary concern. The focus was the combined firm’s control over last-mile internet access and the impact on content providers. To show that the merger posed no threat of competitive harm from potential foreclosure for last mile internet access, the parties had argued, among other things, that the combined company would face substantial competition in the provision of broadband services ‘from a variety of sources’.25 Accordingly, the competition between rival broadband providers would ensure the combined firm would not harm content or edge providers because any foreclosure would make combined firm’s core service offering, broadband internet access, less attractive.

The government saw the market differently. In a September 2014
speech, FCC Chairman Thomas Wheeler observed that most consumers have competitive choices between providers offering download speeds of 4 Mbps, but only 25 per cent of consumers had a choice of providers offering 25 Mbps.26 The Chairman claimed not only that higher-speed broadband was necessary for consumers to enjoy the benefits of the internet, but that traditional cable companies like Comcast and Time Warner are the leading providers of the higher-speed service. While neither the DOJ nor the FCC released a comprehensive public explanation of their reasons for opposing the transaction, it is reasonable to infer from their brief public statements that the government had concluded that the broadband market was considerably less competitive under this new interpretation of broadband and that the risk of foreclosure was unacceptable.27 In the face of the opposition of both agencies, the parties abandoned the deal. The DOJ and the FCC reached this conclusion despite the adoption of the OIO just a month prior – apparently concluding that the FCC’s regulatory scheme was insufficient to assuage the alleged threat to competition posed by the merger.

Debate on these issues will continue into this year as Charter announced its intention to acquire Time Warner Cable and BrightHouse Communications in deals worth approximately US$89 billion, resulting in a company serving 23.9 million customers.28

AT&T’s acquisition of DirecTV clears prolonged review

On 18 May 2014, AT&T announced an agreement to acquire DirecTV in a US$49 billion transaction. Unlike the Comcast-Time Warner transaction, AT&T and DirecTV were horizontal competitors for MVPD services. With its nationwide footprint, DirecTV competed head-to-head against AT&T U-verse video services, which serves 6 million subscribers. After the merger, the combined firm now serves 26 million video subscribers.29 But the parties argued that their services were complementary. DirecTV offered a high-quality video product but lacks the facilities to offer broadband services. AT&T argued that it lacked the scale to negotiate favourable rates for video programming but can deliver high-speed internet services within its wireline footprint.30 Together they could offer compelling bundles of services for video, high-speed data and telephony to better compete with incumbent cable operators already offering bundled services.

During the year-long regulatory process that ensued, opponents raised concerns about, among other things: the loss of video competition, the impact of the transaction on AT&T’s incentive to deploy high-speed fiber networks, and the merged firm’s incentive to hamper competition from rival online content providers. The agencies credited the parties’ argument that their services were complementary and could offer compelling bundled services. The FCC found so, directly stating in its order approving the transaction that the combined firm’s bundled products would ‘stimulate lower prices.’31 The DOJ’s agreement must be inferred from its public statement announcing the closing of its investigation, noting that the combination of ‘land-based internet and video business with DirecTV’s satellite-based video business [did] not pose a significant risk to competition’.32

The FCC addressed many of the opponents’ concerns by placing conditions on the merger. First, while the FCC found that the transaction ‘will spur, in the long term, AT&T’s investment in high-speed broadband networks’, it required the combined firm to deploy a fibre-to-the-premises network to 12.5 million locations within four years.33 Second, to prevent discrimination against rival online video content providers, the FCC conditioned the merger on the prohibition of certain discriminatory usage-based data caps. Third, to address concerns that the combined firm’s bundled offerings will make standalone broadband service unavailable, the FCC imposed a condition requiring the combined firm to offer a low-price standalone broadband offering within its wireline footprint for US$10 per month for 10 Mbps service.34

These regulatory requirements of the FCC’s order and the Department’s decision to simply close its investigation highlight the DOJ’s return to a reliance on structural remedies under Assistant Attorney General Bill Baer. Under the leadership of Christine Varney, the DOJ issued remedy guidelines favoring the imposition of conduct remedies under certain circumstances.35 While the DOJ has not repudiated these guidelines, the Assistant Attorney General has taken numerous opportunities to express the DOJ’s preference for structural relief.36Indeed, the conduct remedy obtained in connection with the 2011 merger of Comcast and NBC Universal37 stands in stark contrast to the one-page press release issued in connection with AT&T-DirecTV.38

Antitrust challenges to long-term programming practices

Policymakers have sought to enable competition with the traditional bundle of MVPD services from over-the-top providers and other potential rivals. In addition, other traditional distribution practices have been under attack in private antitrust litigation.

