Federal Communications Commission FCC 15-94
Before the
Federal Communications Commission
Washington, D.C. 20554
In the Matter of
Applications of
AT&T Inc. and DIRECTV
For Consent to Assign or Transfer Control of
Licenses and Authorizations
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MB Docket No. 14-90
MEMORANDUM OPINION AND ORDER
Adopted: July 24, 2015 Released: July 28, 2015
By the Commission: Chairman Wheeler and Commissioners Clyburn and Rosenworcel issuing separate
statements; Commissioner Pai approving in part, dissenting in part and issuing a statement; Commissioner
O’Rielly approving in part, concurring in part and issuing a statement.
TABLE OF CONTENTS
Heading Paragraph #
I. EXECUTIVE SUMMARY .................................................................................................................... 1
II. DESCRIPTION OF THE APPLICANTS ............................................................................................ 11
A. AT&T ............................................................................................................................................. 11
B. DIRECTV ...................................................................................................................................... 13
III. THE PROPOSED TRANSACTION .................................................................................................... 15
A. Description ..................................................................................................................................... 15
B. Application and Review Process ................................................................................................... 16
IV. STANDARD OF REVIEW AND PUBLIC INTEREST FRAMEWORK .......................................... 18
V. QUALIFICATIONS OF APPLICANTS ............................................................................................. 24
A. Background .................................................................................................................................... 24
B. DIRECTV ...................................................................................................................................... 25
C. AT&T ............................................................................................................................................. 26
1. Minority Cellular Partners Coalition Comments ..................................................................... 27
a. Standing ............................................................................................................................ 31
b.
Pro Forma Transactions ................................................................................................... 32
c. Notice of Apparent Liability ............................................................................................. 39
d. CALEA ............................................................................................................................. 41
2. New Networks Institute & Teletruth Petition .......................................................................... 45
VI.COMPLIANCE WITH COMMUNICATIONS ACT AND FCC RULES AND POLICIES ............ 52
VII.BACKGROUND ON VIDEO PROGRAMMING DISTRIBUTORS ............................................... 53
VIII.INCREASED MARKET CONCENTRATION IN VIDEO DISTRIBUTION SERVICES ............. 59
IX.HORIZONTAL EFFECTS ANALYSIS ............................................................................................ 82
A. Evaluation of Potential Unilateral Effects Using Economic Analysis ........................................... 83
1. Merger Simulation ................................................................................................................... 86
2. BH Simulation Structure and the “Modified Simulation” ....................................................... 91
3. Effects of the Transaction on Consumers .............................................................................. 105
4. Competitive Effects of Integrated Bundles ........................................................................... 111
5. Reduction of Competition in Video Distribution .................................................................. 127
6. Standalone Broadband ........................................................................................................... 134
Federal Communications Commission FCC 15-94
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B. Documentary and Other Record Evidence of Competition between AT&T and DIRECTV
and the Need for Bundles ............................................................................................................. 146
C. Conclusion ................................................................................................................................... 160
X. ADDITIONAL COMPETITIVE EFFECTS AND PUBLIC INTEREST HARMS RAISED
IN THE RECORD .............................................................................................................................. 161
A. Limits on Competitors’ Access to Programming ......................................................................... 162
1. Limiting Access to RSNs and Other Affiliated Programming .............................................. 163
2. Exclusive Programming Agreements .................................................................................... 177
3. Restricting Access to Online Video Content ......................................................................... 185
4. Forcing Competitors to Compensate Programmers for Reduced Payments from the
Applicants .............................................................................................................................. 188
B. Lack of Regulatory Parity ............................................................................................................ 193
C. Potential Harm to Subscribers’ Access to OVD Services ............................................................ 198
1. Increased Incentive to Discriminate Against Unaffiliated OVDs ......................................... 201
2. Potential Levers for Discrimination Against Unaffiliated OVDs ......................................... 206
a. Data Caps ........................................................................................................................ 208
b. Interconnection ............................................................................................................... 214
D. Harm to Supply, Quality, and Diversity in Video Programming ................................................. 220
1. Background on Video Programming ..................................................................................... 222
2. Potential Competitive Harms ................................................................................................ 225
a. Increased Leverage of Combined Entity in Programming Negotiations ........................ 225
b. PEG Channels ................................................................................................................. 239
c. Local Broadcast Television Stations ............................................................................... 245
E. Video Device Market ...........................................................................................................
........ 249
F. Potential Loss of DIRECTV as a Partner for MDU Broadband Entrants .................................... 255
G. Increased Incentive of Combined Entity to Hinder Competition for Broadband in MDUs ........ 260
H. Increased Incentive of Combined Entity to Hinder Competition in Mobile Wireless
Sector ........................................................................................................................................... 265
I. Increased Incentive and Ability of Combined Entity to Shift Wired Subscribers to FWLL ....... 268
J. Use of Orbit and Spectrum Resources ......................................................................................... 271
XI. ANALYSIS OF POTENTIAL BENEFITS ........................................................................................ 273
A. Analytical Framework ................................................................................................................. 273
B. Improved Bundles ........................................................................................................................ 278
C. Reduced Payments for Programming and Bundling Efficiencies ................................................ 283
1. Reduced Payments for Content Acquisition .......................................................................... 283
2. Other Cost Savings and Efficiencies ..................................................................................... 292
3. Innovation in Video Services ................................................................................................ 295
a. Traditional Video ............................................................................................................ 296
b. OVD ................................................................................................................................ 303
c. Improved Advertising Capabilities ................................................................................. 305
D. Video Programming Market ........................................................................................................ 307
E. Video Device Market ................................................................................................................... 311
F. Expanded Deployment of Fiber to the Premises .......................................................................... 315
1. Analysis of the FIM ............................................................................................................... 327
a. Modification of FIM ....................................................................................................... 328
b. Results from Modifications............................................................................................. 338
2. Non-FIM Factors ................................................................................................................... 342
3. Conclusion ............................................................................................................................. 344
G. Evaluation of Applicants’ Claimed Fixed Wireless Local Loop Benefits ................................... 346
1. Introduction ........................................................................................................................... 346
2. FWLL Coverage and Performance Claims ........................................................................... 348
3. Claims that FWLL Would Benefit 13 Million Rural Customers .......................................... 355
4. Competitive Standalone FWLL and DIRECTV Integrated Bundles Would Be a
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Benefit of the Transaction ..................................................................................................... 358
5. FWLL Deployment is Transaction Specific .......................................................................... 365
6. Conclusion ............................................................................................................................. 376
H. Other Potential Public Interest Benefits ....................................................................................... 378
1. Cybersecurity ........................................................................................................................ 378
2. Diversity Practices ................................................................................................................. 389
3. Labor Practices ...................................................................................................................... 390
XII.REMEDIES ....................................................................................................................................... 392
A. Introduction .................................................................................................................................. 392
B. Fiber to the Premises Deployment Commitment ......................................................................... 394
C. Non-Discriminatory Usage-Based Practices ................................................................................ 395
D. Internet Interconnection Disclosure Requirement ....................................................................... 396
E. Discounted Broadband Services for Low-Income Subscribers ................................................... 397
F. Reporting and Outside Compliance Officer ................................................................................. 398
XIII.BALANCING POTENTIAL PUBLIC INTEREST HARMS AND BENEFITS ............................ 399
XIV.CONCLUSION ................................................................................................................................ 400
XV.ORDERING CLAUSES ................................................................................................................... 401
APPENDIX A – List of Licenses to be Transferred
APPENDIX B – Conditions
APPENDIX C – Analysis of Merger Simulation Models
APPENDIX D – Analysis of AT&T’s FWLL Coverage and Performance Claims and Claimed Rural
Benefits
Federal Communications Commission FCC 15-94
I. EXECUTIVE SUMMARY
1. In this proceeding, we approve, subject to conditions, the applications of AT&T Inc.
(“AT&T”) and DIRECTV (collectively, the “Applicants”) for Commission consent to the transfer of
control of various Commission licenses and other authorizations from DIRECTV to AT&T pursuant to
Section 310(d) of the Communications Act of 1934, as amended (the “Act”).
1
2. Our consent to transfer these licenses is based on a careful review of the economic,
documentary, and other record evidence. We engaged in a rigorous analysis of the potential harms and
benefits to ensure that the proposed transaction serves the public interest, convenience, and necessity.
2
Based on this review, we have concluded that, with the adoption of certain conditions designed to address
specific harms and confirm certain benefits that would result from the transaction, the license transfer is
in the public interest.
3. Our record supports the Applicants’ claim that the newly combined entity will be a more
effective multichannel video programming distributor (“MVPD”) competitor, offering consumers greater
choice at lower prices. As standalone companies, neither has the full set of assets necessary to compete
against the dominant providers of video service. Although DIRECTV has approximately 20 million
video subscribers, it lacks broadband
3
capabilities. This limits DIRECTV in its ability to offer video-on-
demand (“VOD”) and other interactive viewing experiences that consumers increasingly seek. In
addition, DIRECTV’s current partnerships with broadband providers to sell third-party bundles of
broadband and DIRECTV satellite video cannot match the convenience and lower prices associated with
bundles of broadband and video offered by a single provider. AT&T offers bundles of its own broadband
and U-verse video where it has deployed fiber to the node (“FTTN”) or fiber to the premises (“FTTP”)
technologies – however, it too faces significant competitive challenges. With fewer than 6 million
subscribers, AT&T’s video product is hampered by higher costs of procuring programming – limiting its
ability to both offer lower consumer prices and expand its high-speed broadband footprint.
4. We find that the combined AT&T-DIRECTV will increase competition for bundles of
video and broadband, which, in turn, will stimulate lower prices, not only for the Applicants’ bundles, but
also for competitors’ bundled products – benefiting consumers and serving the public interest. We also
expect that this improved business model will spur, in the long term, AT&T’s investment in high-speed
broadband networks, driving more competition and thus expanding consumer access and choice. This is,
in other words, a bet on competition.
5. However, the transaction also creates the potential for competitive harms, which we
impose conditions to address.
6. First, the Applicants’ claim that a benefit of this transaction is that it would increase
AT&T’s incentive to deploy FTTP. To the contrary, we find that the transaction creates, at least in the
short term, a disincentive to deploy faster broadband because an FTTP buildout would potentially
“cannibalize” profits from AT&T’s newly acquired DIRECTV subscribers and revenue. To address this
harm, we impose as a condition that the combined entity deploy FTTP to 12.5 million locations within
four years, to capture all of AT&T’s pre-transaction planned deployment, its projected deployment absent
the transaction, and the deployment that the record suggests is profitable as a result of the transaction. In
addition, and because it is important that competition with cable also reach public institutions, AT&T is
required to offer to schools and libraries where it deploys FTTP, which is about 6,000 institutions, the
ability to purchase 1 gigabit E-rate services from AT&T.
1
See 47 U.S.C. § 310(d); Application of AT&T Inc. and DIRECTV, Description of Transaction, Public Interest
Showing, and Related Demonstrations, transmitted by letter from Maureen R. Jeffreys, Counsel for AT&T, to
Marlene H. Dortch, Secretary, FCC, MB Docket No. 14-90, at 10 (filed June 11, 2014) (“Application”).
2
47 U.S.C. § 310(d).
3
Unless the context indicates otherwise, this Order uses the term “broadband” colloquially to refer to the Internet
services AT&T provides other than dial-up Internet services.
Federal Communications Commission FCC 15-94
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7. Second, Applicants have stated that as a result of this transaction they will be able to
offer their own new, flexible, and innovative online video products, which increases the risk that the
combined entity will use its broadband services to hamper competition from online video content or
online video distribution services. We also note that AT&T is alone among the large Internet Service
Providers (“ISPs”) in applying fixed data caps across its broadband services. Thus we impose as a
condition certain restrictions on the use of discriminatory usage-based allowances. We also impose
certain disclosure requirements for interconnection agreements and interconnection metrics, which will
help the Commission address any future concerns about the nature of AT&T’s exchange of Internet traffic
and the potential impact of congestion upon consumers. Coupled with the FTTP buildout requirements,
these conditions improve the ability of alternative video distribution methods to replace the loss of a
horizontal MVPD competitor within AT&T’s video footprint that results from this merger.
8. Third, while we acknowledge that a benefit of the transaction is the Applicants’ ability to
be a more effective competitor to cable providers, we are concerned that the Applicants’ efforts to expand
consumer choice for bundles might prove to be an obstacle for low-income populations who desire
standalone broadband. Thus we impose as a condition a requirement that the Applicants offer discounted
broadband Internet access to eligible consumers.
9. In addition to addressing potential harms and confirming potential benefits, these
conditions as a group create the opportunity for more robust broadband and video distribution
competition in a variety of respects. To ensure that the goals of these conditions are achieved, we require
as a condition of this transaction that the Applicants employ an independent, outside officer responsible
for monitoring and reporting to the Commission any failure to comply with the conditions imposed by
this Order.
10. In general, these conditions will run for four years from the consummation of the
transaction and, with them in place, we find that this combination is in the public interest.
II. DESCRIPTION OF THE APPLICANTS
A. AT&T
11. AT&T provides Internet, video, local and long distance voice, mobile wireless voice and
broadband, and Wi-Fi services in the United States.
4
In addition, AT&T offers worldwide wireless
service and Internet Protocol (“IP”)-based business communications services.
5
Within the United States,
AT&T’s wireline footprint covers portions of 22 states, while its Long Term Evolution (“LTE”) wireless
network covers approximately 300 million people.
6
AT&T offers bundles of high-speed broadband,
video, and Voice over Internet Protocol (“VoIP”) services under its U-verse brand within portions of its
wireline footprint.
7
Through its Project Velocity IP (“Project VIP”), AT&T has stated that it has begun
an expansion of its U-verse services to reach approximately 57 million customer locations or 75 percent
of its wireline footprint.
8
Of these 57 million customer locations, AT&T states that it plans to deploy
FTTN or FTTP technologies to deliver U-verse video, high-speed broadband, and VoIP services to 33
million customer locations.
9
For the remaining 24 million customer locations where U-verse services are
4
See Application at 10.
5
Id.
6
Id.
7
Id.
8
Id. at 10-11.
9
Id. at 10. According to the Application, AT&T currently uses FTTN architecture in most of the U-verse video
footprint. Id. at 11. Under this approach, AT&T deploys fiber to neighborhood nodes. Individual customer
locations are connected to the network via existing copper plant using very-high-bit-rate digital subscriber line
(“VDSL”) technology. Id. U-verse FTTN offers speeds of up to 45 megabits per second (“Mbps”). Id. At the time
(continued….)
Federal Communications Commission FCC 15-94
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or will be available, AT&T’s IPDSLAM (“IPDSL”) technology will deliver U-verse high-speed
broadband and VoIP services, but not video services.
10
12. AT&T currently provides broadband Internet access service to approximately 14.5
million residential subscribers of which 6.5 million subscribers receive broadband Internet access service
at download speeds above 10 Mbps.
11
AT&T provides MVPD services to approximately 6 million
subscribers.
12
AT&T estimates that more than 97 percent of its U-verse video subscribers purchase at
least one other U-verse product and about two-thirds of U-verse video subscribers bundle three or four
services from AT&T.
13
Post-transaction, IPDSL customers, which currently are not offered U-verse
video service, could purchase DIRECTV satellite video from the combined entity.
B. DIRECTV
13. DIRECTV offers direct-to-home satellite digital television services to consumers
nationwide.
14
According to the Application, DIRECTV is a “pure-play” satellite video provider with
approximately 20 million U.S. subscribers.
15
Currently, DIRECTV does not provide any broadband or
voice services of its own.
16
It does offer synthetic service
17
bundles of DIRECTV satellite video service
and broadband and/or voice services provided by various third-party telecommunications, cable, and
satellite partners, including AT&T.
18
14. DIRECTV owns and operates two regional sports networks (“RSNs”), Root Sports
Pittsburgh and Root Sports Rocky Mountain, and holds a minority interest in, and manages, the Seattle-
based RSN, Root Sports Northwest.
19
In a recent joint venture, DIRECTV and AT&T have also acquired
majority ownership of a Houston-area RSN (“CSN Houston”) out of bankruptcy and relaunched it as
(Continued from previous page)
of the Application, AT&T was using in Austin, Texas, FTTP architecture in which fiber extends all the way to a
customer’s location. Id. AT&T provides “U-verse with GigaPower” service over this FTTP architecture, and it
plans to offer Internet speeds of up to 1 gigabit per second (“Gbps”). Id. Prior to the DIRECTV transaction, AT&T
announced plans to bring its FTTP deployment and U-verse with GigaPower service to Dallas; Raleigh-Durham,
N.C.; and Winston-Salem, N.C.; and to expand further, to as many as 21 other major metropolitan areas, including
Atlanta; Chicago; Charlotte, N.C.; San Francisco; and Houston. Id. at 11-12.
10
Id. at 11. According to the Application, IPDSL provides high-speed broadband over copper wires at speeds up to
18 Mbps, but it is not suitable for delivering U-verse video services. Id. at 12.
11
See AT&T Inc. Updated Response to Sept. 9, 2014, Information and Discovery Requests, transmitted by letter
from Maureen R. Jeffreys, Counsel for AT&T, to Vanessa Lemmé, Media Bureau, FCC, MB Docket No. 14-90,
Exhibit 5.b.1 – updated (Oct. 20, 2014) (“AT&T Updated Response to Sept. 9, 2014, Information Request”).
12
See id.
13
Application at 12. Where AT&T U-verse FTTP, FTTN, or IPDSL are not available within AT&T’s wireline
footprint, AT&T sells legacy digital subscriber line (“DSL”) Internet service, providing speeds of up to 6 Mbps, and
does not sell its own video component. Id. at 12 n.14.
14
Id. at 13.
15
Id. DIRECTV also holds interests in entities with approximately 18 million video subscribers in Latin America.
Id. at 13, 15.
16
Id. at 13-14.
17
A synthetic bundle is a bundle of services offered by two different companies. See infra ¶ 56 (discussing
synthetic bundles).
18
Application at 14. DIRECTV has arm’s length agreements to provide these synthetic bundles with CenturyLink,
AT&T, Verizon, Exede, Cincinnati Bell, HughesNet, Windstream, and Mediacom, among others. Id.
19
Id.
Federal Communications Commission FCC 15-94
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Root Sports Southwest.
20
DIRECTV also has a 42 percent non-controlling interest in the Game Show
Network, and smaller, minority interests in the MLB Network, the NHL Network, and a handful of other
networks.
21
III. THE PROPOSED TRANSACTION
A. Description
15. AT&T has entered into an agreement with DIRECTV whereby AT&T will acquire
DIRECTV in a stock-and-cash transaction.
22
Under the terms of the agreement, each share of DIRECTV
common stock will be converted into $28.50 in cash plus the right to receive between 1.724 and 1.905
shares of AT&T common stock, depending on AT&T’s stock price prior to closing.
23
At closing,
DIRECTV will merge with and into a wholly owned subsidiary of AT&T, Steam Merger Sub LLC,
which will be the surviving entity and will be renamed “DIRECTV.”
24
The new DIRECTV will own the
stock of the subsidiaries of the pre-transaction DIRECTV, and these subsidiaries will continue to hold the
Commission licenses and other authorizations they held prior to the transaction.
25
B. Application and Review Process
16. On June 11, 2014, AT&T and DIRECTV filed the Application.
26
On August 7, 2014, the
Commission released the Public Notice accepting the Application for filing and establishing a pleading
20
Joint Opposition of AT&T Inc. and DIRECTV to Petitions to Deny and Condition and Reply to Comments,
transmitted by letter from Maureen R. Jeffreys, Counsel for AT&T, to Marlene H. Dortch, Secretary, FCC, MB
Docket No. 14-90, at 55 (filed Oct. 16, 2014) (“Joint Opposition”). See also In re Houston Reg’l Sports Network,
LP, 514 B. R. 211 (Bankr. S.D. Tex. 2014) (“In re Houston”).
21
Application at 14.
22
Id. at 16.
23
Id.
24
Id.
25
Id. at 16-17.
26
See supra n.1. Subsequent to filing the Application and prior to release of the Public Notice accepting the
Application for filing, the Applicants submitted additional information. See Letter from Maureen R. Jeffreys,
Counsel for AT&T, to Marlene H. Dortch, Secretary, FCC, MB Docket No. 14-90 (Aug. 6, 2014) (submitting
merger simulation and supporting data relied upon in the Declaration of Michael L. Katz); Letter from Maureen R.
Jeffreys, Counsel for AT&T, to Marlene H. Dortch, Secretary, FCC, MB Docket No. 14-90 (July 28, 2014)
(submitting paper prepared by Compass Lexecon entitled “Additional Detail on the Demand Estimation, Merger
Simulation, and Investment Model Analysis Performed by Professor Katz” and associated files); Letter from
Maureen R. Jeffreys, Counsel for AT&T, to Marlene H. Dortch, Secretary, FCC, MB Docket No. 14-90 (July 28,
2014) (submitting paper entitled “Overview of AT&T FTTP Investment Model” and associated files); Letter from
Maureen R. Jeffreys, Counsel for AT&T, to Marlene H. Dortch, Secretary, FCC, MB Docket No. 14-90 (July 24,
2014) (submitting copy of presentation made by Professors Berry and Haile); Letter from Maureen R. Jeffreys,
Counsel for AT&T, to Marlene H. Dortch, Secretary, FCC, MB Docket No. 14-90 (July 21, 2014) (submitting
additional materials supporting the merger simulation described in the presentation prepared by Professors Berry
and Haile); Letter from Maureen R. Jeffreys, Counsel for AT&T, to Marlene H. Dortch, Secretary, FCC, MB
Docket No. 14-90 (July 17, 2014) (submitting (1) presentation prepared by Professors Steve Berry and Phil Haile of
Yale University on behalf of the Applicants; and (2) data supporting the merger simulation described in the
presentation); Letter from Maureen R. Jeffreys, Counsel for AT&T, to Marlene H. Dortch, Secretary, FCC, MB
Docket No. 14-90 (July 17, 2014) (submitting additional data supporting the merger simulation relied upon in the
Declaration of Michael L. Katz); Letter from Maureen R. Jeffreys, Counsel for AT&T, to Marlene H. Dortch,
Secretary, FCC, MB Docket No. 14-90 (July 8, 2014) (submitting additional materials relied upon in the Declaration
of Michael L. Katz); Letter from Maureen R. Jeffreys, Counsel for AT&T, to Marlene H. Dortch, Secretary, FCC,
MB Docket No. 14-90 (July 7, 2014) (submitting additional details on the number of (1) customer locations and
subscribers for FTTP and FTTN technologies; and (2) consumer and business customer subscribers); Letter from
(continued….)
Federal Communications Commission FCC 15-94
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cycle.
27
Eight petitions to deny and thousands of public comments and other filings were received in this
proceeding.
28
In addition to building its record through public comment, the Commission requested
additional information from the Applicants
29
and other entities.
30
The responses to those requests are
included in the record,
31
subject to the protections of the Protective Order issued in this proceeding.
32
(Continued from previous page)
Maureen R. Jeffreys, Counsel for AT&T, to Marlene H. Dortch, Secretary, FCC, MB Docket No. 14-90 (June 30,
2014) (submitting additional materials relied upon in the Declaration of Michael L. Katz); Letter from Maureen R.
Jeffreys, Counsel for AT&T, to Marlene H. Dortch, Secretary, FCC, MB Docket No. 14-90 (June 27, 2014)
(describing the (1) number of customer locations that AT&T serves by the following technology, and (2) the number
of subscribers by service to each technology); Letter from Maureen R. Jeffreys, Counsel for AT&T, to Marlene H.
Dortch, Secretary, FCC, MB Docket No. 14-90 (June 25, 2014) (submitting the FTTP model and supporting data
relied upon in the Declaration of Michael L. Katz); Letter from Maureen R. Jeffreys, Counsel for AT&T, to Marlene
H. Dortch, Secretary, FCC, MB Docket No. 14-90 (June 23, 2014) (submitting additional data supporting the merger
simulation relied upon in the Declaration of Michael L. Katz); Letter from Maureen R. Jeffreys, Counsel for AT&T,
to Marlene H. Dortch, Secretary, FCC, MB Docket No. 14-90 (June 20, 2014) (submitting additional materials
relied upon in the Declaration of Michael L. Katz); Letter from William M. Wiltshire, Counsel for DIRECTV, to
Marlene H. Dortch, Secretary, FCC, MB Docket No. 14-90 (June 19, 2014) (submitting materials considered by
Michael L. Katz in preparing his Declaration); Letter from Maureen R. Jeffreys, Counsel for AT&T, to Marlene H.
Dortch, Secretary, FCC, MB Docket No. 14-90 (June 17, 2014) (submitting merger simulation and supporting data
relied upon in the Declaration of Michael L. Katz).
27
See Commission Seeks Comment on Applications of AT&T Inc. and DIRECTV to Transfer Control of FCC
Licenses and Other Authorizations, MB Docket No. 14-90, Public Notice, DA 14-1129, 29 FCC Rcd 9464 (MB
2014) (“Public Notice”). The Public Notice established September 16, 2014, as the deadline for filing comments or
petitions to deny, and October 16, 2014, as the deadline for responses to comments or oppositions to petitions to
deny. See id. On August 28, 2014, the Media Bureau denied a request to extend the filing deadline for initial
comments and petitions to deny. See Applications of AT&T Inc. and DIRECTV to Transfer Control of FCC
Licenses, MB Docket No. 14-90, Order, DA 14-1253, 29 FCC Rcd 10318 (MB 2014). The deadline for filing
replies was extended to January 7, 2015. See Commission Restarts Clock in Comcast-Time Warner Cable and
AT&T-DIRECTV Merger Proceedings and Establishes Dates for Respective Pleading Cycles, MB Docket No. 14-
90, Public Notice, DA 14-1739, 29 FCC Rcd 14491 (MB 2014) (“Notice of Merger Pleading Cycle Restarts”).
28
Petitions to Deny or to Impose Conditions were filed by: Alliance for Community Media, the Alliance for
Communications Democracy, and Common Cause; Cox Communications, Inc.; DISH Network Corporation; The
Greenlining Institute; Free Press; Public Knowledge and Institute for Local Self-Reliance; and Writers Guild of
America, West, Inc.
29
See Letter to Robert W. Quinn, Jr., Senior Vice President – Federal Regulatory and Chief Privacy Officer, AT&T,
from William T. Lake, Chief, Media Bureau, FCC, MB Docket No. 14-90, 2014 WL 4460323 (Sept. 9, 2014)
(“Sept. 9, 2014, Information Request to AT&T”); Letter to Stacy Fuller, Vice President, Regulatory Affairs,
DIRECTV, from William T. Lake, Chief, Media Bureau, MB Docket No. 14-90, 2014 WL 4460324 (Sept. 9, 2014)
(“Sept. 9, 2014, Information Request to DIRECTV”). Additional information was also sought from the Applicants
later in the Commission’s review. See Letter to Robert W. Quinn, Jr., Senior Vice President – Federal Regulatory
and Chief Privacy Officer, AT&T, from Jamillia Ferris, Office of the General Counsel, FCC, MB Docket No. 14-90,
2014 WL 6070716 (Nov. 14, 2014) (“Nov. 14, 2014, Information Request to AT&T”); Letter to Robert W. Quinn,
Jr., Senior Vice President – Federal Regulatory and Chief Privacy Officer, AT&T, from Jamillia Ferris, Office of the
General Counsel, FCC, MB Docket No. 14-90, 2014 WL 7172163 (Dec. 15, 2014) (“Dec. 15, 2014, Information
Request to AT&T”).
30
See Letter to Catherine Bohigian, Executive Vice President – Government Affairs, Charter Communications, Inc.,
from William T. Lake, Chief, Media Bureau, FCC, MB Docket No. 14-90, 2015 WL 128688 (Jan. 8, 2015); Letter
to Steven Teplitz, Senior Vice President – Government Relations, Time Warner Cable Inc., from William T. Lake,
Chief, Media Bureau, FCC, MB Docket No. 14-90, 2015 WL 128689 (Jan. 8, 2015); Letter to Kathryn Zachem,
Senior Vice President – Regulatory and State Legislative Affairs, Comcast Corporation, from William T. Lake,
Chief, Media Bureau, FCC, MB Docket No. 14-90, 2015 WL 223239 (Jan. 8, 2015).
31
See AT&T Inc. Response to Sept. 9, 2014, Information and Discovery Requests, transmitted by letter from
Maureen R. Jeffreys, Counsel for AT&T, to Vanessa Lemmé, Media Bureau, FCC, MB Docket No. 14-90 (Oct. 7,
(continued….)
Federal Communications Commission FCC 15-94
9
17. In addition to Commission review, the proposed transaction is subject to review by the
United States Department of Justice (“DOJ”) pursuant to its concurrent authority in Section 7 of the
Clayton Act.
33
IV. STANDARD OF REVIEW AND PUBLIC INTEREST FRAMEWORK
18. Pursuant to Section 310(d) of the Act, we must determine whether the Applicants have
demonstrated that the proposed transfer of control of licenses and authorizations will serve the public
interest, convenience, and necessity.
34
In making this determination, we assess whether the proposed
transaction complies with the specific provisions of the Act,
35
other applicable statutes, and the
(Continued from previous page)
2014) (“AT&T Response to Sept. 9, 2014, Information Request”); AT&T Updated Response to Sept. 9, 2014,
Information Request; DIRECTV Response to Sept. 9, 2014, Information and Discovery Requests, transmitted by
letter from William M. Wiltshire, Counsel for DIRECTV, to Marlene H. Dortch, Secretary, FCC, MB Docket No.
14-90 (Oct. 7, 2014) (“DIRECTV Response to Sept. 9, 2014, Information Request”); AT&T Inc. Response to Nov.
14, 2014, Information and Discovery Requests, transmitted by letter Robert W. Quinn, Jr., Senior Vice President –
Federal Regulatory and Chief Privacy Officer, AT&T, to Marlene H. Dortch, Secretary, FCC, MB Docket No. 14-90
(Nov. 25, 2014) (“AT&T Response to Nov. 14, 2014, Information Request”); AT&T Inc. Response to Sept. 9, 2014,
and Dec. 15, 2014, Information and Discovery Requests, transmitted by letter from Maureen R. Jeffreys, Counsel
for AT&T, to Marlene H. Dortch, Secretary, FCC, MB Docket No. 14-90 (Dec. 19, 2014) (“AT&T Response to
Dec. 15, 2014, Information Request”); Comcast Corporation Response to Jan. 8, 2015, Information and Data
Request, transmitted by letter from Kathyrn A. Zachem, Senior Vice President – Regulatory and State Legislative
Affairs, Comcast Corporation, to Marlene H. Dortch, Secretary, FCC, MB Docket No. 14-90 (Jan. 23, 2015)
(“Comcast Response to Jan. 8, 2015, Information Request”); Time Warner Cable Inc. Response to Jan. 8, 2015,
Information and Data Request, transmitted by letter from Matthew A. Brill, Counsel for Time Warner Cable, to
Marlene H. Dortch, Secretary, FCC, MB Docket No. 14-90 (Jan. 23, 2015) (“Time Warner Cable Response to Jan.
8, 2015, Information Request”); Charter Communications, Inc. Response to Jan. 8, 2015, Information and Data
Request, transmitted by letter from John L. Flynn, Counsel for Charter, to Marlene H. Dortch, Secretary, FCC, MB
Docket No. 14-90 (Jan. 20, 2015) (“Charter Response to Jan. 8, 2015, Information Request”).
32
The Media Bureau adopted a Protective Order to (i) limit access to proprietary or confidential information filed in
this proceeding and (ii) more strictly limit access to certain particularly competitively sensitive information. See
Applications of AT&T Inc. and DIRECTV to Transfer Control of FCC Licenses, MB Docket No. 14-90, Joint
Protective Order, DA 14-804, 29 FCC Rcd 6047 (MB 2014), modified by DA 14-1465, 29 FCC Rcd 11883 (MB
2014), amended by DA 14-1602, 29 FCC Rcd 13616 (MB 2014), amended by DA 14-1640, 29 FCC Rcd 13810
(MB 2014) (“Protective Order”). In this Order, Highly Confidential Information, as defined in the Protective
Order, will be marked by the terms “[BEGIN HIGHLY CONF. INFO.]” and “[END HIGHLY CONF. INFO.],”
or “[BEGIN VIDEO PROG. CONF. INFO.]” and “[END VIDEO PROG. CONF. INFO.]” as appropriate. In
this Order, Confidential Information, as defined in the Protective Order, will be marked by the terms “[BEGIN
CONF. INFO.]” and “[END CONF. INFO.]” as appropriate. Such information will be redacted from the publicly
available version of the Order. The unredacted information will be available upon request to persons qualified to
view it under the Protective Order.
33
15 U.S.C. § 18.
34
47 U.S.C. § 310(d); 47 C.F.R. § 25.119.
35
Section 310(d) requires that we consider applications as if the proposed transferee were applying for the licenses
directly. 47 U.S.C. § 310(d). See Applications of Comcast Corporation, General Electric Company, and NBC
Universal, Inc. for Consent to Assign Licenses and Transfer Control of Licensees, MB Docket No. 10-56,
Memorandum Opinion and Order, 26 FCC Rcd 4238, 4247, ¶ 22 n.42 (2011) (“Comcast-NBCU Order”);
Applications for Consent to the Transfer of Control of Licenses, XM Satellite Radio Holdings Inc., Transferor, to
Sirius Satellite Radio Inc., Transferee, MB Docket No. 07-57, Memorandum Opinion and Order and Report and
Order, 23 FCC Rcd 12348, 12363, ¶ 30 n.114 (2008) (“Sirius-XM Order”); News Corp. and DIRECTV Group, Inc.
and Liberty Media Corp. for Authority to Transfer Control, Memorandum Opinion and Order, MB Docket No. 07-
18, 23 FCC Rcd 3265, 3276, ¶ 22 n.72 (2008) (“Liberty Media-DIRECTV Order”); Application of EchoStar
Communications Corporation, General Motors Corporation, and Hughes Electronics Corporation (Transferors)
(continued….)
Federal Communications Commission FCC 15-94
10
Commission’s rules.
36
If the transaction does not violate a statute or rule, we consider whether the
transaction could result in public interest harms by substantially frustrating or impairing the objectives or
implementation of the Act or related statutes.
37
We then employ a balancing test weighing any potential
public interest harms of the proposed transaction against any potential public interest benefits.
38
The
Applicants bear the burden of proving, by a preponderance of the evidence, that the proposed transaction,
on balance, serves the public interest.
39
If we are unable to find that the proposed transaction serves the
public interest for any reason, or if the record presents a substantial and material question of fact, we must
designate the Application for hearing.
40
19. Our public interest evaluation necessarily encompasses the “broad aims of the
Communications Act,” which include, among other things, a deeply rooted preference for preserving and
enhancing competition, accelerating private sector deployment of advanced services, promoting a
diversity of information sources and services to the public, and generally managing the spectrum in the
public interest.
41
Our public interest analysis also entails assessing whether the proposed transaction
would affect the quality of communications services or result in the provision of new or additional
services to consumers.
42
In conducting this analysis, we may consider technological and market changes,
and the nature, complexity, and speed of change of, as well as trends within, the communications
industry.
43
20. Our competitive analysis, which forms an important part of the public interest evaluation,
is informed by, but not limited to, traditional antitrust principles.
44
The Commission and the DOJ each
has independent authority to examine the competitive impacts of proposed communications mergers and
transactions involving transfers of Commission licenses, but the standards governing the Commission’s
competitive review differ somewhat from those applied by the DOJ.
45
The Commission, like the DOJ,
considers how a transaction would affect competition by defining a relevant market, looking at the market
(Continued from previous page)
and EchoStar Communications Corporation (Transferee), MB Docket No. 01-348, Hearing Designation Order, 17
FCC Rcd 20559, 20574, ¶ 25 n.102 (2002) (“EchoStar-DIRECTV HDO”).
36
See Comcast-NBCU Order, 26 FCC Rcd at 4247, ¶ 22; Sirius-XM Order, 23 FCC Rcd at 12363-64, ¶ 30; Liberty
Media-DIRECTV Order, 23 FCC Rcd at 3276-77, ¶ 22; EchoStar-DIRECTV HDO, 17 FCC Rcd at 20574, ¶ 25.
37
See id.
38
See id.; General Motors Corp. and Hughes Electronics Corp., Transferors, and the News Corporation,
Transferee, MB Docket No. 03-124, Memorandum Opinion and Order, 19 FCC Rcd 473, 483, ¶ 15 (2004) (“News
Corp.-Hughes Order”).
39
See id.
40
See 47 U.S.C. § 309(e); see also Comcast-NBCU Order, 26 FCC Rcd at 4247-48, ¶ 22; Sirius-XM Order, 23 FCC
Rcd at 12364, ¶ 30; Liberty Media-DIRECTV Order, 23 FCC Rcd at 3277, ¶ 22; News Corp.-Hughes Order, 19 FCC
Rcd at 483, ¶ 15 n.49; EchoStar-DIRECTV HDO, 17 FCC Rcd at 20574, ¶ 25.
41
See Comcast-NBCU Order, 26 FCC Rcd at 4248, ¶ 23; Sirius-XM Order, 23 FCC Rcd at 12364, ¶ 31; Liberty
Media-DIRECTV Order, 23 FCC Rcd at 3277-78, ¶ 23; News Corp.-Hughes Order, 19 FCC Rcd at 483-84, ¶ 16;
EchoStar-DIRECTV HDO, 17 FCC Rcd at 20575, ¶ 26.
42
See Comcast-NBCU Order, 26 FCC Rcd at 4248, ¶ 23; Sirius-XM Order, 23 FCC Rcd at 12365, ¶ 31; Liberty
Media-DIRECTV Order, 23 FCC Rcd at 3277-78, ¶ 23; EchoStar-DIRECTV HDO, 17 FCC Rcd at 20575, ¶ 26.
43
See id.
44
See Comcast-NBCU Order, 26 FCC Rcd at 4248, ¶ 24; Sirius-XM Order, 23 FCC Rcd at 12365, ¶ 32; Liberty
Media-DIRECTV Order, 23 FCC Rcd at 3278, ¶ 24; News Corp.-Hughes Order, 19 FCC Rcd at 484, ¶ 17;
EchoStar-DIRECTV HDO, 17 FCC Rcd at 20575, ¶ 27.
45
See, e.g., id.
Federal Communications Commission FCC 15-94
11
power of incumbent competitors, and analyzing barriers to entry, potential competition, and the
efficiencies, if any, that may result from the transaction.
46
21. The DOJ, however, reviews telecommunications mergers pursuant to Section 7 of the
Clayton Act, and if it sues to enjoin a merger, it must demonstrate to a court that the merger may
substantially lessen competition or tend to create a monopoly.
47
The DOJ review is consequently limited
solely to an examination of the competitive effects of the acquisition, without reference to diversity,
localism, or other public interest considerations.
48
Moreover, the Commission’s competitive analysis
under the public interest standard is broader. For example, the Commission considers whether a
transaction would enhance, rather than merely preserve, existing competition, and often takes a more
expansive view of potential and future competition in analyzing that issue.
