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ACA: Pay-TV Rates Will Rise Without Strong FCC Conditions On AT&T-DirecTV Deal

Regional Sports Nets Central To Small Cable’s Concerns

PITTSBURGH, September 22, 2014 -  The American Cable Association called on the Federal Communications Commission to impose remedial conditions on the AT&T-DirecTV merger to prevent the merged company from overcharging its rival multichannel video programming distributors (MVPDs) and their customers for must-have programming, primarily its regional sports networks (RSNs).

In comments filed with the FCC, ACA demonstrated that the transaction will worsen the existing harm to consumers and competition in the MVPD market arising from DirecTV's control of RSN programming that rivals must have to compete.  ACA urged the agency to address significant shortcomings of previously adopted merger conditions that have been mostly ineffective for small and medium-sized MVPDs.  ACA's merger analysis was performed by Gary Biglaiser, Professor of Economics at the University of North Carolina, Chapel Hill, and former FCC Assistant Chief Economist.

"The proposed AT&T-DirecTV merger represents a significant horizontal expansion of pay-TV distribution assets combined with important RSN assets.  This will exacerbate the harms caused by DirecTV's prior vertical integration and will result in higher costs to competitors and consumers, particularly the smallest MVPDs," ACA President and CEO Matthew M. Polka said.  Polka added that should AT&T and DirecTV fail to develop and propose enforceable commitments to address the harms identified by ACA, the FCC must do so to protect competition and consumers.

DirecTV's three RSNs are Root Sports Pittsburgh; Root Sports Rocky Mountain (Denver); and Root Sports Northwest (Seattle).  Each of these networks carries live and same-day professional sports games AT&T and DirecTV are also in the process of purchasing Comcast SportsNet Houston, which broadcasts the professional games of the NBA Rockets and MLB Astros.

In Sept. 16 comments, ACA explained that DirecTV already has a strong existing incentive and ability to charge higher programming prices to its rivals for its RSNs and that the AT&T-DirecTV merger will increase the vertical harms of DirecTV's ownership of these must-have programming assets.

In his economic analysis, Professor Biglaiser highlighted that a combined AT&T and DirecTV will have an increased opportunity cost in selling its must-have RSN programming to MVPD rivals due to the efficiencies and programming cost savings the merging parties predict will occur.  As Biglaiser explains, the new firm will take that increased opportunity cost into account in setting prices for its RSNs, resulting in MVPD rivals paying more for the RSN programming than they would if DirecTV remained a separate entity.  This, in turn, will harm consumers, who in all likelihood will see these increases passed through to their monthly bills.

ACA's comments underscored the fact that the "baseball" style arbitration remedy the FCC has used in the past to temper the effects of such mergers has proved ineffective, particularly for smaller MVPDs.  The key problem is that smaller MPVDs lack the critical information of broader market pricing information that is necessary for them to properly identify when a programmer is acting on its merger-induced incentive to charge higher programming prices.  Making matters worse, even when a smaller MVPD senses the programmer might be overcharging it, the smaller MVPD's lack of critical information is combined with a crippling information imbalance that favors the programmer.  This information imbalance tips the scale in favor of the programmer when it comes time for each side to formulate a "final offer" at the outset of the arbitration process.  The upshot is that the smaller MVPD's odds of winning an arbitration are quite low.  This is true even in cases where smaller cable operators rely on their chief buying group, the National Cable Television Cooperative (NCTC) to purchase programming.

These problems deter independent cable operators -- already risk averse because of their limited financial resources -- from initiating arbitrations, which can cost about $1 million per arbitration.

"The FCC's attempt to make the arbitration remedy useable for smaller MVPDs has largely been ineffective.  These MVPDs will be at an even greater risk if the AT&T-DirecTV transaction -- which will vastly expand AT&T's distribution footprint and programming heft -- is consummated," Polka said.

In its application, AT&T pledged to provision 15 million customer locations with broadband services, assuming transaction approval.  It appears that about a net four million higher-cost locations in AT&T's service territory will receive broadband service or improved broadband service under the commitments.

Although ACA believes AT&T's commitment may have significant value, the FCC should determine for any of these "commitment" locations whether AT&T is already receiving or is already eligible to receive

Universal Service Fund (USF) support, including existing high-cost legacy support, existing Connect America Fund (CAF) Phase I incremental support, or future CAF Phase II support.

In any instances where there is an overlap between "commitment locations" and locations where AT&T receives or could receive USF support, the FCC should not permit AT&T to access USF money.  More specifically, AT&T should, in the case of legacy support, not receive any support in the future. In the case of Phase I support, AT&T should return any received support and not receive support in the future. For Phase II, AT&T should not receive support in the future.

"ACA does not oppose AT&T's broadband commitments.  ACA simply wants to ensure that any commitments accepted by the FCC serve the public interest by not ‘double-counting' the commitment and USF support," Polka said.

About the American Cable Association: Based in Pittsburgh, the American Cable Association is a trade organization representing nearly 850 smaller and medium-sized, independent cable companies who provide broadband services for nearly 7 million cable subscribers primarily located in rural and smaller suburban markets across America.  Through active participation in the regulatory and legislative process in Washington, D.C., ACA's members work together to advance the interests of their customers and ensure the future competitiveness and viability of their business.  For more information, visit http://www.americancable.org/

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