There is a concern that the new Deputy Attorney General for Antitrust, Christine Varney, will reapply her power in a broad manner over the antitrust arena. The last time we saw that was in the Microsoft case and before that were AT&T and IBM. In the early to mid 1990s we attempted to deal with the Antitrust Division regarding the separation between local and long distance telephone service to no avail. We wrote a detailed paper looking at Antitrust laws as applied to telecom and it received a small bit of attention but during Clinton and Bush there was no interest in an antitrust litigation. However there are many other opportunities to restart the process and we suggest one possibly area based solely upon our opinion.
One should first remember that antitrust law is established to protect competition and not the competitors. Frequently the law in its application may actually harm one or more competitors. It hopefully opens up competition. Unfortunately this was not the case I the time of the previous two Presidents and especially not as regards to telecom.
We begin by looking at tying arrangements and we quote from the Supreme Court in Eastman Kodak Company v. Image Technical Services, Inc. et al. (June 8, 1992):
“A tying arrangement is “an agreement by a party to sell one product but only on the condition that the buyer also purchases a different (or tied) product, or at least agrees that he will not purchase that product from any other supplier.” Northern Pacific R. Co. v. United States, 356 U.S. 1, 5-6 (1958). Such an arrangement violates 1 of the Sherman Act if the seller has “appreciable economic power”' in the tying product market and if the arrangement affects a substantial volume of commerce in the tied market. Fortner Enterprises, Inc. v. United States Steel Corp., 394 U.S. 495, 503 (1969).”
A tying arrangement exists only when a producer of a desired product sells it only to those who also buy a second product from it (see Areeda & Kaplow, Antitrust Law, p. 704.).
Consider the case of Cablevision which is a cable TV provider in New York, New Jersey and Connecticut. They have been eliminating their analog channels in favor of digital ones. In the past year they have reduced approximately more than 50% of their offered channels unless the subscriber pays for a digital converter box at the rate of about $7 per month per box. The basic non-premium channels are $53 per month plus the $7 per box per month. For a 3 TV set family this is an additional $21 dollars, or almost a 50% increase in revenue.
All that is required to obtain the new digital format is digital conversion as is done in the new digital TV sets. That is a $30-40 box at wholesale, at worst case, and with the rates charged by Cablevision that is a five month payback. Yet they charge the amount on a continuing basis; say for ten years or more, obtaining an almost in my opinion an extortionary return.
In New Jersey there is no remedy since cable is effectively unregulated, there being no local cable boards and the state political appointees are in charge and they are generally are aligned with the carriers and rarely if ever side with a customer.
The Cablevision companies sell two things, video content and a digital conversion box. The latter, the cable converter box, is a separable product offering and the forced tying arrangement of having the customer get the box along with the content we will argue in our opinion is a per se violation of the Antitrust laws.
The Supreme Court has ruled in Jefferson Parish Hospital v. Hyde that when “forcing” occurs with a company that has “market power” that such is unlawful.
The elements of an illegal tying arrangement have been articulated by the Supreme Court in Jefferson Parish Hospital v. Hyde. Specifically the elements for a successful claim are (See Ross, Principles of Antitrust Law, p. 289):
i. the tie must affect more than a de minimis amount of interstate traffic;
ii. where the tying arrangement is not express, buyers must in fact have been coerced into buying the tied product as a condition of buying the tying product;
iii. the two products must be separate;
iv. the defendant must have economic power in the tying market;
v. There must not be any valid business justification for the tied sale.
We shall now go through each of these elements in turn for the sample case of Cablevision and it cable operations. Specifically we look at their demand that a customer must lease a digital cable box from them at what could be considered an extortionary rate for an indeterminate period of time. Unlike the cable ready TV sets the Cablevision approach is to use a proprietary box to convert digital to analog and charge $7 per month for every month of service. The box cannot be integrated into a TV set nor can the subscriber purchase one from a third party.
1. Interstate Traffic
The issue of interstate traffic is a foregone conclusion in the case of cable. Cablevision has a headend on Long Island and it crosses state lines.
2. Coercion
The cable contracts explicitly require the purchase of the tied elements. As we shall argue, these are clearly two separate products and in fact there should be no reason that the cable company should in any way refuse to connect to the competitive third party digital converters. The refusal is a barrier to entry. It is argued in our opinion that that refusal is a per se violation.