49
22. Finally, our public interest authority enables us, where appropriate, to impose and enforce
transaction-related conditions that ensure that the public interest is served by the transaction.
50
Specifically, Section 303(r) of the Communications Act authorizes the Commission to prescribe
restrictions or conditions not inconsistent with law that may be necessary to carry out the provisions of
the Act.
51
Indeed, our extensive regulatory and enforcement experience enables us, under this public
interest authority, to impose and enforce conditions to ensure that the transaction will yield overall public
interest benefits.
52
In exercising this authority to carry out our responsibilities under the Act and related
statutes, we have imposed conditions to confirm specific benefits or remedy specific harms likely to arise
from transactions.
53
46
See Sirius-XM Order, 23 FCC Rcd at 12365, ¶ 32; see also Applications of Sprint Nextel Corp. and SoftBank
Corp. and Starburst II, Inc. for Consent to Transfer Control of Licenses and Authorizations, IB Docket No. 12-343,
Memorandum Opinion and Order, Declaratory Ruling, and Order on Reconsideration, 28 FCC Rcd 9642, 9652, ¶ 25
(2013) (“SoftBank-Sprint Order”).
47
15 U.S.C. § 18; see also Comcast-NBCU Order, 26 FCC Rcd at 4248, ¶ 24; Sirius-XM Order, 23 FCC Rcd at
12365, ¶ 32; Liberty Media-DIRECTV Order, 23 FCC Rcd at 3278, ¶ 24; News Corp.-Hughes Order, 19 FCC Rcd at
484, ¶ 17; EchoStar-DIRECTV HDO, 17 FCC Rcd at 20575, ¶ 27.
48
See SoftBank-Sprint Order, 28 FCC Rcd at 9652, ¶ 25; Sirius-XM Order, 23 FCC Rcd at 12365, ¶ 32; Liberty
Media-DIRECTV Order, 23 FCC Rcd at 3278, ¶ 24.
49
See Comcast-NBCU Order, 26 FCC Rcd at 4248, ¶ 24; Sirius-XM Order, 23 FCC Rcd at 12365-66, ¶ 32; see also
Liberty Media-DIRECTV Order, 23 FCC Rcd at 3278-79, ¶ 25; EchoStar-DIRECTV HDO, 17 FCC Rcd at 20575, ¶
27.
50
See Comcast-NBCU Order, 26 FCC Rcd at 4249, ¶ 25; Sirius-XM Order, 23 FCC Rcd at 12366, ¶ 33; Liberty
Media-DIRECTV Order, 23 FCC Rcd at 3279, ¶ 26; see also Application of WorldCom, Inc. and MCI
Communications Corporation for Transfer of Control of MCI Communications Corporation to WorldCom, Inc., CC
Docket No. 97-211, Memorandum Opinion and Order, 13 FCC Rcd 18025, 18032, ¶ 10 (1998) (“WorldCom-MCI
Order”) (stating that the Commission may attach conditions to the transfers).
51
47 U.S.C. § 303(r). See Comcast-NBCU Order, 26 FCC Rcd at 4249, ¶ 25; Sirius-XM Order, 23 FCC Rcd at
12366, ¶ 33; Liberty Media-DIRECTV Order, 23 FCC Rcd at 3279, ¶ 26; WorldCom-MCI Order, 13 FCC Rcd at
18032, ¶ 10 (citing FCC v. Nat’l Citizens Comm. for Broad., 436 U.S. 775 (1978) (upholding broadcast-newspaper
cross-ownership rules adopted pursuant to Section 303(r))); United States v. Southwestern Cable Co., 392 U.S. 157,
178 (1968) (holding that Section 303(r) permits the Commission to order a cable company not to carry broadcast
signal beyond station’s primary market); United Video, Inc. v. FCC, 890 F.2d 1173, 1182-83 (D.C. Cir. 1989)
(affirming syndicated exclusivity rules adopted pursuant to Section 303(r) authority).
52
See Comcast-NBCU Order, 26 FCC Rcd at 4249, ¶ 25; Sirius-XM Order, 23 FCC Rcd at 12366, ¶ 33; Liberty
Media-DIRECTV Order, 23 FCC Rcd at 3279, ¶ 26.
53
See Comcast-NBCU Order, 26 FCC Rcd at 4249, ¶ 25; Liberty Media-DIRECTV Order, 23 FCC Rcd at 3279,
¶ 26.
Federal Communications Commission FCC 15-94
12
23. This Order examines the proposed transaction as follows. First, we examine whether the
transaction complies with the Act, other applicable statutes, and the Commission’s rules and policies, and
we assess the qualifications of the Applicants. Second, we consider the potential harms and purported
public interest benefits resulting from the transaction. Then, we consider and, where appropriate, impose
conditions to ameliorate the harms or confirm the benefits. Finally, we balance the public interest harms
posed by and the benefits to be gained from the transaction.
V. QUALIFICATIONS OF APPLICANTS
A. Background
24. Section 310(d) of the Act requires that we make a determination as to whether the
Applicants have the requisite qualifications to hold Commission licenses.
54
Among the factors the
Commission considers in its public interest review is whether the applicant for a license has the requisite
“citizenship, character, and financial, technical, and other qualifications.”
55
As a threshold matter, the
Commission must determine whether the Applicants to the proposed transaction – both the transferee and
the transferor – meet the requisite qualifications and requirements to hold and transfer licenses under
Section 310(d) and the Commission’s rules.
56
With respect to Commission-related conduct, the
Commission has stated that all violations of the Act, or of the Commission’s rules or policies, are
predictive of an applicant’s future truthfulness and reliability and thus have a bearing on an applicant’s
character qualifications.
57
The Commission has previously determined that in its review of character
issues, it will also consider certain types of adjudicated, non-Commission-related misconduct,
specifically: (1) felony convictions; (2) fraudulent misrepresentation to governmental units; and (3)
violations of antitrust or other laws protecting competition.
58
For the reasons discussed below, we find
that the Applicants have the requisite character qualifications to hold Commission licenses.
B. DIRECTV
25. No parties have raised issues with respect to the basic qualifications of the transferor,
DIRECTV. The Commission generally does not reevaluate the qualifications of transferors unless issues
related to basic qualifications have been sufficiently raised in petitions to warrant designation for
hearing.
59
We find that there is no reason to reevaluate the requisite citizenship, character, financial,
technical, or other basic qualifications under the Communications Act and our rules, regulations, and
policies, of DIRECTV.
54
47 U.S.C. § 310(d).
55
47 U.S.C. §§ 308, 310(d); see Comcast-NBCU Order, 26 FCC Rcd at 4349, ¶ 276; News Corp.-Hughes Order, 19
FCC Rcd at 485, ¶ 18; EchoStar-DIRECTV HDO, 17 FCC Rcd at 20576, ¶ 28.
56
See 47 U.S.C. § 310(d); see also, e.g., Comcast-NBCU Order, 26 FCC Rcd at 4349, ¶ 276; News Corp.-Hughes
Order, 19 FCC Rcd at 485, ¶ 18; EchoStar-DIRECTV HDO, 17 FCC Rcd at 20576, ¶ 28.
57
See Applications of Cellco Partnership d/b/a Verizon Wireless and Atlantis Holdings LLC for Consent to Transfer
Control of Licenses, Authorizations, and Spectrum Manager and de facto Transfer Leasing Arrangements, WT
Docket No. 08-95, Memorandum Opinion and Order and Declaratory Ruling, 23 FCC Rcd 17444, 17464, ¶ 32
(2008) (citations omitted) (“Verizon Wireless-ALLTEL Order”).
58
See Applications of AT&T Wireless Services, Inc. and Cingular Wireless Corporation for Consent To Transfer
Control of Licenses and Authorizations, Memorandum Opinion and Order, 19 FCC Rcd 21522, 21548, ¶ 47 (2004)
(“AT&T-Cingular Order”).
59
See, e.g., SoftBank-Sprint Order, 28 FCC Rcd at 9653, ¶ 27.
Federal Communications Commission FCC 15-94
13
C. AT&T
26. Two parties, Minority Cellular Partners Coalition (“MCPC”) and New Networks Institute
& Teletruth (“New Networks”), have raised issues with respect to the basic qualifications of the
transferee, AT&T.
60
These issues are discussed more fully below.
1. Minority Cellular Partners Coalition Comments
27. The Commission has determined on numerous occasions that AT&T was qualified to
acquire Commission licenses.
61
Here, MCPC
62
questions those qualifications. MCPC first alleges that
AT&T defrauded its minority partners and engaged in serious Commission-related misconduct, including
forcing out minority partners in certain cellular license partnerships, and that AT&T engaged in related
violations of the Commission’s license transfer rules.
63
It states that the Commission, through an
evidentiary hearing or otherwise, should elicit the facts necessary to resolve the question of whether
AT&T intentionally violated Section 310(d) of the Act and Sections 1.17 and 1.948 of the Rules.
64
In
60
On May 4, 2015, Erik Underwood, Founder and CEO of My24HourNews.Com, Inc., belatedly informed the
Commission that he opposes the transaction and requested that the Commission suspend its review until the
completion of civil litigation recently initiated by My24HourNews.Com concerning a contract dispute between
My24HourNews.Com and AT&T. Letter from Erik M. Underwood, Founder/CEO My24HourNews.Com, Inc., to
Thomas Wheeler, Chairman, FCC, MB Docket No. 14-90 (May 4, 2015) (“Underwood Letter”); see also Email
from Erik M. Underwood to Thomas Wheeler, MB Docket No. 14-90 (June 11, 2015) (attaching Complaint and
Civil Cover Sheet in My24HourNews.Com, Inc. v. AT&T Corp., No. 1:15-cv-01210 (D. Colo. filed June 9, 2015)).
Although Underwood asserts that “AT&T has violated anti-competition and telecommunication laws of this
country,” Underwood Letter at 1, he does not identify any specific Commission rule or policy or any provision of
the Communications Act that he believes is at issue. Underwood also claims that he attached confidential emails to
his letter as evidence of AT&T’s anticompetitive conduct. We have been unable to ascertain that we received the
emails and note that Underwood did not file them according to the procedures specified for the filing of confidential
information. See Protective Order, 29 FCC Rcd at 13816, ¶ 14. The pending litigation at issue concerns claims for
breach of contract, misappropriation of intellectual property, and other alleged wrongdoing arising from a pre-
existing dispute not involving the Commission’s rules or the Communications Act. Underwood does not claim that
his request to suspend Commission review of the Application is necessary to address a transaction-specific harm or
benefit or that AT&T lacks the necessary character qualifications to hold Commission licenses. Moreover, except in
limited circumstances that do not apply here, the Commission does not consider unadjudicated claims of non-
Commission misconduct. Policy Regarding Character Qualifications in Broadcast Licensing Amendment of Rules
of Broadcast Practice and Procedure Relating to Written Responses to Commission Inquiries and the Making of
Misrepresentations to the Commission by Permittees & Licensees, Gen. Docket No. 81-500, Report, Order and
Policy Statement, 102 FCC 2d 1179, 1204-06, ¶ 48 (1986), recon. granted in part, denied in part, 1 FCC Rcd 421
(1986), appeal dismissed sub nom. Nat’l Ass’n for Better Broad. v. FCC, No. 86–1179 (D.C. Cir. June 11, 1987)
(“1986 Character Policy Statement”). Thus, we deny the request.
61
See, e.g., Applications of AT&T Mobility Spectrum LLC, New Cingular Wireless PCS, LLC, Comcast
Corporation, Horizon Wi-Com, LLC, NextWave Wireless, Inc., and San Diego Gas & Electric Company for Consent
to Assign and Transfer Licenses, WT Docket No. 12-240, Memorandum Opinion and Order, 27 FCC Rcd 16459,
16466-67, ¶ 19 (2012) (“AT&T-WCS Order”); see also Applications of Cricket License Company, LLC, Leap
Wireless International, Inc., and AT&T Inc. for Consent to Transfer Control and Assignment of Authorizations, WT
Docket No. 13-193, Memorandum Opinion and Order, DA 14-349, 29 FCC Rcd 2735, 2745, ¶ 19 (WTB, IB 2014)
(“AT&T-Leap Wireless Order”); AT&T Inc., Cellco Partnership d/b/a Verizon Wireless, Grain Spectrum, LLC, and
Grain Spectrum II, LLC, WT Docket No. 13-56, Memorandum Opinion and Order, 28 FCC Rcd 12878, 12885, ¶ 17
(2013).
62
MCPC explains that its members were minority partners in partnerships with AT&T that held 11 cellular licenses.
Comments of Minority Cellular Partners Coalition, MB Docket 14-90, at 1 (filed Sept. 16, 2014) (“MCPC
Comments”).
63
See id. at 9-12, 15-17.
64
See id. at 21.
Federal Communications Commission FCC 15-94
14
particular, MCPC maintains that AT&T divested MCPC’s members of their interests in cellular licenses
held in partnership with AT&T by mischaracterizing certain transactions as pro forma license
assignments that require only notification to the Commission, rather than transfers of control that require
prior Commission approval.
65
MCPC notes that, while the Commission’s findings may or may not be
disqualifying, they may work to ensure AT&T’s future compliance with Section 310(d) and be of
substantial aid to the Chancery Court in Delaware, where MCPC’s claims are currently being litigated.
66
28. The Applicants respond that the claims raised by MCPC relate to matters of Delaware
Corporate and Partnership Law that are unrelated to the current proceeding.
67
They note that MCPC’s
claims are already being heard in Delaware Chancery Court, which is the appropriate forum.
68
Further,
they state that MCPC should have raised the allegations about transfer of control years ago.
69
Finally,
AT&T contends it properly filed the pro forma notifications challenged by MCPC in full compliance with
the requirements of Section 310(d).
70
29. MCPC also notes that the Commission issued a notice of apparent liability (“NAL”) in
January 2015, finding that AT&T appeared to have operated a number of wireless stations at variance
with their licensed parameters.
71
While MCPC observes that the unadjudicated NAL it cites cannot be
used against AT&T in this proceeding,
72
it recommends that the Commission examine the facts
underlying the NAL to determine whether AT&T is engaging in a pattern of noncompliant behavior.
73
AT&T responds that the Commission has not yet determined what sanction, if any, is appropriate in that
enforcement proceeding.
74
AT&T argues further that the Commission has concluded in the 1986
Character Policy Statement that an unadjudicated NAL is an inappropriate ground for a finding of
unfitness.
75
30. Finally, MCPC claims that AT&T violated the Communications Assistance for Law
Enforcement Act (“CALEA”)
76
and the Commission’s CALEA rules
77
by participating in the President’s
65
Id. at 15-17.
66
Id. at 21.
67
See Joint Opposition at 73.
68
See id.
69
See id. at 74.
70
See id. at 74-75.
71
Letter from Russell D. Lukas, Counsel for MCPC, to Marlene H. Dortch, Secretary, FCC, MB Docket No. 14-90,
at 1-2 (March 4, 2015) (“MCPC March 4, 2015, Ex Parte Letter”) (citing AT&T Inc., Parent Company of New
Cingular Wireless PCS, LLC and AT&T Mobility Puerto Rico, Inc., Notice of Apparent Liability for Forfeiture, 30
FCC Rcd 856 (2015) (“AT&T Mobility Puerto Rico NAL”)).
72
MCPC March 4, 2015, Ex Parte Letter at 2 (citing 47 U.S.C. § 504(c)).
73
Id. (citing The Commission’s Forfeiture Policy Statement and Amendment of Section 1.80 of the Rules to
Incorporate the Forfeiture Guidelines, CI Docket No. 95-6, Memorandum Opinion and Order, 15 FCC Rcd 303,
304, ¶¶ 3-4 (1999) (“1999 Forfeiture Guidelines”); Infinity Radio Operations, Inc., Order on Review, 22 FCC Rcd
9824, 9827, ¶ 9 (2007) (“Infinity Forfeiture Review Order”).
74
Letter from Maureen R. Jeffreys, Counsel for AT&T, to Marlene H. Dortch, Secretary, FCC, MB Docket No. 14-
90, at 4-5 (March 11, 2015) (“AT&T March 11, 2015, Ex Parte Letter”).
75
Id. at 5 (citing 1986 Character Policy Statement, 102 FCC 2d at 1204-06, ¶ 48).
76
Section 103(a)(1) of CALEA, 47 U.S.C. § 1002(a)(1), requires telecommunications carriers to establish the
capability of providing to law enforcement agencies (“LEAs”) call content information, pursuant to a court order or
other lawful authorization. Section 103(a)(2) of CALEA, 47 U.S.C. § 1002(a)(2), requires telecommunications
carriers to establish the capability of providing to LEAs reasonably available call-identifying information (“CII”),
pursuant to a court order or other lawful authorization. Section 105 of CALEA, 47 U.S.C. § 1004, requires
(continued….)
Federal Communications Commission FCC 15-94
15
Surveillance Program (“PSP”).
78
According to MCPC, under this program, AT&T permitted the National
Security Agency (“NSA”) to intercept communications or to have access to call-identifying information
without the lawful authorization required by CALEA and the CALEA rules for the 33-month period
ending on July 15, 2004.
79
While MCPC recognizes that AT&T has been granted immunity from civil
damages claims arising from its participation, if any, in the PSP,
80
and that the statute of limitations for
any forfeiture penalty under Section 503(b)(6)(B) of the Communications Act has passed,
81
MCPC
nevertheless advocates that the Commission investigate this matter in the context of this transaction
proceeding for purposes of evaluating AT&T’s qualifications to hold the licenses currently held by
DIRECTV.
82
MCPC also argues that an investigation into AT&T’s involvement with the PSP is
warranted because such an investigation would help restore the public’s confidence in the privacy of their
communications.
83
In addition, MCPC recommends conditioning this transaction on AT&T submitting
its systems security and integrity (“SSI”) plan to the Commission, subject to notice and comment.
84
MCPC asserts that the public’s confidence in the privacy of individuals’ communications has been
“shaken” by AT&T’s participation in the PSP and that a “modicum” of that confidence could be restored
if the Commission were to impose the condition MCPC recommends.
85
a. Standing
31. As an initial matter, although MCPC frames its comments as raising the question of
whether AT&T has the requisite character qualifications to hold Commission licenses, MCPC’s
participation in this proceeding appears to be motivated by its ongoing business dispute with AT&T,
which is wholly unrelated to the transaction. To establish party-in-interest standing to challenge an
application, a petitioner must allege facts sufficient to demonstrate that grant of the application would
(Continued from previous page)
telecommunications carriers to ensure that “any interception of communications or access to call-identifying
information effected within its switching premises can be activated only in accordance with a court order or other
lawful authorization.”
77
See 47 C.F.R. §§ 1.20000-08 (“CALEA rules”).
78
MCPC March 4, 2015, Ex Parte Letter at 5.
79
Id. at 8-11. For background on the PSP, see In re NSA Telecomm. Records Litig., 633 F. Supp. 2d 949, 955-957
(N.D. Cal. 2009).
80
MCPC March 4, 2015, Ex Parte Letter at 11. See also 50 U.S.C. § 1885a (statutory provision in which Congress
granted telecommunications carriers immunity from civil suits to the extent they participated in the PSP under
certain circumstances); In re NSA Telecomm. Records Litig., 671 F.3d 881 (9th Cir. 2011) (finding this grant of
immunity to be Constitutional).
81
MCPC March 4, 2015, Ex Parte Letter at 11 (citing 47 U.S.C. § 503(b)(6)(B)).
82
Id. In response, AT&T points out that substantially similar allegations were raised in a 2006 transfer of control
proceeding. AT&T notes that the Commission did not investigate these issues in the context of the 2006
proceeding, finding that these issues were outside the scope of its investigative powers. AT&T argues that the
Commission should follow that precedent here. AT&T March 11, 2015, Ex Parte Letter at 2-4 (citing AT&T Inc.
and BellSouth Corporation, Application for Transfer of Control, WC Docket No. 06-74, Memorandum Opinion and
Order, 22 FCC Rcd 5662, 5757, ¶ 192 (2007) (“AT&T-BellSouth Merger Order”)). MCPC responded that the
factors underlying the Commission’s decision in the AT&T-BellSouth Merger Order not to investigate these issues
do not apply in this proceeding. Letter from Russell D. Lukas, Counsel for MCPC, to Marlene H. Dortch, Secretary,
FCC, MB Docket No. 14-90, at 1 (March 19, 2015) (“MCPC March 19, 2015, Ex Parte Letter”). We need not
address this issue here because we find for other reasons that this issue does not warrant investigation in this
transaction review proceeding.
83
MCPC March 19, 2015, Ex Parte Letter at 2.
84
MCPC March 4, 2015, Ex Parte Letter at 12; MCPC March 19, 2015, Ex Parte Letter at 2.
85
MCPC March 19, 2015, Ex Parte Letter at 2.
Federal Communications Commission FCC 15-94
16
cause it to suffer a direct injury.
86
In addition, petitioners must demonstrate a causal link between the
claimed injury and the challenged action.
87
To demonstrate a causal link, petitioners must establish that
the injury can be traced to the challenged action and that the injury would be prevented or redressed by
the relief requested.
88
MCPC has not articulated any theory by which the Commission’s disposition of
the Application would redress an injury to MCPC. Moreover, MCPC does not allege that its members are
competitors or viewers of AT&T’s or DIRECTV’s programming.
89
In other words, MCPC does not
allege that its members currently compete with AT&T in the video programming or video distribution
market, or indeed, in any market. Accordingly, we conclude that MCPC’s dispute with AT&T does not
give it standing to object to the transfer of control of DIRECTV to AT&T.
90
b. Pro Forma Transactions
32. At the outset, we note that MCPC’s allegations regarding violations under Delaware law
are being adjudicated by the Chancery Court in Delaware.
91
They do not involve alleged violations of the
Communications Act or Commission rules, and there has been no adjudicated finding of wrongdoing.
Thus, they are outside the scope of our character qualifications inquiry.
92
33. Furthermore, we note that MCPC has not offered any evidence to support its allegations.
Section 309(d)(1) of the Communications Act requires parties filing petitions to deny applications to
support their allegations of fact with an affidavit of a person or persons with personal knowledge
86
See, e.g., AT&T-WCS Order, 27 FCC Rcd at 16465, ¶ 16; Touchtel Corporation, Assignor, Penryn Corporation,
Assignee, Order on Reconsideration, 29 FCC Rcd 16249, 16250-51, ¶ 7 (2014) (“Touchtel Order”). See also AT&T-
Cingular Order, 19 FCC Rcd at 21547, ¶ 46 n.196 (the Commission had “doubts” regarding petitioner’s standing
when there was no demonstration that it would be directly affected by the order); Applications of Nextel
Communications, Inc. and Sprint Corporation For Consent to Transfer Control of Licenses and Authorizations, WT
Docket No. 05-63, Memorandum Opinion and Order, 20 FCC Rcd 13967, 14021, ¶ 150 n.335 (2005) (“Sprint-
Nextel Order”) (same).
87
See Touchtel Order, 29 FCC Rcd at 16250-51, ¶ 7 (and sources cited therein).
88
See id. (and sources cited therein).
89
Sunburst Media-Louisiana, LLC, Memorandum Opinion and Order, 29 FCC Rcd 9777, 9778, ¶ 5 (2014)
(Generally, to establish standing in the broadcast regulatory context, a petitioner must show that it is: (1) a
competitor in the market suffering signal interference; (2) a competitor in the market suffering economic harm; or
(3) a resident of the station’s service area or a regular listener of the station.).
90
We recognize that an informal objection may be filed pursuant to Section 1.41 of the Commission’s rules without
demonstrating standing. 47 C.F.R. § 1.41. The Commission has discretion whether to consider an informal
objection. AT&T-Cingular Order, 19 FCC Rcd at 21547, ¶ 46 n.196; Sprint-Nextel Order, 20 FCC Rcd at 14021, ¶
150 n.335; Touchtel Order, 29 FCC Rcd at 16251, ¶ 8. In this case, we find that the public interest warrants
considering MCPC’s contentions as informal objections. However, for the reasons discussed below, we conclude
that they do not present a substantial and material question of fact warranting further inquiry into AT&T’s character
qualifications. For these reasons, we also find that MCPC’s proposed condition is unnecessary.
91
The matters being considered in the Chancery Court in Delaware address private contractual disputes, for which
the Commission had repeatedly stated it is not the appropriate forum for resolution. See, e.g., AT&T-Cingular
Order, 19 FCC Rcd at 21551, ¶ 56 n.222 (rejecting argument that transfer should be denied on grounds that it
violated partnership agreements; “these are private contractual disputes that are not relevant to our public interest
analysis and are best resolved in courts of competent jurisdiction”).
92
1986 Character Policy Statement, 102 FCC 2d at 1204-06, ¶ 48 (1986); Policy Regarding Character
Qualifications in Broadcast Licensing, Amendment of Part 1, the Rules of Practice and Procedure, Relating to
Written Responses to Commission Inquiries and the Making of Misrepresentations to the Commission by Applicants,
Permittees and Licensees, and the Reporting of Information Regarding Character Qualifications, Memorandum
Opinion and Order, 7 FCC Rcd 6564, 6566, ¶ 9 (1992) (pending litigation involving alleged non-Commission
misconduct is presumptively not relevant to a licensee’s character qualifications).
Federal Communications Commission FCC 15-94
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thereof.
93
MCPC did not submit any such affidavit. Accordingly, even if MCPC did have standing to
raise its allegations, MCPC has not satisfied the evidentiary threshold of Section 309(d)(1) to show that
grant of the Application would be prima facie inconsistent with the public interest so as to warrant further
inquiry.
34. As a separate and independent basis for rejecting MCPC’s allegations, we find that the
allegations are unpersuasive. MCPC claims that AT&T mischaracterized and possibly misrepresented
substantive transfer of control transactions as pro forma transactions that do not require prior Commission
approval, thereby violating a Commission rule.
94
Specifically, as mentioned above, MCPC maintains that
the 11 transactions at issue divested MCPC’s members of their interests in cellular licenses held in
partnership with AT&T and that AT&T mischaracterized those transactions as pro forma.
95
In addition,
MCPC observes that, in 1998, the Commission adopted the Section 310(d) Forbearance Order,
identifying six kinds of transactions as warranting pro forma treatment, and contends that the 11
transactions at issue here do not fit into any of those six categories.
96
35. MCPC is mistaken in asserting that the 11 transactions it cites were not pro forma
transactions. The first type of transaction identified in the Section 310(d) Forbearance Order as
warranting pro forma treatment is an “assignment from an individual or individuals (including
partnerships) to a corporation owned or controlled by such individuals or partnerships without any
substantial change in their relative interests.”
97
In each of the 11 transactions at issue here, AT&T
assigned a license from a partnership to a corporation. These transactions did not result in any substantial
change in ownership because AT&T had de jure and de facto control of each assigning partnership prior
to the assignment and it held such control after the assignment.
98
Therefore, the 11 transactions fit
perfectly within the first category of pro forma transactions identified in the Section 310(d) Forbearance
Order.
99
93
47 U.S.C. § 309(d)(1).
94
MCPC Comments at 16. See also 47 C.F.R. § 1.948(c)(1) (exempting pro forma transactions from the
requirement that licensees obtain approval from the Commission prior to transferring or assigning their licenses).
95
MCPC Comments at 15-17.
96
Id. at 15-16 (citing FCBA’s Petition for Forbearance from Section 310(d) of the Communications Act,
Memorandum Opinion and Order, 13 FCC Rcd 6293 (1998) (“Section 310(d) Forbearance Order”)). In that order,
the Commission decided to forbear from enforcing the requirement in Section 310(d) of the Communications Act
that parties obtain prior approval for transfers of licenses, provided that the license was issued by the Wireless
Telecommunications Bureau, the licensee notified the Bureau prior to completing the transaction, and the
transaction fell into one of the six categories listed in that order. Section 310(d) Forbearance Order, 13 FCC Rcd at
6299, ¶ 9.
97
Section 310(d) Forbearance Order, 13 FCC Rcd at 6298-99, ¶ 8 (quoted in MCPC Comments at 15).
98
See Joint Opposition at 74. See also Section 310(d) Forbearance Order, 13 FCC Rcd at 6297, ¶ 7 (noting that a
pro forma transaction is one in which there is no substantial change in de jure or de facto control).
99
In its reply, MCPC also states that, “[b]y the time the public was notified of AT&T’s actions, the issue of AT&T’s
compliance with § 1.948(c) of the Rules was largely moot.” Reply Comments of Minority Cellular Partners
Coalition, MB Docket 14-90, at 5 (filed Nov. 5, 2014) (“MCPC Reply”). However, the Commission’s rules permit
a party-in-interest to file a petition for reconsideration of the grant of a pro forma application within 30 days of the
date of public notice of the acceptance of the pro forma notification. 47 C.F.R. § 1.106(f). Thus, MCPC has no
basis for contending that it did not have adequate notice of AT&T’s actions. Significantly, with respect to the 11
applications specifically identified by MCPC, no petition for reconsideration was ever filed following the release of
the public notices reflecting Commission acceptance of such applications. As a result, MCPC’s contentions here are
in effect late-filed petitions for reconsideration of AT&T’s pro forma transfer applications, and so they do not
warrant further consideration in this proceeding.
Federal Communications Commission FCC 15-94
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36. MCPC maintains that the 11 transactions resulted in a substantial change in ownership
and therefore could not be treated as pro forma transactions, because, according to MCPC, the
Commission treats “any general partnership interest” as a “controlling interest.”
100
However, the rules
that MCPC cites for this proposition do not govern the determination of whether the pro forma
transaction procedures are applicable to a proposed transaction, but rather how to attribute interests in
spectrum holdings for purposes of a competitive analysis of the spectrum aggregation that would result
from a transaction.
101
37. On the other hand, the standard established by the Commission for determining whether
the pro forma transaction procedures are applicable is whether there is a “substantial change in
ownership.” Generally, a “substantial change in ownership” requires a transfer of 50 percent or more of a
licensee’s stock.
102
A “substantial change in ownership” requires a change in de facto or de jure control,
and so it requires more than simply determining whether there is “any general partnership interest,” as
MCPC suggests.
103
Because AT&T exercised control both before and after the transactions, there was not
a substantial change in ownership.
104
38. Further, MCPC has not attempted to substantiate its claims of misrepresentation, the
critical element of which is intent to deceive.
105
MCPC claims that AT&T conceded the truth of this
allegation by not refuting it.
106
To the contrary, however, AT&T disagreed with MCPC’s underlying
premise that the pro forma transactions were improper,
107
and, for the reasons stated above, we agree.
Thus, MCPC has not established a prima facie case that AT&T intended to deceive the Commission.
100
MCPC Comments at 15 (citing 47 C.F.R. § 20.22(b)(1) (adopted in Policies Regarding Mobile Spectrum
Holdings, WT Docket No. 12-269, Report and Order, 29 FCC Rcd 6133, 6248 (2014) (“Spectrum Holdings Report
and Order”); 47 C.F.R. §§ 1.919(c)(ii)(A), 20.6(d)(1)).
101
Spectrum Holdings Report and Order, 29 FCC Rcd at 6245, ¶ 302. Since 2004, the Commission has applied a
test, called an “initial spectrum screen,” to help identify for case-by-case review local markets where changes in
spectrum holdings resulting from the transaction may be of particular concern. AT&T-Cingular Order, 19 FCC Rcd
at 21525, ¶ 4 (cited in Spectrum Holdings Report and Order, 29 FCC Rcd at 6140-41, ¶ 13).
102
See, e.g., SoftBank-Sprint Order, 28 FCC Rcd at 9700-01, ¶ 142. In the SoftBank-Sprint Order, the Commission
noted that there may be other factors in particular cases that may affect de facto control, but nothing in the record in
this proceeding suggests that any such factors were relevant in the 11 assignments cited by MCPC.
103
In the Section 310(d) Forbearance Order, the Commission listed several factors that may be relevant to a finding
of de facto control: (1) power to constitute or appoint more than 50 percent of the board of directors or partnership
management committee; (2) authority to appoint, promote, demote, and fire senior executives that control the day-
to-day activities of the licensee; (3) ability to play an integral role in major management decisions of the licensee;
(3) authority to pay financial obligations, including expenses arising out of operating; (4) ability to receive monies
and profits from the facility’s operations; and (5) unfettered use of all facilities and equipment. Section 310(d)
Forbearance Order, 13 FCC Rcd at 6297-98, ¶ 7 (citing, e.g., Intermountain Microwave, 24 Rad. Reg. (P & F) 983,
984 (1963)).
104
Joint Opposition at 74 (stating that AT&T filed pro forma notices consistent with 47 C.F.R. § 1.948(c) because it
controlled the entity both before and after the transaction).
105
Swan Creek Commc’ns, Inc. v. FCC, 39 F.3d 1217, 1222 (D.C. Cir. 1994); Citadel Broadcasting Co.,
Memorandum Opinion and Order, Notice of Apparent Liability, 22 FCC Rcd 7083, 7090, ¶ 14 (2007) (“Citadel
Broadcasting NAL”).
106
MCPC Reply at 3 (“[I]t is particularly for the Commission to adjudicate MCPC’s undisputed allegation that
AT&T misrepresented facts in a series of filings that purported to notify the Commission of the transactions which
effected the ouster of its partners.”) (emphasis in original).
107
Joint Opposition at 74 (stating that “MCPC’s arguments are incorrect” and that AT&T properly filed pro forma
notices).
Federal Communications Commission FCC 15-94
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c. Notice of Apparent Liability
39. As noted above, MCPC recommends that the Commission examine the facts underlying
an NAL recently issued to AT&T
108
to determine whether AT&T has engaged in a pattern of
noncompliant behavior.
109
As both MCPC and AT&T observe, Section 504(c) prohibits the Commission
from using the mere issuance of an NAL to the prejudice of AT&T in this or any other proceeding.
110
MCPC is correct that, as a general matter, the Commission can consider the facts underlying an NAL,
when appropriate, to determine whether a party is engaging in a pattern of noncompliant behavior.
111
40. In this case, we find that MCPC has not provided any basis for finding that the recently
issued NAL evidences a pattern of noncompliant behavior sufficient to call into question AT&T’s
reliability as a licensee. MCPC merely alleges, without more, that the NAL, together with orders
adopting consent decrees “that forced AT&T to settle for $126.75 million,” establishes a “pattern of
flagrant disregard” for the Communications Act and the Commission’s rules.
112
The Commission has
fully investigated the conduct underlying the NAL and determined that the appropriate sanction is
forfeiture, not revocation or another remedy premised on a conclusion that AT&T lacks the necessary
character qualifications to hold a license. The orders adopting consent decrees that MCPC cites prohibit
the Commission from using the facts developed in the subject investigations in any other proceeding, and
the adopting orders concluded that there was no basis for an adverse character finding as a result of the
investigations.
113
Finally, MCPC has provided no evidence to suggest that AT&T has engaged in
misrepresentation or lack of candor, and nothing in the record otherwise presents a substantial and
material question of fact as to AT&T’s proclivity to deal truthfully with the Commission.
114
d. CALEA
41. In addition to our conclusion that MCPC generally lacks standing to participate in this
proceeding, to the extent that MCPC raises concerns regarding public confidence in the privacy of
individuals’ communications, we disagree that it has standing to raise such concerns in this proceeding.
Generally, courts will grant a third party standing to assert the rights of another only if the third party
asserting the right has a close relationship with the person who possesses the right and if there is a
hindrance to the possessor’s ability to protect his own interests.
115
MCPC has not demonstrated that any
of its members were subscribers of AT&T whose communications or call-identifying information was
inappropriately disclosed to NSA, nor has it identified any hindrance limiting AT&T subscribers’ ability
108
AT&T Mobility Puerto Rico NAL, 30 FCC Rcd at 856, ¶¶ 1-2 (proposing $640,000 forfeiture based on a finding
that AT&T willfully and repeatedly operated 59 of its common carrier fixed point-to-point microwave stations at
variance from their authorized parameters in violation of Section 301 of the Communications Act, 47 U.S.C. § 301,
and Sections 1.903(a) and 1.947(a)-(b) of the Commission’s rules, 47 C.F.R. §§ 1.903(a), 1.947(a)-(b)).
109
MCPC March 4, 2015, Ex Parte Letter at 1-2 (citing 1999 Forfeiture Guidelines, 15 FCC Rcd at 304, ¶¶ 3-4;
Infinity Forfeiture Review Order, 22 FCC Rcd at 9827, ¶ 9).
110
47 U.S.C. § 504(c).
111
1999 Forfeiture Guidelines, 15 FCC Rcd at 304, ¶ 3. AT&T appears to have misread the 1986 Character Policy
Statement because in that order the Commission found that allegations of non-Commission misconduct prior to
adjudication by another agency or court are inappropriate grounds for a finding of unfitness and was not referring to
unadjudicated Commission NALs. 1986 Character Policy Statement, 102 FCC 2d at 1204-06, ¶ 48.
112
See MCPC March 4, 2015, Ex Parte Letter at 1-2; MCPC Reply at 2 (citing AT&T Mobility LLC, Order, DA 14-
1457, 29 FCC Rcd 11803 (EB 2014) (“AT&T Mobility LLC”); AT&T Inc., Order, DA 13-594, 28 FCC Rcd 5994
(EB 2013) (“AT&T Inc. Order”)).
113
AT&T Mobility LLC, 29 FCC Rcd 11803; AT&T Inc. Order, 28 FCC Rcd 5994.
114
See 1986 Character Policy Statement, 102 FCC 2d at 1209, ¶ 55 (relevant character traits are truthfulness and
reliability).
115
Kowalski v. Tesmer, 543 U.S. 125, 129-130 (2004) (citing Powers v. Ohio, 499 U.S. 400, 411 (1991)).
Federal Communications Commission FCC 15-94
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to protect their own interests. Thus, MCPC has not shown that it can meet either prong of the Supreme
Court’s legal test.
42. Further, even if MCPC had standing to raise its CALEA concern, we find that there are
procedural grounds for not considering MCPC’s contentions. MCPC raised its concern for the first time
in its reply.
116
As was emphasized in the Public Notice, to allow the Commission to consider fully all
substantive issues regarding the Application in as timely and efficient a manner as possible, petitioners and
commenters must raise all issues in their initial filings. New issues may not be raised in responses or
replies.
117
A party or interested person seeking to raise a new issue after the pleading cycle has closed
must show good cause why it was not possible for it to have raised the issue previously.
118
MCPC’s
allegations are untimely, and MCPC has offered no explanation for its failure to raise them earlier. The
existence of the surveillance program was widely known well before this proceeding was initiated, and
the sources MCPC cites in support of its allegations that AT&T participated in the program all were
publicly available in advance of this proceeding.
43. In addition, MCPC states that the alleged CALEA rule violations ceased in July 2004.
119
One of the factors that the Commission considers in making character determinations is the passage of
time since the conduct. In the 1986 Character Policy Statement, the Commission determined that, even
as to consideration of past conduct indicating “a flagrant disregard of the Commission’s regulations and
policies,” a 10-year limitation should apply, given the “inherent inequity and practical difficulty”
involved in requiring applicants to respond to allegations of greater age.
