On January 18, 2011, the U.S. Department of Justice (DOJ) and the Federal Communications Commission (FCC) took actions to allow the formation of Comcast Corporation’s (Comcast) $37 billion joint venture with General Electric Company, which gave Comcast a managing interest and 51 percent ownership in NBC Universal Inc. (NBC), with General Electric maintaining 49 percent ownership. These approvals paved the way for the deal to close on January 29, 2011. The transaction, first announced on December 3, 2009, was approved by the DOJ subject to certain conditions agreed to by the parties that resolve the DOJ’s competitive concerns. It was also approved by the FCC after a 4-1 vote finding the acquisition to be in the public interest, subject to certain conditions, some of which are similar to the DOJ’s. The combination of Comcast and NBC marks the first time that a cable company has owned a major network television station.
Comcast is the nation’s largest cable company, with approximately 23 million video subscribers. With over 15 million Internet subscribers, Comcast is also the nation’s largest high-speed Internet provider. In addition, Comcast owns a number of networks, including E! Entertainment, Golf, and Versus, and has a partial interest in various others, including the MLB Network and NHL Network.
Along with owning the NBC Television Network, which produces nearly 75 percent of the programming shown on the NBC Television Network and the USA cable network, NBC owns a number of movie companies, including Universal Pictures, Focus Films, and Universal Studios. NBC also owns 32 percent of Hulu, one of the largest online television websites. Hulu is a joint venture between NBC, Fox, and ABC.
The DOJ, along with five state attorneys general, filed a civil antitrust lawsuit in the U.S. District Court for the District of Columbia to block the formation of the joint venture, and simultaneously filed a consent decree to settle the case. The DOJ’s complaint alleged that the proposed transaction had the potential to suppress competition from traditional competitors, including cable, satellite, and telephone providers, as well as competitors in the emerging market for online television and movie content. The complaint further asserted that under the terms of the proposed joint venture, Comcast could limit the availability of important NBC content as a way to disadvantage its competitors. The DOJ recognized that consumers are increasingly turning to the Internet for video programming as a way to view content at any time on a variety of devices and that this joint venture gives Comcast a very large role in the future of online television and video distribution. To this point, the agencies were concerned that Comcast has an incentive to impede the development of new businesses that potentially compete with it and to restrain innovation in the market for distribution of video programming by increasing the cost of content, or by denying access to NBC content altogether.
As a result of these competitive concerns, the DOJ imposed a series of conditions on the joint venture that require certain changes to the original proposal. According to the settlement agreement, Comcast is required to license the same package of programming that it sells to traditional video programming distributors to online distributors. Under this provision of the settlement, online video providers have two options. Under the first option, Comcast must license to a requesting online provider any package of programming it provides to cable or satellite providers under terms that are economically equivalent to those on which the joint venture licenses a cable or satellite provider. Its contracts with traditional providers will, therefore, provide the model for its contracts with online competitors. This option is designed to ensure that the joint venture will not be able to use its control of content to disadvantage online providers in relation to traditional video programming distributors. Under the second option, once an online video provider signs a deal with any specified NBC competitor, Comcast must offer comparable content on similar contractual terms. This provision ensures that the programming licensed by the joint venture to online providers reflects the licensing trends of its peers as the industry develops. Under this provision, Comcast will be held to a standard set by its competitors – the licensing terms agreed to by NBC’s peers will be used as a benchmark for determining the reasonableness of Comcast’s future licensing contracts. With regard to both of these options, if an agreement cannot be reached on the terms of the license, the competitor may apply to the DOJ for permission to submit its dispute to commercial arbitration. The DOJ, in its sole discretion, can permit such arbitration, although it may choose to seek judicial enforcement of the decree where appropriate.
The joint venture must also adhere to the Open Internet provisions adopted by the FCC. The Open Internet Report and Order lays out basic rules aimed at preserving the Internet as a transparent, free, and open place for future innovation. Requiring that Comcast adhere to the Open Internet provisions ensures that the combined company does not discriminate against broadband content not managed by Comcast.
