NEWS CORP., GM, HUGHES DEFEND MERGER DEAL AGAINST OPPONENTS

Applicants submitted reply comments and addressed many of the “parade of horribles that would allegedly result,” they said, citing “vertical foreclosure” as the most common. They also addressed additional “makeweight” arguments they said the Commission should reject or address in separate proceedings. Consumer groups, cable operators and cable associations were among opponents who also filed reply comments.

A “vertical foreclosure” strategy would combine programming assets (Fox) and distribution assets (DirecTV) with the intention of hurting rivals, the applicants said. In the context of this proposal, the strategy would “have no basis in fact or in sound economic theory” but the real consequence of hurting News Corp.’s revenue, they said: “To recoup these losses, [News Corp.] would have to gamble that a sufficient number of subscribers from the foreclosed [multichannel video program distributors (MVPDs)] would be motivated to subscribe to DirectTV, or that DirecTV could unilaterally raise its price without losing subscribers.”

Vertical foreclosure would be more of a concern if the combination of the companies resulted in a larger market power, the applicants said, but it won’t. “[I]n markets where there is a cable operator, DirecTV is a distant 2nd or 3rd in subscribership, with the local cable company holding a share that generally is about 8 times that held by DirecTV (10.1% v. 80.7%)… [B]ecause News Corp. has no MVPD assets in the [U.S.], it will also be true after the proposed transaction is consummated,” they said. Additionally, the Commission noted in its Exclusivity Sunset Order that a vertically integrated cable programmer would benefit more from withholding programming with a larger number of subscribers, the applicants said: “[I]t is not a concern with respect to a DBS operator with only a 13% market share.”

If foreclosure were profitable, they said, a contract between News Corp. and DirecTV could have already been implemented and the “failure to recognize this as a possibility is a significant flaw in the commenters’ economic analysis.” This possibility renders the anti-competitive effects raised in this proceeding irrelevant, they said, because they're not specific to the transaction. Additionally, “the fact that News Corp. and DirecTV have not entered into such agreements is strong evidence that the foreclosure strategies proffered by the commenters are in fact not economically rational,” they said.

The applicants addressed the value of Fox’s broadcast programming and regional sports networks (RSNs), saying DirecTV’s market share would have to quadruple for News Corp. to profit from refusing retransmission consent. Exorbitant price increases wouldn’t work either because of the risk that MVPDS would completely refuse to carry the programming and subscribers would refuse the higher rates, they said: “[E]ven such highly popular programming cannot create subscriber movements or support price increases of this magnitude.

Replies from Advance/Newhouse, Cox Communications, Cable One and Insight said that regardless of whether News Corp. says they won’t raise rates or withhold programming, the company will have an increased incentive and ability to do so: “While News Corp. might not permanently withhold programming… [w]ithholding programming from a single, mid-size MSO, which refuses to pay a higher rate for News Corp.’s programming, which would have a fairly limited impact on News Corp.’s revenues, while sending a message to all other distributors of programming and thus enhancing News Corp.’s bargaining power.”

The applicants said that other arguments made by opponents were either “frivolous or irrelevant,” including the suggestions that News Corp. would distribute Fox programming via national feed, that the Commission should impose a broadcast-DBS cross ownership ban and that the company should waive retransmission consent rights: “If the Commission is to advance its goal of moving away from a world in which a transfer of control proceeding is an ‘opportunity to import any and every concern one has with the… parties [and for] regulators [to] use the parties’ desire to merge as a chance to grind every ax,’ these arguments must be rejected.”

Cablevision said in its reply that it supported a waiver of retransmission consent rights by local Fox broadcaster to eliminate the extraction of “supracompetitive compensation” for consent, avoiding the need for “intensive regulatory oversight.” The American Cable Assn. (ACA) said that if larger companies like EchoStar, Cox and Cablevision are concerned about retransmission consent and program access, “what about the average ACA member serving 8,000… [or] under 1,000 subscribers?” The Commission should determine whether the applicants plan to make specific commitments, if any, concerning retransmission and program access and how these commitments will be enforced, said the ACA.

Meanwhile, the Center for Digital Democracy (CDD), which previously submitted comments, replied jointly with the Consumer Federation of America (CFA), the Consumers Union (CU) and the Media Access Project (MAP) saying that the advent of a deal combining News Corp. and DirecTV will make a “troubling situation” with media “much worse.” The deal threatens to “seriously harm meaningful competition between media companies in this nation,” they said, especially since the relaxation of the media ownership rules (CD June 3 p1). Although News Corp. has said their programming will remain accessible, the consumer groups said, a loophole remains in terms of what outside programming will be chosen for DirecTV and the close relationship between News Corp. and programming provider Liberty Media.

The consumer groups also alleged that the deal wouldn’t increase “meaningful competition” between DBS and cable or prevent cable price increases: “[T]he lack of local channels on satellite systems in many communities prevents satellite from being a substitute for cable… [satellite] service is not as attractive as cable in several respects and many consumers simply cannot subscribe.” If satellite were a better substitute, they said, it would exert a greater influence on cable, particularly in terms of pricing: “The FCC also attempted to estimate a price effect between satellite and cable… In fact, it found… [t]he higher the penetration of satellite, the higher the price of cable.” It’s unfair to force consumers to accept inflated cable rates and “inadequate” TV competition that will result from the deal, they said.

Advance/Newhouse also mentioned the potential for News Corp. to harm competitors through Gemstar/TV Guide by controlling the “'look and feel’ of cable operators’ key day-to-day interface with their subscribers,” Advance/Newhouse said: “The Commission should ensure that this transaction begin to alleviate -- rather than exacerbate -- the competitive harms associated with Gemstar/TV Guide’s effort to dominate all aspects of the market for [electronic program guides (EPGs)].” The ACA also mentioned EPGs, saying its members don’t have resources to create EPGs of their own: “News Corp. will have the incentive and ability to increase EPG costs and threaten to withhold access to disadvantage smaller competitors of DirecTV.”