120
As the AT&T conduct that
MCPC maintains resulted in rule violations ended more than 10 years ago, the limitation adopted in the
1986 Character Policy Statement applies to that conduct.
44. Finally, assuming for the sake of argument that MCPC had raised this argument in a
timely manner, we conclude that the argument does not provide an adequate basis for investigating
AT&T’s character qualifications or imposing a remedial condition. MCPC asserts not only that AT&T
participated in the PSP surveillance program but that it knew that its participation violated CALEA and
the Commission’s rules.
121
However, Congress adopted legislation in 2008 to give electronic
communications service providers, including AT&T, immunity from civil suit for their involvement in the
PSP surveillance program under certain circumstances.
122
Prior to adopting this legislation, the Senate
Select Committee on Intelligence determined that, contrary to MCPC’s assertion, the PSP participants
acted on a good faith belief that the program and their assistance were lawful.
123
Therefore, we do not
believe any facts that might be developed in connection with this proceeding are necessary to make a
determination regarding AT&T’s proclivity to deal truthfully with the Commission and to comply with
the Communications Act and Commission rules, which is the essence of the character qualifications
inquiry.
116
MCPC Reply at 4-5.
117
Public Notice, 29 FCC Rcd at 9469 (citing 47 C.F.R. § 1.45(c)).
118
Id.
119
MCPC March 4, 2015, Ex Parte Letter at 11.
120
1986 Character Policy Statement, 102 FCC 2d at 1229, ¶ 105 (quoting Kaye-Smith Enterprises, 71 FCC 2d 1402,
1406-07, ¶ 10 (1979), recon. denied, 46 Rad. Reg. 2d (P & F) 1583 (1980)).
121
MCPC March 4, 2015, Ex Parte Letter at 9-11.
122
See 50 U.S.C. § 1885a (immunity legislation), S. REP. NO. 110-209, at 7 (2007).
123
S. REP. NO. 110-209, at 7.
Federal Communications Commission FCC 15-94
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2. New Networks Institute & Teletruth Petition
45. On May 12, 2015, New Networks filed a Petition for Investigation opposing the
transaction and requesting that the Commission investigate whether AT&T engaged in misrepresentation,
in violation of Section 1.17 of the Commission’s rules, in its representations to the Commission of its
compliance with the AT&T-BellSouth Merger Order
124
broadband deployment condition.
125
New
Networks alleges that AT&T did not meet the AT&T-BellSouth Merger Order broadband condition based
on statements AT&T has made since 2008 regarding its plans for its wireline and wireless broadband
deployment.
126
AT&T asserts that it complied with the condition.
127
46. Consistent with the Public Notice establishing the pleading cycle in this proceeding, we
dismiss these untimely new allegations.
128
Under the pleading schedule established for this proceeding,
comments and petitions to deny were due over nine months ago.
129
New Networks had ample time to
submit its petition during the established pleading cycle, but it failed to do so and offers no justification
for its late submission. Nor does New Networks seek leave to file belatedly. We note, however, that
New Networks may pursue its allegations by filing a complaint with the Enforcement Bureau.
130
47. We further conclude, as an alternative, independent basis for rejecting the petition, that
the record does not present a substantial and material question of fact regarding New Networks’ claim
124
AT&T-BellSouth Merger Order, 22 FCC Rcd 5662.
125
New Networks Institute & Teletruth Petition for Investigation into Whether AT&T Committed Perjury in its
Representations to the FCC Regarding its Deployment of Broadband and Request to Delay Action on the AT&T-
DIRECTV Merger Pending Investigation, MB Docket No. 14-90 (filed May 14, 2015) (“New Networks Petition”);
see 47 C.F.R. § 1.17. New Networks also alleges that promises for fiber to the curb and fiber to the home (“FTTH”)
were made to the Commission in 2004 and have not been fulfilled. See New Networks Petition at 4-5, 14-17.
126
See New Networks Petition at 1-5.
127
Joint Opposition at 23 n.67; AT&T Response to Sept. 9, 2014, Information Request at 222-223.
128
To the extent New Networks seeks to have its petition treated as a petition to deny, it is dismissed as untimely for
the reasons stated above. Further, New Networks lacks standing to file a petition to deny because it has not
established that any individual member would be harmed by the transaction. See Applications for Consent to the
Assignment and/or Transfer of Control of Licenses Adelphia Communications Corporation (and Subsidiaries,
Debtors-In-Possession), Assignors, to Time Warner Cable Inc. (Subsidiaries), Assignees, Adelphia Communications
Corporation, (and Subsidiaries, Debtors-In-Possession), Assignors and Transferors, to Comcast Corporation
(Subsidiaries), Assignees and Transferees, MB Docket No. 05-192, Memorandum Opinion and Order, 21 FCC Rcd
8203, 8215-16, ¶¶ 18-20 & n.73 (2006) (“Adelphia Order”) (standing of organization established by evidence that
members resided in service area of MVPD applicants). Our dismissal is without prejudice to New Networks’ ability
to raise its allegations outside of this proceeding in a complaint filed with the Enforcement Bureau.
129
Public Notice, 29 FCC Rcd at 9464 (The Public Notice accepted the Application for filing on August 7, 2014,
and it established September 16, 2014, as the deadline for filing comments or petitions to deny, October 16, 2014, as
the deadline for responses to comments or oppositions to petitions to deny, and November 5, 2014, as the deadline
for replies to responses or oppositions). The Public Notice stated that any “party or interested person seeking to
raise a new issue after the pleading cycle has closed must show good cause why it was not possible for it to have
raised the issue previously . . . . Absent such a showing of good cause, any issues not timely raised may be
disregarded by the Commission.” Id. at 9469. The pleading cycle was temporarily suspended by the Media Bureau
on October 22, 2014, and subsequently, the deadline for replies to responses or oppositions was extended until
January 7, 2015. Applications of Comcast Corp. and Time Warner Cable Inc. for Consent to Assign or Transfer
Control of Licenses and Authorizations, and AT&T, Inc. and DIRECTV for Consent to Assign or Transfer Control of
Licenses and Authorizations, MB Docket Nos. 14-57, 14-90, Order, DA 14-1523, 29 FCC Rcd 12715 (MB 2014);
Notice of Merger Pleading Cycle Restarts, 29 FCC Rcd 14491.
130
47 U.S.C. §§ 208, 503. See Softbank-Sprint Order, 28 FCC Rcd at 9676, ¶ 85 (finding that allegations of prior
conduct by the licensee were more appropriately resolved through the Commission’s complaint process under
Section 208 of the Act).
Federal Communications Commission FCC 15-94
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that AT&T violated the Commission’s rules and AT&T intended to deceive the Commission with respect
to its broadband deployment.
131
The critical representation, according to New Networks, pertained to
residential broadband deployment as of the end of 2007, defined as a specific speed of service in a
defined geographic area.
132
48. Specifically, the AT&T-BellSouth Merger Order broadband condition required that, by
December 31, 2007, AT&T-BellSouth would offer Internet access service at speeds in excess of 200
kilobits per second (“kbps”) in at least one direction to 100 percent of the residential living units in the
AT&T-BellSouth in-region territory, using wireline broadband for at least 85 percent of such living units,
and using “alternative technologies and operating arrangements including but not limited to satellite
service and [Worldwide Interoperability for Microwave Access (“Wi-Max”)] fixed wireless technologies”
for the remaining 15 percent of living units.
133
Further, at least 30 percent of the new deployment needed
to be to rural or low-income units.
134
New Networks’ petition alleges that AT&T neither deployed
Internet service to 100 percent of the residential living units in the in-region territory, nor achieved the 30
percent incremental deployment to rural or low-income units.
49. New Networks’ position appears to be that AT&T did not satisfy the broadband
deployment condition because it failed to cover 100 percent of its footprint with its wireline U-verse
service, a technology that provides download speeds of up to 45 Mbps or greater.
135
However, New
Networks neglects to consider that only 85 percent of living units in the AT&T-BellSouth in-region
territory needed to be covered by wireline technologies and that technologies other than U-verse,
including digital subscriber line (“DSL”) and IPDSL, would also meet the defined level of service. In
addition, the deployment totals that New Networks provides are based upon AT&T’s current footprint
and not AT&T’s footprint as it existed on December 31, 2007, when the condition applied.
136
New
Networks further neglects to consider that 15 percent of living units in the footprint could be covered
using alternative technologies or operating arrangements, such as satellite service and Wi-Max fixed
wireless service.
137
131
See Swan Creek Commc’ns, Inc. v. FCC, 39 F.3d at 1222 (intent to deceive is a critical element of
misrepresentation); Citadel Broadcasting NAL, 22 FCC Rcd at 7090, ¶ 14 (“[C]arelessness, exaggeration, or
slipshoddiness, which lack [the] necessary element [of intent to deceive], do not constitute misrepresentation.”).
132
New Networks Petition at 17-19. See also AT&T-BellSouth Merger Order, 22 FCC Rcd at 5807, Appendix F.
133
AT&T-BellSouth Merger Order, 22 FCC Rcd at 5807, Appendix F.
134
Id.
135
See supra n.9 (noting that AT&T currently offers U-verse primarily via FTTN architecture, which offers speeds
of up to 45 Mbps).
136
Free Press also alleges that AT&T failed to fulfill the AT&T-BellSouth Merger Order condition, citing a press
report from 2012 indicating that some individuals at that time had been unable to obtain broadband service from
AT&T. Free Press Petition at 32-33. The Commission has previously determined that news articles are not
sufficient to establish a prima facie showing under Section 309(d) of the Communications Act, 47 U.S.C. §
309(d)(1). See Application of the Pikes Peak Broad. Co., Memorandum Opinion and Order and Notice of Apparent
Liability, 12 FCC Rcd 4626, 4630, ¶ 14 (1997) (“Pikes Peak Broad. Order”) (“[A] newspaper article is not an
acceptable substitute for the requirement of Section 309(d) of the Communications Act that allegations in a petition
to deny be supported by the affidavit of a person with personal knowledge of the facts alleged.”). Moreover, the
merger condition applied to a period that ended several years before the period at issue in the cited news article.
Free Press does not claim that its allegations call into question AT&T’s character qualifications, and for the reasons
explained here, we conclude that they do not.
137
For example, Wideband Code Division Multiple Access (“WCDMA”) technology and High Speed Data Packet
Access (“HSDPA”) technology both were capable of delivering Internet service that would have met the definition
of Internet service under the AT&T-BellSouth Merger Order condition. WCDMA provides speeds up to 2 Mbps and
average user speeds of 220-320 kbps. See Implementation of Section 6002(b) of the Omnibus Budget Reconciliation
Act of 1993, Annual Report and Analysis of Competitive Market Conditions with Respect to Commercial Mobile
(continued….)
Federal Communications Commission FCC 15-94
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50. New Networks also argues that the Applicants’ statements regarding the deployment of
an additional 15 million locations in connection with the instant proceeding is further evidence that
AT&T does not have 100 percent broadband deployment in its footprint and has therefore not satisfied its
2006 condition to achieve 100 percent deployment.
138
However, New Networks fails to consider the
extent to which deployment of such additional service might be to areas located outside of AT&T’s
incumbent local exchange carrier (“ILEC”) territory.
139
Further, as discussed above, it fails to consider
the extent to which AT&T had deployed wireline broadband technologies other than U-verse or wireless
technologies.
51. As a result, we cannot conclude that the facts alleged by New Networks, if true, would
demonstrate that AT&T falsely certified compliance with the AT&T-BellSouth Merger Order conditions
or intended to deceive the Commission.
140
Thus, we find that New Networks has not made out even a
prima facie case of a rule violation or misrepresentation.
141
Even assuming New Networks has made a
prima facie case, we conclude, for the reasons explained above, that the record does not present a
substantial and material question of fact on this issue warranting further inquiry in this proceeding.
142
(Continued from previous page)
Services, WT Docket No. 07-71, Twelfth Report, 23 FCC Rcd 2241, 2300, ¶ 130 (2008) (“12th Annual CMRS
Competition Report”). HSDPA allows average download speeds of 400-700 kbps. Id. at ¶ 130. In 2005, AT&T
(Cingular) began its launch of WCDMA. See Implementation of Section 6002(b) of the Omnibus Budget
Reconciliation Act of 1993, Annual Report and Analysis of Competitive Market Conditions with Respect to
Commercial Mobile Services, WT Docket No. 06-17, Eleventh Report, 21 FCC Rcd 10947, 10999, ¶ 130 (2006).
AT&T continued to deploy WCDMA/HSDPA on its network in 2006, and it planned to continue to deploy
WCDMA/HSDPA throughout a majority of its network. See 12th Annual CMRS Competition Report, 23 FCC Rcd
at 2302, ¶ 137. See also AT&T Inc., AT&T Significantly Expands Broadband Service to Rural Consumers Across
Traditional 22-State Territory (press release), May 9, 2007, available at http://www.prnewswire.com/news-
releases/att-significantly-expands-broadband-service-to-rural-consumers-across-traditional-22-state-territory-
58052722.html (visited June 12, 2015) (announcing the expansion of AT&T’s satellite broadband service).
138
New Networks Petition at 3. In addition, New Networks relies on alleged facts contained in third-party sources
such as trade press and analyst reports, id. at 20-22, 24, Items 9, 10, 13, that are not supported by an affidavit of an
individual with personal knowledge of the facts alleged, as required by Section 309(d)(1) of the Communications
Act. 47 U.S.C. § 309(d)(1); Pikes Peak Broad. Order, 12 FCC Rcd at 4630, ¶ 14.
139
The 15 million locations in connection with the instant proceeding include 13 million FWLL locations. Our
analysis verifies that the majority of the FWLL deployment would be outside of AT&T’s wireline territory. See
infra ¶ 270.
140
See Gencom Inc. v. FCC, 832 F.2d 171, 181 (D.C. Cir. 1987) (“The Commission’s inquiry at this level is much
like that performed by a trial judge considering a motion for a directed verdict: if all the supporting facts alleged in
the affidavits were true, could a reasonable factfinder conclude that the ultimate fact in dispute had been
established.” (citing Citizens for Jazz on WRVR, Inc. v. FCC, 775 F.2d 392, 397 (D.C. Cir. 1985))).
141
Id. at 180 (“Initially, the Commission must determine whether the applicant seeking a hearing has set forth
‘specific allegations of fact sufficient to show that . . . a grant of the application would be prima facie inconsistent
with [the public interest, convenience, and necessity].’” (quoting Citizens for Jazz on WRVR, Inc. v. FCC, 775 F.2d
at 394); Shareholders of Hispanic Broad. Corp. (Transferor) and Univision Communications, Inc. (Transferee) for
Transfer of Control of Hispanic Broad. Corp., and Certain Subsidiaries, Licensees of KGBT9AM), Harlingen, TX et
al., MB Docket No. 02-235, Memorandum Opinion and Order, 18 FCC Rcd 18834, 18845, ¶ 29 (2003) (petitions
that offer conclusory statements or allegations not supported by record evidence, affidavits, or sworn statements are
not sufficient to meet the pleading requirements of Section 309(d)(1) of the Act, 47 U.S.C. § 309(d)(1)).
142
47 U.S.C. § 309(d)(2), (e) (if the record presents a substantial and material question of fact as to whether an
application is in the public interest, the Commission shall designate the matter for hearing).
Federal Communications Commission FCC 15-94
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VI. COMPLIANCE WITH COMMUNICATIONS ACT AND FCC RULES AND POLICIES
52. As noted above, for the proposed transaction to be in the public interest, it must be in
compliance with the Communications Act, other applicable statutes, and the Commission’s rules.
143
We
find that the proposed transaction will not violate any statutory provision or Commission rule.
144
VII. BACKGROUND ON VIDEO PROGRAMMING DISTRIBUTORS
53. This transaction involves the combination of two entities that deliver video programming
to consumers. As background for our analysis of that combination, below we provide an overview of the
video programming distribution industry.
54. Today there are primarily three types of entities that deliver video programming to
consumers – broadcast television stations, MVPDs, and online video distributors (“OVDs”).
145
We focus
our industry description on MVPDs because our analysis of the public interest benefits and harms
considers in substantial part the competitive effects of the transaction on those services. We also consider
the evolution of OVD services. Related to our analysis are bundles that combine video services with
Internet access and/or voice telephony as part of a “double-” or “triple-play” bundle.
146
55. MVPDs include cable operators (both incumbent cable operators and cable
“overbuilders”),
147
direct broadcast satellite (“DBS”) providers, such as DIRECTV, and telephone
companies (“telephone MVPDs”), such as AT&T and Verizon, that provide MVPD service in some of the
areas where they offer landline telephone service.
148
MVPDs bundle linear programming networks into
groups of channels or “tiers”
149
and sell this programming to consumers, deriving revenues from
subscription fees and the sale of advertising time they receive through their carriage agreements.
150
MVPDs primarily deliver video programming services using their own facilities.
151
As part of an MVPD
subscription, MVPDs also typically offer VOD and TV Everywhere services, which allow subscribers to
143
See, e.g., Comcast-NBCU Order, 26 FCC Rcd at 4247, ¶ 22; Sirius-XM Order, 23 FCC Rcd at 12363-64, ¶ 30;
Liberty Media-DIRECTV Order, 23 FCC Rcd at 3276-77, ¶ 22; EchoStar-DIRECTV HDO, 17 FCC Rcd at 20574, ¶
25.
144
The Applicants state that the transaction would not violate any law or rule. Application at 18. Moreover, no
party has alleged that the transaction would violate any provision of the Communications Act, related statutes, or the
Commission’s rules.
145
See Annual Assessment of the Status of Competition in the Market for the Delivery of Video Programming, MB
Docket No. 14-16, Sixteenth Annual Report, 30 FCC Rcd 3253, 3256-59, ¶¶ 2-11 (2015) (“Sixteenth Annual
Report”).
146
See id. at 3261, ¶ 21, 3285-86, ¶¶ 74, 77, 3288, ¶ 81.
147
Overbuilders are generally defined as companies that build additional cable systems “over” one that already
exists and offer customers a competitive alternative. See Sixteenth Annual Report, 30 FCC Rcd at 3265 n.59.
148
The two largest telephone MVPDs are Verizon and AT&T. See generally id. at 3263-64, ¶ 27.
149
Linear television channels are streams of programming that offer video programs on a specific channel at a
specific time of day. See id. at 3260, ¶ 18; see also Promoting Innovation and Competition in the Provision of
Multichannel Video Programming Distribution Services, MB Docket No. 14-261, Notice of Proposed Rulemaking,
29 FCC Rcd 15995 (2014) (“MVPD Definition NPRM”) (seeking comment on a proposal to define “linear video” as
a “stream of video programming that is prescheduled by the programmer”).
150
Liberty Media-DIRECTV Order, 23 FCC Rcd at 3280, ¶ 30. We note that the Commission is currently seeking
comment on the interpretation of the statutory definition of “MVPD” and on whether that definition includes certain
Internet-based distributors of video programming. See MVPD Definition NPRM, 29 FCC Rcd 15995.
151
See Sixteenth Annual Report, 30 FCC Rcd at 3260-61, ¶¶ 19, 21.
Federal Communications Commission FCC 15-94
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access a selection of programming at a time of their choosing and on a variety of in-home and mobile,
Internet-connected devices.
152
56. Where capable, MVPDs may offer their subscribers such video services as part of a
bundle that may include Internet access/and or voice telephony.
153
Bundles are one way that MVPDs
attempt to differentiate their services from the services of their rivals.
154
These bundles are usually
offered at a discount to purchasing the parts of the bundle separately.
155
An MVPD that also has Internet
access facilities is able to offer a bundle (an “integrated bundle”).
156
Other MVPDs (such as DBS
providers) that do not have the facilities to provide bundles of services may enter into cooperative
agreements with telephone companies, cable operators, or satellite Internet providers so that they can
market bundles to their video subscribers (“synthetic bundles”).
157
57. Subscribers are increasingly buying video services as part of a bundle. From 2012 to
2013, revenues from bundles increased for several cable providers from a little more than 1 percent (Time
Warner Cable) to almost 10 percent (Charter).
158
152
See id. at 3260, ¶ 18, 3294-96, ¶¶ 95-100. In contrast to cable systems, DBS systems have less bandwidth and
use a one-way technology, which puts DBS at a disadvantage when it comes to providing two-way video services
like VOD. DIRECTV and DISH deliver some VOD content over broadband, which requires their subscribers to
also subscribe to a broadband service provided by a separate entity. Id. at 3300-01, ¶¶ 111-114; see Annual
Assessment of the Status of Competition in the Market for the Delivery of Video Programming, MB Docket No. 12-
203, Fifteenth Annual Report, 28 FCC Rcd 10496, 10546-57, ¶¶ 112-114 (2013) (“Fifteenth Annual Report”); see
also DIRECTV, SEC Form 10-K for the Year Ended Dec. 31, 2013, at 3 (“We also provide video-on-demand, or
VOD, by ‘pushing’ top-rated movies onto customers’ digital video recorders, or DVRs, for instant viewing, as well
as via broadband to our subscribers who have connected their set-top receiver to their broadband service.”);
Application, Declaration of Patrick T. Doyle, Executive Vice President and Chief Financial Officer, DIRECTV,
transmitted by letter from Maureen R. Jeffreys, Counsel for AT&T, to Marlene H. Dortch, Secretary, FCC, MB
Docket No. 14-90, ¶¶ 19-21 (filed June 11, 2014) (“Doyle Decl.”) (discussing the importance of a two-way
connection using broadband and the fact that DIRECTV’s ability to provide VOD services has been hampered by
the lack of such a connection).
153
Broadband Internet access service means a mass-market retail service by wire or radio that provides the
capability to transmit data to and receive data from all or substantially all Internet endpoints, including any
capabilities that are incidental to and enable the operation of the communications service, but excluding dial-up
Internet access service. Protecting and Promoting the Open Internet, GN Docket No. 14-28, Report and Order on
Remand, Declaratory Ruling, and Order, 30 FCC Rcd 5601, 5682, ¶ 187 (2015) (“2015 Open Internet Order”); see
also Sixteenth Annual Report, 30 FCC Rcd at 3372, ¶ 258 (“Access to high-speed data pipelines capable of
delivering a high quality video signal is critical for OVD entrants. In some offerings, OVDs require sufficient
Internet capacity to transmit their programming, and consumers need sufficient broadband service to access OVDs’
content.”) (citations omitted).
154
See Sixteenth Annual Report, 30 FCC Rcd at 3288, ¶ 81, 3297, ¶ 101.
155
See id. at 3288, ¶ 81.
156
Application, Declaration of Paul Guyardo, Executive Vice President and Chief Revenue and Marketing Officer,
DIRECTV, transmitted by letter from Maureen R. Jeffreys, Counsel for AT&T, to Marlene H. Dortch, Secretary,
FCC, MB Docket No. 14-90, ¶ 7 (filed June 11, 2014) (“Guyardo Decl.”); AT&T and DIRECTV, White Paper,
Additional Evidence that Video and Broadband are Complements, at 2, 26 (“Video and Broadband
Complementarity White Paper”), transmitted by letter from Maureen R. Jeffreys, Counsel for AT&T, to Marlene H.
Dortch, Secretary, FCC, MB Docket No. 14-90 (filed Nov. 12, 2014).
157
Guyardo Decl. ¶ 7; see also Sixteenth Annual Report, 30 FCC Rcd at 3261, ¶ 21 n.24, 3286, ¶ 77.
158
Time Warner Cable Inc., SEC Form 10-K for the Year Ended Dec. 31, 2013, at 39; Comcast Corp., SEC Form
10-K for the Year Ended Dec. 31, 2013, at 53; Charter Communications, Inc., SEC Form 10-K for the Year Ended
Dec. 31, 2013, at 40.
Federal Communications Commission FCC 15-94
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58. OVDs offer consumers choices that may either complement the consumer’s MVPD
services or compete directly with at least some of the services provided by MVPDs.
159
Most OVDs today
do not offer a substantial amount of the most popular video programming that is provided by MVPDs,
including live sports programming and local broadcast programming, nor do most OVDs offer bundles of
linear programming such as those offered by traditional MVPDs. The number and types of OVDs have
grown significantly over the last few years and include programmers, content producers and owners,
affiliates of online services, retailers, manufacturers, and MVPDs.
160
The types of services that OVDs
offer vary widely and include, but are not limited to, linear programming, on-demand programming, and
combinations of original programming and full length movies and television programs.
161
Further,
several online video services have been announced or launched recently that promise to offer access to
popular linear networks in a manner similar to MVPD services.
162
Consumers can access OVD services
through an Internet connection on their computers, tablets, and mobile wireless devices and, within the
last few years, using a range of devices that allow consumers to view OVD services on their
159
See Sixteenth Annual Report, 30 FCC Rcd at 3352-53, ¶ 215.
160
See id. at 3353-63, ¶¶ 216-235. Further, some devices that access OVDs, such as Roku and Amazon Fire TV,
function as aggregators. See id. at 3362, ¶ 233. It is difficult at this time to determine to what extent individual
OVDs have grown because rating/viewing information is non-standard and limited. See id. at 3365-66, ¶ 242.
However, Netflix publicly reports its subscriber and revenue figures for its online streaming service. Netflix had 20
million streaming subscribers in the United States at the end of 2011 and its subscribers increased to approximately
32 million at the end of 2013. Netflix, Inc., SEC Form 10-Q/A for the Quarterly Period Ended Sept. 30, 2012, at 3-
4; Netflix, Inc., SEC Form 10-K for the Year Ended Dec. 31, 2013, at 19.
161
See Application, “An Economic Assessment of AT&T’s Proposed Acquisition of DIRECTV,” Declaration of
Michael L. Katz, transmitted by letter from Maureen R. Jeffreys, Counsel for AT&T, to Marlene H. Dortch,
Secretary, FCC, MB Docket No. 14-90, ¶ 48 (filed June 11, 2014) (“Katz Decl.”). An example of a linear OVD is
Pluto.TV. See Pluto.TV, http://pluto.tv/ (visited June 18, 2015). An example of an OVD providing on-demand
programming is Hulu Plus, which includes programs that originally aired the previous day on broadcast and cable
television. See Hulu, http://www.hulu.com/tv (visited June 18, 2015). Examples of OVDs offering combinations of
original programming and full length movies and television shows are Netflix and Amazon. See Sixteenth Annual
Report, 30 FCC Rcd at 3359, ¶ 229, 3361-62, ¶ 232; Amazon.com, Inc., Amazon Original Series Alpha House and
Betas to Premier This Month (press release), Nov. 4, 2013, available at http://phx.corporate-
ir.net/phoenix.zhtml?c=176060&p=irol-newsArticle&ID=1871791 (visited June 15, 2015).
162
See, e.g., DISH Network Corp., Sling TV to Launch Live, Over-the-Top Service for $20 Per Month; Watch on
TVs, Tablets, Computers, Smartphones, Game Consoles (press release), Jan. 5, 2015, available at
http://about.dish.com/press-release/products-and-services/sling-tv-launch-live-over-top-service-20-month-watch-
tvs-tablets (visited June 18, 2015); Sony Corp., Sony Network Entertainment International and Sony Computer
Entertainment Unveil PlayStation
TM
Vue, A New Cloud-Based TV Service That Pioneers the Future of Television
(press release), Nov. 13, 2014, available at http://www.sony.com/en_us/SCA/company-news/press-releases/sony-
corporation-of-america/2014/sony-network-entertainment-international-and-sony-.html?icid=pr-newswire-feed
(visited June 24, 2015); Joe Flint, CBS Launches Online Subscription Video Service, WALL ST. J., Oct. 16, 2014,
available at http://www.wsj.com/articles/cbs-launches-online-subscription-video-service-1413465013 (visited June
18, 2015); Ryan Knutson, Verizon Eyes Digital Video Service by Mid-2015, WALL ST. J., Sept. 14, 2014, available
at http://www.wsj.com/articles/verizon-ceo-eyes-digital-video-service-by-mid-2015-1410467151 (visited June 18,
2015).
Federal Communications Commission FCC 15-94
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televisions.
163
Although the number of customers who are relying only on OVD services to access video
programming is growing, it is still a small fraction of the consumers purchasing video services.
164
VIII. INCREASED MARKET CONCENTRATION IN VIDEO DISTRIBUTION SERVICES
59. AT&T and DIRECTV both provide MVPD service to consumers in the United States.
AT&T offers MVPD service under its U-verse brand within portions of its 22-state wireline footprint,
while DIRECTV offers direct-to-home satellite digital television service to consumers nationwide.
165
The
record includes concerns raised by commenters that the transaction reduces the number of competitors
that provide MVPD services and, as a result, harms competition for distribution of video programming.
60. In many geographic areas, the combination of AT&T and DIRECTV would result in the
loss of an MVPD and provider of bundled video and broadband services. The Applicants maintain that
this geographic overlap is minimal.
166
In addition, the Applicants allege that even within those areas
where both AT&T and DIRECTV offer video service, consumers would continue to have numerous
competitive video options following the transaction.
167
The Applicants contend that the current
combination of Internet broadband and video offered by AT&T and DIRECTV in collaboration is a
synthetic bundle and inferior to the integrated bundle that AT&T and cable providers each offer
independently.
168
163
See Sixteenth Annual Report, 30 FCC Rcd at 3353-59, ¶¶ 217-228; Katz Decl. ¶ 45; Matt Burnes, Google
Launches the $35 Chromecast Streaming Device to Bring Chrome to the Living Room, TECHCRUNCH, July 24, 2013,
available at http://techcrunch.com/2013/07/24/google-chromecast/ (visited June 18, 2015); Molly Wood, Where the
Amazon Fire TV Fits Into the Living Room, N.Y. TIMES, April 2, 2014, available at
http://bits.blogs.nytimes.com/2014/04/02/where-the-amazon-fire-tv-fits-into-the-living-room/?_r=0 (visited June 18,
2015).
164
See, e.g., Number of Cable “Cord Cutters” Continues to Rise, RT, April 19, 2014, available at
http://rt.com/usa/cable-cutters-flock-netflix-hulu-532/ (visited June 18, 2015) (citing a study published by Experian
Marketing Service and stating that from 2010 to 2013 the number of customers, with high-speed Internet access,
who have never subscribed to cable (“cord nevers”) or stopped subscribing (“cord cutters”) increased by 44 percent
from 5.1 to 7.6 million households). In contrast there are approximately 101 million MVPD subscribers. See
Sixteenth Annual Report, 30 FCC Rcd at 3256, ¶ 2.
165
See Application at 10, 13.
166
See id. at 53, 68; see also Comments of the Free State Foundation, MB Docket 14-90, at 20 (filed Sept. 16, 2014)
(“Free State Comments”).
167
See Application at 72-79. But see Petition to Deny of Free Press, MB Docket 14-90, at 16-19 (filed Sept. 16,
2014) (“Free Press Petition”) (arguing that the Applicants overstate the level of local MVPD competition when the
Applicants point to: (1) Google Fiber, which has extremely limited coverage; (2) overbuilders, without providing
any evidence of the extent of competition from overbuilders; and (3) OVD services, which rely on a broadband
connection such as that provided by AT&T and which are not in the same product market as MVPD services).
168
Application, Declaration of Lori M. Lee, Senior Executive Vice President – Home Solutions, AT&T, transmitted
by letter from Maureen R. Jeffreys, Counsel for AT&T, to Marlene H. Dortch, Secretary, FCC, MB Docket No. 14-
90, ¶¶ 4, 53-58 (filed June 11, 2014) (“Lee Decl.”); see also Application at 20, 52; Doyle Decl. ¶¶ 24-25; Guyardo
Decl. ¶¶ 7, 21, 41-45; Katz Decl. ¶¶ 26-27, 29-32, 68-71, 97-106; Application, Declaration of John T. Stankey,
Group President and Chief Strategy Officer, AT&T, transmitted by letter from Maureen R. Jeffreys, Counsel for
AT&T, to Marlene H. Dortch, Secretary, FCC, MB Docket No. 14-90, ¶¶ 26-29 (filed June 11, 2014) (“Stankey
Decl.”); AT&T and DIRECTV, White Paper, Why the “Double Moral Hazard” Problem Cannot be Resolved by
Contract, at 17-19 (“Double Moral Hazard White Paper”), transmitted by letter from Maureen R. Jeffreys, Counsel
for AT&T, to Marlene H. Dortch, Secretary, FCC, MB Docket No. 14-90 (filed Nov. 12, 2014). The Applicants
also note that competition “for video/broadband bundles occurs primarily between the competitors offering
integrated bundles.” Application at 57-62.
Federal Communications Commission FCC 15-94
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61. The Applicants also explain that AT&T’s primary business is its broadband product and
bundled services.
169
Thus AT&T views cable providers, not DIRECTV, as its closest competitors.
170
The
Applicants assert that DIRECTV focuses on its standalone video product, which AT&T views as a
complement to AT&T’s broadband offering.
171
62. Several commenters express concern that the transaction would result in the loss of a
video provider competitor in the areas where AT&T currently offers video service.
172
Free Press and
Writers Guild of America, West, Inc. (“WGAW”) also argue that the transaction would harm consumers
by reducing the Applicants’ incentives to invest more in direct competition through expanded and
improved broadband access, as well as by foreclosing innovation in MVPD services.
173
Free Press
challenges the Applicants’ assertion that several competitive options would remain for standalone video
customers post-transaction.
174
63. In contrast, Communications Workers of America (“CWA”) and the Free State
Foundation (“Free State”) contend the transaction raises few antitrust concerns, noting that the transaction
is primarily a non-horizontal merger of complementary services.
175
Free State argues the transaction
would potentially benefit consumers by expanding consumer choice for broadband and MVPD
services.
176
Further, Free State contends that AT&T and DIRECTV combined would have only 24
percent of the national market for video subscribers.
177
64. To analyze these concerns about the loss of competition between AT&T and DIRECTV,
we first consider the relevant product and geographic market definitions for the proposed transaction and
evaluate any resulting concentration, and then we turn to a direct estimate of the competitive effects of the
transaction.
169
Application at 52-53.
170
Id. at 56-58.
171
See id. at 7-8, 57, 69-71; see also AT&T and DIRECTV, White Paper, Additional Evidence that AT&T and
DIRECTV are not Particularly Close Substitutes, at 2, 18-39 (“Competition White Paper”), transmitted by letter
from Maureen R. Jeffreys, Counsel for AT&T, to Marlene H. Dortch, Secretary, FCC, MB Docket No. 14-90 (filed
Nov. 12, 2014).
172
See, e.g., Free Press Petition at 6-19; Petition to Deny of Public Knowledge and Institute for Local Self-Reliance,
MB Docket 14-90, at 5-8 (filed Sept. 16, 2014) (“Public Knowledge-ILSR Petition”); MCPC Comments at 19-21;
Comments of Senator Al Franken, MB Docket 14-90, at 7 (filed Sept. 16, 2014) (“Franken Comments”); Petition to
Condition Consent of Cox Communications, Inc., MB Docket 14-90, at 3 (filed Sept. 16, 2014) (“Cox Petition”);
Comments of National Association of Broadcasters, MB Docket 14-90, at 2-3 (filed Sept. 16, 2014) (“NAB
Comments”); Joint Petition to Deny of the Alliance for Community Media, the Alliance for Communications
Democracy, and Common Cause, MB Docket 14-90, at 5-8 (filed Sept. 16, 2014) (“ACM et al. Petition”); Reply
Comments of the Alliance for Community Media, the Alliance for Communications Democracy, and Common
Cause, MB Docket 14-90, at 1-2 (filed Jan. 7, 2015) (“ACM et al. Reply”); Petition to Deny of Writers Guild of
America, West, Inc., MB Docket 14-90, at 4, 9 (filed Sept. 16, 2014) (“WGAW Petition”); Reply Comments of
Writers Guild of America, West, Inc. to Opposition, MB Docket 14-90, at 3-5 (filed Jan. 7, 2015) (“WGAW
Reply”).
173
Free Press Petition at 6-7; WGAW Petition at 14-19.
174
Free Press Petition at 16-19.
175
Comments of Communications Workers of America, MB Docket 14-90, at 14-15 (filed Sept. 16, 2014) (“CWA
Comments”); Free State Comments at 20-22.
176
Free State Comments at 16-17.
177
Id. at 21-22.
Federal Communications Commission FCC 15-94
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Product Market
65. We consider the relevant product market consistent with Commission precedent and the
analytical framework and principles outlined by the 2010 DOJ/FTC Horizontal Merger Guidelines.
178
In
previous transactions involving video providers, the Commission defined the relevant product market as
“multichannel video programming service” as offered by all MVPDs.
179
66. Positions of the Parties. Several commenters argue that there is growing competition to
MVPDs from online video.
180
The Applicants note that online video offerings have grown exponentially
and are becoming formidable alternatives to MVPD services.
181
The Applicants further argue that
although online video services have been considered complementary to traditional MVPD service, OVDs
are becoming increasingly important competitors.
182
As a result, the Applicants assert that traditional
MVPDs are adjusting product offerings and marketing strategies in response to the mounting competition
from these online video services.
183
67. Free Press dismisses claims that online video services are substitutes for MVPD service
and argues that OVD services should not be included in the same product market as MVPD service.
184
As
support for its position, Free Press claims that only a small number of consumers leave MVPD services
for online video service and that, despite the expansion of online video offerings, the MVPD market
continues to increase in both subscribers and profits.
185
68. Discussion. Consistent with Commission findings in prior transactions, we conclude that
the relevant product market for evaluating the record on market concentration is “multichannel video
programming service” as offered by all MVPDs.
186
Consistent with the Commission’s decision in the
178
DOJ and the Federal Trade Commission (“FTC”) Horizontal Merger Guidelines define the relevant product
market as the smallest group of competing products for which a hypothetical monopoly provider of the products
could profitably impose at least a “small but significant and non-transitory price increase,” presuming no change in
the terms of sale of other products. U.S. Department of Justice and the Federal Trade Commission Horizontal
Merger Guidelines, August 19, 2010, § 4.1.1 at 9 (“2010 DOJ/FTC Horizontal Merger Guidelines”). In other
words, when one product is a reasonable substitute for the other in the eyes of a sufficiently large number of
consumers, it is included in the relevant product market even though the products themselves are not identical.
Thus, the relevant product market includes all products “reasonably interchangeable by consumers for the same
purposes.” United States v. E.I. du Pont de Nemours & Co., 351 U.S. 377, 395 (1956); see also United States v.
Microsoft Corp., 253 F.3d 34, 52 (D.C. Cir. 2001), cert. denied, 122 S. Ct. 350 (2001) (“[T]he relevant market must
include all products ‘reasonably interchangeable by consumers for the same purposes.’” (quoting E.I. du Pont de
Nemours, 351 U.S. at 395)).
179
See Comcast-NBCU Order, 26 FCC Rcd at 4255-56, ¶ 40; Liberty Media-DIRECTV Order, 23 FCC Rcd at 3280-
81, ¶ 31; Adelphia Order, 21 FCC Rcd at 8235, ¶ 63; News Corp.-Hughes Order, 19 FCC Rcd at 501, ¶ 53.