Under the settlement, Comcast is also being required to relinquish its management stake in Hulu. This condition takes away Comcast’s ability to sit on Hulu’s board of directors. According to the DOJ, Hulu is one of the most successful online providers to date, and Comcast has an incentive to prevent Hulu from becoming even more attractive because it would then exert increased competitive pressure on Comcast’s cable business. This relief takes away Comcast’s ability to suppress Hulu’s further development as a competitor.
In addition, the settlement agreement requires Comcast to expand children’s programming and the diversity of programming available to Spanish-speaking viewers, and offer Internet services to low-income individuals at reduced prices.
Although the DOJ’s complaint alleged concerns related to Comcast’s cable, satellite and telephone competitors, because the FCC order requires the joint venture to license NBC content to those competitors, the DOJ did not impose the same requirement. On the other hand, the DOJ decree’s anti-discrimination, retaliation, and punishment provisions are extended to these traditional competitors. Under the decree, the defendants may not take actions that would deter video programmers and online providers from contracting with each other. Finally, the decree prohibits restrictive licensing practices with only narrow exceptions.
The approval of the joint venture was not without objection. Michael J. Copps, senior Democratic commissioner and the lone dissenter in the FCC’s vote, acknowledged the wide-reaching effects of the proposed merger and stated his belief that the deal “confers too much power in one company’s hands.” Mr. Copps further stated that the FCC’s conditions “aim no higher than maintaining the status quo” and that “the public interest requires more . . .” In contrast, Assistant Attorney General Christine Varney stated that the coordinated effort between the DOJ and FTC protects “the market and allow[s] for continued innovation.” Ms. Varney went on to state that the “settlement demonstrates how the antitrust laws offer critical protection to nascent markets as well as consumers in the digital age.” The DOJ will “vigorously enforce the settlement to prevent harm to competition in video distribution.”
One interesting aspect of this settlement is that the government is taking an extremely active role in preserving the current openness of online video distribution, going to great lengths to ensure that Comcast will not be able to exclude potential competitors – especially in the emerging online video market – by denying access to content or retaliating against those providers that signed agreements with Comcast/NBC competitors. The mechanisms set up to challenge Comcast’s actions show that the government is willing to step in to serve as a review board for potential disputes in the online video distribution market.
This settlement is also interesting because it imposes strict conditions on what is largely a vertical transaction. Vertical transactions typically receive less scrutiny than horizontal ones because they tend not to raise significant anticompetitive issues and generally increase efficiency. During the Bush administration, prosecution of vertical mergers was at a low ebb, but the current administration has showed renewed interest in challenging vertical acquisitions. The Comcast/NBC deal is the third vertical merger in which the DOJ has sought relief in just over a year. In January 2010, the DOJ challenged the Live Nation/Ticketmaster merger and, more recently in November, it challenged GrafTech International’s acquisition of Seadrift Coke L.P.
This settlement also continues an agency trend of challenging vertical relationships in innovation-intensive markets and, more specifically, a repeated willingness to heavily scrutinize large vertical deals with an Internet component (for example, the FTC’s challenge of the AOL/Time Warner deal). Considering the agencies’ more recent focus on vertical mergers involving tech industry transactions, future deals that may potentially limit Internet content should expect increased scrutiny and the imposition of conditions designed to prevent blocking access to such content, as was imposed here.
Indeed, the terms of the settlement ensure that Comcast cannot remove NBC content from popular online video websites, including Netflix, and obliges the joint venture to continue providing content to online video distributors under fair economic terms.
Finally, the FCC's order requires that Comcast adhere to its Open Internet provisions. These rules attempt to protect the ability of any individual with an Internet connection to create websites and other Internet services without permission from, or paying tolls to, broadband providers such as Comcast, and prohibit these Internet providers from blocking or slowing certain content sent to Internet users. However, these provisions, and the FCC’s authority to enforce them, have been hotly contested in Congress and the courts. Indeed, Verizon recently filed a lawsuit in federal court challenging the FCC’s Open Internet rules, piggybacking on a D.C. Circuit decision last April holding that the FCC lacked the authority to stop Comcast from slowing Internet traffic to a popular file-sharing website. If Congress or the courts rule that the Open Internet provisions are unenforceable, by agreeing to abide by the FCC’s rules, Comcast could be held to a different, and higher, standard than others in the marketplace.