A series of class action lawsuits have alleged that restrictions imposed on the distribution of regional sports networks by Major League Baseball and the National Hockey League are anti-­competitive.39 The complaints allege an agreement to divide the market for live games into exclusive geographic territories for regional sports networks (RSNs) carrying the games of the local teams and while licensing the games to the leagues so the leagues can sell packages of out-of-market games. Because the local games are blacked out of out-of-market packages to protect the local team, RSNs and MVPDs that carry the games, the plaintiffs allege the restrictions allow the charging of supra-competitive prices. The defendants’ various motions to dismiss the Section 1 claims against the defendants were denied in 2012, and the cases proceeded to discovery.

In August 2014, the court also denied a motion for summary judgment.40 The court first rejected MLB’s argument that baseball’s exemption from the antitrust laws applies to territorial broadcasting restrictions, finding that broadcasting was not central enough to baseball’s operations to fall within the exemption. Second, based on the plaintiffs’ expert report finding higher prices to consumers for live broadcasts and out-of-market packages, the court concluded that plaintiffs had carried their initial burden of showing an actual impact on competition.41 The RSNs and MVPDs had argued that they played no role in crafting the territorial restrictions, which were presented to them on a non-negotiable basis, and have never acted to actually enforce the restrictions. The court rejected this, saying that a downstream entity need not help create, request, or enforce a restraint to be held liable under Section 1. Further, plaintiffs produced evidence showing that the RSNs and MVPDs had at times pressured the leagues to retain the territorial restrictions.

With the discovery set to close in December 2015, the case now proceeds toward a possible trial date. At stake is the MVPD’s hold as the exclusive outlet of local professional games at a time when live sports content has become one of the most valuable programming assets. Consumers’ desire to watch sports programming live, rather than time-shifted, has made the programming worth more to advertisers and MVPDs seeking to continue to sell their subscription packages. Any disruption of this model could have a significant impact on how consumers receive video services.

In June 2015, the court granted preliminary approval of a settlement in the NHL case. The proposed settlement includes price cuts for out-of-market bundles and the introduction of single-team out-of-market packages at 80 per cent of the price of the bundle.42 But it does not do away with territorial restrictions or blackouts.

The plaintiffs’ success in this litigation has encouraged more litigations as class actions have now been filed challenging the exclusive agreement between the National Football League and DirecTV for its Sunday Ticket package of out-of-market games.43

The year ahead will also see the close of discovery and summary judgment motions filed in Cablevision Systems Corp v Viacom International, Inc arising from the parties’ 2012 negotiation for the carriage of Viacom’s cable networks, including Nickelodeon, Comedy Central, BET and MTV. Cablevision alleges that Viacom’s practice of requiring distributors to carry less popular programming as a condition of licensing rights to more popular networks constitutes illegal tying. A ruling on the merits in favour of Cablevision also has the potential to impact how programming is packaged and delivered to consumers.

The author would like to thank Mike Herring for his contributions to this chapter.