180
See, e.g., Comments of Netflix, Inc., MB Docket 14-90, at 12-13 (filed Sept. 16, 2014) (“Netflix Comments”);
Comments of Cogent Communications Group, Inc., MB Docket 14-90, at 2, 9-10 (filed Sept. 16, 2014) (“Cogent
Comments”); Franken Comments at 1-2; WGAW Petition at 14-15, 18-20; WGAW Reply at 14-16, 24.
181
Application at 75-76; Katz Decl. ¶¶ 45-54.
182
Katz Decl. ¶¶ 50, 52-54.
183
Application at 76-79; Katz Decl. ¶¶ 50-51; see also WGAW Petition at 14-15, 18, 20; WGAW Reply at 14-16,
24 (agreeing that OVD services are complementary to MVPD services, but stating that OVDs are increasingly
becoming more viable alternatives to MVPD services).
184
Free Press Petition at 16-19. Free Press asserts that online video can be accessed only through a broadband
connection available from a facilities-based broadband provider, such as AT&T, and that, as a result, the future
viability of online video competition is in doubt. Id. at 17.
185
Id. at 19.
186
See Comcast-NBCU Order, 26 FCC Rcd at 4255-56, ¶ 40; Liberty Media-DIRECTV Order, 23 FCC Rcd at 3280-
81, ¶ 31; Adelphia Order, 21 FCC Rcd at 8235, ¶ 63; News Corp.-Hughes Order, 19 FCC Rcd at 501, ¶ 53.
Federal Communications Commission FCC 15-94
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Comcast-NBCU Order, we find that, for most consumers today, OVD services are not substitutes for
MVPD services.
187
Rather, as we note in our description of current industry conditions discussed
above,
188
OVDs typically offer consumers choices that may either complement their MVPD services or
compete with some portion of the services MVPDs offer, such as VOD. Indeed, despite the increased
number of OVDs and increased use by consumers of OVD services, we do not have evidence on the
record that any OVD would be, in the near term, a disciplining force if the combined entity were to
increase price or decrease quality. However, given the development of additional and new OVD services
and the proliferation of new technologies and devices that allow consumers to view video programming
sold by OVDs on their computers, phones, and televisions,
189
we acknowledge that OVDs have the
potential to become substitutes for MVPD services with a market presence that is sufficient to counter
effectively an increase in price or decrease in quality by the combined entity.
190
Therefore, as we analyze
the competitive effects of the transaction, we consider any potential competitive harms that may arise
from the transaction that would delay or minimize entry of OVDs into the market.
Geographic Market
69. We consider the relevant geographic market consistent with Commission precedent and
the analytical framework and principles outlined by the 2010 DOJ/FTC Horizontal Merger Guidelines.
191
In previous transactions, the Commission defined the relevant market as local.
192
187
See Comcast-NBCU Order, 26 FCC Rcd at 4269, ¶ 79; see also United States v. Microsoft, 253 F.3d at 52-54
(excluding “middleware” software from the definition of the relevant product market because of its present non-
interchangeability with Windows, notwithstanding its long-term future potential). In the Comcast-NBCU Order, the
Commission found that instances of consumers replacing MVPD services with OVD services were “relatively
infrequent.” Comcast-NBCU Order, 26 FCC Rcd at 4269, ¶ 79. Consumers may choose to cancel their MVPD
service (“cord cutters”), reduce their MVPD spending (“cord shavers”), or forego subscribing to an MVPD service
in the first place (“cord nevers”). While observers differ on the degree to which these behaviors are occurring today,
estimates continue to be relatively small. See Sixteenth Annual Report, 30 FCC Rcd at 3395-97, ¶¶ 301-304.
Moreover, the vast majority of consumers who watch video programming from OVDs also subscribe to an MVPD
video service, indicating that consumers consider the services to be complements, rather than substitutes. Sixteenth
Annual Report, 30 FCC Rcd at 3289, ¶ 84, 3352-53, ¶ 215; see also Fifteenth Annual Report, 28 FCC Rcd at 10557-
58, ¶ 132 (noting that Netflix, the largest online video subscription service, has reported that the overwhelming
majority of its subscribers also subscribe to an MVPD service and view the products as complementary).
188
See supra ¶ 58.
189
See supra ¶ 58.
190
We note further that the Commission is currently seeking comment on the interpretation of the statutory
definition of “MVPD” and on whether that definition includes certain Internet-based distributors of video
programming. See MVPD Definition NPRM, 29 FCC Rcd 15995. As the Commission has stated, however, that
proceeding will not define or opine on which services or providers are in the same relevant product market as a
service designated as an MVPD. Id. at 16002, ¶ 15 n.33.
191
See, e.g., Comcast-NBCU Order, 26 FCC Rcd at 4256-57, ¶ 42; Liberty Media-DIRECTV Order, 23 FCC Rcd at
3281, ¶ 32; Adelphia Order, 21 FCC Rcd at 8235-36, ¶ 64; News Corp.-Hughes Order, 19 FCC Rcd at 505, ¶ 62;
EchoStar-DIRECTV HDO, 17 FCC Rcd at 20610, ¶ 119. The 2010 DOJ/FTC Horizontal Merger Guidelines define
a relevant geographic market as the region where a hypothetical monopolist that is the only producer of the relevant
product in the region could profitably impose at least a “small but significant and non-transitory” increase in the
price of the relevant product, assuming that the prices of all products provided elsewhere do not change. See 2010
DOJ/FTC Horizontal Merger Guidelines § 4.2.1 at 13. In cases where price discrimination based on customer
location is feasible, the 2010 DOJ/FTC Horizontal Merger Guidelines state that geographic markets may be defined
based on the locations of customers, rather than the locations of suppliers. Id. § 4.2.2 at 14-15.
192
See, e.g., Comcast-NBCU Order, 26 FCC Rcd at 4256-57, ¶ 42; Liberty Media-DIRECTV Order, 23 FCC Rcd at
3281, ¶ 32; Adelphia Order, 21 FCC Rcd at 8235-36, ¶ 64; News Corp.-Hughes Order, 19 FCC Rcd at 505, ¶ 62;
EchoStar-DIRECTV HDO, 17 FCC Rcd at 20610, ¶ 119.
Federal Communications Commission FCC 15-94
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70. Positions of the Parties. Free Press, Public Knowledge and Institute for Local Self-
Reliance (“Public Knowledge-ILSR”), and WGAW argue that the relevant geographic market for this
transaction is local for MVPD services.
193
Free Press also contends that the appropriate geographic
market is smaller than the Designated Market Area (“DMA”)
194
level,
195
which the Commission has used
to identify local markets in prior transactions.
196
Free Press argues that analysis of the transaction at the
DMA level understates the competitive effect of the instant transaction because U-verse video typically is
not offered throughout an entire DMA; rather AT&T typically serves only portions of certain DMAs.
197
71. Discussion. Consistent with past practice and the record before us, for the purposes of
analyzing market concentration issues raised by commenters in the record, we define the relevant
geographic market as a local market where consumers face similar choices for MVPD services.
Consumers make decisions based on the MVPD services available to them at their residences, as they are
unlikely to move in order to change providers.
198
In previous transactions involving MVPDs, the
Commission defined the relevant geographic market for MVPD services as the franchise area of the local
cable operator.
199
In this transaction, neither Applicant is tied to traditional cable franchise areas.
DIRECTV’s satellite network has a nationwide footprint. AT&T’s U-verse video service is available in
discrete geographic areas and overlaps areas served by incumbent cable operators, but unlike such cable
providers, AT&T is not registered with the Commission as a cable system and therefore does not serve
prescribed franchise areas.
200
Accordingly, we do not find the franchise area of the local cable operator to
be a useful approximation of the local market for the purposes of evaluating market concentration that
may result from this transaction. Moreover, our analysis and the record evidence confirm that AT&T
does not serve entire DMAs and indeed faces different competitors in different parts of any given
DMA.
201
Therefore, a DMA is not the ideal geographic area for analyzing changes in concentration that
result from this transaction. We find that for this transaction the relevant local geographic area is where
193
Free Press Petition at 9-16; Public Knowledge-ILSR Petition at 5-6; WGAW Reply at 4-5.
194
A DMA is a Nielsen-defined television market consisting of a unique group of counties. The United States is
divided into 210 DMA markets. Nielsen identifies television markets by placing each U.S. county (except for
certain counties in Alaska) in a market based on measured viewing patterns and by MVPD distribution. See
Sixteenth Annual Report, 30 FCC Rcd at 3274-75, ¶ 45 n.122.
195
Free Press Petition at 9-11, 14-16.
196
See, e.g., News Corp.-Hughes Order, 19 FCC Rcd at 506, ¶ 65 (“[W]e conclude that in the case of broadcast
television programming, it is reasonable to use DMAs to define the relevant geographic market for each individual
broadcast station.”).
197
Free Press Petition at 9-11, 14-16.
198
See, e.g., Comcast-NBCU Order, 26 FCC Rcd at 4256-57, ¶ 42; Liberty Media-DIRECTV Order, 23 FCC Rcd at
3281, ¶ 32; Adelphia Order, 21 FCC Rcd at 8235-36, ¶ 64; News Corp.-Hughes Order, 19 FCC Rcd at 505, ¶ 62;
EchoStar-DIRECTV HDO, 17 FCC Rcd at 20610, ¶ 119.
199
See, e.g., id.
200
See Sixteenth Annual Report, 30 FCC Rcd at 3263-64, ¶ 27; Fifteenth Annual Report, 28 FCC Rcd at 10507, ¶
28. A majority of AT&T’s U-verse video footprint falls within the states that have statewide video franchising laws.
Compare Fifteenth Annual Report, 28 FCC Rcd at 10516-17, ¶ 41 n.100 and Sixteenth Annual Report, 30 FCC Rcd
at 3270, ¶ 36 n.90 (identifying states that had adopted statewide video franchising laws), with AT&T Response to
Sept. 9, 2014, Information Request, Exhibit 5.a.1 (identifying DMAs in which AT&T provides MVPD service).
201
There are [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] DMAs in which the U-verse
footprint covers [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] . See AT&T Response to
Sept. 9, 2014, Information Request, Exhibit 5.a.1; SNL Kagan, 2014Q3 TV Household (Projections), January 2015
(“SNL Kagan 2014Q3 TV Household Projections”).
Federal Communications Commission FCC 15-94
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AT&T has deployed its U-verse network and customers have similar choices of MVPD providers.
202
We
rely on county level data as a proxy of these local areas because, of the data that are available to the
Commission, county data offer a reasonable approximation.
Market Participants
72. Positions of the Parties. The Applicants claim that, in addition to traditional MVPDs,
other sources of video competition continue to emerge, primarily OVDs.
203
Free Press argues the
Applicants overstate the level of local MVPD competition from online video services.
204
As noted above,
Free Press dismisses the Applicants’ claim that online video services are substitutes for MVPD service.
205
73. Discussion. Within the relevant product market of multichannel video programming
service distributed by MVPDs, we conclude that the market participants are cable operators, DBS
providers, telephone MVPDs, and overbuilders.
206
The record indicates that the primary providers of
MVPD services in the vast majority of the U-verse video footprint are the two DBS operators, DIRECTV
and DISH, and an incumbent franchised cable operator.
207
In portions of the U-verse video footprint, a
cable overbuilder or other wireline provider may also offer MVPD service.
208
We find that these other
MVPDs compete in at least some relevant geographic markets. As discussed above, for the purposes of
evaluating the record related to market concentration, we do not include OVDs in the market, but
recognize that they are growing in competitive importance.
209
We also note that there is no evidence in
the record that suggests there are other MVPDs that would likely enter the market and obtain sufficient
share to counteract the competitive effects of the transaction.
210
While entry may be possible, we find that
there appear to be several significant barriers to rapid entry in the MVPD market.
211
Increase in Concentration
74. Concentration in the relevant markets can be one indicator of the likely competitive
effects of a proposed merger. Consistent with Commission precedent, as well as the 2010 DOJ/FTC
Horizontal Merger Guidelines, in order to respond to comments filed in this proceeding, we examine the
202
The Applicants’ merger simulation, discussed in our competitive effects analysis, Section IX.A.5, relies on a
DMA-level analysis, and so we rely on DMAs when analyzing that economic data.
203
Application at 74-79.
204
Free Press Petition at 17-19.
205
Id.
206
See supra ¶¶ 55, 68.
207
Application at 72-73.
208
Id. at 73-74. For example, AT&T states that it faces competition from Grande Communications in Texas and
RCN in New York and Chicago. Id. at 73-74 n.262.
209
See supra ¶ 68.
210
The 2010 DOJ/FTC Horizontal Merger Guidelines include as market participants firms that are considered
“rapid entrants.” Rapid entrants are firms that are not current producers in a relevant market but that are very likely
to provide a rapid response to a price increase as a result of a merger, without incurring significant sunk costs. 2010
DOJ/FTC Horizontal Merger Guidelines § 5.1 at 15-16.
211
See, e.g., Sixteenth Annual Report, 30 FCC Rcd at 3269-83, ¶¶ 35-64 (discussing entry conditions for MVPDs).
See also AT&T Response to Sept. 9, 2014, Information Request at 115-120; MVPD Definition NPRM, 29 FCC Rcd
15995.
Federal Communications Commission FCC 15-94
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post-transaction market concentration and the change in market concentration that is likely to result from
the transaction.
212
75. Market concentration is often measured by the Herfindahl-Hirschman Index (“HHI”).
213
Under the 2010 DOJ/FTC Horizontal Merger Guidelines, the DOJ and Federal Trade Commission
(“FTC”) consider a market with an HHI that exceeds 2,500 to be “Highly Concentrated.”
214
Moreover,
the 2010 DOJ/FTC Horizontal Merger Guidelines indicate that a merger resulting in a Highly
Concentrated market (i.e., a post-merger HHI that exceeds 2,500) and producing an increase in the HHI of
more than 200 points “will be presumed to be likely to enhance market power.”
215
“The presumption may
be rebutted by persuasive evidence showing that the merger is unlikely to enhance market power.”
216
However, market concentration measures are the beginning, not the end, of the competitive analysis.
217
76. Positions of the Parties. Free Press and Public Knowledge-ILSR argue that the proposed
transaction would harm video consumers in the geographic areas where AT&T’s U-verse video product
and DIRECTV’s satellite video service overlap by increasing concentration well beyond levels that raise
antitrust concerns.
218
They claim that the proposed transaction would violate the presumption articulated
in the 2010 DOJ/FTC Horizontal Merger Guidelines in 64 DMAs, where approximately 99 percent of
AT&T’s video subscribers and half of the U.S. population reside, with an average HHI increase of 450
points and an average HHI above 3,300.
219
Furthermore, Free Press contends that an HHI analysis at the
DMA level understates the competitive effect of the proposed transaction because U-verse video is not
offered throughout an entire DMA that AT&T serves.
220
Free Press claims that when the scope of review
212
See EchoStar-DIRECTV HDO, 17 FCC Rcd at 20614, ¶ 133; 2010 DOJ/FTC Horizontal Merger Guidelines §
5.3 at 18 (“In evaluating market concentration, the Agencies consider both the post-merger level of market
concentration and the change in concentration resulting from a merger.”).
213
The HHI is calculated as the sum of the squares of the market shares of each firm participating in a relevant
market. The HHI can range from nearly zero in the case of an atomistic market to 10,000 in the case of a pure
monopoly. Because the HHI is based on the squares of the market shares of the participants, it gives proportionately
greater weight to market participants with larger market shares. Changes in market concentration are measured by
the change in the HHI. See 2010 DOJ/FTC Horizontal Merger Guidelines § 5.3 at 18-19. To assess whether the
increase in horizontal market concentration is significant or not, we consider the absolute level of the post-
transaction HHI, a widely utilized measure of market concentration, as well as the change in the HHI. See infra ¶¶
78-81.
214
2010 DOJ/FTC Horizontal Merger Guidelines § 5.3 at 19.
215
Id.
216
Id.
217
See, e.g., WorldCom-MCI Order, 13 FCC Rcd at 18049-50, 18100-01, ¶¶ 39, 135 (stating that an HHI analysis
alone is not conclusive, but it provides guidance on potential anticompetitive effects of a merger); see also 2010
DOJ/FTC Horizontal Merger Guidelines § 5.3 at 18 (“Market shares may not fully reflect the competitive
significance of firms in the market or the impact of a merger. They are used in conjunction with other evidence of
competitive effects.”). Such measures may potentially identify mergers that may raise competitive concerns and,
therefore, warrant more in-depth analysis of the potential anticompetitive effects. 2010 DOJ/FTC Horizontal
Merger Guidelines § 5.3 at 18-19.
218
Free Press Petition at 6; Public Knowledge-ILSR Petition at 5-6; see also WGAW Reply at 8 (citing the
arguments made by Free Press and Public Knowledge-ILSR).
219
Free Press Petition at 9-14; see also Public Knowledge-ILSR Petition at 5-6. Free Press asserts that in 61 DMAs,
the transaction would increase the market’s HHI value by more than 200 points and result in a post-transaction HHI
above 2,500. In the remaining three DMAs, the HHI would increase by between 100 and 200 points, resulting in a
post-transaction HHI above 2,500. Free Press Petition at 12-13 n.23.
220
Free Press Petition at 9-11, 14-15.
Federal Communications Commission FCC 15-94
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is narrowed to just the U-verse footprint, the HHI increases to nearly 4,000.
221
Free Press argues that for
almost a quarter of the country, the proposed transaction would reduce the number of pay-TV competitors
from four to three and the level of market concentration post-transaction would be higher in this case than
after consummation of AT&T’s bid for T-Mobile USA, Inc. (“T-Mobile”) in 2011, which the DOJ filed
suit to block.
222
77. The Applicants state that opponents have not provided any evidence to rebut the
economic evidence that they have submitted; instead, opponents rely only on “primitive” HHI
concentration calculations using MVPD market shares.
223
The Applicants dismiss these calculations,
noting that market shares and HHI calculations are merely a starting point for any competitive analysis
224
and cannot overcome the Applicants’ detailed econometric analyses submitted in the record.
225
Additionally, because this transaction involves complementary products, the Applicants argue that an
MVPD concentration analysis does not accurately predict the competitive effects of the transaction.
226
Instead, the Applicants argue that the transaction necessitates a more in-depth analysis to predict whether
the transaction would harm consumers.
227
78. Discussion. As our analysis below indicates, using the thresholds from the 2010
DOJ/FTC Horizontal Merger Guidelines, we find that 58 DMAs and 1,109 counties meet the Highly
Concentrated definition.
228
However, as noted in previous Commission Orders as well as the 2010
DOJ/FTC Horizontal Merger Guidelines, calculations of market concentration measures may not fully
reflect the competitive significance of the merging firms or the impact of the transaction. Thus, HHIs are
often used in conjunction with other analyses to evaluate potential anticompetitive harms of a merger and
we consider them here.
229
221
Id. at 15. Free Press’s calculations are based on local geographies within U-verse’s footprint that are smaller than
the DMA, but larger than the household level. However, Free Press clarifies that this local geography is not
referring to specific local franchise areas. Id. at 15 n.24.
222
Id. at 15-16. In 2011, DOJ filed an antitrust lawsuit to block the merger of AT&T and T-Mobile. Complaint,
United States v. AT&T, Inc., No. 1:11-cv-01560 (D.D.C. filed Aug. 31, 2011), available at
http://www.justice.gov/sites/default/files/opa/legacy/2011/08/31/Justice-ATT-TMobile-Complaint.pdf (visited June
24, 2015).
223
Joint Opposition at 28-30; Joint Opposition, “An Economic Assessment of AT&T’s Proposed Acquisition of
DIRECTV,” Reply Declaration of Michael L. Katz, transmitted by letter from Maureen R. Jeffreys, Counsel for
AT&T, to Marlene H. Dortch, Secretary, FCC, MB Docket No. 14-90, ¶¶ 51, 59 (filed Oct. 16, 2014) (“Katz Reply
Decl.”).
224
Joint Opposition at 28-29.
225
Id. at 30 (citing Katz Reply Decl. ¶¶ 52-59).
226
Id. at 29-30.
227
Id. at 30-31.
228
We note that Free Press uses DMA-level data to calculate market concentration. See Free Press Petition at 11-14.
Accordingly, to more accurately compare our calculations with those of Free Press, we find it appropriate to begin
our initial HHI analysis by using DMA-level data. In the second part of our analysis, we use county-level data,
which reflect the relevant geographic market defined for this transaction. In addition, our analysis of the economic
data considers DMA-level data because the Applicants used a DMA-level analysis in the merger simulations
submitted in the record. See Appendix C, Analysis of Merger Simulation Models, ¶ 9 (“Appendix C”).
229
2010 DOJ/FTC Horizontal Merger Guidelines § 5.3 at 18. See also Applications of GCI Communication Corp.,
ACS Wireless License Sub, Inc., ACS of Anchorage License Sub, Inc., And Unicom, Inc. for Consent To Assign
Licenses To The Alaska Wireless Network, LLC, WT Docket No. 12-187, Memorandum Opinion and Order and
Declaratory Ruling, 28 FCC Rcd 10433, 10450-51, ¶¶ 42-43 (2013) (conducting a two-part analysis, an initial
screen using HHI and a case-by-case market analysis, to determine the competitive effects of a proposed joint
venture of two wireless providers); Applications of AT&T Inc. and Cellco Partnership d/b/a/ Verizon Wireless, WT
(continued….)
Federal Communications Commission FCC 15-94
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79. Using data available to the Commission, we are able to calculate
230
the post-transaction
HHI and the change in the HHI for 74 DMAs within the U-verse video footprint.
231
Under the thresholds
from the 2010 DOJ/FTC Horizontal Merger Guidelines, 58 of the 74 DMAs meet the Highly
Concentrated definition.
232
80. However, as discussed above, because AT&T often offers service to only part of a DMA,
a DMA is too large a geographic market in which to measure market concentration. Accordingly, we rely
on county level data, which is a reasonable approximation of the local geographic market. According to
our analysis, AT&T’s U-verse network covers at least part of 1,159 counties in parts of 74 DMAs.
233
The
post-transaction HHI for these counties ranges from 1,971 to 7,827 and the change in the HHI ranges
from 0.362 to 3,745.
234
There are 1,109 counties that meet the Highly Concentrated definition.
235
81. Our analysis indicates that the proposed transaction would increase concentration in the
video distribution market in certain geographic areas affecting 24 percent of U.S. households.
236
(Continued from previous page)
Docket No. 09-104, Memorandum Opinion and Order, 25 FCC Rcd 8704, 8724-27, ¶¶ 42-48 (2010) (“AT&T-
Verizon Wireless Order”) (similarly conducting a two-part analysis, an initial screen using HHI and a case-by-case
market analysis, to determine the competitive effects of the proposed transaction).
230
To calculate market share in DMAs and in the counties within those DMAs, we utilized data from SNL Kagan’s
MediaCensus. MediaCensus provides subscriber data for third-party information, and it is commonly used by the
Commission and outside parties for media analysis. Therefore, we find it reasonable to rely on data from
MediaCensus for our analysis herein.
231
The HHI for these DMAs range from 1,811 to 4,705, and the change in the HHI ranges from 0.46 to 1,019. To
identify DMAs within the U-verse video footprint, we relied on data submitted by the Applicants. See AT&T
Response to Sept. 9, 2014, Information Request, Exhibit 5.a.1. To conduct the HHI analysis, we retrieved
subscriber counts for all U.S. video providers on a DMA level using MediaCensus for the DMAs AT&T identified
as being within the U-verse video footprint. We aggregated the total video subscribers on a DMA level by adding
the subscriber counts per provider in each unique DMA. We then calculated individual provider market share by
dividing each provider’s subscriber count, for each market, by the total DMA video subscriber count. According to
the Applicants, AT&T video’s service overlaps with DIRECTV’s in 77 DMAs. See AT&T Response to Sept. 9,
2014, Information Request, Exhibit 5.a.1. MediaCensus did not report any U-verse subscriber projections for
[BEGIN CONF. INFO.] [END CONF. INFO.] . However, our analysis finds that the number of homes passed by
U-verse video in these DMAs is negligible and that AT&T no longer provides U-verse service in the Hartford-New
Haven, CT, DMA. Therefore, our findings are consistent with MediaCensus’s report of no U-verse subscriber
projections in these DMAs. See AT&T Response to Sept. 9, 2014, Information Request, Exhibit 5.a.1; SNL Kagan
2014Q3 TV Household Projections; AT&T Inc., AT&T Services, AT&T U-verse, Availability, U-Verse in
Connecticut, http://www.att-services.net/att-u-verse/availability/uverse-connecticut.html (visited June 18, 2015)
(noting that effective Oct. 25, 2014, the state of Connecticut is no longer part of the AT&T local service territory).
Accordingly, our analysis utilizes data for 74 DMAs and excludes the three DMAs for which MediaCensus did not
have U-verse subscriber projections. SNL Kagan, MediaCensus (Projections) 2014Q3, January 2015
(“MediaCensus 2014Q3”).
232
See MediaCensus 2014Q3. See also 2010 DOJ/FTC Horizontal Merger Guidelines § 5.3 at 19.
233
See MediaCensus 2014Q3. To conduct the HHI analysis at the county level, we retrieved subscriber counts for
all U.S. video providers on a county level using MediaCensus. We aggregated the total video subscribers on a
county level by adding the subscriber counts per provider in each unique county. We then calculated individual
provider market share by dividing each provider’s subscriber count, for each county, by the total county video
subscriber count. We analyzed only the same 74 DMAs previously used in our HHI DMA analysis above. See
supra n.231.
234
See MediaCensus 2014Q3.
235
See id.; see also 2010 DOJ/FTC Horizontal Merger Guidelines § 5.3 at 19.
236
See SNL Kagan, MediaCensus (Projections) 2014Q4, April 2015 (“MediaCensus 2014Q4”); Letter from
Maureen R. Jeffreys, Counsel for AT&T, to Marlene H. Dortch, Secretary, FCC, MB Docket No. 14-90, Attachment
(continued….)
Federal Communications Commission FCC 15-94
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However, given the complexities of the video services industry and the evidence in the record, in the
subsequent section we analyze the competitive effects of the transaction using economic analysis and
other record evidence.
IX. HORIZONTAL EFFECTS ANALYSIS
82. In the sections below, we discuss the economic analysis submitted by the Applicants and
documentary evidence related to the harm from a loss of competition between AT&T and DIRECTV.
A. Evaluation of Potential Unilateral Effects Using Economic Analysis
83. We first evaluate the potential and magnitude of any unilateral effects. Horizontal
transactions such as the combination of AT&T’s and DIRECTV’s MVPD services, in which rival firms
are combining, raise potential competitive concerns when the combined entity has the incentive and the
ability to raise prices, lower quality, or otherwise harm competition in a relevant market.
237
If consumers
consider products offered by firms other than those offered by the merging entities to be close substitutes,
the combined firm is unlikely to substantially raise its product’s price because consumers would respond
by switching to a substitute product.
238
84. Unilateral effects arise when firms, regardless of the anticipated actions or responses of
other firms, find it profitable to raise prices or otherwise exercise market power following a horizontal
merger.
239
When a merger combines two firms selling products that substitute for each other, there is an
increased incentive for the combined entity to unilaterally raise the price of one or both firms’ offerings
above the pre-merger level.
240
The degree of direct competition or substitution between the merging
parties and whether there are non-merging parties that are close substitutes (or that could quickly
reposition themselves to be close substitutes) are important factors in determining the likelihood and
magnitude of any potential price increase as a result of such unilateral effects.
241
85. The Applicants maintain that AT&T’s broadband product and DIRECTV’s standalone
video service are complementary products.
242
According to the Applicants, the transaction would allow
(Continued from previous page)
(July 7, 2014) (submitting additional details on the number of (1) customer locations and subscribers for FTTP and
FTTN technologies and (2) consumer and business customer subscribers). In addition, while we note that WGAW
asserts that “consumers in 129 designated market areas (‘DMAs’) will lose a competing MVPD if this merger is
approved” (WGAW Petition at 4; see also WGAW Reply at 1, 3), based on SNL Kagan data, the information
submitted by the Applicants, and our own analysis, we find that AT&T and DIRECTV both offer MVPD service in
portions of only 74 DMAs, as detailed above.
237
See 2010 DOJ/FTC Horizontal Merger Guidelines § 1 at 1-2, § 6 at 20-24.
238
See Liberty Media-DIRECTV Order, 23 FCC Rcd at 3280, ¶ 28; Adelphia Order, 21 FCC Rcd at 8234, ¶ 59;
Applications for Consent to the Transfer of Control of Licenses from Comcast Corporation and AT&T Corp.,
Transferors, to AT&T Comcast Corporation, Transferee, Memorandum Opinion and Order, 17 FCC Rcd 23246,
23260, ¶ 41 (2002) (“Comcast-AT&T Order”); 2010 DOJ/FTC Horizontal Merger Guidelines § 6.1 at 22.
239
See EchoStar-DIRECTV HDO, 17 FCC Rcd at 20619, ¶ 152; 2010 DOJ/FTC Horizontal Merger Guidelines § 1
at 2, § 6 at 20-24.
240
See EchoStar-DIRECTV Order, 17 FCC Rcd at 20624, ¶ 169; 2010 DOJ/FTC Horizontal Merger Guidelines §
6.1 at 20; Joseph Farrell & Carl Shapiro, Antitrust Analysis of Horizontal Mergers: An Economic Alternative to
Market Definition, 10 B.E.
J. OF THEORETICAL ECON. 1 (Policies and Perspectives), Art. 9, at 6 (2010).
241
See Comcast-NBCU Order, 26 FCC Rcd at 4286-87, ¶ 119 n.287; 2010 DOJ/FTC Horizontal Merger Guidelines
§ 6.1 at 20-22; see also United States v. H&R Block, 833 F. Supp. 2d 36, 81 (D.D.C. 2011) (stating that unilateral
effects in a differentiated product market are likely to be profitable where the products controlled by the merging
firms are close substitutes, products offered by non-merging firms are sufficiently different to make a small but
significant and non-transitory price increase profitable for the merging firms, and non-merging firms are unlikely to
reposition their products to offer close substitutes for the products offered by the merging firms).
242
Joint Opposition at 27-30.
Federal Communications Commission FCC 15-94
37
the combined entity to offer consumers better, integrated bundles of these complementary products.
243
The Applicants argue that the transaction would intensify, not harm, MVPD competition.
244
Furthermore,
the Applicants contend that their detailed economic analysis supports the assertion that consumers would
benefit from the transaction, including a simulation of the effect of this transaction.
245
In the section
below, we present our findings on that economic analysis.
246
1. Merger Simulation
86. Merger simulations may be used to evaluate potential unilateral effects, that is, the effects
based primarily upon the elimination of competition between the merging parties following the
transaction.
247
Generally, merger simulations evaluate the degree to which, following a merger of
competitors, the merging parties and their rivals would increase their prices and whether potential cost
savings would preclude any price increases. Merger simulation methods need not rely on market
definition, but they often include independent price responses by non-merging parties.
248
The question
posed in any merger simulation is essentially: “Assuming that all industry participants’ product offerings
remain the same, what price changes arise from the changed pricing incentives created by the proposed
transaction?”
87. The Applicants submitted two merger simulations – a simulation submitted by Dr.
Michael Katz (the “Katz Simulation”) and a simulation submitted by Professors Steve Berry and Phil
Haile (the “BH Simulation”).
249
The Applicants assert that these merger simulations demonstrate that the
243
Id. at 28; Lee Decl. ¶ 25.
244
Joint Opposition at 27-32.
245
Id. at 28-32.
246
For a more detailed discussion of our economic analysis, see generally Appendix C.
247
2010 DOJ/FTC Horizontal Merger Guidelines § 6.1 at 21; EchoStar-DIRECTV Order, 17 FCC Rcd at 20621-24,
¶¶ 158-169 and Appendix E, “Merger Simulations of the EchoStar-DIRECTV Merger”; see United States v. H&R
Block, 833 F. Supp. 2d at 88.
248
2010 DOJ/FTC Horizontal Merger Guidelines § 6.1 at 21.
249
Katz Decl. ¶¶ 85-95; Katz Reply Decl. ¶¶ 52-55; Compass Lexecon, “Additional Detail on the Demand
Estimation, Merger Simulation, and Investment Model Analysis Performed by Professor Katz” ¶¶ 5-46 (“Katz
Additional Detail”), transmitted by letter from Maureen R. Jeffreys, Counsel for AT&T, to Marlene H. Dortch,
Secretary, FCC, MB Docket No. 14-90 (filed July 28, 2014); Steve Berry & Phil Haile, “Quantitative Analysis of an
AT&T-DIRECTV Merger” (“Berry-Haile Analysis”), transmitted by letter from Maureen R. Jeffreys, Counsel for
AT&T, to Marlene H. Dortch, Secretary, FCC, MB Docket No. 14-90 (filed July 17, 2014); Steve Berry & Phil
Haile, “Quantitative Analysis of an AT&T-DIRECTV Merger: Updated Results” (“Berry-Haile Updated Results”),
transmitted by letter from Maureen R. Jeffreys, Counsel for AT&T, to Marlene H. Dortch, Secretary, FCC, MB
Docket No. 14-90 (filed Sept. 23, 2014); Steve Berry & Phil Haile, “Quantitative Analysis of an AT&T-DIRECTV
Merger: Additional Discussion of Modeling Choices, Data, and Results” (“Berry-Haile Additional Discussion”),
transmitted by letter from Maureen R. Jeffreys, Counsel for AT&T, to Marlene H. Dortch, Secretary, FCC, MB
Docket No. 14-90 (filed Sept. 23, 2014). Dr. Katz compares his simulation with the BH Simulation, noting the
improvements that Professors Berry and Haile made. See Katz Reply Decl. ¶¶ 56-57.
Federal Communications Commission FCC 15-94
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proposed transaction would have a net positive effect on overall consumer surplus,
250
even without
considering the transaction’s projected operational efficiencies and other benefits.
251
88. The Applicants claim that the two merger simulations are closely related,
252
and after
examining both, we agree. Our evaluation of the Applicants’ merger simulations focuses on the BH
Simulation because it is more detailed and economically rigorous. In doing so, we make a number of
additions and corrections to the BH Simulation. We base our findings on this “Modified Simulation.”
We note that no party has submitted comments on either of the Applicants’ merger simulations.
253
89. The BH Simulation considers the post-transaction changes in the prices different
providers charge for their standalone video, a video/broadband bundle, and standalone broadband
services.
254
This framework reflects that currently: (1) AT&T and DIRECTV each offer to subscribers
standalone video services and a bundle of video and Internet service (AT&T with an integrated or
synthetic bundle and DIRECTV with a synthetic bundle) and (2) AT&T offers a standalone broadband
service.
90. We conduct an economic analysis of whether the AT&T-DIRECTV transaction is likely
to result in a unilateral price increase post-transaction based on the BH Simulation. Below we discuss
briefly the structure of the BH Simulation, our modifications, and the results for standalone video
services, video and broadband bundles, and standalone broadband services. The merger simulation
quantifies the net result of three primary effects of the transaction that may influence the prices of the
services offered by the firms: (1) the “horizontal effect” from the loss of a competitor in the markets
where AT&T and DIRECTV both offer video services, (2) a “bundle effect” that results from the
synthetic bundle of AT&T broadband and DIRECTV video being priced jointly by a single firm, and (3)
the effect of claimed reductions in the payments made by AT&T to video programmers. We discuss the
relative magnitude of these three effects and their impact on consumer surplus as evidenced by the merger
simulations.
2. BH Simulation Structure and the “Modified Simulation”
91. The BH Simulation combines an estimation of consumer demand for each of a variety of
video-broadband bundles, standalone broadband, and standalone video products, with assumptions about
firms’ pricing decisions of all of these products to predict the effects of the transaction on prices and
consumer welfare.
255
It is important to note at the outset that this merger simulation differs from typical
merger simulations in that it includes a variety of services, not all of which compete with each other
250
The change in consumer surplus can be interpreted as the additional amount of money that each consumer would
have to pay each month following the merger to make him or her indifferent between the merger occurring and not
occurring. Thus, a positive change in consumer surplus – which implies that each consumer would be indifferent
between the status quo and a post-merger world in which he or she has to pay an additional positive amount –
indicates that the merger leads to an increase in consumer welfare. For a more detailed explanation, see Appendix C
n.118.
251
Katz Decl. ¶¶ 85, 94; Katz Additional Detail ¶ 1; Joint Opposition at 30-32; Katz Reply Decl. ¶¶ 53-55; Berry-
Haile Additional Discussion at 3.
252
Berry-Haile Analysis at 11; Joint Opposition at 31; Katz Reply Decl. ¶¶ 2, 24, 56-58 (The merger simulation
performed by Professors Berry and Haile confirms Dr. Katz’s merger simulation results).
253
The Applicants submitted the merger simulations in the record and they were available to those parties authorized
to view material under our Protective Order. Protective Order, 29 FCC Rcd at 6050-51, ¶ 7. None of the
information relied on by the Applicants’ merger simulations is the subject of the court order that precludes access to
certain information in the record. See CBS Corp. v. FCC, 785 F.3d 699, 700 (D.C. Cir. 2015).
254
See Katz Decl. ¶¶ 87-88; Katz Additional Detail Table A-16; Berry-Haile Analysis at 99-120; Berry-Haile
Updated Results at 100a-118.
255
Joint Opposition at 30-32. For further details on the structure of the BH Simulation, see generally, Appendix C.
Federal Communications Commission FCC 15-94
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directly, and some of which may complement each other. Specifically, the BH Simulation considers that
consumers can purchase broadband and video services as standalone products or bundled together.
256
92. The BH Simulation makes a series of computations: (1) obtaining subscribership shares
and a measure of price from marketplace data; (2) modeling and estimating demand; (3) estimating
marginal costs consistent with the assumption that observed prices are those that each seller would
separately choose to maximize its own profits given the prices chosen by others; and (4) simulating post-
transaction prices offered by all firms when the combining parties maximize profits jointly, rather than
separately, given those marginal costs.
257
The inputs into these computations include data on prices and
product characteristics of offered services (i.e., video, broadband, or a combination of the two). The
output of these computations is a set of prices based on the new post-transaction pricing incentives.
258
93. The BH Simulation uses data on price, subscriber counts, consumer demographics, and
component characteristics.
259
The BH Simulation constructs subscriber shares and a price measure for
each product.
260
These shares and prices, along with product characteristics and consumer demographics,
are used to estimate a demand model of consumer willingness to pay for the video, broadband, integrated
bundles, and synthetic bundles.
261
The demand model assumes that each consumer chooses one product,
which can include bundles of video and broadband, and that consumers choose the product that offers the
most benefit after taking into account price and product characteristics.
262
94. The BH Simulation then estimates the post-transaction prices at which each firm would
sell its services.
263
Underlying this estimation is an assumption that each firm sets prices that maximize
its profits given its marginal costs taking the prices of other firms as given.
264
To estimate the post-
transaction prices, the BH Simulation first infers the marginal costs for which the previously derived price
measure would maximize current profits for each firm, with the assumption that each firm is setting prices
independently of the others.