3. Separate Products
In Kodak the Court ruled that products or services are separate when there is sufficient consumer demand to justify firms providing one item without the other. Let us consider the products being offered. For the Cable Provider they are:
One should first remember that antitrust law is established to protect competition and not the competitors. Frequently the law in its application may actually harm one or more competitors. It hopefully opens up competition. Unfortunately this was not the case I the time of the previous two Presidents and especially not as regards to telecom.
We begin by looking at tying arrangements and we quote from the Supreme Court in Eastman Kodak Company v. Image Technical Services, Inc. et al. (June 8, 1992):
“A tying arrangement is “an agreement by a party to sell one product but only on the condition that the buyer also purchases a different (or tied) product, or at least agrees that he will not purchase that product from any other supplier.” Northern Pacific R. Co. v. United States, 356 U.S. 1, 5-6 (1958). Such an arrangement violates 1 of the Sherman Act if the seller has “appreciable economic power”' in the tying product market and if the arrangement affects a substantial volume of commerce in the tied market. Fortner Enterprises, Inc. v. United States Steel Corp., 394 U.S. 495, 503 (1969).”
A tying arrangement exists only when a producer of a desired product sells it only to those who also buy a second product from it (see Areeda & Kaplow, Antitrust Law, p. 704.).
Consider the case of Cablevision which is a cable TV provider in New York, New Jersey and Connecticut. They have been eliminating their analog channels in favor of digital ones. In the past year they have reduced approximately more than 50% of their offered channels unless the subscriber pays for a digital converter box at the rate of about $7 per month per box. The basic non-premium channels are $53 per month plus the $7 per box per month. For a 3 TV set family this is an additional $21 dollars, or almost a 50% increase in revenue.
All that is required to obtain the new digital format is digital conversion as is done in the new digital TV sets. That is a $30-40 box at wholesale, at worst case, and with the rates charged by Cablevision that is a five month payback. Yet they charge the amount on a continuing basis; say for ten years or more, obtaining an almost in my opinion an extortionary return.
In New Jersey there is no remedy since cable is effectively unregulated, there being no local cable boards and the state political appointees are in charge and they are generally are aligned with the carriers and rarely if ever side with a customer.
The Cablevision companies sell two things, video content and a digital conversion box. The latter, the cable converter box, is a separable product offering and the forced tying arrangement of having the customer get the box along with the content we will argue in our opinion is a per se violation of the Antitrust laws.
The Supreme Court has ruled in Jefferson Parish Hospital v. Hyde that when “forcing” occurs with a company that has “market power” that such is unlawful.
The elements of an illegal tying arrangement have been articulated by the Supreme Court in Jefferson Parish Hospital v. Hyde. Specifically the elements for a successful claim are (See Ross, Principles of Antitrust Law, p. 289):
i. the tie must affect more than a de minimis amount of interstate traffic;
ii. where the tying arrangement is not express, buyers must in fact have been coerced into buying the tied product as a condition of buying the tying product;
iii. the two products must be separate;
iv. the defendant must have economic power in the tying market;
v. There must not be any valid business justification for the tied sale.
We shall now go through each of these elements in turn for the sample case of Cablevision and it cable operations. Specifically we look at their demand that a customer must lease a digital cable box from them at what could be considered an extortionary rate for an indeterminate period of time. Unlike the cable ready TV sets the Cablevision approach is to use a proprietary box to convert digital to analog and charge $7 per month for every month of service. The box cannot be integrated into a TV set nor can the subscriber purchase one from a third party.
1. Interstate Traffic
The issue of interstate traffic is a foregone conclusion in the case of cable. Cablevision has a headend on Long Island and it crosses state lines.
2. Coercion
The cable contracts explicitly require the purchase of the tied elements. As we shall argue, these are clearly two separate products and in fact there should be no reason that the cable company should in any way refuse to connect to the competitive third party digital converters. The refusal is a barrier to entry. It is argued in our opinion that that refusal is a per se violation.
3. Separate Products
In Kodak the Court ruled that products or services are separate when there is sufficient consumer demand to justify firms providing one item without the other. Let us consider the products being offered. For the Cable Provider they are:
- Content: This is the provision of video content as is currently provided.
- Digital Converter: These are the digital to analog converter boxes.
4. Economic Power of Incumbent
It is beyond a doubt that the incumbent has economic power. It has monopoly franchise power throughout the region, with Verizon FIOS being still a weak second competitor.
5. Business Justifications
There are no viable business justifications for the bundling of such services. Any customer may have an off the air antenna with an off the shelf digital converter and a cable service. Why not just have a common third party provided such converter as is already available in all new Television sets.
We then argue that perhaps the Justice Department may want to look at this fertile and significant area.
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