Notes

  1. United States v Western Elec Co, 552 F Supp 131, 227-28, 231 (DDC 1982), aff’d mem. sub nom. Maryland v United States, 460 US 1001 (1983) (requiring break up AT&T’s long distance and local exchange carrier businesses).
  2. Communications Act § 230(b)(2) (stating that the internet should be a ‘vibrant and competitive free market ... unfettered by Federal or State regulation’).
  3. Commissioner Joshua Wright, Federal Trade Commission, Remarks at the Information Economy Project’s Conference on US Broadband Markets in 2013: Broadband Policy & Consumer Welfare: The Case for an Antitrust Approach to Net Neutrality Issues at 2 (19 April 2013) (‘I hope to make the case for why antitrust is particularly well suited for addressing the concerns raised in the longstanding debate surrounding net neutrality in a manner that best serves consumers, and to explain why I believe the FTC’s core competencies as an antitrust and consumer protection agency make it equal to the task.’), available at: https://www.ftc.gov/sites/default/files/documents/public_statements/broadband-policy-consumer-welfare-case-antitrust-approach-net-neutrality-issues/130423wright_nn_posting_final.pdf.
  4. The White House, Press Release, Statement by the President on Net Neutrality (10 November 2014) (advocating for net neutrality regulation).
  5. Protecting and Promoting the Open Internet, GN Docket No. 14-28 (12 March 2015) (the ‘Open Internet Order’).
  6. Open Internet Order ¶¶ 15-19.
  7. See Verizon v FCC, 740 F3d 623 (DC Cir 2014).
  8. Open Internet Order ¶¶ 37, 456-536 (forbearing from the requirement ‘to unbundle last-mile facilities, no tariffing, no rate regulation, and no cost accounting rules’).
  9. Commissioner Joshua Wright, Federal Trade Commission, Remarks at the Information Economy Project’s Conference on US Broadband Markets in 2013: Broadband Policy & Consumer Welfare: The Case for an Antitrust Approach to Net Neutrality Issues at 2 (19 April 2013).
  10. See Open Internet Order ¶¶ 274 (‘[broadband internet access service’ is a telecommunications service subject to Title II ... This finding both removes the common carrier limitation from the exercise of our affirmative section 706 authority and also allows us to exercise authority directly under sections 201 and 202 of the Communications Act in adopting today’s rules.’).
  11. See 15 USC § 45(a)(2); see also 15 USC § 44 (defining ‘Acts to regulate commerce’ as including the Communications Act).
  12. FTC v AT&T Mobility LLC, Complaint, Case No. 14-CV-04785-EMC (ND Cal 28 October 2014), ¶43.
  13. FTC v AT&T Mobility LLC, Order Denying Defendant’s Motion to Dismiss, Case No. 14-CV-04785-EMC (ND Cal 31 March 2015), at 19.
  14. FTC v AT&T Mobility LLC, Order Granting Defendant’s Motion to Certify, Case No. 14-CV-04785-EMC (ND Cal 15 May 2015).
  15. Open Internet Order ¶¶ 141, 291, 444-45 (asserting FCC’s authority under Communications Act § 201(b) to regulate ‘unjust or unreasonable’ practices to broadband internet access providers). In addition, the Open Internet Order also limits the FTC’s ability to continue its role as privacy enforcer with respect to broadband internet access services.
  16. Commissioner Terrell McSweeny, Federal Trade Commission, Prepared Statement before the United States House of Representatives Committee on the Judiciary (25 March 2015).(‘The optimum outcome for consumers is Open internet coupled with repeal of the common carrier exemption that may hinder the FTC from protecting consumers against unfair and deceptive common carrier activities.’).
  17. Open Internet Order ¶ 203.
  18. Barbara van Schewick, Net Neutrality and Quality of Service: What a Non-Discrimination Rule Should Look Like, 67 STAN. L. REV. 1, 16 (January 2015).
  19. Christopher S Yoo, ‘What Can Antitrust Contribute to the Network Neutrality Debate?’, 1 INT’L J. COMM. 493, 502-03 (2007).
  20. See Verizon Commc’ns Inc v Law Offices of Curtis v Trinko, LLP, 540 US 398 (2004) (concluding that the antitrust laws did not compel incumbent network provider to share with a rivals); Pacific Bell Tel Co v linkLine Commc’ns, Inc, 555 US 438 (2009) (concluding that when network provider has no duty to deal at the wholesale level and does not engage in predatory pricing at the retail level it has no obligation to set wholesale prices on terms that ensure its rival’s profitability).
  21. Trinko, 540 US at 407 (requiring proof of (1) monopoly power; and (2) the acquisition, enhancement or maintenance of that monopoly power through exclusionary conduct).