265
Using these marginal costs, the BH Simulation estimates the profit-
256
See Appendix C ¶ 11 and Section III.C. The BH Simulation defines products from the point of view of the
consumer, and with providers offering components to consumers. Components include standalone video, standalone
broadband, and integrated bundles and are best thought of as the services “priced” by a provider. From the
consumer’s perspective, a product can be a standalone video service from a single provider, a standalone broadband
service from a single provider, an integrated bundle from a single provider – all of which are “components” – or a
synthetic bundle of video and broadband components from two separate providers (the price of the latter being the
sum of the component prices of the two providers, possibly including a discount if the components are marketed
jointly).
257
See id. Section II.
258
See id. Section II.E.
259
See id. ¶¶ 12-13. The BH Simulation estimation is performed at the DMA level. See id. ¶ 9.
260
See id. Section II.B. The BH Simulation relies on a single price measure per product – a quality adjusted price
index for each firm and component (which includes integrated bundles). See id. Section II.B.2.
261
See id. Section II.C.
262
See id. ¶ 22. In addition to price and product characteristics, the demand model also controls for average
consumer demographics in the DMA such as age, income, and education. The demand model also makes use of
what are called nests. Nesting is an important feature that allows substitution patterns between products to be more
flexible and enables the data to better guide these substitution patterns. The BH Simulation uses a nested logit
model to estimate demand. The BH Simulation uses four nests (bundles, video only, broadband only, and nothing -
the outside good) to model demand. See id. ¶¶ 24-25.
263
See id. ¶¶ 29-32.
264
See id.
265
See id. ¶ 29.
Federal Communications Commission FCC 15-94
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maximizing prices for all marketplace participants following the transaction.
266
The BH Simulation
restricts the price of products (and therefore the prices of underlying components) to be constant across a
DMA, as well as accounting for the pre-transaction discount on the synthetic bundles DIRECTV offers
with AT&T and other telephone MVPDs and cable providers.
267
By maximizing the joint AT&T and
DIRECTV profits, the BH Simulation captures the changes in the Applicants’ pricing incentives as a
result of the transaction, and it allows prices by all other firms to respond to the changed ownership.
268
95. In evaluating the BH Simulation, we found small coding errors in the computer programs
submitted by the Applicants.
269
We corrected these coding errors and found that these corrections did not
significantly change the BH Simulation results, though the post-transaction changes in consumer surplus
were slightly lower than those generated by the BH Simulation.
270
Further, the BH Simulation relied on
third-party price data collected using web scraping (i.e., collected from third-parties’ web advertised
pricing, where available). We replaced the web-scraped data for Comcast, Time Warner Cable, and
Charter with actual pricing data provided by these companies, which better reflect the prices offered to
consumers.
271
The variant of the BH Simulation that includes the corrections to the coding errors as well
as actual third-party pricing data is referred to as the “Modified Simulation.” We use the Modified
Simulation to conduct an economic analysis of the competitive effects of the transaction.
272
96. Also important for the analysis are the effects of the BH Simulation’s inclusion of an
estimation of programming payment reductions that result from the transaction. These programming
payment reductions are the only claimed transaction efficiencies accounted for in the BH Simulation.
273
The Applicants estimate that by combining with DIRECTV, AT&T could lower its programming
payments by at least [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] .
274
The BH
266
See id.
267
See id. ¶¶ 30-31.
268
See id. ¶ 32.
269
See id. Section IV.A.
270
See id. ¶ 49 n.95. Correcting these coding errors resulted in consumers being slightly more price sensitive. See
id. ¶ 49.
271
See Comcast Response to Jan. 8, 2015, Information Request; Time Warner Cable Response to Jan. 8, 2015,
Information Request; Charter Response to Jan. 8, 2015, Information Request; see also Appendix C Section IV.B.
272
See Appendix C ¶ 54. For output from the “Corrected Simulation” and the original BH Simulation, see generally
Appendix C. As noted above, no commenters challenged the BH Simulation, which was made available to third
parties that signed the Protective Order in this proceeding. Protective Order, 29 FCC Rcd at 6050-51, ¶ 7. While
commenters did not have access to certain information that we used to analyze the BH Simulation, see CBS Corp.,
785 F.3d at 701-03, our analysis yielded more conservative results than the Applicants’ analysis and so commenters
are not disadvantaged by their lack of access. See infra nn.278-279 (discussing the Applicants’ payments for
programming). In addition, because our use of this information yielded results less favorable for the Applicants,
were we to rely only on information that was available to third parties, we would still find that the transaction is
unlikely to cause significant anticompetitive unilateral effects, given the potential for lower prices for consumers as
a result of reduced programming payments. Thus, while the additional information informed our analysis, we would
reach the same conclusion without it.
273
These efficiencies are marginal cost reductions and do not include other potential public interest benefits.
274
See Application at 36; Katz Decl. ¶ 115; Joint Opposition at 16. AT&T Response to Sept. 9, 2014, Information
Request at 244. Dr. Katz estimates that DIRECTV’s programming payments are approximately [BEGIN HIGHLY
CONF. INFO.] [END HIGHLY CONF. INFO.] percent less than AT&T’s. See Katz Decl. ¶ 115.
Federal Communications Commission FCC 15-94
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Simulation projects that [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] percent
of the reductions in programming payments would be passed on to consumers.
275
97. In the BH Simulation, the programming payment reduction is modeled as a flat dollar
reduction [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] in estimated marginal
costs for products that include the AT&T U-verse video product after the Applicants combine.
276
These
reductions in programming payments achieved post-transaction are a significant assumption in the BH
Simulation and have a large influence on the claimed benefits that are estimated to flow to consumers.
277
98. We evaluated the Applicants’ claimed programming payment reductions using data
submitted by the Applicants.
278
We calculated programming payments per subscriber per month for
AT&T and DIRECTV in 2014.
279
Using data submitted in the record, we find that there is almost no
difference between (1) our calculation of AT&T’s and DIRECTV’s programming payments and (2) the
programming payments calculated by the Applicants to derive their claimed programming payment
reductions in the BH Simulation.
280
99. However, the approximate [BEGIN HIGHLY CONF. INFO.] [END HIGHLY
CONF. INFO.] percent difference between AT&T’s and DIRECTV’s per subscriber costs for video
programming appears to result from a combination of the following three factors: (1) AT&T’s
programming payments on individual channels are typically higher per subscriber per month than
DIRECTV’s; (2) AT&T offers more channels on its video service than DIRECTV, which inflates
AT&T’s per subscriber payments relative to DIRECTV’s; and (3) the difference between AT&T’s and
DIRECTV’s distribution of subscribers across the full range of offered channels, which may depend on
275
AT&T and DIRECTV, White Paper, Content Cost Savings Will Result in Both Improved Profitability and Pass
Through to Consumers, at 11-12 (“Content Cost White Paper”), transmitted by letter from Maureen R. Jeffreys,
Counsel for AT&T, to Marlene H. Dortch, Secretary, FCC, MB Docket No. 14-90 (filed Nov. 12, 2014); Katz Reply
Decl. ¶ 24.
276
See Appendix C ¶ 37.
277
In the BH Simulation, the consumer surplus typically increases by around $1.00 per household per month if the
full programming payment reduction is credited. See id. Section V.A.
278
See AT&T Response to Sept. 9, 2014, Information Request, Exhibit 40 a-c; DIRECTV Response to Sept. 9,
2014, Information Request, Schedule 37. See supra n.272 (discussing access to certain confidential information).
279
Our analysis also compares AT&T’s and DIRECTV’s programming payments with Comcast’s programming
payments. For a detailed discussion, see Appendix C Section IV.C., Table 1. See also supra n.272 (discussing
access to certain confidential information).
280
Our modifications to the Applicants’ analysis yield a reduction of [BEGIN HIGHLY CONF. INFO.] [END
HIGHLY CONF. INFO.] percent per subscriber per month, while the Applicants found a reduction of [BEGIN
HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] percent per subscriber per month. See AT&T
Response to Sept. 9, 2014, Information Request, Exhibit 40 a-c; DIRECTV Response to Sept. 9, 2014, Information
Request, Schedule 37. See also AT&T Response to Sept. 9, 2014, Information Request, Exhibit 69.c.2; ATT-FCC-
01741325, [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] ; ATT-FCC-01645622, [BEGIN
HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] . These estimates are the differences in the
Applicants’ payments in 2014, while their filings state that the difference would be up to [BEGIN HIGHLY
CONF. INFO.] [END HIGHLY CONF. INFO.] percent in future years. AT&T also claims elsewhere in its
filings that it expects the difference between AT&T and DIRECTV programming payments to be [BEGIN
HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] percent prior to the projected closing date of the
transaction. See AT&T Response to Sept. 9, 2014, Information Request at 243. We measure the programming
payment reduction in the merger simulation [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.]
relative to the marginal costs coming out of the merger simulation, and not the “actual” costs of video programming.
When compared to the marginal costs in the BH Simulation, the programming payment reduction translates to a
reduction of approximately [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] percent, similar
to the amount that the Applicants claim would be realized in the long run.
Federal Communications Commission FCC 15-94
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whether a channel is included in a “basic” or “premium” tier.
281
The effects of these three factors are
considered in our adjustment to programming payment reductions in the BH Simulation.
282
100. In determining the appropriate post-transaction reduction in programming payments to
build into the merger simulation, one consideration is the implicit assumption in the simulation that the
characteristics of the pre- and post-transaction video products offered by each company do not change.
283
Programming payment reductions that are the result of changes in the channel lineup offered to
subscribers (i.e., dropping channels or placing channels on a higher service tier) could potentially reduce
the quality of the video product and lead to ambiguous effects on consumers. In general, consumers
would benefit if the reduced programming payments from altered channel lineups were passed through as
lower prices, but some consumers could be harmed if they were to lose channels that were once offered or
if they are forced to pay higher prices to receive those channels on a higher service tier. Regardless of
whether such a change would benefit or harm consumers, the record does not provide any evidence of
whether the Applicants intend to change the channel lineup to reduce programming payments. Indeed,
the BH Simulation implicitly assumes the characteristics of the products are held constant when
considering the effect of programming payment reductions on prices and consumer surplus.
101. Therefore, we estimate the consumer surplus effect in the Modified Simulation under two
separate programming payment reductions. We first credit only those reductions that are a result of
channel-by-channel [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] in the
Modified Simulation (the “Low Programming Payment Reduction” or “Low PPR”). However, we also
acknowledge that there may be additional potential programming payment reductions if the channel
lineup is changed – that is if the Applicants decide, for reasons not evident or established on the record, to
offer a different selection of channels – and therefore we also estimate the consumer effect using the
[BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] difference in programming
payment reductions claimed by the Applicants as an upper bound of the potential, consumer surplus
effects holding other characteristics constant (the “High Programming Payment Reduction” or “High
PPR”).
284
102. We estimate that the difference in programming payments that are due to the channel-by-
channel difference in licensing fees paid by AT&T and DIRECTV is approximately [BEGIN HIGHLY
CONF. INFO.] [END HIGHLY CONF. INFO.] percent difference in the overall payments between the
two companies. Therefore, in evaluating the effects of the programming payment reductions in the
Modified Simulation, we consider programming payment reductions of both the High Programming
Payment Reduction [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] and the Low
Programming Payment Reduction [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.]
, the former representing the full difference between AT&T and DIRECTV programming payments,
285
and the latter representing only those payments that are not due to channel-by-channel differences in
license fees.
286
281
See Appendix C ¶¶ 59-67.
282
See supra n.272 (discussing access to certain confidential information).
283
Although the input prices in a merger simulation are adjusted for characteristics of the products, to estimate how
prices change as a result of the transaction, the characteristics of each service must be the same in the pre- and post-
transaction scenarios.
284
That is, the High Programming Payment Reduction would be the appropriate measure if (1) consumers do not
view changes in the channel lineup as changes in product “quality” that reduce surplus and (2) the reductions
achieved by changing the channel lineup are passed through to consumers in the form of lower prices.
285
See Appendix C ¶¶ 75-76.
286
[BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] See id. ¶ 76.
Federal Communications Commission FCC 15-94
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103. Finally, we acknowledge that the “nested logit” structure used in the BH Simulation is
known to pass through a higher percent of transaction efficiencies relative to other merger simulation
structures.
287
The BH Simulation pass-through rate – the percent of the programming payment reductions
that would be passed on to consumers through lower prices – is [BEGIN HIGHLY CONF. INFO.]
[END HIGHLY CONF. INFO.] percent.
288
It is not possible to alter the pass-through rate without
adopting a different merger simulation structure that may not capture the significant benefits of the nested
logit structure in determining the substitution between products and/or the discrete choices made by
subscribers.
289
104. However, the Applicants also claim that the BH Simulation estimates demonstrate that
there is no harm from the transaction, regardless of whether there are off-setting programming payment
reductions that are passed through to consumers, and that any pass-through of programming payment
reductions is over and above the benefits that would accrue.
290
To support this claim, they rely on the BH
Simulation without cost savings to be passed through. Thus, when considering consumer surplus and
consumer benefits of the transaction, we also analyze the results from the Modified Simulation assuming
no programming payment reductions to compare with the relevant BH Simulation results, as well as to
assess potential competitive harms when reductions in programming payments are not passed through to
consumers.
3. Effects of the Transaction on Consumers
105. Our economic analysis of the Applicants’ merger simulation finds that the net effect of
the transaction on consumers is positive.
291
Our finding considers the elimination of competition between
U-verse video and DIRECTV’s video service, the benefits of the pricing complementarity of AT&T
broadband and DIRECTV video, and the pass-through to subscribers of a certain percentage of
programming payment reductions.
292
We find that the economic analysis in our record demonstrates that
the consumer surplus would increase slightly without accounting for programming payment reductions
and would increase more substantially when programming payment reductions are included.
106. Positions of the Parties. The Applicants claim that the transaction would result in a
positive net effect on consumer surplus, inside and outside of AT&T’s footprint.
293
The Applicants assert
287
See Simon P. Anderson, Andre de Palma & Brent Kreider, Tax Incidence in Differentiated Product Oligopoly, 81
J.
PUB. ECON. 173, 173-192 (2001).
288
Content Cost White Paper at 11-12; Katz Reply Decl. ¶¶ 24, 53.
289
Changing the pass-through rate in the BH Simulation would require changing the demand model used in the
simulation to another form (e.g., linear demand, Constant Elasticity of Substitution (“CES”) demand, etc.).
However, given the structure of the industry, we find that the nested logit model is appropriate, in spite of the higher
pass-through rate, because it permits consumers to purchase only a single product from a single firm. In particular,
we find that the nested logit demand model appropriately captures the likelihood that most households will subscribe
to only a single broadband service. In addition, the nested logit demand model reflects the fact that consumers are
more likely to substitute within nests (or services) that share product characteristics (e.g., they will choose among
broadband and video services, only video services, or only broadband services versus substituting from video
services to broadband services).
290
See Content Cost White Paper at 10-11. For further discussion of the Berry and Haile merger simulation and
pass-through of programing payment reductions, see Appendix C Section V.B.
291
The consumer surplus changes estimated by the BH Simulation are limited to those that would arise from
unilateral quality-adjusted price changes; the simulation does not account for potential surplus changes from price
coordination among providers or from non-price factors, such as improved customer service, installation, VOD
integration, and improved video user interfaces.
292
See Appendix C Section V.
293
Application at 83-84; Katz Decl. ¶ 85; Katz Additional Detail ¶ 1, Tables A-16, A-19; Joint Opposition at 31;
Katz Reply Decl. ¶¶ 53, 55.
Federal Communications Commission FCC 15-94
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this would be the case, even without accounting for any programming payment reductions.
294
The results
from the Katz Simulation indicate that, based solely on bundling benefits outweighing increased
horizontal concentration,
295
the population-weighted average effect of the transaction in AT&T’s U-verse
footprint would increase consumer surplus by $0.85 per consumer per month,
296
and outside the U-verse
footprint would increase consumer surplus by $1.82 per consumer per month.
297
107. The Applicants claim that the BH Simulation confirms the Katz Simulation’s consumer
surplus estimates.
298
The BH Simulation estimates that the transaction would have an annual net positive
effect between $940 million and $1.44 billion on consumer surplus, assuming a conservative estimate of
programming payment reductions.
299
108. Discussion. Based on our analysis of the Modified Simulation, we find that even were
there to be no reductions in programming payments, consumer surplus would increase slightly as a result
of the transaction, though the effect does not appear to be very significant. The Modified Simulation’s
monthly per subscriber consumer surplus without programming payment reductions is estimated to be
$0.02, approximately $0.83 less and $0.07 less than the Katz Simulation estimates
300
and the BH
Simulation estimates, respectively.
301
The Modified Simulation indicates that the harm from the
increased horizontal concentration of video in DMAs where AT&T video and DIRECTV overlap is
approximately offset by the benefits of reduced prices that result from the newly integrated AT&T
broadband/DIRECTV video bundle.
109. Including the reduction in payments from the Low Programming Payment Reduction
increases the per subscriber per month consumer surplus to $0.51, although this is less than half of the per
month consumer surplus of $1.11 that results from using the High Programming Payment Reduction.
302
Comparing the results using the High Programming Payment Reduction in the Modified Simulation with
results from the BH Simulation with programming payment reductions of the same magnitude, our
estimate of the increase in consumer surplus is slightly higher than the change reported in the BH
Simulation.
303
110. We acknowledge that the change in consumer surplus would be small were the
transaction not to lead to programming payment reductions and that merger simulations lack measures
with which to test whether this number is statistically different from zero.
294
Katz Decl. ¶ 85; Joint Opposition at 31; Katz Reply Decl. ¶¶ 53, 55.
295
Katz Decl. ¶¶ 89; Katz Reply Decl. ¶ 55.
296
Katz Decl. ¶ 90; Katz Additional Detail Table A-16.
297
Katz Decl. ¶ 92; Katz Additional Detail Table A-19.
298
Joint Opposition at 31; Katz Additional Detail ¶ 4; Katz Reply Decl. ¶¶ 56, 58.
299
Joint Opposition at 31-32; Katz Reply Decl. ¶¶ 56, 58; Berry-Haile Analysis at 118-119; Berry-Haile Additional
Discussion at 3, 8-9, 44.
300
See Appendix C Table 3; Katz Decl. ¶ 90; Katz Additional Detail Table A-16.
301
See Berry-Haile Updated Results at 18. Professors Berry and Haile report results for three nesting parameters
and one nesting parameter. The comparison between the BH Simulation and the Modified Simulation are for the
three nesting parameters and for the case of “All DMAs w/ AT&T Availability.”
302
See Appendix C Table 3.
303
See Berry-Haile Updated Results at 18 (estimating consumer surplus to be $0.94. The comparison between the
BH Simulation and the Modified Simulation is for the three nesting parameters and for the case of “All DMAs w/
AT&T Availability.”
Federal Communications Commission FCC 15-94
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4. Competitive Effects of Integrated Bundles
111. Our analysis of the merger simulation also supports a finding that the transaction has a
positive effect on the price of bundled products and, as a consequence, offers consumers a more
competitive alternative to the cable bundle offered by cable operators. In addition, we find that other
operational efficiencies beyond the pricing complementarities estimated in the merger simulation may
potentially benefit consumers, including by offering a stronger competitor for bundled services.
112. Positions of the Parties. The Applicants assert that a customer purchasing a synthetic
bundle generally pays significantly more than the customer would pay for a comparable integrated
bundle.
304
The Applicants argue that combining AT&T broadband services and DIRECTV video would
benefit consumers by creating an integrated bundle offering that is a better alternative to the cable
operators’ bundles.
305
113. The Applicants argue that the BH Simulation demonstrates that the transaction would
produce downward pressure on the price of the bundle of AT&T’s broadband and DIRECTV’s video and
on the price of competing products (e.g., cable bundles and standalone broadband and video products
offered by cable operators).
306
The Applicants rely on the BH Simulation to predict that the price of an
AT&T broadband and DIRECTV video bundle would fall by $8.27 and $7.32 per month under the cases
of a zero programming payment reduction and a High PPR, respectively.
307
The change to the AT&T
integrated bundle would result in an increase in price of $4.19 with no programming payment reductions
and decline by $4.48 in the case of a High PPR.
308
They also claim that because of the significant
downward pressure on the price of cable providers’ video and broadband bundles, those prices would fall
by $0.13 and $0.79 per month under the cases of a zero programming payment reduction and a High PPR,
respectively.
309
114. The Applicants argue that the economic theory of “double marginalization” supports their
finding that the synthetic bundle price is higher than the price would be for an integrated bundle.
310
The
Applicants note that double marginalization occurs when “each independent firm in the supply chain
applies its own mark-up” to the product.
311
In this case, the Applicants assert that both AT&T and
DIRECTV “mark up” the price of their respective components of the synthetic broadband and video
bundle.
312
In comparison, a bundle of broadband and video offered by a single cable operator has only
one price mark-up.
313
As a result, the Applicants argue that the prices offered by cable companies are
more competitive than the Applicants are able to offer with their synthetic bundle.
304
See Lee Decl. ¶¶ 54-56; Guyardo Decl. ¶¶ 27-29.
305
See Application at 7, 23, 32-33, 63.
306
See Joint Opposition at 31; Berry-Haile Additional Discussion at 3. The Katz Simulation also predicts that this
transaction creates downward pressure on prices, which in turn, would lead to a competitive response by rival
providers of bundled services. See Application at 6-7, 54-55, 64-65, 83-84; Katz Decl. ¶¶ 87-89, 92.
307
Berry-Haile Updated Results at 101, 110.
308
Id. at 102, 111.
309
Id.
310
See Application at 65-67; Katz Decl. ¶¶ 4, 67-71, 73-77, 82-83; Katz Reply Decl. ¶ 12; Double Moral Hazard
White Paper at 5, 14-16.
311
See Double Moral Hazard White Paper at 5.
312
See Application at 66; Guyardo Decl. ¶ 27; see also Letter from Maureen R. Jeffreys, Counsel for AT&T, to
Marlene H. Dortch, Secretary, FCC, MB Docket No. 14-90, Attachment (“Bundles Ex Parte Presentation”) at 6-7
(April 21, 2015) (submitting written ex parte presentation on bundled services).
313
See Double Moral Hazard White Paper at 5.
Federal Communications Commission FCC 15-94
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115. In addition, the Applicants assert that the integrated bundle would be more competitive in
ways that cannot be quantified in the merger simulation. The Applicants state that currently, synthetic
bundle customers must schedule two separate installation appointments and then each company must send
out a separate installer.
314
The Applicants report that in the vast majority of cases, those installations
occur on different days.
315
The Applicants also explain that AT&T-DIRECTV synthetic bundle
subscribers receive separate bills, which the Applicants assert makes it difficult for consumers to
determine whether appropriate bundle discounts have been applied.
316
They report that it can take
[BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] for the bundle discount to appear
on the customer’s bill because of the AT&T and DIRECTV internal activation confirmation process.
317
The Applicants assert that post-transaction they can consolidate all of these services.
318
116. CWA agrees with the Applicants and argues that the proposed transaction would “benefit
consumers by exerting pressure to constrain rate increases and offer new and better services.”
319
Other
commenters support the transaction, contending that it would increase competition for the provision of
bundled services.
320
Free State believes that consumers would benefit because “bundled offerings by an
integrated provider enjoy greater cost efficiencies, enabling integrated providers to offer more
competitive pricing.”
321
A number of other commenters argue that the transaction would enable services
to be bundled in a way that could benefit consumers without a price increase.
322
314
See Application at 38; Katz Decl. ¶¶ 36, 104; Bundles Ex Parte Presentation at 3-4.
315
See Joint Opposition at 12 & n.24; DIRECTV Response to Sept. 9, 2014, Information Request at 81; Katz Decl.
¶ 36; Guyardo Decl. ¶ 32; Doyle Decl. ¶ 20; Lee Decl. ¶ 57. The Applicants note that, currently, only [BEGIN
HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] percent of new customers get video and
Internet/phone installed on the same day. They also assert that DIRECTV typically schedules installation first,
which means that subscribers cannot have their Internet-enabled set-top box connected (and thus the non-linear
offerings supported) until the Internet access service is installed by AT&T. See DIRECTV Response to Sept. 9,
2014, Information Request at 81; Guyardo Decl. ¶ 32. In many cases, the task of connecting the set-top box to the
Internet falls on the Internet access provider’s technician, who does not have the expertise to install the set-top box.
See DIRECTV Response to Sept. 9, 2014, Information Request at 81; Guyardo Decl. ¶ 32; Doyle Decl. ¶ 20; Katz
Decl. ¶ 36. See also infra ¶ 150.
316
See Guyardo Decl. ¶ 33; Lee Decl. ¶ 57; Katz Decl. ¶ 36; Joint Opposition at 12; DIRECTV Response to Sept. 9,
2014, Information Request at 82.
317
See Guyardo Decl. ¶ 33; Lee Decl. ¶ 57; see DIRECTV Response to Sept. 9, 2014, Information Request at 82.
318
See Joint Opposition at 15.
319
See CWA Comments at 9.
320
See, e.g., Reply Comments of the Information Technology and Innovation Foundation, MB Docket 14-90, at 2-3
(filed Oct. 16, 2014) (“ITIF Reply”); Letter from Todd Maisch, President, Illinois Chamber of Commerce, to FCC,
MB Docket No. 14-90, at 1 (Sept. 12, 2014); Letter from A. Richard Heffron, President, Delaware State Chamber of
Commerce, to FCC, MB Docket No. 14-90, at 1 (Sept. 15, 2014); Letter from New Jersey State Chamber of
Commerce to FCC, MB Docket No. 14-90, at 1 (Sept. 12, 2014); Letter from Catherine Glover, President,
Tennessee Chamber of Commerce and Industry, to FCC, MB Docket No. 14-90, at 1 (Oct. 8, 2014); Letter from
Kevin Brinegar, President, Indiana Chamber of Commerce, to Thomas Wheeler, Chairman, FCC, MB Docket No.
14-90, at 1 (Oct. 9, 2014).
321
See Free State Comments at 17.
322
See, e.g., Letter from Brent Wilkes, Executive Director, League of United Latin American Citizens et al., to
Thomas Wheeler, Chairman, FCC, MB Docket No. 14-90, at 2 (Oct. 16, 2014); Letter from Mike Beebe, Governor
of Arkansas, to Thomas Wheeler, Chairman, FCC, MB Docket No. 14-90, at 1 (Sept. 11, 2014); Letter from Evelyn
Lugo, President, South Carolina Hispanic Chamber of Commerce, to FCC, MB Docket No. 14-90, at 1 (Sept. 9,
2014).
Federal Communications Commission FCC 15-94
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117. Conversely, WGAW argues that the new bundles would not be competitive because they
contain the “least attractive technologies” and that the benefits from lower prices are only “theoretical …
[and] not verifiable.”
323
WGAW also expresses concern that “[b]undles also have the effect of tying a
consumer to a single provider, which discourages innovation and competition between providers offering
Internet and video service.”
324
Free Press asserts that the Applicants do not need an integrated bundle to
be competitive. Free Press argues that the synthetic bundles are less competitive today because AT&T’s
introductory price for broadband is 133 percent higher for DIRECTV’s synthetic bundle than it is for
AT&T’s integrated bundle ($34.95 versus $14.95).
325
Without the transaction, Free Press maintains that
the parties would adjust and offer synthetic bundles that are more attractively priced than the synthetic
bundles they currently offer.
326
118. In addition, several commenters assert that the Applicants are trying to divert the
Commission’s attention from the transaction’s competitive harms by focusing on bundling
opportunities.
327
Commenters dismiss the Applicants’ claims regarding the benefits of integrated bundles,
arguing that there is a market for standalone video service and consumers should have the choice to
purchase bundled services from one provider or standalone services from one or multiple providers.
328
119. Discussion. Our examination of this merger simulation concludes that the Applicants
have adequately demonstrated that the transaction will likely increase the competitiveness of the
Applicants’ integrated bundles as an alternative to the cable providers’ bundles.
329
Although there may be
certain differences between the integrated bundle of AT&T broadband and DIRECTV video compared to
an integrated bundle of broadband and video offered by cable operators,
330
some consumers may view the
integrated bundle of AT&T-DIRECTV to be a better alternative to the integrated bundle offered by a
cable provider.
331
323
See WGAW Petition at 27-28. Public Knowledge-ILSR argue that the Commission should only consider a future
integrated fixed wireless/DBS bundle to be an adequate alternative to cable if it is fully substitutable for the
integrated bundle of broadband and video offered by cable operators, a point that they maintain the Applicants have
not adequately demonstrated. In addition, Public Knowledge-ILSR argue that the Applicants have not made specific
or verifiable pricing commitments with respect to the integrated fixed wireless/DBS bundle. See Public Knowledge-
ILSR Petition at 17.
324
See WGAW Petition at 21.
325
See Free Press Petition at 20-21.
326
See id. at 22-23, 34-35.
327
See id. at 19-20; ACM et al. Petition at 5-7; ACM et al. Reply at 1-2; WGAW Reply at 2.
328
See ACM et al. Petition at 6; WGAW Reply at 2, 24. For a description of the Applicants’ claims regarding the
potential efficiencies and benefits of bundled offerings, see infra Section XI.B.
329
See Appendix C ¶ 3. Using the BH Simulation and post-transaction prices, the subscriber diversion rates from
the cable bundles to the integrated bundles of the combined firm would be [BEGIN HIGHLY CONF. INFO.]
[END HIGHLY CONF. INFO.] under the cases of no PPR, Low PPR and High PPR, respectively. Using the BH
Simulation and pre-transaction prices, the subscriber diversion rate from cable bundles to the integrated AT&T
bundle and the synthetic AT&T-DIRECTV bundle is [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF.
INFO.] , indicating that the bundles of the combined firm are slightly more attractive post-transaction than they
were before the transaction and that the attractiveness increases with the reduction in programming payments. The
diversion rate is the fraction of subscribers leaving the cable bundle that would subscribe to an integrated bundle of
the combined firm, were the price of the cable bundle to increase. The diversions rates are generated as output by
the BH and Modified Simulations.
330
See Guyardo Decl. ¶¶ 22-26; WGAW Petition at 28.
331
See Katz Reply Decl. ¶ 17.
Federal Communications Commission FCC 15-94
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120. We also find that the economic analysis submitted by the Applicants supports their
assertion that the transaction will likely result in downward pressure on the prices of AT&T-DIRECTV
broadband and video bundles, and to a lesser extent, the prices of cable bundles. In the Modified
Simulation, the price of the AT&T broadband/DIRECTV video bundle decreases by $2.74 with no
programming payment reductions and decreases by $2.20 and $1.38 for Low PPR and High PPR,
respectively. This change represents a decrease of 2.2 percent relative to the pre-transaction prices in the
simulation when no programming payment reductions are considered, and decreases of approximately 1.8
and 1.1 percent relative to pre-transaction prices when using the Low PPR and the High PPR,
respectively.
121. For AT&T’s U-verse bundle, the Modified Simulation calculates a price increase of
$1.31 with no programming payment reductions and decrease by $2.93 and $6.70 with the Low PPR and
the High PPR, respectively.
332
This change represents an increase of 1.1 percent relative to the prices in
the simulation with no programming payment reductions and decreases of approximately 2.4 and 5.5
percent with Low PPR and High PPR, respectively.
333
For the cable bundle, the Modified Simulation
calculates a price decrease of $0.08 with no programming payment reductions and decreases of $0.52 and
$0.66 for Low PPR and High PPR, respectively. This change represents an increase of 0.05 percent
relative to the prices in the simulation with no programming payment reductions and decreases of
approximately 0.34 and 0.66 percent with Low PPR and High PPR, respectively.
122. In the Modified Simulation, as the programming payment reduction increases, the
decrease in the price of the AT&T broadband/DIRECTV video bundle post-transaction becomes smaller.
On the other hand, the AT&T U-verse bundle price rises post-transaction in the case of no programming
payment reductions and then declines as programming payment reductions are introduced. When
reductions are set at the Low PPR or the High PPR, the post-transaction price falls below the pre-
transaction price.
334
123. The differential impact of the programming payment reductions on the post-transaction
prices of the bundles of the combined firm is a result of AT&T’s incentive to maximize its profits over all
of its products – bundles and standalone products.
335
In the merger simulation, programming payment
reductions reduce [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] . The results of
the merger simulation indicate that it is more profitable for the combined firm to slightly increase the
332
The direction of the price changes for the AT&T-DIRECTV bundle and the cable bundle do not differ between
the BH Simulation and the Modified Simulation, but there are differences in the magnitude. See Berry-Haile
Updated Results at 101-102, 110-111; Appendix C ¶¶ 89-94, Tables 7-9.
333
Notably, all percentage increases in prices reported here are changes relative to the “recentered” hedonic prices in
the merger simulation (i.e., they are not increases over an established price). Percentage price changes are only
informative to the extent that the simulation price levels roughly correspond to notional real marketplace prices, and
they have only limited value, as the simulation is able to identify only level changes in prices. See Appendix C
¶¶ 19-21, 85. As an example, AT&T currently offers an Internet and video bundle on its website (which requires a
12-month commitment and includes the U450 package with HBO) at an introductory price of $109. See AT&T Inc.,
Bundles, https://www.att.com/shop/bundles.html (visited June 18, 2015). However, the pre-transaction “recentered”
hedonic price of the AT&T integrated Internet and video bundle is approximately $121 in both the BH Simulation
and the Modified Simulation. The percentage price change predicted by the simulation would differ slightly
depending on which price is used as the base price.
334
For the AT&T-DIRECTV bundle, the BH Simulation price falls by $8.27 and $7.32 per month under the cases of
no PPR and High PPR, respectively; for the Modified Simulation, for the same two PPR scenarios, the price falls by
$2.74 and $1.38. For the AT&T integrated bundle, the BH Simulation price increases by $3.76 and decreases by
$4.88 per month under the cases of no PPR and High PPR, respectively; for the Modified Simulation, for the same
two PPR scenarios, the price increases by $1.31 and declines by $6.70.
335
For a discussion of the effect of programming payment reductions on standalone video services, see infra ¶¶ 142-
143.
Federal Communications Commission FCC 15-94
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price of the AT&T broadband/DIRECTV video bundle and significantly decrease the price of the bundle
with the AT&T video product as the programming payments fall. The increased profits from those that
continue to purchase the higher-priced DIRECTV video products and the increased profit from those that
purchase the lower-cost AT&T video products (due to less than 100 percent pass-through) may outweigh
the loss in profit from those who leave the DIRECTV video products. The transaction also allows the
combined entity to partially recapture the profit lost from those subscribers that are diverted from
DIRECTV products to AT&T’s video products when prices on those products rise. The combined effects
of all price changes results in higher profit for the combined firm in the merger simulation.
124. In addition to the increased consumer surplus, we also find that there are certain other
quality improvement benefits of the newly integrated bundle that cannot be captured by a merger
simulation. Specifically, we agree with the Applicants that integrated bundles have the potential to
improve the quality and competitiveness of the Applicants’ bundle by allowing for single installation,
billing, and customer service.
125. We disagree with commenters that argue that the new integrated bundles are not a benefit
of the transaction. As discussed above, Free Press argues that the parties do not need to merge to compete
in the provision of bundles and that instead AT&T could lower its introductory broadband synthetic
bundle price to match the price of AT&T’s own integrated bundle.
336
We find that the evidence in the
record supports the conclusion that AT&T is more likely to offer discounts for integrated bundles than
synthetic bundles that include DIRECTV video, including because AT&T offers better discounts of U-
verse video today.
337
In addition, economic theory supports our finding that AT&T is unlikely to match
the price of broadband offered in a synthetic bundle with the price of broadband offered with its
integrated bundle because AT&T captures all of the benefit of increased video sales from lower
broadband prices offered with its integrated bundle.
338
Conversely, if AT&T lowered its broadband price
for the synthetic bundle, then DIRECTV would capture the benefit from the increased video sales instead
of AT&T.
126. Further, one of the primary reasons that AT&T and DIRECTV are entering into this
transaction is to compete more effectively against the integrated bundle of broadband and video offered
by cable operators.
339
We find that the Applicants’ provision of integrated bundles will increase
competition for bundled services.
5. Reduction of Competition in Video Distribution
127. We recognize that because AT&T and DIRECTV both offer video services, post-
transaction, there will be a loss of a video provider within the U-verse video footprint. However, as
explained below, we find that this very limited potential for competitive harm, when balanced against the
benefits of the transaction, does not require a condition. In addition, we impose certain conditions to
create a pathway for new competition from online video providers. These include the deployment of
336
Free Press Petition at 20-23.
337
See ATT-FCC-00729772, [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] . The
Applicants state that there is often a price disparity between the AT&T-DIRECTV synthetic bundle and the
integrated bundle offered by a single company. See Lee Decl. ¶ 55; see also Double Moral Hazard White Paper at
14. The Applicants claim that discounts for integrated bundles are often greater such that the price of an “integrated
U-verse bundle with a comparable AT&T U-verse IPTV package” for the first 24 months of service “is
approximately $575 less than the comparable synthetic AT&T/DIRECTV bundle.” Similarly, the cost of a Comcast
integrated bundle for 24 months is “over $375 less than the AT&T/DIRECTV synthetic bundle.” See Lee Decl. ¶
56.
338
See Katz Reply Decl. ¶¶ 14-16. In addition, the customer experience for integrated bundles is often superior to
synthetic bundles. See infra Section XI.B.
339
See Application at 55-68.
Federal Communications Commission FCC 15-94
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more and faster high-speed broadband, as well as imposing certain conditions that ensure AT&T does not
favor its own video services through the use of discriminatory usage allowances or other retail terms and
conditions.
128. Positions of the Parties. The Applicants acknowledge that both AT&T and DIRECTV
offer standalone video services. However, AT&T claims that it does not offer its U-verse service in most
of the country and also that, with fewer than 6 million video subscribers, it focuses its video marketing
efforts almost exclusively on bundles and is not a significant provider of standalone video.
340
Therefore,
according to the Applicants, there is little head-to-head competition between AT&T and DIRECTV in
standalone video services.
341
As support, AT&T notes that more than 97 percent of its video customers
buy U-verse video as a bundle with broadband or other services.
342
Therefore, the Applicants conclude
that there would be little competitive impact from the transaction because: (1) AT&T is not a significant
standalone video competitor; (2) AT&T does not provide significant competition to DIRECTV; and (3)
consumers would continue to have “numerous” standalone video options in the U-verse region.
343
129. The Applicants consider the potential increase in standalone video prices using the BH
Simulation. According to the Applicants, the BH Simulation predicts a small price increase for
DIRECTV’s standalone video subscribers ranging from less than 2 percent to less than 5 percent
depending on the model specifications, and the Applicants argue that, in any case, such increase would be
offset by a “standard cost efficiency.”
344
The Applicants argue that even this small price increase is
overstated because the BH Simulation does not capture important synergies that would put downward
pressure on the combined firm’s pricing of DIRECTV video services, nor does it account for likely cost
savings and quality improvements that would benefit DIRECTV’s subscribers.
345
The BH Simulation
reports an average post-transaction price increase of $0.07 for all video subscribers, which the Applicants
argue is a negligible change of [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.]
percent.
346
130. Several commenters express concern that the transaction would result in the loss of a
competitor in the markets where AT&T currently offers video service, leading to fewer MVPD choices
and higher prices.
347
Commenters dismiss the Applicants’ claims regarding the benefits of integrated
bundles, arguing that consumers should have the choice to purchase bundled services from one provider
340
See id. at 24, 68-72. AT&T claims that it focuses on providing bundled services because U-verse video service is
[BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] . See Lee Decl. ¶¶ 11, 16.
341
See Application at 69-71.
342
See id. at 70; Lee Decl. ¶ 12. AT&T claims that it has approximately 138,000 standalone video customers. See
Lee Decl. ¶ 12; Katz Decl. ¶ 80.
343
See Application at 71-74.
344
See AT&T and DIRECTV, White Paper, There is No Basis for Competitive Concern About the Impact on
DIRECTV Stand-Alone Video Customers, at 4-5 (“Standalone Video White Paper”), transmitted by letter from
Maureen R. Jeffreys, Counsel for AT&T, to Marlene H. Dortch, Secretary, FCC, MB Docket No. 14-90 (filed Nov.
12, 2014).
345
See Standalone Video White Paper at 5-12.
346
See id. at 15 (stating that “[g]iven that average monthly charges for video service are typically in the
neighborhood of [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] , a predicted seven-cent
price increase represents a negligible change – [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF.
INFO.] ”).
347
See, e.g., Free Press Petition at 6-19; Public Knowledge-ILSR Petition at 5-8; MCPC Comments at 19-21;
Franken Comments at 7; Cox Petition at 3; NAB Comments at 2-3; ACM et al. Petition at 5-8; ACM et al. Reply at
1-2; WGAW Petition at 4, 9; WGAW Reply at 3-5.
Federal Communications Commission FCC 15-94
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or standalone services from one or multiple providers.
348
Free Press also criticizes the Applicants for their
assertion that several competitive options would remain post-transaction for standalone MVPD
customers.
349
In contrast, Free State discounts the harms to competition on the basis that the combined
entity would have only 24 percent of the national market for video subscribers.
350
131. Discussion. Based on our analysis of the Modified Simulation, we recognize that there is
some potential upward pricing pressure on the price for standalone video within AT&T’s U-verse
footprint, with the price effect being somewhat dependent on the extent of the programming payment
reductions. As described in more detail below, our economic analysis shows that if the programming
payment reductions on AT&T’s video service increase, the post-transaction price on DIRECTV
standalone video also increases and the post-transaction price for AT&T standalone video decreases.
This result is similar to the effect we found on the AT&T broadband and DIRECTV video integrated
bundles discussed above. Specifically, the merger simulation demonstrates that it is more profitable for
the combined firm to raise the prices on DIRECTV video services in those areas where DIRECTV and U-
verse video overlap (and lower prices on AT&T video services) as AT&T’s programming payments fall.
This is due, in part, to the fact that a portion of the subscribers who leave DIRECTV video products after
the price increases will subscribe to AT&T video products at the now lowered prices (which also have
higher margins given less than 100 percent of the reduction in programming payments is passed through
to consumers). The profits from subscribers diverted from DIRECTV to AT&T are internalized by the
combined firm after the transaction.
132. To inform our assessment of the effects of the reduction in competition between AT&T’s
and DIRECTV’s video services, we analyzed the Modified Simulation
351
with no programming payment
reductions, and we found the decrease in consumer surplus to be insignificant. The Modified Simulation
calculates that the monthly per subscriber price would increase for DIRECTV’s standalone video
customers by $0.80, roughly less than 1 percent over pre-transaction levels.
352
For AT&T’s standalone
video customers, the price increase would be $1.57 per month, an increase of approximately 2 percent.
353
When accounting for Low Programming Payment Reductions, the price for DIRECTV’s standalone video
service increases by $0.97 per month, roughly 1.2 percent over the pre-transaction levels whereas the
price for AT&T’s U-verse standalone video decreases by $2.85 per month, approximately 3.8 percent less
348
See ACM et al. Petition at 6; WGAW Reply at 2, 24; see Reply Comments of Cox Communications, Inc. to Joint
Opposition, MB Docket 14-90, at v (filed Nov. 5, 2014) (“Cox Reply”). For a description of the Applicants’ claims
regarding the potential efficiencies and benefits of bundled offerings, see infra Section XI.B.
349
Free Press Petition at 16-19.
350
Free State Comments at 21-22.
351
The direction of the price changes for the AT&T-DIRECTV standalone video service does not differ between the
BH Simulation and the Modified Simulation with and without programming payment reductions, but there are
differences in the magnitude. See Berry-Haile Updated Results at 101-102, 110-111; Appendix C ¶¶ 89-94, Tables
7-9. The original BH tables do not show the standalone AT&T video price changes, but examination of the BH
Simulation results indicates that the price changes are directionally the same as those of the Modified Simulation.
352
See supra n.333. As an example, in terms of current rate plan prices, the price changes from the Modified
Simulation would reflect an approximate 0.9 to 1.4 percent price increase for a DIRECTV Premier plan depending
on the amount of the programming payment reduction. See DIRECTV, DIRECTV Entertainment Package
Selection, https://www.directv.com/DTVAPP/pepod/configure.jsp#package-section (visited June 24, 2015)
(providing prices for DIRECTV packages upon input of zip code).
353
See DIRECTV, DIRECTV Entertainment Package Selection,
https://www.directv.com/DTVAPP/pepod/configure.jsp#package-section (visited June 24, 2015). As an example, in
terms of current rate plan prices, the price changes from the Modified Simulation would reflect an approximate 11.7
percent price decrease to a 2.7 percent price increase for an AT&T U300 plan depending on the amount of the
programming payment reduction. See AT&T Inc., AT&T U-verse, https://www.att.com/shop/en/u-verse.html
(visited June 15, 2015) (providing prices for U-verse bundles).
Federal Communications Commission FCC 15-94
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than pre-transaction levels.
354
Finally, when the Modified Simulation incorporates the High PPR, the
price for DIRECTV’s standalone video service increases by $1.24 per month, approximately 1.5 percent
more than the pre-transaction price whereas the price for AT&T’s U-verse standalone video decreases by
$6.92 per month, roughly 9.1 percent less than pre-transaction levels.
355
133. Given this very small potential increase, compared to the overall benefits of the
transaction, and our findings based on the other evidence in the record, we decline to impose a condition
that would regulate the prices of standalone DIRECTV video.
356
6. Standalone Broadband
134. Currently, customers may purchase AT&T’s broadband Internet access service as a
standalone product (i.e., without purchasing AT&T video or phone services). Approximately [BEGIN
HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] of AT&T’s residential U-verse broadband
customers purchase standalone residential broadband service.
357
AT&T offers standalone broadband to
customers at prices ranging from $29.95 a month for downstream speeds up to 3 Mbps, $34.95 a month
for downstream speeds up to 6 Mbps, $44.95 a month for downstream speeds up to 18 Mbps, and $64.95
a month for downstream speeds up to 45 Mbps.
358
In Austin, Texas, Nashville, Tennessee, and Atlanta,
where AT&T has launched FTTP with GigaPower, AT&T offers standalone broadband at speeds between
75 Mbps to 1 Gbps per second for prices ranging from $70 a month to $120 a month.
359
DIRECTV does
not offer its own broadband service.
360
135. Positions of the Parties. Commenters express concern that the combined entity would
increase the price for standalone broadband in order to encourage consumers to purchase its bundled
services.
361
Netflix, Inc. (“Netflix”) argues that standalone broadband service would not remain a
354
See Appendix C Table 8.
355
See id. Table 9.
356
The Applicants claim that the number of DIRECTV subscribers with no broadband service is small [BEGIN
HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] . See Standalone Video Customers White Paper at
12-13.
357
See AT&T Response to Sept. 9, 2014, Information Request, Exhibit 5.g.2; Letter from Maureen R. Jeffreys,
Counsel for AT&T, to Marlene H. Dortch, Secretary, FCC, MB Docket No. 14-90 (April 21, 2015) (submitting
AT&T’s Form 477 data filings for the periods ended June 30, 2013, and December 31, 2013) (“AT&T April 21,
2015, Form 477 Data Filing”).
358
AT&T Inc., AT&T U-verse High Speed Internet, http://www.att.com/shop/internet/u-verse-internet.html (visited
June 18, 2015) (providing U-verse Internet bundle prices). AT&T offers promotions in certain geographic areas.
359
AT&T Inc., Shop U-verse, U-verse with AT&T GigaPower, https://www.att.com/shop/u-verse/gigapower.html
(visited June 1, 2015) (the pricing data for each city was determined by clicking on “Enter ZIP” at the top of the
page and entering the zip codes for Austin, Texas, Nashville, Tenn., and Atlanta).
360
Letter from Maureen R. Jeffreys, Counsel for AT&T, to Marlene H. Dortch, Secretary, FCC, MB Docket No. 14-
90, Attachment (“OVD Ex Parte Presentation”) at 2 (April 21, 2015) (submitting written ex parte presentation on
OVD services).
361
See Public Knowledge-ILSR Petition at 6 (“Even AT&T admits that this merger could exert upward pressure on
‘the price of standalone video or broadband.’ Suggesting only that this could be offset by cheaper bundles (though it
is not committing to offering cheaper bundles).”); WGAW Petition at 21 (“In the Comcast-NBCU Order, the
Commission found that a provider offering both video and Internet services could use bundling to hinder
competition by requiring cable and Internet to be purchased together, or by making it economically impractical to
purchase standalone broadband. Even Applicants acknowledge this harm, writing ‘in theory, there may be a
potential incentive for the combined company to raise prices for standalone broadband in order to incentivize
customers to purchase the bundle of services.’”). But see Application at 80-81; Joint Opposition at 37.
Federal Communications Commission FCC 15-94
53
competitive option for the combined entity in the long term.
362
The Greenlining Institute (“Greenlining”)
argues that the proposed transaction would reduce the availability of standalone broadband services to
low-income communities whose residents cannot afford bundled services.
363
WGAW argues that the
combined entity’s bundles would harm competition by tying customers to a single provider and that,
although the Applicants claim that the ability to bundle video and Internet services would be a benefit of
the transaction, bundling is also an effective strategy to discourage the substitution of OVD services for
the MVPD services that the combined entity would provide as part of a bundle of integrated broadband
and video services.
364
Commenters argue that the Commission has long shown a preference for
protecting standalone telecommunications services in order to safeguard consumer choice
365
and that the
Commission should adopt conditions to ensure that the combined entity offers reasonably priced
standalone broadband.
366
136. Several parties state that AT&T should commit to adopting an affordable, low-cost
broadband Internet service.
367
The National Association of Telecommunications Officers and Advisors
(“NATOA”) argues that AT&T’s commitment to provide high-speed Internet to underserved rural areas
comes up short when compared to what Comcast had announced as a commitment in connection with the
formerly contemplated merger with Time Warner Cable.
368
NATOA states that AT&T should voluntarily
commit to offering a low-cost broadband adoption service similar to Comcast’s Internet Essentials
broadband adoption program.
369
The California Emerging Technology Fund (“CETF”) recommends that
the Commission require AT&T to offer standalone broadband at an affordable rate for low-income
individuals and likewise notes that the $9.95 per month rate offered by Comcast as part of its Internet
Essentials program has worked well in recent years.
370
Several public interest groups also suggest that the
362
Netflix Comments at 28 (stating that if the Applicants are correct that standalone high-speed broadband service is
not competitive in the long term, there is unlikely to be significant competitive constraints in the future on the
combined entity that would prevent it from harming OVDs to protect its own video offering).
363
Petition to Deny of the Greenlining Institute, MB Docket 14-90, at 4-6 (filed Sept. 16, 2014) (“Greenlining
Petition”).
364
WGAW Petition at 20-21, 28 (citing Comcast-NBCU Order, 26 FCC Rcd at 4279, ¶ 102) (noting that tying a
consumer to a single provider discourages innovation and competition between providers offering Internet and video
service).
365
Id. at 22-24 (citing Comcast-NBCU Order, 26 FCC Rcd at 4279, ¶¶ 101-102); Joint Statement of Chairman
Kevin J. Martin and Commissioner Deborah Taylor Tate, Concurring Statement of Commissioner Michael J. Copps,
and Concurring Statement of Commissioner Jonathan S. Adelstein, AT&T-BellSouth Merger Order, 22 FCC Rcd at
5827, 5831, 5838.
366
See Franken Comments at 8; WGAW Reply at 35 (asserting that AT&T should be required to offer standalone
broadband service of at least 10 Mbps down and 3 Mbps up for no more than $25 a month and AT&T should further
agree that fixed wireless broadband will be made available as a standalone service).
367
See Comments of the National Association of Telecommunications Officers and Advisors, MB Docket 14-90, at
4-5 (filed Sept. 16, 2014) (“NATOA Comments”); Letter from John Bergmayer et al., Public Knowledge et al., to
Marlene H. Dortch, Secretary, FCC, MB Docket No. 14-90, at 1-2 (May 28, 2015) (“Public Interest Advocates May
28, 2015, Ex Parte Letter”); Comments of California Emerging Technology Fund, MB Docket 14-90, at 10 (filed
Oct. 14, 2014) (“CETF Comments”). We note that CETF’s comments were filed after the deadline established by
our pleading cycle and shall therefore be treated as an informal request. 47 C.F.R. § 1.41.
368
NATOA Comments at 4-5 (addressing low-cost broadband service commitment announced by Comcast in
connection with its proposed merger with Time Warner Cable).
369
Id. at 5; see also Application of Comcast Corp. and Time Warner Cable Inc., Description of Transaction, Public
Interest Showing, and Related Demonstrations, MB Docket No. 14-57, at 59-66, 106-26 (filed April 8, 2014).
370
CETF Comments at 10. CETF recommends that the low rate broadband service be available to the general public
for three years but suggests that, if the Commission wishes to limit the rate to specific underserved groups, the rate
(continued….)
Federal Communications Commission FCC 15-94
54
Commission require that AT&T make affordable broadband service available to all low-income
customers and underserved communities as a condition of any approval of the Application.
371
The public
interest groups argue that such a condition is necessary “to ensure that all individuals within the merged
entity’s service territory may share in the alleged, merger-specific broadband deployment public interest
benefits of the transaction.”
372
137. The Applicants assert that the combined entity would continue to have strong incentives
to compete for standalone broadband customers.
373
While the Applicants acknowledge a post-transaction
incentive to potentially raise the price of their standalone broadband product to induce customers to
purchase bundled service, they claim that the overall effect on consumer welfare from that incentive is
minimal as it is counterbalanced by lower prices for the integrated bundle relative to the synthetic bundle
currently offered
374
as well as by lower prices of cable bundles, cable standalone video, and cable
standalone broadband.
375
Thus, AT&T contends that “the overall effect on current purchasers of
standalone Internet access services may be beneficial.”
376
138. The Applicants claim that AT&T’s broadband speed disadvantage, relative to broadband
offerings of cable, other telephone MVPDs, and Internet service providers that are building high-speed
broadband networks, also provides a strong incentive to keep standalone prices competitive.
377
Further,
AT&T states the projected increase in the number of households that receive all of their video from online
services
378
also would maintain its incentive to compete for standalone broadband customers.
379
(Continued from previous page)
should be available to low-income persons, seniors, and people with disabilities. CETF adds that returning veterans
should also be considered for eligibility. Id. CETF also recommends that the Commission establish verifiable
performance goals and compliance oversight for AT&T, as well as require AT&T to provide non-onerous service
terms and adequate notice of availability for the low rate broadband service. Id.
371
Public Interest Advocates May 28, 2015, Ex Parte Letter at 1-2.
372
Id.
373
Application at 80. The Applicants also assert that “DIRECTV currently does not have broadband service
offerings and has no reasonable prospect of developing such offerings organically.” Id.; see also Doyle Decl. ¶¶ 5-
6, 14, 25. Thus, the Applicants claim that “there is no current or potential horizontal broadband competition
between the merging parties.” Application at 80; see also Katz Decl. ¶¶ 78, 84.
374
Application at 80; see also Katz Decl. ¶ 84.
375
Application at 80-81; see also Katz Decl. ¶¶ 4, 84, 88-89. The Applicants assert that the econometric analysis
“shows that the drop in the price of the AT&T/DIRECTV bundle creates downward pressure on the range of cable
broadband offerings, i.e., cable video/broadband bundles and cable standalone broadband, as well as cable
standalone video.” Application at 81; see also Katz Decl. ¶ 88, Table 2, ¶ 92, Table 3. The Applicants believe that
the “overall effect of any theoretical increase in prices for the relatively small number of AT&T standalone
broadband customers would be more than offset by the expected decrease in prices for the much larger group of
consumers purchasing the combined AT&T/DIRECTV broadband/video bundle, cable bundles, or cable standalone
broadband.” Application at 81; see also Katz Decl. ¶¶ 84-85, 88, 90, 92, 94.
376
Application at 81 (quoting Katz Decl. ¶ 84). The Applicants contend that the overall projected impact on
consumer welfare is positive and any cost efficiencies unaccounted for in Dr. Katz’s merger simulation would tend
to put further downward pressure on standalone prices. Joint Opposition at 31 n.94; see also Application,
Declaration of Rick L. Moore, Senior Vice President, AT&T, transmitted by letter from Maureen R. Jeffreys,
Counsel for AT&T, to Marlene H. Dortch, Secretary, FCC, MB Docket No. 14-90, ¶ 20 (filed June 11, 2014)
(“Moore Decl.”) (asserting that the transaction would generate cost savings that would lead to improved standalone
services for consumers).
377
Application at 81-82; see also Lee Decl. ¶ 25.
378
Application at 82.
379
Id.
Federal Communications Commission FCC 15-94
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139. The Applicants commit that, for three years after closing, they will “offer standalone
wireline broadband service at reasonable market-based prices, including a service with speeds of at least 6
Mbps down (where feasible) at a 12-month price no greater than $34.95 per month (provided that the
price can be increased by no more than any increase in the Consumer Price Index for All Urban
Consumers (CPI-U) for Communications every 12 months starting 12 months following deal close).”
380
The Applicants assert that this commitment would provide additional protections and guaranteed benefits
to consumers who want to purchase only broadband service.
381
140. Commenters argue that the Applicants’ commitment is too vague and that the time
limitation of three years is insufficient to protect low-income consumers.
382
Some commenters request
that the Applicants be required to offer standalone broadband service at speeds of at least 25 Mbps where
it is technically able to do so at a price not greater than $29.95 for seven years, and that the minimum
speed offered as a standalone broadband service should be increased as the Commission’s benchmark
broadband speed increases. Further, commenters request that any broadband speed offered as part of a
bundled package must also be made available on a standalone basis, on equivalent usage terms and
conditions as the bundled offering, at a reasonable price that takes into account the cost savings of not
having to provide bundled services.
383
Applicants contend that their proposed commitment to offer
“standalone broadband service for three years at reasonable market-based prices” is “designed to assure
customers that, after the merger, they will continue to enjoy a rich selection of standalone options
throughout AT&T’s wireline broadband footprint.”
384
141. In addition, the Applicants state that their commitment to offer a 6 Mbps service where
feasible ensures that “it would be more widely available than a service of higher speeds.”
385
They state
380
Id. at 50; Joint Opposition at 37; see also Letter from Debbie Goldman, Telecommunications Policy Director,
Communications Workers of America, to Marlene H. Dortch, Secretary, FCC, MB Docket No. 14-90, at 1 (Feb. 3,
2015) (“CWA Feb. 3, 2015, Ex Parte Letter”) (noting that AT&T’s voluntary commitment to offer standalone
broadband services for the next three years is a substantial public interest benefit); Letter from Robert W. Quinn Jr.,
Senior Vice President – Federal Regulatory and Chief Privacy Officer, AT&T, to Marlene H. Dortch, Secretary,
FCC, MB Docket No. 14-90, at 1 (Nov. 5, 2014) (noting AT&T’s commitment to keep standalone broadband
services available for those customers who do not desire a bundle of services); Letter from Robert W. Quinn Jr.,
Senior Vice President – Federal Regulatory and Chief Privacy Officer, AT&T, to Marlene H. Dortch, Secretary,
FCC, MB Docket No. 14-90, at 1 (June 25, 2014) (“AT&T June 25, 2014, Ex Parte Letter”) (noting AT&T’s
commitment to keep standalone broadband services available for those customers who do not desire a bundle of
services). According to the Applicants, this specific commitment to maintain affordable standalone broadband
service is clear evidence of the importance it places on broadband, thereby refuting Greenlining’s concerns that the
transaction would reduce the availability of standalone broadband. Joint Opposition at 37 n.120. The Applicants
further argue that the specific terms offered by AT&T also rebut Greenlining’s suggestion that AT&T’s commitment
is at “whatever speed and price AT&T designs to offer.” Joint Opposition at 37 n.120 (quoting Greenlining Petition
at 10).
381
See Application at 50, 82.
382
Greenlining Petition at 9-10 (stating that AT&T’s commitment is nothing more than a promise that AT&T
provide standalone broadband service at “whatever speed and price AT&T designs to offer”); see also WGAW
Petition at 21 (noting that the Applicants’ standalone broadband protections are offered for only three years).
383
Letter from Robert M. Cooper, Counsel for Cogent Communications, Inc.; Matt Wood, Free Press; John
Bergmayer, Public Knowledge; Jeffrey Blum, DISH Network Corporation; and Josh Stager, New America’s Open
Technology Institute, to Marlene H. Dortch, Secretary, FCC, MB Docket No. 14-90, at 2-3 (May 12, 2015) (“Cogent
et al. May 12, 2015, Ex Parte Letter”).
384
Letter from Maureen R. Jeffreys, Counsel for AT&T, to Marlene H. Dortch, Secretary, FCC, MB Docket No. 14-
90, Attachment (“Conditions Ex Parte Presentation”) at 9 (May 26, 2015) (submitting written ex parte in response to
conditions proposed by Cogent, DISH, Cox, and other parties).
385
Conditions Ex Parte Presentation at 9.
Federal Communications Commission FCC 15-94
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that the commenters’ proposal for higher-speed standalone service would “benefit far fewer people, as
only about [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] percent of AT&T
customers subscribe to speed tiers of 25 Mbps or above.”
386
Applicants also state that the commenters’
proposed seven-year duration fails to recognize the potential harm such long-term restrictions can cause
in a market known for rapid technological advances, and that the proposed three-year term follows the
precedent set in the Comcast-NBCU transaction.
387
142. Discussion. The Modified Simulation predicts very little change in the price of AT&T’s
standalone broadband post-transaction.
388
The Modified Simulation finds that with no programming
payment reductions the price would decrease by $0.33, which is roughly 0.73 percent less than pre-
transaction levels.
389
The Modified Simulation also finds, with a Low Programming Payment Reduction,
that the price of AT&T’s standalone broadband service falls by $0.12, which is approximately 0.27
percent less than pre-transaction levels. For a High Programming Payment Reduction, the price of
standalone broadband increases by $0.21 per month, which is roughly an increase of 0.46 percent over
pre-transaction levels.
143. In addition, the Modified Simulation shows little change (positive or negative) in the
prices of standalone broadband offered by other cable and telephone MVPD providers. The largest
change in standalone broadband prices (in absolute magnitude) in the Modified Simulation is a $0.64
decrease in the cable standalone broadband price when there is a High PPR. This change represents a
decrease of 1.2 percent relative to the prices in the simulation, and all other standalone broadband prices
have changes of less than 1 percent in magnitude. Thus, we decline to impose as a condition the
Applicants’ standalone broadband pricing commitment.
144. However, we have stated previously that it is in the public’s interest to ensure that a
bundled option is not the consumer’s only competitive choice,
390
and this protection may be particularly
important for low-income subscribers who may not be able to afford bundled services.
391
145. Thus, we adopt, as a condition to granting the Application, a requirement that AT&T
implement and offer a discounted broadband services program to eligible consumers, as set forth in
Appendix B.
386
Id.
387
Id. at 10.
388
See Appendix C Tables 7-9. The direction of the price changes for the AT&T-DIRECTV standalone broadband
service does not differ between the BH Simulation and the Modified Simulation without programming payment
reductions, but there is a difference in the magnitude. For the High PPR scenario, the direction and magnitude are
not the same. See Berry-Haile Updated Results at 101-102, 110-111; Appendix C ¶¶ 89-94, Tables 7-9.
389
As an example, in terms of current rate plan prices, the price changes from the Modified Simulation would reflect
an approximate 0.73 percent price decrease to a 0.36 percent price increase for an AT&T Max Plus plan depending
on the amount of the programming payment reduction. See AT&T Inc., AT&T U-verse High Speed Internet,
http://www.att.com/shop/internet/u-verse-internet.html (visited June 18, 2015) (providing U-verse Internet bundle
prices).
390
Comcast-NBCU Order, 26 FCC Rcd at 4279, ¶¶ 101-103 (the Commission determined that the standalone
broadband condition could help mitigate Comcast’s ability to use its vertical properties to harm competing video
distributors). WGAW contends that the Commission’s preference for unbundled services promotes competition
among distributors, allowing consumers to choose the services and the providers that best meet their needs, and that
the emergence of OVDs increases the importance of access to affordable high-speed standalone broadband. See
WGAW Reply at 24.
391
Greenlining Petition at 4-5.
Federal Communications Commission FCC 15-94
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B. Documentary and Other Record Evidence of Competition between AT&T and
DIRECTV and the Need for Bundles
146. We also examined documentary and other evidence in the record to determine whether
the transaction would harm competition. Such evidence is an important part of our analysis of the
potential competitive effects of the loss of competition between AT&T and DIRECTV.
392
Although the
record shows that the proposed transaction results in some loss of competition between AT&T and
DIRECTV, the record also supports the Applicants’ assertion that they have focused their marketing
efforts on customers of the cable companies and view the cable companies as their primary competitors.
In addition, the record supports the Applicants’ assertion that they are significantly limited by their
inability to offer a competitive integrated bundle and that those limitations cannot be overcome by
offering a synthetic bundle of AT&T broadband and DIRECTV satellite video. Thus, we find the
Applicants’ post-transaction ability to offer a competitive integrated bundle of broadband and video,
which may also have the effect of reducing competitors’ prices, to be a significant consumer benefit that
outweighs the limited reduction in competition. This benefit, along with the other conditions we impose,
outweighs the risk from the limited reduction in competition.
147. The Applicants claim that the transaction would promote competition because AT&T and
DIRECTV’s video services are not “particularly close substitutes.”
393
As previously noted, AT&T
regards itself as primarily a wireline provider, and as such, it focuses its marketing efforts on its
broadband product and bundled services.
394
AT&T explains that its video footprint covers only one-
quarter of U.S. households and, within that footprint, more than 97 percent of AT&T U-verse video
customers buy that service bundled with broadband or other services.
395
AT&T notes that only 138,000
of its customers buy U-verse video on a standalone basis.
396
148. AT&T also asserts that its primary competitors are cable operators and cable
overbuilders, citing evidence that when AT&T’s bundle customers switch to another provider, they
largely choose cable and not satellite service.
397
In contrast, AT&T considers DIRECTV’s satellite video
service to be a complement to its broadband service.
398
149. DIRECTV states that it focuses its marketing efforts on the customers of other MVPD
providers, including cable operators and DISH, and on its standalone video subscribers.
399
DIRECTV
also asserts that it has had limited success in targeting broadband or bundled services customers,
400
including because its satellite technology does not offer a two-way connection for non-linear video.
401
DIRECTV explains the competitive importance of a two-way connection, stating that “the rise in non-
392
2010 DOJ/FTC Horizontal Merger Guidelines § 2.2 at 4-6.
393
See generally Competition White Paper. See also Katz Decl. ¶ 81 (arguing that DBS MVPDs and wireline
MVPDs offer differentiated products primarily because wireline MVPDs provide integrated bundles).
394
Lee Decl. ¶¶ 28, 38-41.
395
See Application at 7; Lee Decl. ¶¶ 7, 12.
396
Application at 7; Lee Decl. ¶ 12; Katz Decl. ¶ 80.
397
See Application at 57-58; Lee Decl. ¶¶ 23-25, 28, 30, 38-41; Competition White Paper at 2-18.
398
See Application at 57-58; Competition White Paper at 2, 18-19.
399
See Application at 7-8, 57, 69-71; Competition White Paper at 2, 19-39.
400
See Application at 62-63 (“[T]he DIRECTV synthetic bundle is severely disadvantaged both in terms of speed
and price, in comparison to the integrated bundles offered by cable operators, AT&T, and Verizon. It also provides
an inferior customer experience, such as requiring two separate installation visits. … When customers leave
DIRECTV, the lack of an integrated bundle is often a key reason they give.”).
401
Doyle Decl. ¶ 19.
Federal Communications Commission FCC 15-94
58
linear viewing – outside of the scheduled broadcast, such as VOD and DVR content – has . . . increased
the importance of offering a two-way connection using broadband.”
402
DIRECTV maintains that the
absence of a two-way connection “hampers its ability to integrate traditional linear video with on-demand
and OTT [over-the-top] services in ways that create the richer, more flexible, and increasingly ubiquitous
video experience demanded by consumers.”
403
DIRECTV states that “cable companies, which offer
broadband bundles that organically provide a two-way connection, have capitalized on this advantage by
offering innovative features and services such as remote digital video recorders and VOD programming
stored in the ‘cloud.’”
404
150. DIRECTV also explains its efforts to overcome this inherent satellite disadvantage, for
example by offering connected set-top boxes to allow its subscribers to access services over the
Internet.
405
DIRECTV notes that this strategy requires subscribers to separately arrange for and maintain
their own broadband service,
406
which makes it difficult for DIRECTV to get the DIRECTV set-top boxes
connected to other providers’ Internet service.
407
DIRECTV cites data suggesting that “ [BEGIN
HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] .”
408
DIRECTV also notes that
DIRECTV’s most advanced boxes permit customers to record roughly 100 hours of content while
DIRECTV “manages” another 100 hours of content.
409
DIRECTV asserts that broadband-enabled cable
operators, with essentially unlimited cloud storage capacity, face no such difficulty.
410
151. The Applicants maintain that DIRECTV’s growth has stagnated because even “a high-
quality standalone video product may not be sufficient to compete with providers that offer their own
integrated bundles of video and broadband services.”
411
They note that in 2013 approximately [BEGIN
HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] percent of new DIRECTV video
subscribers also activated broadband purchased in a synthetic bundle sold by DIRECTV.
412
Similarly,
AT&T sales of DIRECTV video [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF.
INFO.] .
413
152. The Applicants also claim that, consistent with the economic analysis described above,
their synthetic bundles are not competitive with bundles offered by cable operators “because they cannot
match either the discounts on price or the seamless customer service offered by cable companies.”
414
The
Applicants state that neither AT&T nor DIRECTV has enough incentive to resolve the problems
associated with synthetic bundles because the solutions “require considerable capital investment and
402
Id.
403
Id.
404
Id.
405
Id. ¶ 20.
406
Id.
407
Id.
408
Id.
409
Id. ¶ 21.
410
Id.
411
Id. ¶ 14.
412
Guyardo Decl. ¶ 20.
413
Lee Decl. ¶ 58.
414
Id. ¶¶ 4, 53-58. See also Application at 20, 52; Doyle Decl. ¶¶ 24-25; Guyardo Decl. ¶¶ 7, 21, 41-45; Katz Decl.
¶¶ 26-27, 29-32, 68-71, 97-106; Stankey Decl. ¶¶ 26-29; Double Moral Hazard White Paper at 17-19. The
Applicants also note that competition “for video/broadband bundles occurs primarily between the competitors
offering integrated bundles.” Application at 57-62.
Federal Communications Commission FCC 15-94
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effort by each party, but there is no business case for such outlays because the anticipated additional
revenues and profits the projects might generate do not justify the anticipated costs.”
415
153. The Applicants contend that they cannot improve the competitiveness of the synthetic
bundles.
416
Indeed, the Applicants claim that efforts to resolve the shortcomings of the synthetic bundles
have been largely unsuccessful.
417
The Applicants argue that “it is impractical, if not impossible” to
overcome the synthetic bundle’s shortcomings because any action by one party (e.g., AT&T) to increase
demand for its own product creates a benefit for the other party (e.g., DIRECTV), which is not
internalized by the acting party.
418
The Applicants have attempted to resolve these issues by modifying
the joint marketing arrangement but report that these efforts have not been successful.
419
As a result,
neither party has an incentive to invest in the synthetic bundle at the optimal level.
420
As noted above, the
Applicants describe this situation as the commonly known “double moral hazard problem,” which occurs
when independent firms contract to supply complementary goods jointly.
421
The Applicants explain that
the firms have misaligned incentives, which results in less investment in the joint offering than is optimal
because neither party takes into account the benefits that accrue to the other party from their
investment.
422
The Applicants state that post-transaction, the double moral hazard problem would be
eliminated and the customer experience would be greatly simplified because there would be a single sales
process, a single installation appointment, a single bill, and “one call” resolution for billing and service
issues.
423
154. As stated above, the Applicants also argue that the synthetic bundle customer experience
is inferior to the integrated bundle customer experience.
424
For example, the synthetic bundle customer
must make two different installation appointments and receives two different bills.
425
The Applicants
note that synthetic bundlers are further disadvantaged because they are likely to incur additional fees that
fully integrated providers typically waive for their own bundled customers.
426
The Applicants also assert
that the synthetic bundle price discount given to the customer might not be applied for several months,
which results in customer confusion and complaints.
427
They note that if customers have a complaint,
they often need to contact both AT&T and DIRECTV instead of being able to resolve all of their issues
415
Double Moral Hazard White Paper at 21; see also Katz Reply Decl. ¶ 16.
416
Joint Opposition at 15.
417
Guyardo Decl. ¶¶ 36-38; Lee Decl. ¶ 59.
418
Double Moral Hazard White Paper at 2-5. See also Application at 67.
419
Application at 65; Joint Opposition at 13-15; Guyardo Decl. ¶¶ 36-38; Katz Decl. ¶¶ 74-76, 100-103; Lee Decl.
¶ 59. The Applicants do note that they have had some limited success resolving the customer service issues and
improving the incentives for each side to promote and sell the service. Guyardo Decl. ¶¶ 36, 38. See also Double
Moral Hazard White Paper at 8-21.
420
Application at 66; Katz Decl. ¶¶ 4, 69.
421
Application at 66; Katz Decl. ¶ 97.
422
Double Moral Hazard White Paper at 4-5; Application at 66-67.
423
Joint Opposition at 15; see also Doyle Decl. ¶ 27; Katz Decl. ¶¶ 61, 63; Katz Reply Decl. ¶ 12.
424
Application at 20; Guyardo Decl. ¶¶ 31-38; Katz Decl. ¶¶ 104-105; Lee Decl. ¶¶ 4, 13.
425
Katz Decl. ¶ 36; Lee Decl. ¶ 57. They could also be required to undergo multiple credit checks. Guyardo Decl.
¶ 31.
426
Guyardo Decl. ¶ 29 ( [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] ). Guyardo Decl. ¶
29. See also Katz Decl. ¶ 75; Double Moral Hazard White Paper at 11.
427
Guyardo Decl. ¶ 33; Lee Decl. ¶ 57.
Federal Communications Commission FCC 15-94
60
through a single call because AT&T has to resolve broadband service issues while DIRECTV has to
resolve video problems.
428
155. Discussion. We find that the record reflects that AT&T primarily focuses its competitive
strategy, marketing, and pricing on other providers of broadband and bundled services, namely incumbent
cable operators and cable overbuilders.
429
Although AT&T tracks pricing strategies and service offerings
of all MVPDs, including DIRECTV, the record also supports AT&T’s claim that its primary competition
is the bundle offered by cable operators.
430
156. The record also supports DIRECTV’s position that it is at a competitive disadvantage
without broadband or bundled services. Like AT&T, DIRECTV tracks pricing strategies and service
offerings of all MVPDs, but it identifies cable operators as its primary competitors.
431
To compete with
cable operators and their bundled services, DIRECTV offers synthetic bundles by partnering with
broadband providers including AT&T.
432
However, as explained, DIRECTV has had limited success
with its synthetic bundles. DIRECTV also has attempted to differentiate its standalone video product
from other video providers, including by emphasizing DIRECTV’s exclusive content, and providing
consumer upgrades.
433
157. Additionally, the record supports the Applicants’ position that bundles of broadband and
video are more attractive to consumers. An analysis prepared for AT&T by Frost and Sullivan found that
[BEGIN CONF. INFO.] [END CONF. INFO.] .
434
The report also indicated that [BEGIN CONF.
INFO.] [END CONF. INFO.] .
435
The Applicants note that 78 percent of basic cable video subscribers
purchase a bundle of services
436
and that “more than 97 percent of AT&T’s 5.7 million video customers
subscribe to bundled services.”
437
The Applicants disclose that in the first quarter of 2014 “approximately
[BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] percent of the subscribers leaving
DIRECTV reported that they will purchase a bundle of video and broadband services from their new
provider,” which they assert is an increase from the level reported three years earlier.
438
AT&T’s internal
documents state that [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] .
439
In
428
Guyardo Decl. ¶ 34; Katz Decl. ¶ 36; Lee Decl. ¶ 57.
429
The Commission has previously noted that telephone MVPDs and cable operators differentiate their services by
highlighting the benefits of their bundled services, in contrast to DBS providers, which focus their marketing efforts
on video service. See Sixteenth Annual Report, 30 FCC Rcd at 3288, ¶ 81.
430
For example, documents discussing AT&T’s U-verse subscriber churn rates demonstrate that [BEGIN HIGHLY
CONF. INFO.] [END HIGHLY CONF. INFO.] See, e.g., ATT-FCC-03227145, [BEGIN HIGHLY CONF.
INFO.] [END HIGHLY CONF. INFO.] ; ATT-FCC-03226408, [BEGIN HIGHLY CONF. INFO.] [END
HIGHLY CONF. INFO.] . See also Lee Decl. ¶ 30.
431
Documents discussing DIRECTV’s subscriber churn rates evidence that [BEGIN HIGHLY CONF. INFO.]
[END HIGHLY CONF. INFO.] . See DTVFCC-00645037, [BEGIN HIGHLY CONF. INFO.] [END HIGHLY
CONF. INFO.] . See, also, e.g., DTVFCC-01748388, [BEGIN HIGHLY CONF. INFO.] [END HIGHLY
CONF. INFO.] ; DTVFCC-00244051, [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] .
432
See, e.g., DTVFCC-01748388, [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] .
433
See, e.g., id.; see also Competition White Paper at 2, 19-39.
434
ATT-FCC-00140646, [BEGIN CONF. INFO.] [END CONF. INFO.] .
435
Id.
436
Application at 21; Doyle Decl. ¶ 16.
437
Application at 2. See also Application at 70; Lee Decl. ¶ 12; Competition White Paper at 6.
438
Guyardo Decl. ¶ 11. See also Application at 63; Katz Decl. ¶ 31.
439
Video and Broadband Complementarity White Paper at 7.
Federal Communications Commission FCC 15-94
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addition, the Applicants’ documents discussing the AT&T-DIRECTV synthetic bundle show that
[BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] .
440
In addition, AT&T found that
having “ [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] .”