  22. Barbara van Schewick, ‘Net Neutrality and Quality of Service: What a Non-Discrimination Rule Should Look Like’, 67 STAN. L. REV. 1, 19 (January 2015).
  23. Steve Donohue, Comcast dominates 2013 broadband subscriber growth rankings, Fierce Cable (17 March 2014), available at: www.fiercecable.com/story/comcast-dominates-2013-broadband-subscriber-growth-rankings/2014-03-17 (reporting data that at least 6 broadband providers serve at least 4.6 million subscribers and that none has a market share higher than 24 per cent).
  24. Comcast Corp. & Time Warner Cable Inc, Application & Public Interest Statement, MB Docket 14-57 (8 April 2014), at 169.
  25. Id at 158 (identifying competitors as ‘from providers of DSL (including [Fiber-to-the-Node]), [Fiber-to-the-Premises], wireless, and other types of broadband service (including cable overbuilders, satellite, and fixed wireless)’).
  26. FCC Chairman Tom Wheeler, Speech, ‘The Facts and Future of Broadband Competition’ 1776 Headquarters, Washington, DC (4 September 2014). Ultimately, the FCC redefined the term ‘broadband’ to mean a minimum download speed of 25Mbps and an upload speed of 3 Mbps.
  27. US Dep’t of Justice, Press Release, Comcast Corporation Abandons Proposed Acquisition of Time Warner Cable After Justice Department and the Federal Communications Commission Informed Parties of Concerns (24 April 2015) (stating that the merger would have created ‘an unavoidable gatekeeper for internet-based services’ and that the abandonment of the transaction was a ‘victory ... for providers of content and streaming services who work to bring innovative products to consumers’); Statement of FCC Chairman Tom Wheeler, MB-Docket 14-57 (24 April 2015) (‘The proposed merger would have posed an unacceptable risk to competition and innovation especially given the growing importance of high-speed broadband to online video and innovative new services’).
  28. Time Warner Cable, Press Release, Charter Communications to Merge with Time Warner Cable and Acquire Bright House Networks (26 May 2015), available at: http://ir.timewarnercable.com/investor-relations/investor-news/financial-release-details/2015/Charter-Communications-to-Merge-with-Time-Warner-Cable-and-Acquire-Bright-House-Networks/default.aspx.
  29. In the Matter of Applications of AT&T & DirecTV, Memorandum Opinion & Order, MB Docket No. 14-90 (28 July 2015) ¶11.
  30. Applications of AT&T & DirecTV, Public Interest Statement, MB Docket 14-90 (10 June 2014), at 21.
  31. In the Matter of Applications of AT&T & DirecTV, Memorandum Opinion & Order, MB Docket No. 14-90 (28 July 2015) ¶11.
  32. US Department of Justice, Press Release, Justice Department Will Not Challenge AT&T’s Acquisition of DirecTV (21 July 2015), available at: www.justice.gov/opa/pr/justice-department-will-not-challenge-atts-acquisition-directv.
  33. In the Matter of Applications of AT&T & DirecTV, Memorandum Opinion & Order, MB Docket No. 14-90 (28 July 2015) ¶4,6.
  34. Id ¶397, Appendix B.
  35. United States Department of Justice, Antitrust Division Policy Guide to Merger Remedies (June 2011), at 12-17.
  36. See, eg, Assistant Attorney General Bill Baer, Speech, Remarks at the Global Competition Review Fourth Annual Antitrust Law Leaders Forum (6 February 2015), available at: www.justice.gov/opa/speech/assistant-attorney-general-bill-baer-delivers-remarks-global-competition-review-fourth (‘Pursuing meaningful structural relief in mergers is important’).
  37. US v Comcast Corp, et al, Case No. 1:II-cv-00l06 (1 September 2011) (requiring, among other things, provision of economically equivalent video programming terms to OVDs).
  38. US Department of Justice, Press Release, Justice Department Will Not Challenge AT&T’s Acquisition of DirecTV (21 July 2015), available at: www.justice.gov/opa/pr/justice-department-will-not-challenge-atts-acquisition-directv.
  39. Garber v Office of the Commissioner of Baseball, Case No. 12-cv-3704 (SDNY) ; Laumann v National Hockey League, Case No. 12-cv-1817 (SDNY).
  40. Garber, Opinion & Order, Case Nos. 12-cv-3704 & 12-cv-1817 (SDNY 8 August 2014).
  41. The court did exclude the portion of the experts report related to the damages model so the plaintiff s are proceeding on the basis of seeking only an injunction.
  42. Laumann, Order Preliminarily Approving Proposed Settlement, Case No. 12-cv-1817 (SDNY 15 June 2015).
  43. See, eg, 1465 3rd Ave Rest Corp v NFL, Case No. Case No. 2:15-cv-6145 (13 August 2015).

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