441
DIRECTV internal
documents also support [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] .
442
158. Based on our review of the record, we also agree that the customer experience for
synthetic bundles is often inferior to the customer experience for integrated bundles. DIRECTV’s
documents demonstrate that [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] .
443
Additionally, DIRECTV’s documents state that “ [BEGIN HIGHLY CONF. INFO.] [END HIGHLY
CONF. INFO.] .”
444
DIRECTV’s customer satisfaction data support this viewpoint because customers of
DIRECTV’s synthetic bundle report having a dramatically inferior experience compared to DIRECTV’s
video-only customers.
445
Similarly AT&T’s documents state that synthetic bundles “ [BEGIN HIGHLY
CONF. INFO.] [END HIGHLY CONF. INFO.] .”
446
159. Thus, we conclude that the Applicants’ ability to provide an integrated bundle of AT&T
broadband and DIRECTV video throughout AT&T’s broadband footprint is a significant positive
competitive effect of the transaction.
C. Conclusion
160. We find that our competitive effects analysis does not support a finding that the
transaction creates overall public interest harm.
X. ADDITIONAL COMPETITIVE EFFECTS AND PUBLIC INTEREST HARMS RAISED
IN THE RECORD
161. In addition to our analysis of the competitive effects described above, we also considered
other public interest harms that were raised in the record. Our findings on each of these potential public
interest harms are described below.
A. Limits on Competitors’ Access to Programming
162. Commenters identified concerns that the combined entity may have an increased
incentive, and potentially increased ability, to impede competitors’ or potential competitors’ access to
affiliated and unaffiliated programming. We find that to the extent that the issues identified by
commenters are transaction specific, the Commission’s existing rules afford adequate protections.
440
See, e.g., ATT-FCC-01463960, [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] .
441
ATT-FCC-00428824, [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] . See also Video
and Broadband Complementarity White Paper at 7; Competition White Paper at 5.
442
ATT-FCC-03371650, [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] . See also
DTVFCC-00935963, [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] .
443
See DTVFCC-00691428, [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] . See also
DTVFCC-01008205, [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] ; DTVFCC-02626878,
[BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] .
444
See DTVFCC-02626878, [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] ; Guyardo
Decl. ¶ 32.
445
Joint Opposition at 13 (At AT&T, in particular, sales of the synthetic bundle of AT&T’s broadband along with
DIRECTV’s video [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] ). See also Guyardo
Decl. ¶ 35.
446
ATT-FCC-03149985, [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] . See also Double
Moral Hazard White Paper at 17-21.
Federal Communications Commission FCC 15-94
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1. Limiting Access to RSNs and Other Affiliated Programming
163. DIRECTV owns and operates two RSNs, Root Sports Pittsburgh and Root Sports Rocky
Mountain, and holds a minority interest in, and manages, the Seattle-based RSN, Root Sports
Northwest.
447
DIRECTV also has a 42 percent non-controlling interest in the Game Show Network and
smaller, minority interests in the MLB Network, the NHL Network, and a handful of other networks,
including the Tennis Channel.
448
DIRECTV and AT&T also recently acquired majority ownership of a
Houston-area RSN (“CSN Houston”) out of bankruptcy and relaunched it as Root Sports Southwest.
449
As a result of the transaction, AT&T would acquire DIRECTV’s interests in these programming content
holdings.
164. Positions of the Parties. Some commenters express concern that the combined entity
would have the incentive and ability to restrict access to vertically owned programming, especially sports
programming.
450
These commenters argue that the combined entity could foreclose and unfairly
disadvantage rival MVPDs by withholding or artificially raising costs for these programming assets.
451
Cequel Communications, LLC d/b/a Suddenlink Communications (“Suddenlink”) notes that some
subscribers are willing to change MVPD providers just to gain access to sports content such as
DIRECTV’s RSNs
452
and that an MVPD’s access to sports programming, and the price and terms of such
access, are important to an MVPD’s ability to compete.
453
165. To mitigate the potential harm that the combined entity could exploit its ownership of
programming, including RSNs, against competing MVPDs, some commenters propose that the
Commission impose certain conditions for approving the transaction.
454
Commenters ask the
Commission to affirm that the program access rules would apply to all video services provided by the
combined entity, regardless of the facilities used to provide that service.
455
Several commenters also ask
the Commission to impose arbitration conditions, as it has done in some previous transactions, to mitigate
447
Application at 14; Doyle Decl. ¶ 9.
448
Id.
449
Joint Opposition at 55. See also In re Houston, 514 B.R. 211. We note that AT&T, DIRECTV, Comcast, and
several smaller MVPDs are currently carrying Root Sports Southwest, but DISH and Suddenlink have not yet
entered into agreements to carry the RSN. See Root Sports, Channel Finder,
http://southwest.rootsports.com/channel-finder.com/channel-finder/ (visited June 18, 2015).
450
Franken Comments at 6-7; Comments of Cequel Communications, LLC d/b/a Suddenlink Communications, MB
Docket 14-90, at 4-5 (filed Sept. 16, 2014) (“Suddenlink Comments”); Reply Comments of American Cable
Association, MB Docket 14-90, at 3-9 (filed Jan. 7, 2015) (“ACA Reply”); see also Letter from Bridget Watkins et
al., All West Commc’ns et al., to Thomas Wheeler, Chairman, FCC, MB Docket No. 14-90, at 1-2 (July 9, 2015)
(submitting the concerns of small MVPDs that currently purchase carriage rights for RSNs owned or controlled by
the Applicants).
451
Id.
452
Suddenlink Comments at 4.
453
Id.
454
Id. at 4-5, 8-14.
455
Franken Comments at 7; Cox Petition at 18-21; Cox Reply at 6-7; Letter from Jason E. Rademacher, Cooley
LLP, Counsel for Cox Communications, Inc., to Marlene Dortch, Secretary, FCC, MB Docket No. 14-90, at 1 (Nov.
7, 2014) (“Cox Nov. 7, 2014, Ex Parte Letter”); Letter from Jason E. Rademacher, Cooley LLP, Counsel for Cox
Communications, Inc., to Marlene Dortch, Secretary, FCC, MB Docket No. 14-90, at 3 (Dec. 4, 2014) (“Cox Dec. 4,
2014, Ex Parte Letter”); Letter from Jason E. Rademacher, Cooley LLP, Counsel for Cox Communications, Inc., to
Marlene Dortch, Secretary, FCC, MB Docket No. 14-90, at 3 (Dec. 22, 2014) (“Cox Dec. 22, 2014, Ex Parte
Letter”).
Federal Communications Commission FCC 15-94
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potential harms from vertical integration between video programmers and distributors.
456
Commenters
note that, until recently, DIRECTV’s RSNs were subject to arbitration conditions under the Liberty
Media-DIRECTV Order but that the conditions have since expired.
457
American Cable Association
(“ACA”) argues that, despite the expiration of these conditions, DIRECTV has the same incentives to
charge competing MVPDs higher prices for its RSN programming.
458
Other commenters agree, pointing
to AT&T’s and DIRECTV’s prior conduct and arguing that increased opportunity costs and bargaining
power as a result of the transaction create a greater incentive to harm rivals.
459
Commenters propose that
the Commission adopt various other related conditions to address these concerns.
460
166. The Applicants respond by observing that neither AT&T nor DIRECTV has substantial
content holdings.
461
AT&T’s U-verse service is not available in the areas served by DIRECTV’s existing
RSNs. The Applicants contend the transaction does not increase the incentive to withhold DIRECTV’s
RSNs because AT&T’s U-verse service is not available in the areas served by those RSNs.
462
The
Applicants also note that Root Sports Southwest was unsuccessful prior to their acquisition because it
lacked wide distribution. Although Root Sports Southwest operates in an area where U-verse is available,
the Applicants argue that they would have strong incentives to seek carriage to strengthen the RSN’s
economic viability.
463
Finally, the Applicants also note that AT&T is subject to the Commission’s
existing program access rules and that DIRECTV remains subject to program access conditions for its
RSN programming.
464
Therefore, the Applicants conclude there are no transaction-specific harms that
warrant additional program access conditions.
465
456
Suddenlink Comments at 5-6, 8; ACA Reply at 15-22, 54; Reply Comments of WaveDivision Holdings, LLC,
MB Docket 14-90, at 3, 6 (filed Jan. 7, 2015) (“Wave Reply”).
457
Comments of American Cable Association, MB Docket 14-90, at 12-14 (filed Sept. 16, 2014) (“ACA
Comments”); Suddenlink Comments at 5-6; Wave Reply at 3.
458
ACA Comments at 13-14. For example, Wave asserts that following the recent expiration of DIRECTV’s
arbitration conditions, DIRECTV has failed to negotiate meaningfully for Root Sports Northwest. Wave Reply at 4-
5. Wave states that its agreement with DIRECTV to carry Root Sports Northwest expired on December 31, 2014,
but that DIRECTV has granted Wave an extension of this agreement to allow negotiations to continue. Id. at 4 n.9.
459
Cox Petition at 7, 9; Suddenlink Comments at 6-7; ACA Comments at 12-15. For example, Suddenlink argues
that the recent program access arbitration between Armstrong Utilities, Inc. and DIRECTV demonstrates that
DIRECTV has a history of imposing unfair rates on competing MVPDs. Suddenlink Comments at 6-7. See
DIRECTV Sports Net Pittsburgh, LLC v. Armstrong Utilities, Inc., Memorandum Opinion and Order, 29 FCC Rcd
8624, 8629-30, ¶ 14 (2014) (affirming an arbitration decision in favor of Armstrong Utilities in a dispute concerning
the fair market value of an RSN owned by DIRECTV Sports Net Pittsburgh).
460
ACA proposes several conditions, including a non-discriminatory access condition; various modifications of the
program access complaint process for MVPDs that file complaints under the non-discriminatory access condition;
certain conditions designed to prevent the combined entity’s increased size from harming MVPDs in their
negotiations with other programmers; and a requirement that any program access condition remain in effect for at
least nine years. See ACA Reply at 43-59. Suddenlink proposes a prohibition on tying carriage of one RSN to
carriage of any other RSN(s) and an a la carte condition (or alternatively, an MFN condition) on DIRECTV’s RSN
programming. See Suddenlink Comments at 8-13. Wave proposes a requirement that the rates, terms, and
conditions charged to terrestrial facilities-based providers for distribution of DIRECTV-affiliated RSNs be no more
than those made available to competitors of those providers. See Wave Reply at 6.
461
Joint Opposition at 54.
462
Id.
463
Id. at 55.
464
Id. at 55-56.
465
Id. at 56.
Federal Communications Commission FCC 15-94
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167. Discussion. On the basis of this record, we do not find harms relating to access to
affiliated programming that require us to impose upon the combined entity company-specific conditions
in addition to our existing program access rules. With the exception of the recent joint venture in
Houston, AT&T’s U-verse service is not available in any of the markets served by DIRECTV’s existing
affiliated RSNs (Root Sports Pittsburgh, Root Sports Rocky Mountain, and Root Sports Northwest).
466
Accordingly, because the combined entity’s concentration in these markets would not increase as a result
of the transaction, the transaction would not affect the combined entity’s incentive to make these RSNs
available to its rivals.
467
In addition, AT&T and DIRECTV already jointly control the Houston RSN
through a joint venture, with AT&T owning a 40 percent interest and DIRECTV owning a 60 percent
interest.
468
Because the Houston RSN is already vertically integrated as to AT&T and DIRECTV
separately, the transaction does not change the combined entity’s ability or incentives to limit access of
the RSN to other MVPDs. As a joint venture, the Houston RSN can be expected to maximize the profits
of both AT&T and DIRECTV when negotiating with a rival MVPD.
469
168. Congress enacted the program access provisions of Section 628 of the Act as part of the
1992 Cable Act to address concerns that vertically integrated program suppliers have the incentive and
ability to favor their affiliated cable operators over unaffiliated MVPDs.
470
Specifically, Congress was
concerned that a vertically integrated programmer may exclude rival distributors, including new entrants
and new technologies, from access to its programming, or raise programming prices to harm competition
in the video distribution market.
471
Thus, the program access rules adopted by the Commission pursuant
to Section 628 provide several important protections to unaffiliated MVPDs.
472
169. We confirm that the combined entity will be subject to the program access rules with
respect to all affiliated programming, including RSN programming and non-RSN programming, offered
on both its U-verse video and DBS service. Section 628(j) of the Act extends the program access rules to
common carriers, such as AT&T, as well as affiliates of common carriers, that provide video
programming by any means to subscribers.
473
As a DBS service, DIRECTV is not currently subject to the
466
Id. at 54.
467
See Adelphia Order, 21 FCC Rcd at 8261-62, ¶ 128 (“It is the combination of RSN ownership and MVPD market
share that makes anticompetitive strategies possible.”); Implementation of the Cable Television Consumer
Protection and Competition Act of 1992; Development of Competition and Diversity in Video Programming
Distribution: Section 628(c)(5) of the Communications Act Sunset of Exclusive Contract Prohibition, CS Docket No.
01-290, Report and Order, 17 FCC Rcd 12124, 12140, ¶ 38 (2002) (“2002 Extension Order”) (“The number of
subscribers that a vertically integrated cable programmer serves is of particular importance in calculating the
benefits of withholding programming from rival MVPDs. … Other things being equal, then, as the number of
subscribers rises, so does the likelihood that withholding would be profitable.”).
468
See DIRECTV Response to Sept. 9, 2014, Information Request at 36; Derek Baine, Cable Network M&A Market
Awakens From Quiet Period, SNL
KAGAN, Nov. 28, 2014.
469
See ACA Comments, Exhibit A, Statement of Professor Gary Biglaiser (“Biglaiser Statement”) at 10 n.9.
470
See 1992 Cable Act § 2(a)(5), 47 U.S.C. § 521 (2012).
471
See id.; see also H.R. REP. NO. 102-862, at 93 (1992) (Conf. Rep.); S. REP. NO. 102-92, at 28 (1991).
472
See 47 C.F.R. §§ 76.1000-1004.
473
47 U.S.C. § 548(j) (“Any provision that applies to a cable operator under this section shall apply to a common
carrier or its affiliate that provides video programming by any means directly to subscribers.”); see also 47 C.F.R. §
76.1004 (“Any provision that applies to a cable operator under §§ 76.1000 through 76.1003 shall also apply to a
common carrier or its affiliate that provides video programming by any means directly to subscribers.”). The
Applicants have acknowledged that AT&T is subject to these existing program access rules. Joint Opposition at 55-
56. We note that AT&T has contested previously whether its U-verse video service is a “cable service.” See, e.g.,
Comments of AT&T Services, MB Docket No. 13-140, at 5 (filed June 19, 2013) (“AT&T Services MB 13-140
Comments”) (contesting regulatory classification as a cable system for regulatory fee purposes); see also Fifteenth
Annual Report, 28 FCC Rcd at 10508, ¶ 28 (noting that AT&T U-verse has not registered with the Commission as a
(continued….)
Federal Communications Commission FCC 15-94
65
program access rules under Section 628, although DIRECTV’s affiliated RSN programming remains
subject to program access conditions under the Liberty Media-DIRECTV Order.
474
Following the
transaction, however, DIRECTV will be a wholly owned subsidiary, and hence an affiliate, of AT&T.
475
Accordingly, we conclude that following the transaction, DIRECTV, as an affiliate of a common carrier
that provides video programming to subscribers, will be subject to the program access rules under Section
628(j).
170. We further conclude that it is unnecessary to impose arbitration or any other additional
program access conditions to address concerns regarding access to RSNs or other programming owned or
controlled by the combined entity. We find that the transaction would not increase the combined entity’s
incentives or ability to withhold RSN programming from its rivals. For the combined entity to foreclose
RSN programming from its rivals, the transaction would have to change the opportunity cost of doing so.
The combined entity would have to weigh the loss in revenue from selling its affiliated programming to
rivals against the gains in revenue from subscribers leaving the rival provider as a result of RSN
programming being withheld and becoming a subscriber of the combined entity. Based on our analysis of
the facts described herein, we do not believe that as a result of this transaction the gains from withholding
RSN programming from its rivals would outweigh the losses from providing the programming, nor has
any party submitted evidence to the contrary. Thus, on the basis of this record we find the existing
program access rules address the potential for anticompetitive conduct with respect to the combined
entity’s RSNs and other vertically integrated programming.
476
171. Furthermore, we find that there is insufficient evidence of harm from the combined
entity’s ownership of the Houston RSN to warrant imposition of arbitration or other program access
conditions. The combined entity’s [BEGIN CONF. INFO.] [END CONF. INFO.] percent market
share in the Houston DMA is not [BEGIN CONF. INFO.] [END CONF. INFO.] percent market share
in this DMA.
477
We also note that, following AT&T’s and DIRECTV’s acquisition of this RSN out of
bankruptcy, Root Sports Southwest has already reached agreements with most of the MVPDs that serve
the Houston DMA to distribute the RSN.
478
172. We do not have a basis on the record to conclude that the combined entity would have an
incentive to foreclose access to RSN programming in DMAs where its combined market share would
increase significantly post-transaction, such as Dallas and St. Louis, where the Applicants do not
(Continued from previous page)
cable system). As AT&T concedes that it is subject to the program access requirements pursuant to Section 628(j),
we need not address the broader issue of whether U-verse video constitutes a cable service. See Joint Opposition at
55-56.
474
See Liberty Media-DIRECTV Order, 23 FCC Rcd at 3303, ¶ 83.
475
Application at 16. As a wholly owned subsidiary of AT&T post-transaction, DIRECTV will be an “affiliate” of a
common carrier pursuant to Section 3 of the Act. See 47 U.S.C. § 153(2) (defining “affiliate” as “a person that
(directly or indirectly) owns or controls, is owned or controlled by, or is under common ownership or control with,
another person,” with “own” meaning “to own an equity interest (or the equivalent thereof) of more than 10
percent”). Both Section 628(j) and the definition of affiliate were added to the Act by the Telecommunications Act
of 1996. Telecommunications Act of 1996, Pub. L. No. 104-104, §§ 3, 301(h), 110 Stat. 56, 58, 117 (1996).
476
We acknowledge the concerns raised by parties regarding the effectiveness of the Commission’s existing
program access and program carriage rules; however, we believe that such concerns are industry-wide, not merger
specific, and therefore are better addressed in a separate proceeding. See, e.g., ACA Reply at 10-11; Cox Petition at
6-18; Petition to Impose Conditions of DISH Network Corp., MB Docket 14-90, at 12 (filed Sept. 16, 2014) (“DISH
Petition”).
477
See MediaCensus 2014Q3. The Houston RSN was formerly affiliated with Comcast, one of the largest MVPDs
in the Houston market. Despite that affiliation, however, the RSN struggled and eventually sought bankruptcy
protection, after which the Applicants acquired majority control of the RSN in late 2014. See supra ¶¶ 163, 167.
478
See supra n.449.
Federal Communications Commission FCC 15-94
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currently own RSNs.
479
Nothing in the record suggests that AT&T or DIRECTV has explored RSN
opportunities in these DMAs or that such opportunities are likely to be available in these DMAs in the
near future.
480
173. Furthermore, we find unpersuasive the analysis by ACA’s economics expert Professor
Gary Biglaiser, and consequently, we do not change our findings based on that submission. Professor
Biglaiser uses the Nash bargaining framework the Commission relied on in the Comcast-NBCU Order to
analyze potential RSN related harms.
481
According to Professor Biglaiser, given that AT&T does not
provide U-verse service in the same areas as DIRECTV’s three RSNs and that the Applicants already
have a RSN joint venture in Houston, the only variable that would change is the profit.
482
He claims that
the efficiencies and increased bargaining power in buying programming achieved by combining AT&T
with DIRECTV’s distribution and programming assets would increase the profitability per video
subscriber of the DIRECTV service.
483
This higher profit margin, Professor Biglaiser avers, would
increase the combined entity’s opportunity cost of selling affiliated programming to rival MVPDs,
leading to higher prices for rivals and ultimately consumers.
484
174. Professor Biglaiser, however, does not provide estimates for the other variables in the
Nash bargaining model, which he acknowledges would not change as a result of the transaction.
485
Nor
does he quantify the extent to which profits would increase. Instead, he simply claims that given the
Applicants’ claimed efficiencies, profits would increase, and increase such that the Applicants would
have an incentive to withhold RSN programming from their rivals. ACA’s economics expert does not
provide evidence that the combined entity’s profits would increase to such a degree that it would provide
the combined entity with the incentive to foreclose rival MVPDs from its RSN programming. Thus, we
find speculative the assertion that the combined entity’s profit margin would increase to the degree he
suggests, thereby increasing its opportunity cost of selling affiliated programming to rivals.
175. Further, some of the efficiencies on which ACA’s economics expert relies to support his
argument that the combined entity’s profits would increase such that it would have an incentive to
479
The combined market share in the Dallas and in the St. Louis DMAs are approximately [BEGIN CONF. INFO.]
[END CONF. INFO.] respectively. See MediaCensus 2014Q3.
480
DIRECTV, since 2012, has explored potential RSN opportunities in the [BEGIN HIGHLY CONF. INFO.]
[END HIGHLY CONF. INFO.] DMAs. See DIRECTV Response to Sept. 9, 2014, Information Request at 36.
AT&T does not provide U-verse service in the Phoenix DMA, but it does provide U-verse service in the Chicago
DMA. The Applicants’ combined market share in the [BEGIN CONF. INFO.] [END CONF. INFO.] DMA is
less than [BEGIN CONF. INFO.] [END CONF. INFO.] percent and in the [BEGIN CONF. INFO.] [END
CONF. INFO.] DMA is slightly greater than [BEGIN CONF. INFO.] [END CONF. INFO.] percent. See
MediaCensus 2014Q3. Given the current contractual situations of sports teams in both DMAs, it is unlikely that
opportunities to acquire RSNs in these DMAs would be available in the near future. See DIRECTV Response to
Sept. 9, 2014, Information Request at 36.
481
See Biglaiser Statement at 7. The Nash bargaining model relied on in the Comcast-NBCU model was: C = αdπ
where C is the opportunity cost for an MVPD to sell its programming assets to a rival MVPD, α is the diversion rate,
d is the departure rate if programming is withheld, and π is the monthly profit. See Comcast-NBCU Order, 26 FCC
Rcd at 4258, ¶ 46 and Appendix B, “Technical Appendix,” Section 1.B (describing the vertical price increases in the
Comcast-NBCU merger).
482
See Biglaiser Statement at 10.
483
See id. at 11-14; see also ACA Comments at 14-16; ACA Reply at 4.
484
See Biglaiser Statement at 9-11, 14; see also ACA Comments at 14-17; ACA Reply at 4-5.
485
These other variables are the diversion rate (the rate at which subscribers of one provider would switch to
another) and the departure rate (the estimated rate that a subscriber would leave a rival provider if an MVPD
withheld affiliated programming). Professor Biglaiser states that neither of these variables would change in the
DMAs where the combined entity would have a RSN. See Biglaiser Statement at 9-10.
Federal Communications Commission FCC 15-94
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withhold RSN programming may not be as large as claimed. For example, as discussed above, we find
that it is likely that at least part of the programming payment reductions would be passed onto consumers
in the form of lower prices, and therefore its profits may not be as great.
486
Additionally, Professor
Biglaiser claims that benefits from AT&T’s ability to bundle its Fixed Wireless Local Loop service
(“FWLL”) service with DIRECTV’s video service would raise the opportunity cost of selling its RSN
programming to rivals in the four relevant DMAs.
487
However,
the record provides no evidence that the
penetration rate of FWLL in any of these DMAs would be high. Further, even if the penetration rate were
high, there is no evidence on the record that customer uptake of a FWLL and DIRECTV bundle would be
large enough to raise the opportunity cost of selling RSN programming to rivals in these DMAs.
488
176. Finally, we find that this transaction is distinguishable from previous transactions where
the Commission imposed arbitration or other program access conditions. In each such prior transaction,
the Commission found that competitive harm would likely result from the vertical integration of
significant programming interests (including RSNs or other programming) that could not be addressed by
the Commission’s program access rules.
489
That is not the case here. As discussed above, the record does
not support a finding that the transaction would increase the combined entity’s ability or incentive to
implement foreclosure or price raising strategies with respect to its RSN programming or other affiliated
programming. Accordingly, based on all of these factors, we conclude that adoption of arbitration or
other program access conditions is not warranted.
2. Exclusive Programming Agreements
177. Positions of the Parties. Commenters express concern about the Applicants’ ability to
obtain exclusive programming agreements. Cox Communications, Inc. (“Cox”) argues that the
transaction increases the risk that the combined entity would secure exclusive contracts for programming
content, particularly sports programming, and that such contracts would inhibit competition from smaller
MVPDs.
490
Cox asserts that DIRECTV’s exclusive NFL Sunday Ticket package, which allows
subscribers to view every out-of-market live NFL game, provides DIRECTV with a significant
competitive advantage and that permitting the combined entity to maintain and expand exclusive access to
NFL Sunday Ticket would harm competition.
491
In addition, Cox states that allowing the combined entity
to obtain other exclusive programming agreements would give it an unfair advantage that would be nearly
486
See supra ¶ 110. As discussed below, while AT&T is likely to achieve some programming payment reductions,
[BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] which may similarly affect the amount of
the reduction and thereby AT&T’s profits. See infra ¶ 289.
487
See Biglaiser Statement at 12-13 (using AT&T’s LTE network); ACA Comments at 16.
488
As discussed below, we find that there is uncertainty about the actual user speed and pricing that would affect the
profitability of the FWLL deployment. See infra ¶¶ 370-374.
489
In the Liberty Media-DIRECTV Order and the News Corp.-Hughes Order, the Commission concluded that the
combined entities in those cases would have an increased incentive to adopt a temporary foreclosure strategy in
order to increase fees for RSN programming. See Liberty Media-DIRECTV Order, 23 FCC Rcd at 3306, ¶ 88; News
Corp.-Hughes Order, 19 FCC Rcd at 543-548, ¶¶ 147-162. In the Adelphia Order, the Commission found that the
transactions would increase the combined entity’s incentive and ability to adopt a uniform price strategy for RSN
programming. See Adelphia Order, 21 FCC Rcd at 8267-73, ¶¶ 140-154. In the Comcast-NBCU Order, the
Commission found that Comcast-NBCU would have an increased ability and power to implement exclusionary
(either complete foreclosure or price raising) strategies with respect to RSN programming, local broadcast
programming, and national cable programming. See Comcast-NBCU Order, 26 FCC Rcd at 4254-58, ¶¶ 36-44.
490
Cox Petition at 7; Cox Nov. 7, 2014, Ex Parte Letter at 1-2; Cox Dec. 4, 2014, Ex Parte Letter at 3; Cox Dec. 22,
2014, Ex Parte Letter at 3.
491
Cox Petition at 9; Cox Nov. 7, 2014, Ex Parte Letter at 1-2; Cox Dec. 4, 2014, Ex Parte Letter at 3; Cox Dec. 22,
2014, Ex Parte Letter at 3.
Federal Communications Commission FCC 15-94
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impossible for smaller rivals to overcome.
492
Cox suggests that AT&T’s nationwide, multi-platform
reach gives it the ability to outbid rival MVPDs for other exclusive programming rights.
493
Other
commenters also raise concerns about the combination of AT&T’s wireless service with DIRECTV’s
exclusive programming content.
494
Cox proposes a condition prohibiting the combined entity from
entering into or continuing any existing exclusive programming contracts or, at a minimum, exclusive
contracts for major sports programming.
495
178. The Applicants note that the Commission recently declined to extend the prohibition on
exclusive arrangements between cable operators and affiliated programmers, finding that exclusive
contracts may have the procompetitive benefit of allowing MVPDs to differentiate their programming.
496
The Applicants further state that there is no reason that the combined entity should be the only MVPD
unable to enter into exclusive arrangements with unaffiliated programmers.
497
The Applicants observe
that the Commission rejected requests for conditions prohibiting DIRECTV from entering into exclusive
agreements for NFL Sunday Ticket in prior transaction reviews.
498
In its reply, Cox asserts that previous
transaction decisions approving DIRECTV’s access to exclusive programming to encourage competition
are irrelevant given that this transaction would result in the loss of a DIRECTV competitor and the
combined entity would have unprecedented size and customer reach.
499
Cox also notes that there is no
precedent for allowing exclusive agreements with a company that can offer a nationwide bundle of video,
voice, and data services.
500
Cox asserts that DIRECTV is the only large MVPD that has exclusive
programming arrangements for national or competitively significant programming.
501
179. Discussion. We recognize that, depending on the factual circumstances, exclusive
contracts may be procompetitive or anticompetitive. In connection with this transaction, we do not find
potential harms relating to exclusive contracts that are not already addressed by our existing program
access rules. Thus, we decline to impose a condition prohibiting the combined entity from continuing or
entering into any exclusive programming contracts, whether for affiliated or unaffiliated programming.
180. With respect to affiliated programming, the Commission in 2012 allowed the prohibition
on exclusive contracts involving satellite-delivered, cable-affiliated programming to expire, concluding
that such a prohibition was no longer necessary to protect and preserve competition and diversity in the
492
Cox Petition at 9-10. Cox also cites reports that renewal of DIRECTV’s exclusive agreement for NFL Sunday
Ticket is a condition for completion of the transaction as evidence that the combined entity intends to pursue an
exclusive programming strategy. Cox Petition at 7; see also DISH Petition at 17-18 (arguing that because AT&T
has conditioned its transaction agreement on retaining exclusive rights for NFL Sunday Ticket, the Commission
should assess the competitive effects of such an important exclusive deal).
493
Cox Petition at 7.
494
AMC et al. Petition at 10; DISH Petition at 17-18.
495
Cox Petition at 11-13; Cox Nov. 7, 2014, Ex Parte Letter at 2; Cox Dec. 4, 2014, Ex Parte Letter at 3; Cox Dec.
22, 2014, Ex Parte Letter at 3.
496
Joint Opposition at 56-57; see also Revision of the Commission’s Program Access Rules et al., MB Docket No.
12-68, Report and Order, Order on Reconsideration, and Further Notice of Proposed Rulemaking, 27 FCC Rcd
12605, 12631, ¶ 37 (2012) (“2012 Program Access Order”).
497
Joint Opposition at 58.
498
Id. at 56-57.
499
Cox Reply at 4.
500
Id. at 5.
501
Id.
Federal Communications Commission FCC 15-94
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distribution of video programming.
502
The Commission may still assess the effect of exclusive contracts
on a case-by-case basis, pursuant to which it considers whether an exclusive contract involving affiliated
programming may be a prohibited “unfair” act under Section 628(b) of the Act.
503
The Commission’s
case-by-case approach allows for consideration of the potential procompetitive benefits of individual
exclusive contracts, such as promoting investment in new programming, particularly local programming,
and permitting MVPDs to differentiate their service offerings.
504
Thus, any exclusive contract involving
affiliated programming entered into by the combined entity may be challenged on a case-by-case basis as
an “unfair” act under Section 628(b) of the Act.
181. We conclude that this case-by-case complaint process will be sufficient to remedy
potential competitive concerns regarding exclusive contracts with vertically integrated programmers that
may result from this transaction. Neither AT&T nor DIRECTV currently has any exclusive contracts
involving affiliated programming. Indeed, as discussed above, neither AT&T nor DIRECTV has a
significant amount of vertically integrated programming.
505
Cox nevertheless contends that the combined
entity intends to pursue an exclusive programming strategy, citing reports that the transaction was
conditioned on the renewal of DIRECTV’s exclusive agreement for NFL Sunday Ticket.
506
We find
Cox’s contention, based in part on the fact that the Applicants conditioned the transaction on the renewal
of DIRECTV’s exclusive agreement for NFL Sunday Ticket, to be speculative and unsupported by the
record.
507
Moreover, there is nothing in the record that demonstrates that competing MVPDs would be
502
2012 Program Access Order, 27 FCC Rcd at 12625, ¶ 31. The exclusive contract prohibition generally banned
exclusive contracts for satellite cable programming or satellite broadcast programming between any cable operator
and any cable-affiliated programming vendor in areas served by a cable operator. See 2012 Program Access Order,
27 FCC Rcd at 12607, ¶ 1; see also 47 U.S.C. § 548(c)(2)(D). The exclusive contract prohibition in Section
628(c)(2)(D) applied only to “satellite cable programming” and “satellite broadcast programming.” See 47 U.S.C. §
548(c)(2)(D). However, in 2010, the Commission adopted rules providing for the processing of complaints alleging
that an “unfair act,” including an exclusive contract, involving terrestrially delivered, cable-affiliated programming
violates Section 628(b) of the Act. See Review of the Commission’s Program Access Rules and Examination of
Programming Tying Arrangements, MB Docket No. 07-198, First Report and Order, 25 FCC Rcd 746 (2010)
(“2010 Program Access Order”), affirmed in part and vacated in part sub nom. Cablevision Sys. Corp. et al. v.
FCC, 649 F.3d 695 (D.C. Cir. 2011) (“Cablevision II”).
503
See 47 U.S.C. § 548(b) (prohibiting a cable operator, a satellite cable programming vendor in which a cable
operator has an attributable interest, or a satellite broadcast programming vendor from engaging in “unfair” acts, the
purpose or effect of which is to hinder significantly or to prevent any MVPD from providing satellite cable
programming or satellite broadcast programming to subscribers or consumers); 47 C.F.R. § 76.1001(a) (same). The
same case-by-case process applies to Section 628(b) complaints challenging exclusive contracts involving satellite-
delivered, cable-affiliated programming and exclusive contracts involving terrestrially delivered, cable-affiliated
programming. See 2012 Program Access Order, 27 FCC Rcd at 12640-45, ¶¶ 53-58; 2010 Program Access Order,
25 FCC Rcd at 777-788, ¶¶ 46-61.
504
See 2012 Program Access Order, 27 FCC Rcd at 12608, 12629-31, ¶¶ 2, 35-37.
505
See supra ¶¶ 166-167.
506
Cox Petition at 7. Cox also emphasizes that AT&T has argued previously that exclusive video programming
contracts with an affiliated network are anticompetitive. Id. at 8 (citing AT&T 2012 Program Access Order
Comments, MB Docket No. 12-68, at 20-22 (filed Dec. 14, 2012) (emphasis added); Cox Nov. 7, 2014, Ex Parte
Letter at 2; Cox Dec. 4, 2014, Ex Parte Letter at 3; Cox Dec. 22, 2014, Ex Parte Letter at 3. We note, however, that
it has not been alleged, nor is it reflected in the record, that either AT&T or DIRECTV holds an exclusive contract
with any of the limited number of affiliated networks involved in this proceeding.
507
To the extent that Cox bases this argument on reports that the transaction was conditioned on the renewal of
DIRECTV’s exclusive agreement for its unaffiliated NFL Sunday Ticket package, we note that the Commission has
previously found no evidence that exclusive arrangements for unaffiliated programming, including DIRECTV’s
exclusive agreements for NFL Sunday Ticket, have harmed competition. See infra ¶ 183.
Federal Communications Commission FCC 15-94
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unable to address concerns regarding any exclusive contracts involving affiliated programming through
the existing case-by-case process.
182. With respect to unaffiliated programming, the record does not support a condition barring
the combined entity from entering into exclusive contracts. As the Commission has previously stated,
exclusive agreements between MVPDs and non-vertically integrated programmers are not captured by the
underlying rationale for the program access rules.
508
Congress enacted the exclusive contract prohibition
of the program access rules based on its determination that combining MVPD market power with
ownership of programming resulted in an imbalance of power, which limited the development of
competition among MVPDs and restricted consumer choice.
509
Congress found that programming
networks affiliated with cable operators have an incentive and ability to discriminate against MVPDs with
which their affiliated cable operators compete.
510
In contrast, unaffiliated programmers may have a lesser
incentive to favor one MVPD over another in order to achieve particular competitive outcomes in the
video distribution market.
511
In general, an unaffiliated programmer is concerned with obtaining the
highest price it can for its programming.
512
183. The Commission has previously found that there was no evidence to conclude that
exclusive arrangements involving unaffiliated programmers have harmed competition in the video
distribution market.
513
In addition, in prior transactions involving DIRECTV, the Commission has
specifically rejected arguments that DIRECTV should be prohibited from entering into exclusive
contracts with respect to unaffiliated programming, such as NFL Sunday Ticket.
514
There is nothing in
the record of this proceeding that would cause us to reach a different conclusion. We recognize that NFL
Sunday Ticket is valuable programming and that the combined entity’s size and reach would increase as a
result of the transaction. Nevertheless, commenters have offered no evidence that DIRECTV’s exclusive
contract for NFL Sunday Ticket has harmed competition in the video distribution market or would harm
competition post-transaction. Moreover, we note that competing MVPDs would continue to have access
to the NFL games that are aired on the broadcast television stations that they carry, as well as the NFL
games aired on ESPN and NFL Network.
184. We note further that, while some commenters raise concerns about the competitive
impact of combining AT&T’s wireless service with DIRECTV’s exclusive NFL Sunday Ticket package,
Verizon Wireless currently holds exclusive distribution rights for NFL games on mobile devices through
the 2017 season.
515
There is also no evidence in the record that the transaction would confer an unfair
508
See Liberty Media-DIRECTV Order, 23 FCC Rcd at 3319, ¶ 117; see also 2002 Extension Order, 17 FCC Rcd at
12126-7, ¶¶ 6-7.
509
See 2002 Extension Order, 17 FCC Rcd at 12127, ¶ 7.
510
See id.
511
See Liberty Media-DIRECTV Order, 23 FCC Rcd at 3319, ¶ 117.
512
See id.
513
See Implementation of the Cable Television Consumer Protection and Competition Act of 1992 – Development of
Competition and Diversity in Video Programming Distribution: Section 628(c)(5) of the Communications Act:
Sunset of Exclusive Contract Prohibition, MB Docket No. 07-26, Report and Order, 22 FCC Rcd 17791, 17843, ¶
77 (2007) (“2007 Extension Order”), aff’d sub nom. Cablevision Sys. Corp. et al. v. FCC, 597 F.3d 1306 (D.C. Cir.
2010) (“Cablevision I”). See also 2012 Program Access Order, 27 FCC Rcd at 12625, ¶ 37 (noting that even with
respect to programming affiliated with an MVPD, the “Commission has recognized that exclusive contracts may
result in the procompetitive benefit of allowing MVPDs to differentiate their service offerings”).
514
See Liberty Media-DIRECTV Order, 23 FCC Rcd at 3319-20, ¶ 118 (finding that the record did not support a
condition forbidding DIRECTV from entering into exclusive distribution agreements involving unaffiliated
programming, such as NFL Sunday Ticket); News Corp.-Hughes Order, 19 FCC Rcd at 600-601, ¶¶ 291-293
(same).
515
See Adam Swanson, Verizon Wireless Extends Streaming-Content Deal with NFL, SNL KAGAN, June 7, 2013.
Federal Communications Commission FCC 15-94
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advantage on the combined entity in obtaining exclusive distribution agreements for unaffiliated
programming in the future. Thus, we conclude that the record does not support a condition barring the
combined entity from entering into exclusive contracts with unaffiliated programmers. Furthermore, to
the extent any competitor believes the combined firm has unfairly entered into an exclusive agreement
with an unaffiliated programmer, we note that the Commission has not foreclosed a challenge under
Section 628(b) to an exclusive contract involving unaffiliated programming.
516
3. Restricting Access to Online Video Content
185. Positions of Parties. DISH expresses concern that the addition of approximately 20
million new video subscribers from DIRECTV would give AT&T an increased incentive to preserve and
grow its subscribers by diminishing the attractiveness of rival MVPD and OVD services.
517
DISH
suggests that the combined entity may accomplish this by using its newly enlarged negotiating leverage to
pressure third-party programmers to grant online video rights to the combined entity and to withhold
these same rights from rival MVPDs and OVDs.
518
To address this potential harm, DISH proposes that
the Commission adopt a condition prohibiting the combined entity from entering into or enforcing any
contractual provisions with programmers, including any most favored nation (“MFN”) provisions, which
restrict the online rights of third-party distributors.
519
In addition, ACA calls generally for conditions to
prevent the combined entity from interfering with a third-party programmer’s ability to provide any
prices, terms, or conditions to another MVPD.
520
186. The Applicants argue that programmers have far greater bargaining power than video
distributors and that the transaction would not alter relative bargaining power in such a way as to reduce
the quantity and variety of programming content that providers have to offer.
521
The Applicants assert
that the combined entity would not have the leverage to require third-party programmers to withhold or
restrict access to programming by competitors, either traditional MVPDs or OVDs.
522
Therefore, the
Applicants do not believe that any conditions are necessary.
523
187. Discussion. We find DISH’s generalized assertion that the combined entity would have
an increased incentive and ability to force third-party programmers into withholding online video rights
from rival MVPDs and OVDs to be unsupported by the record. Based on our review of the totality of the
516
See Implementation of Section 302 of the Telecommunications Act of 1996, Open Video Systems, CS Docket No.
96-46, Second Report and Order, 11 FCC Rcd 18223, 18319, ¶ 184 (1996) (“[C]able operators, common carriers
providing video programming directly to subscribers and open video system operators are not generally restricted
from entering into exclusive contracts with non-vertically integrated programmers. Nonetheless, as we found in the
DBS Order, our finding herein does not preclude an aggrieved party from seeking relief in an appropriate case under
other provisions of Section 628 and the Commission’s rules thereunder.” (citing Implementation of the Cable
Television Consumer Protection and Competition Act of 1992, Memorandum Opinion and Order on Reconsideration
of the First Report and Order, 10 FCC Rcd 3105, 3121, ¶ 33, 3126-27, ¶ 40 (1994))); see also 2010 Program Access
Order, 25 FCC Rcd at 779 n.191 (“We do not reach any conclusions in this Order, nor do we foreclose potential
complaints, regarding other acts that may be ‘unfair methods of competition or unfair acts or practices’ under
Section 628(b). For example, the rules established by this Order do not address exclusive contracts between a cable
operator and a non-cable-affiliated programmer.”).
517
DISH Petition at 14.
518
Id. at 14-16; see also WGAW Reply at 16-17 (quoting DISH’s Petition and noting potential for AT&T to
disadvantage competing OVDs by negotiating restrictive distribution agreements).
519
DISH Petition at 30.
520
ACA Reply at 57-58.
521
Joint Opposition at 50-51.
522
Id. at 52 n.188.
523
Id. at 49.
Federal Communications Commission FCC 15-94
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record we cannot find that DIRECTV has been able to limit consumers’ access to distribution of video
programming online or that with an additional approximately 6 million U-verse video subscribers the
combined entity would be better positioned to impede the ability of other MVPDs or OVDs to attract and
retain subscribers. Nor does the record contain evidence that AT&T has pursued or, post-transaction,
intends to pursue such a strategy with respect to programming contracts. Therefore, we find DISH’s
argument to be unsubstantiated by the record and will not impose the conditions requested by DISH and
ACA.
524
4. Forcing Competitors to Compensate Programmers for Reduced Payments
from the Applicants
188. Positions of the Parties. Several commenters assert that the combined entity’s increased
size and market power would give it the ability to negotiate substantial volume discounts for
programming, leading programmers to offset these discounts by charging smaller MVPDs higher
prices.
525
These commenters assert that this offset would competitively disadvantage the combined
entity’s rivals and result in higher prices for their customers.
526
Cox proposes a condition prohibiting the
combined entity from entering into programming agreements that result in the combined entity receiving
an “unreasonable discount” for programming, on a per subscriber basis, as compared to the rates a
programmer charges to any other MVPD.
527
Cox suggests that the Commission establish a percentage
discount that would be presumptively unreasonable and enforce such a condition by requiring the
combined entity to include in its new programming contracts a provision in which both the combined
entity and the programmer certify compliance with the discount limitation.
528
Cox maintains that such a
condition would allow the combined entity to secure programming deals only at a reasonable discount
compared to what mid-sized and smaller MVPDs are forced to pay.
529
189. The Applicants respond that there is no support for the assertion that the savings realized
by the combined entity would increase competitors’ costs.
530
They state that programmers already
negotiate aggressively to obtain the best possible rates from each individual MVPD based on its size and
the value that it brings to the programmer.
531
The Applicants further state that programmers would not
need to recoup “lost” revenues through higher prices from other MVPDs because the transaction would
create new revenue opportunities for programmers by, for example, expanding the demand for content
524
We acknowledge that commenters did not have access to all of the record related to this argument. See CBS
Corp., 785 F.3d at 701-03. While we would have preferred for the commenters to have full access to the record,
given the unusual delays that resulted from litigation related to access to certain documents and the unique
circumstances before us, we determine that the public interest is best served by completing our review of the
Application. We reach this conclusion after balancing the commenters’ ability to have full access to the record
against the Commission’s careful review of the record, our interest in bringing the benefits of this transaction to the
public, and fairness to the Applicants.
525
ACA Comments at 18-19; Biglaiser Statement at 14-16; Cox Petition at 13-14; DISH Petition at 10-13; WGAW
Petition at 14; Reply Comments of COMPTEL, MB Docket 14-90, at 6 (filed Jan. 7, 2015) (“COMPTEL Reply”);
Cox Reply at 7-9; WGAW Reply at 11-12; Cox Nov. 7, 2014, Ex Parte Letter at 2.
526
ACA Comments at 19-20; Cox Petition at 16; DISH Petition at 13-14; WGAW Petition at 14; ACA Reply at 11-
13; COMPTEL Reply at 6; Cox Reply at 8; WGAW Reply at 12; Cox Nov. 7, 2014, Ex Parte Letter at 2.
527
Cox Petition at 17; Cox Nov. 7, 2014, Ex Parte Letter at 2; Cox Dec. 4, 2014, Ex Parte Letter at 3; Cox Dec. 22,
2014, Ex Parte Letter at 3.
528
Cox Petition at 17.
529
Id.
530
Joint Opposition at 53; Katz Reply Decl. ¶ 29; Conditions Ex Parte Presentation at 12.
531
Joint Opposition at 53; Katz Reply Decl. ¶ 29.
Federal Communications Commission FCC 15-94
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and increasing programmers’ advertising reach.
532
The Applicants state that Cox’s proposal on volume
discounts would prevent the combined entity from fully realizing substantial cost savings that would
benefit consumers and that there is no justification to prevent the combined entity from achieving these
“pro-competitive” consumer benefits.
533
Cox counters that advertising revenues for basic cable networks
advertising to the Applicants’ customers would have to increase by 25 percent or more to offset the
reduction in programmers’ revenues from AT&T’s claimed content cost savings.
534
190. Discussion. We conclude that commenters have failed to substantiate a harm that
requires a condition establishing a limit on the volume discounts that the combined entity may negotiate
for programming. For example, ACA claims that programmers would have to offset volume discounts to
the combined entity with increased prices to smaller MVPDs in order to ensure that financial market
expectations are realized.
535
Commenters have failed to offer evidence, however, to show that this
behavior has occurred when other MVPDs, including DIRECTV, have received volume discounts.
191. Further, Cox asserts that the structure of the video distribution marketplace has caused a
severe imbalance between the prices paid for programming by the largest MVPDs and those paid by mid-
sized and small MVPDs, citing comments it filed in a pending program access rulemaking proceeding.
536
To the extent that there potentially is an industry-wide public interest harm associated with volume
discounts as such, it has not been established on the record before us, and it would be beyond the scope of
this proceeding in any event as it is not transaction specific.
537
192. Based on all of these factors, we conclude that the record does not support a finding that
programmers would offset any volume discounts received by AT&T post-transaction by increasing
programming costs for smaller MVPDs such that we could justify adoption of the proposed condition.
538
B. Lack of Regulatory Parity
193. Positions of the Parties. Cox observes that the basic service tier requirements that apply
to cable operators do not apply to DIRECTV’s satellite service and that AT&T has contested whether
such “cable operator” obligations apply to its U-verse video service.
539
These basic tier requirements, it
532
Joint Opposition at 53-54; Katz Reply Decl. ¶ 33.
533
Conditions Ex Parte Presentation at 12.
534
Cox Reply at 8; Cox Nov. 7, 2014, Ex Parte Letter at 2. See infra n.924.
535
ACA Comments at 20; Biglaiser Statement at 15-16.
536
Cox Petition at 13, nn.26-27; Cox Reply at 8. See Revision of the Commission’s Program Access Rules et al.,
MB Docket No. 12-68, Notice of Proposed Rulemaking, 27 FCC Rcd 3413, 3466-68, ¶¶ 98-100 (2012) (“2012
Program Access NPRM”) (seeking comment on whether the program access rules adequately address potentially
discriminatory volume discounts and, if not, how the rules should be revised to address these concerns); see also
Cox 2012 Program Access NPRM Comments, MB Docket No. 12-68, at 3-7 (filed June 22, 2012); Cox 2012
Program Access NPRM Reply, MB Docket No. 12-68, at 2 (filed July 23, 2012); Cox 2012 Program Access Order
Comments, MB Docket No. 12-68, at 1-5 (filed Dec. 14, 2012); Cox 2012 Program Access Order Reply, MB
Docket No. 12-68, at 1-2 (filed Jan. 14, 2013).
537
We also note that the Commission’s program access rules contemplate that a complaint may be filed challenging
volume-based pricing in certain circumstances. On the filing of such a complaint, a cable-affiliated programmer
may be required “to demonstrate that such volume discounts are reasonably related to direct and legitimate
economic benefits reasonably attributable to the number of subscribers . . . but may also identify non-cost economic
benefits related to increased viewership.” 47 C.F.R. § 76.1002(b)(3) note.
538
See Comcast-AT&T Order, 17 FCC Rcd at 23269, ¶ 65 (rejecting arguments that programmers would offset
volume discounts realized by the combined firm by raising rival MVPDs’ costs).
539
Cox Petition at 26 n.65 (citing AT&T Services MB 13-140 Comments at 5 (“AT&T’s U-verse TV service is an
IP-based MVPD service, and not a ‘cable service.’”)). Under Section 623 of the Act, cable operators are required to
offer an entry-level basic service which includes: (1) all commercial and noncommercial local broadcast stations
(continued….)
Federal Communications Commission FCC 15-94
74
states, impose costs on Cox and other cable operators and reduce the choices that they are able to offer
customers.
540
Cox asserts that without these requirements, the combined entity would have unfair cost,
pricing, and packaging advantages over mid-sized cable operators to the detriment of consumers.
541
Accordingly, Cox proposes a condition requiring the combined entity to provide all television broadcast
stations to its video customers regardless of whether it is distributing programming via its U-verse video
platform, its satellite platform, or any wireless video platform the new company develops.
542
194. Cox further argues that the transaction would create opportunities and incentives for the
combined entity to harm competition for Multiple Dwelling Unit (“MDU”) services.
543
Cox notes that
cable operators and common carriers or their affiliates are expressly prohibited under the Commission’s
2007 MDU Order from entering into exclusive agreements to serve MDUs, but satellite providers are
not.
544
Cox asks the Commission to confirm that any video programming services offered by the
combined entity to MDUs – whether furnished through AT&T’s broadband service or satellite – are
covered by the restrictions on exclusive contracts imposed by the 2007 MDU Order.
545
195. The Applicants respond that the basic tier issues are unrelated to the transaction.
546
The
Applicants also assert that the MDU issue is an open question in a pending rulemaking proceeding and is
properly addressed in that proceeding.
547
196. Discussion. We decline to impose a condition requiring the combined entity to comply
with the basic service tier requirements. Cox’s concerns regarding these requirements are unrelated to the
proposed transaction and, rather, are focused on a broader concern about the applicability of the basic
tiering requirements. Thus, we find that this proceeding is not the appropriate venue to address basic tier
issues.
197. We also conclude that the combined entity will be subject to the prohibition on exclusive
contracts to serve MDUs imposed in the 2007 MDU Order.
548
The 2007 MDU Order made clear that
common carriers or their affiliates that provide video programming directly to subscribers under Section
628(j) of the Act are prohibited from executing or enforcing contracts that give them the exclusive right to
provide video programming services to MDUs.
549
As discussed above, AT&T is a common carrier and,
following the transaction, DIRECTV will be a wholly owned subsidiary of AT&T. Accordingly, the
(Continued from previous page)
entitled to carriage under the Communication Act’s must-carry provisions; (2) any public, educational, and
governmental access channels; and (3) any other local broadcast station provided to any subscriber. See 47 U.S.C. §
543(b)(7)(A). Cable operators may also offer additional non-broadcast channels on their basic service tiers. See id.
§ 543(b)(7)(B).
540
Cox Petition at 26.
541
Id. at 27; Cox Reply at 7.
542
Cox Petition at 27; Cox Reply at 6-7.
543
Cox Petition at 28; Cox Reply at 12.
544
Id.; see Exclusive Service Contracts for Provision of Video Services in Multiple Dwelling Units and Other Real
Estate Developments, MB Docket No. 07-51, Report and Order and Further Notice of Proposed Rulemaking, 22
FCC Rcd 20235, ¶ 51 (2007) (“2007 MDU Order”), aff’d, NCTA v. FCC, 567 F.3d 659 (D.C. Cir. 2009); 47 C.F.R.
§ 76.2000.
545
Cox Petition at 28; Cox Reply at 12-13.
546
Joint Opposition at 59 n.216.
547
Id. at 71-72.
548
See also supra Section X.F. (addressing arguments that the transaction would result in the loss of DIRECTV as a
potential partner for MDU broadband entrants).
549
See 2007 MDU Order, 22 FCC Rcd at 20254, ¶ 40; see also 47 C.F.R. § 76.2000.
Federal Communications Commission FCC 15-94
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combined entity will be prohibited from entering into or enforcing exclusive agreements to serve
MDUs.
550
C. Potential Harm to Subscribers’ Access to OVD Services
198. We consider whether the transaction would harm the public interest by increasing the
ability or incentive of the combined firm to use its broadband network to limit competition from
unaffiliated OVDs.
199. AT&T currently provides broadband Internet access service to approximately [BEGIN
HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] subscribers
551
and MVPD services to
approximately 6 million subscribers.
552
Of AT&T’s residential broadband subscribers, [BEGIN
HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] receive broadband Internet access service
at download speeds of 10 Mbps or greater, representing [BEGIN HIGHLY CONF. INFO.] [END
HIGHLY CONF. INFO.] percent of all subscribers nationally who receive service at those speeds.
553
Today, AT&T generally views its MVPD offering as ancillary to these broadband services.
554
In contrast,
DIRECTV, which has approximately 20 million video subscribers, does not offer facilities-based
broadband services.
555
Thus, because the proposed transaction would not increase AT&T’s number of
broadband subscribers or the geographic footprint of its broadband networks, the transaction would not
increase AT&T’s ability to discriminate against OVDs.
200. However, commenters have expressed concern that the transaction would increase
AT&T’s incentive to discriminate against unaffiliated OVDs in order to favor its own enhanced bundle of
MVPD and OVD services, particularly through the use of discriminatory data allowances or “caps,” and
degradation of interconnection with AT&T’s broadband network. In addition, the Applicants have stated
that a benefit of the transaction is the combined entity’s ability to develop its own online video
offerings.
556
As discussed below, we find that the transaction may increase the Applicants’ incentive and
ability to use data allowances to discriminate in favor of their own, affiliated online offerings, and we
impose a condition to prevent the combined entity from discriminatory data practices. We also impose
550
See Exclusive Service Contracts for Provision of Video Services in Multiple Dwelling Units and Other Real
Estate Developments, Second Report and Order, MB Docket No. 07-51, 25 FCC Rcd 2460, 2474-75, ¶¶ 40-41
(2010) (“2010 MDU Order”) (concluding that the prohibition on exclusive contracts to serve MDUs applied to a
private cable operator that was an affiliate of a common carrier). As a wholly owned subsidiary of AT&T post-
transaction, DIRECTV will be an “affiliate” of a common carrier pursuant to Section 3 of the Act. See 47 U.S.C. §
153(2) (defining “affiliate” as “a person that (directly or indirectly) owns or controls, is owned or controlled by, or is
under common ownership or control with, another person,” with “own” meaning “to own an equity interest (or the
equivalent thereof) of more than 10 percent”). Thus, post-transaction, both AT&T and DIRECTV will be subject to
the prohibition on exclusive contracts to serve MDUs pursuant to the 2010 MDU Order. Accordingly, we need not
address the broader issue of whether AT&T’s U-verse service constitutes a cable service.
551
See AT&T April 21, 2015, Form 477 Data Filing; AT&T Updated Response to Sept. 9, 2014, Information
Request, Exhibit 5.b.1 – updated.
552
See AT&T Updated Response to Sept. 9, 2014, Information Request, Exhibit 5.b.1 – updated.
553
As of December 2013, AT&T had fewer than [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF.
INFO.] subscribers with broadband service with speeds of 25 Mbps or greater. See AT&T April 21, 2015, Form
477 Data Filing. In a filing submitted in this proceeding, AT&T reports that as of February 2015 it had fewer than
[BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] subscribers of broadband service with
speeds of 25 Mbps or greater. OVD Ex Parte Presentation at 2.
554
See Section IX.B.
555
See Application at 13.
556
See id. at 48-49.
Federal Communications Commission FCC 15-94
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conditions to enable the Commission to monitor the Applicants’ future interconnection arrangements and
certain performance metrics.
1. Increased Incentive to Discriminate Against Unaffiliated OVDs
201. Positions of the Parties. Several commenters express concern that the transaction would
increase AT&T’s incentive to discriminate against unaffiliated OVDs.
557
They note that post-transaction,
AT&T would become the nation’s second largest MVPD
558
and, as a consequence, AT&T would have a
greater incentive to protect its video revenues from future OVD competition.
559
WGAW notes that the
bundling of video and broadband is a key rationale given for the transaction but that such bundles would
remain attractive only if OVDs are not competitive substitutes for the combined entity’s video service,
which gives the combined entity increased incentive to hinder OVD competition.
560
Cogent
Communications Group, Inc. (“Cogent”) acknowledges that OVD services are complementary to
AT&T’s standalone broadband, but it asserts that OVD services are a threat to DIRECTV’s video
services.
561
202. Commenters maintain that the Applicants’ post-transaction incentives are not limited by
the possibility that consumers would switch from AT&T broadband to another provider in the event their
OVD service is degraded. Instead, commenters argue that when OVD services are subjected to
discriminatory treatment, an OVD subscriber is more likely to switch to an alternative OVD than to an
alternative broadband provider because of: (i) the significantly lower costs associated with switching
OVDs as compared to broadband providers; (ii) the substantial number of alternative OVDs with
overlapping content; and (iii) the lack of alternative broadband providers.
562
203. The Applicants reject the assertion that they have an incentive to discriminate against
unaffiliated OVDs. The Applicants assert that OVD services are a complement to AT&T’s broadband
business and that the combined entity’s overriding incentive would be to grow that business.
563
The
Applicants also assert that AT&T has made substantial investments in its broadband network, which
would remain competitive only if it provides customers with seamless and high-quality access to the full
range of online video services.
564
Thus, the Applicants state that rather than discriminating against online
557
See Cogent Comments at 6-11; DISH Petition at 3, 25-27; Franken Comments at 1-2; Netflix Comments at 11-
14; Public Knowledge-ILSR Petition at 5-6, 8; WGAW Petition at 4, 19-25.
558
See Cogent Comments at 6-7; WGAW Petition at 4, 19; Reply Comments of Cogent Communications Group,
Inc., MB Docket 14-90, at 3 (filed Jan. 7, 2015) (“Cogent Reply”); WGAW Reply at 14, 18.
559
See Cogent Comments at 6-7; DISH Petition at 26; Franken Comments at 1-2; Netflix Comments at 13, 28;
Public Knowledge-ILSR Petition at 5-6, 8; WGAW Petition at 4; Cogent Reply at 3-4; Reply Comments of DISH
Network Corp., MB Docket 14-90, at 5-6 (filed Jan. 7, 2015) (“DISH Reply”); Reply Comments of Netflix, Inc.,
MB Docket 14-90, at 3 (filed Jan. 7, 2015) (“Netflix Reply”); Reply Comments of Public Knowledge to Opposition
to Petition to Deny, MB Docket 14-90, at 5-6 (filed Jan. 7, 2015) (“Public Knowledge Reply”); WGAW Reply at 2,
14, 18.
560
See WGAW Reply at 15.
561
Cogent Reply at 5; cf. WGAW Reply at 14 (“Online video offerings currently serve as a complement to MVPD
service but as OVDs invest in high-budget original content, their growth could facilitate a decline in MVPD
subscribers.”).
562
See Cogent Comments at 15 n.48; Netflix Comments at 17-18, 29-32; Cogent Reply at 9-11; Public Knowledge
Reply at 5; WGAW Reply at 17.
563
See Application at 79; Joint Opposition at 4-5, 34-37; Katz Reply Decl. ¶¶ 72-78.
564
See Joint Opposition at 4-5 (“To drive broadband adoption, AT&T has long supported unfettered access to OTT
services, and it has made significant investments to ensure that customers enjoy all that the Internet has to offer.
With this transaction, those investments will only increase . . . .”); id. at 34-37; Katz Reply Decl. ¶¶ 72-75; see also
Application at 82.
Federal Communications Commission FCC 15-94
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video, they are encouraging the growth of online video services and providers, including by investing in
their own OVD services.
565
204. In the Applicants’ view, any restrictions that AT&T attempts to impose on the ability of
its broadband customers to access online video services would likely reduce the quality of its broadband
Internet access service.
566
The Applicants point out that reducing the quality of AT&T’s broadband
Internet access service would, in turn, reduce the total sales of that service, both as part of bundles and on
a standalone basis.
567
According to the Applicants, a strategy of degrading broadband would be profitable
only if it has the effect of encouraging consumers to purchase more video services from the combined
entity.
568
The Applicants contend, however, that the most likely response by AT&T’s standalone
broadband customers would be to seek an alternative access provider.
569
In addition, the Applicants assert
that the BH Simulation demonstrates that a degradation of AT&T’s broadband service would also reduce
AT&T’s video sales.
570
Accordingly, the Applicants conclude that a strategy of discrimination against
OVDs would be unprofitable and, thus, that the combined entity would not have an incentive to foreclose
OVD competition.
571
205. Discussion. We conclude that post-transaction AT&T has an increased incentive to
discriminate against unaffiliated OVDs.
572
As we have found in other proceedings, “broadband providers
have incentives to interfere with and disadvantage the operation of third-party Internet-based services that
compete with their own services.”
573
We disagree that the Applicants’ incentive to attract and retain
broadband subscribers precludes any incentives to engage in conduct that hinders consumers’ access to
unaffiliated OVDs.
574
While we acknowledge that the documentary evidence supports the Applicants’
565
See Application at 79; Joint Opposition at 37.
566
See Katz Reply Decl. ¶ 74.
567
See id. ¶ 77. The Applicants also state that if the combined entity were to degrade its customers’ online video
experience, it would lose not only the profits from its broadband service, but also the profits from the video and
voice components of its double-play and triple-play bundles. See id. ¶ 75; see also OVD Ex Parte Presentation at 7-
8 (stating that degradation of OVD access would decrease demand especially for AT&T DSL and DSL service
bundles).
568
See Katz Reply Decl. ¶ 77.
569
See id.
570
See id. ¶ 78. Dr. Katz models broadband degradation as a unilateral increase in the quality-adjusted price of the
service. We were able to reproduce his reported findings with our modified version (described in Appendix C) of
the BH Simulation and to verify their robustness under different modeling assumptions regarding pricing behavior.
We note, however, that the BH Simulation – which does not capture dynamic incentives and also does not allow
either granular adjustments to product quality or a precise identification of consumers’ substitution patterns between
video services provided by OVDs and MVPDs – is of limited use in evaluating the profitability of a foreclosure
strategy.
571
See id.
572
The Commission has previously recognized the incentive of Internet access providers such as AT&T to
discriminate against unaffiliated OVDs. See Annual Assessment of the Status of Competition in the Market for the
Delivery of Video Programming, MB Docket No. 07-269, Fourteenth Report, 27 FCC Rcd 8610, 8731, 8733, ¶¶
271, 274 (2012) (“MVPDs have the ability and incentive to degrade the broadband service available to unaffiliated
OVDs.”) (“Fourteenth Annual Report”); Preserving the Open Internet, GN Docket No. 09-191, Report and Order,
25 FCC Rcd 17905, 17916, ¶ 22 (“2010 Open Internet Order“) (“[B]roadband providers have incentives to interfere
with the operation of third-party Internet-based services that compete with the providers’ revenue-generating
telephony and/or pay-television services.”).
573
2015 Open Internet Order, 30 FCC Rcd at 5662, ¶ 140.
574
While the Applicants use the BH Simulation to predict that a strategy of degrading broadband would reduce
broadband and video sales, their analysis ignores some important aspects of OVD degradation that distinguish it
(continued….)
Federal Communications Commission FCC 15-94
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position that AT&T has traditionally viewed its video product as ancillary to its more profitable
broadband services,
575
post-transaction AT&T would have different incentives to use strategies that limit
consumers’ access to OVD services in order to favor the DIRECTV video product or the combined
entity’s online video products. Again, as we stated in prior proceedings, many end users may have
limited choice among broadband providers
576
and switching costs can be a significant impediment to the
ability of consumers to change broadband providers.
577
2. Potential Levers for Discrimination Against Unaffiliated OVDs
206. Given our finding that the transaction has the potential to increase the Applicants’
incentive to discriminate against OVDs, we analyze the potential levers that would enable the Applicants
to engage in such discrimination and consider whether any conditions are warranted to address potential
public interest harms.
207. As noted above, currently AT&T provides broadband Internet access services to 14.5
million subscribers. Commenters assert that post-transaction the Applicants would use these services to
harm OVDs in two principal ways: (1) usage-based data restrictions or data caps; and (2) interconnection
fees.
578
a. Data Caps
208. Positions of the Parties. Commenters contend that generally applied data caps can be a
significant problem for broadband subscribers who rely on OVDs for video entertainment.
579
For
example, Netflix explains that some subscribers could consume their entire monthly data allotment after
(Continued from previous page)
from quality reductions and price increases. See supra ¶ 204. We conclude that the Applicants’ analysis understates
AT&T’s incentive to engage in a strategy of OVD degradation, particularly over the long term.
575
ATT-FCC-00460915, [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] ; ATT-FCC-
01154928, [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] ; ATT-FCC-00518651, [BEGIN
HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] .
576
See 2010 Open Internet Order, 25 FCC Rcd at 17921, ¶ 25; see also id. at 17923, ¶ 32 (“most residential end
users today have only one or two choices for wireline broadband Internet access service”); see also 2015 Open
Internet Order, 30 FCC Rcd at 5631, ¶ 81 n.134 (“… data suggests that meaningful alternative broadband options
may be largely unavailable to many Americans, further limiting the ability to switch providers. Based on the
submissions from various commenters, it appears that between 65% and 70% of households have at most two
options for high speed Internet access.”).
577
See Netflix Comments at 17-18, 29-32 (stating that consumers face significant switching costs when changing
ISPs, including early termination fees; the inconvenience of ordering, installing and setup, and associated deposits or
fees; the difficulty in returning equipment and the cost of replacing incompatible customer-owned equipment; the
risk of temporarily losing service; problems learning how to use the new service; and the loss of a provider specific
email address or website); see also Cogent Comments at 15 n.48; Cogent Reply at 9-11; Public Knowledge Reply at
5; WGAW Reply at 17. The Commission has also previously recognized the significant costs consumers face in
switching broadband providers. See 2010 Open Internet Order, 25 FCC Rcd at 17924-25, ¶ 34; see also 2015 Open
Internet Order, 30 FCC Rcd at 5631-62, ¶ 81 (“[t]he broadband provider’s position as gatekeeper is strengthened by
the high switching costs consumers face when seeking a new service. … These costs may limit consumers’
willingness and ability to switch carriers, if such a choice is indeed available.”).
AT&T’s internal documents confirm this view. When Netflix was suffering from congestion in interconnecting to
AT&T’s last-mile network, AT&T’s Chief Technology Officer stated [BEGIN HIGHLY CONF. INFO] [END
HIGHLY CONF. INFO] See ATT-FCC-02459548, [BEGIN HIGHLY CONF. INFO] [END HIGHLY CONF.
INFO] .
578
See generally DISH Petition at 26-27; Public Knowledge-ILSR Petition at 8; Netflix Comments at 14-25, 27;
WGAW Petition at 20, 22-24; Cogent Comments at 11-16; COMPTEL Reply at 7; WGAW Reply at 17-20.
579
See Netflix Comments at 27.
Federal Communications Commission FCC 15-94
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just a single weekend of “binge watching” online video content.
580
Commenters also argue that the
combined entity could impose discriminatory data caps that exempt its own, or affiliated, online video
services, which would discourage consumers from accessing unaffiliated OVD services.
581
Commenters
request that, to the extent that the combined entity utilizes usage-based billing for its broadband Internet
service, it should be prohibited from exempting any video service from such usage-based billing.
582
209. The Applicants respond that data caps ensure that the lightest users of broadband do not
subsidize the heaviest users.
583
The Applicants also state that, to the extent that AT&T has implemented
data caps, it has done so at levels sufficient to accommodate the broadband needs of most customers.
584
AT&T notes that it has been transparent about its data allowance policies and practices, in compliance
with the 2010 Open Internet Order.
585
AT&T also states that it would voluntarily commit to abide by the
2010 Open Internet Order for three years after closing
586
and that such commitment empowers the
Commission to enforce the rule prohibiting unreasonable discrimination.
587
Further, the Applicants stress
that the Commission declined to impose across-the-board prohibitions of usage-based billing when it
issued the 2015 Open Internet Order and that the Commission instead opted to look at data allowance
policies on a case-by-case basis.
588
210. Discussion. As discussed below, the record establishes that the Applicants seek to
improve the combined entity’s ability to offer its own, or affiliated, online video content. We note that
today AT&T imposes usage-based data caps on its wireline broadband customers and is alone among the
580
See id.
581
See DISH Petition at 26-27 (“AT&T could impose restrictive data caps for data that travels over the public
Internet portion of its pipe, while exempting any AT&T/DIRECTV online services from those caps. If DISH online
video services are subject to a low monthly data cap, this could depress consumer interest in accessing those
services, while at the same time driving consumers to use AT&T/DIRECTV services because they are exempted
from the data cap.”); Public Knowledge-ILSR Petition at 8 (expressing concern that AT&T could “discriminate in
transmitting lawful network traffic over a consumer’s Internet connection, prioritize its own video services, give its
own video services preferential treatment with respect to caps, tiers, metering, or other usage-based pricing, or
measure, count, or otherwise treat its own video services differently than other over-the-top video services”);
Netflix Comments at 25, 27; WGAW Petition at 20, 22-23.
582
Cogent et al. May 12, 2015, Ex Parte Letter at 6.
583
See Joint Opposition at 38-39; Katz Reply Decl. ¶ 68 (“It can also be an efficient mechanism for recovering
common network costs by having the users who derive the greatest benefit from the network make the greatest
contribution toward those costs.”).
584
See Joint Opposition at 39.
585
Id.; see also Conditions Ex Parte Presentation at 6 (stating that AT&T’s usage-based pricing for wireline
broadband includes data allowances that accommodate a majority of customers and that are similar to those offered
by other broadband providers).
586
Application at 51.
587
See Joint Opposition at 39 n.126; Katz Reply Decl. ¶ 70. Several commenters claim that the combined entity’s
commitment to abide by the Commission’s 2010 Open Internet Order protections is not sufficient to address the
concerns with discriminatory data caps. See, e.g., Netflix Comments at 34 (stating that the combined entity should
also be prohibited from exempting its affiliated services from any data cap applicable to any of its services); DISH
Petition at 27-30 (contending that the Commission should require the combined entity to provide its U-verse
broadband Internet access service at reasonable and non-discriminatory wholesale rates and stating that this
condition would, among other things, “reduce AT&T’s incentive to block or degrade competing online content
traveling on AT&T’s U-verse residential broadband network (such as DISH’s IPVOD), because consumers could
switch to another broadband access provider that did not engage in such practices”).
588
Conditions Ex Parte Presentation at 5-6.
Federal Communications Commission FCC 15-94
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major ISPs in imposing such data allowances for all subscribers.
589
We find that as the combined entity
expands its online offerings, it will have an increased incentive to limit subscriber demand for
competitors’ online video content, including through data caps that discriminate against third-party
content by exempting its own content from the data cap. Indeed, AT&T’s internal documents indicate
that [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] .
590
211. AT&T and DIRECTV have each developed online video programming offerings and,
prior to announcing this transaction, stated that they will expand such offerings.
591
For example, in 2014,
AT&T announced that it will join The Chernin Group, which manages and invests in media businesses, to
invest over $500 million to acquire and launch online video services.
592
In addition, DIRECTV’s internal
documents describe [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] .
593
In
December 2014, DIRECTV launched Yaveo, its first Internet-only subscription video service, aimed at
U.S. Hispanic consumers, in conjunction with partners including Univision Communications and Viacom.
When the acquisition was announced, DIRECTV’s Chief Revenue and Marketing Officer, Paul Guyardo,
stated, “Yaveo gets DirecTV into the OTT business, and we’re excited to start with a compelling Spanish-
language service targeted to the Hispanic community,” and “[w]e’ll learn a great deal, use the findings to
grow and improve the Yaveo platform and expand our OTT offering over time.”
594
212. AT&T also has stated that its acquisition of DIRECTV would improve its ability to
introduce OVD services, offering a number of reasons why the transaction would improve its online video
capabilities.
595
First, the Applicants claim that, post-transaction, the combined entity would be a more
desirable partner for development of innovative online video arrangements due to its combination of
assets, including a nationwide base of video subscribers, a nationwide state-of-the-art wireless network, a
21-state wireline broadband network, and DIRECTV’s expertise in customer interfaces for video
589
Id. at 6.
590
See ATT-FCC-00159899, [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] .
591
ATT-FCC-03405559, [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] ; DTVFCC-
03726077, [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] .
592
The Chernin Group and AT&T Create New Venture to Acquire, Invest In and Launch Online Video Businesses,
AT&T NEWSROOM, April 22, 2014, available at
http://about.att.com/story/the_chernin_group_and_att_create_new_venture_to_acquire_invest_in_and_launch_onlin
e_video_businesses.html (visited June 24, 2015); see also Application at 77; Lee Decl. ¶ 48 (noting that AT&T
recently entered into an arrangement with The Chernin Group to acquire, invest in, and launch online video services,
which will “generate additional capabilities to develop and market innovative OTT services that can be delivered
through all types of wired and wireless devices,” and that “[t]he programming for those services will likely include
ad-supported and subscription-based video-on-demand channels, as well as streaming services”). Netflix contends
that AT&T’s $500 million joint venture with The Chernin Group to invest in online video services “provides further
incentive for AT&T to favor affiliated OTT services over those provided by third parties.” Netflix Reply at 3 n.6.
See Cogent Reply at 6-7.
593
DTVFCC-00031845, [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] .
594
See Todd Spangler, DirecTV Launches First Over-the-Top Video Service, Yaveo, for U.S. Hispanic Audiences,
V
ARIETY.COM, Dec. 22, 2014, available at http://variety.com/2014/digital/news/directv-launches-first-over-the-top-
video-service-yaveo-for-u-s-hispanic-audiences-1201385186/ (visited June 24, 2015).
595
See Stankey Decl. ¶ 59 (“The transaction will dramatically improve AT&T’s ability to develop OTT services in a
number of important ways.”); Guyardo Decl. ¶ 15 (noting DIRECTV’s online video developments and stating that
“[w]e hope through this transaction to be able to combine our efforts with those of AT&T, and that the combination
will in turn result in a more comprehensive OTT response”); AT&T Response to Sept. 9, 2014, Information Request
at 225 (“the transaction will significantly enhance AT&T’s ability to promote the development of over-the-top
(‘OTT’) services”).
Federal Communications Commission FCC 15-94
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services.
596
Second, they argue that the combined entity’s aggregate spending on content would increase
its attractiveness to content providers and allow it to secure more innovative content rights
arrangements.
597
Third, the Applicants note that DIRECTV’s in-house development team of engineers
has substantial expertise in encoding digital content and developing interfaces for consumers to interact
with online video and has already deployed this technology to facilitate live, real-time online streaming of
linear content.
598
Post-transaction, the Applicants claim that the combined entity “ [BEGIN HIGHLY
CONF. INFO.] [END HIGHLY CONF. INFO.] .”
599
Fourth, noting that DIRECTV has production
facilities and efforts underway to produce original programming, the Applicants state that the combined
entity, with its increased scale, would be better positioned both to launch and to market original
programming and to fund more investment in new programming ventures.
600
Fifth, from an operational
standpoint, the Applicants note that [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF.
INFO.] and “facilitat[ing] the development of innovative OTT services.”
601
213. Although the increased online offerings that may arise as a result of the transaction have
the potential to benefit consumers, they also will add to the Applicants’ incentive to shield affiliated
content from competition. We find that the transaction will increase the combined entity’s incentive to
discriminate against unaffiliated OVDs
602
and online video programming to protect both its traditional
video services and its OVD services. Therefore, we impose as a condition of this transaction conditions
that prohibit certain discriminatory usage-based allowances.
b. Interconnection
214. Positions of the Parties. Commenters contend that AT&T has the ability to discriminate
against unaffiliated OVDs by allowing congestion to build up at the interconnection points with AT&T’s
last-mile network and charging OVDs for access to the network, thereby raising its rivals’ costs of
conducting business.
603
Netflix claims that recently, AT&T allowed its interconnection points with
Netflix to become congested, and Cogent claims that AT&T in the past has refused to upgrade capacity at
interconnection points between AT&T’s last-mile broadband network and Netflix’s transit provider
(Cogent),
604
which had a significant detrimental effect on the ability of AT&T’s DSL and U-verse
596
See Stankey Decl. ¶ 59 (“Because AT&T has both wireline and wireless broadband networks to complement its
MVPD offerings, it is especially well-positioned to offer content providers a coordinated set of platforms through
which to reach their potential viewers, wherever those viewers want to be.”).
597
See id. ¶ 61.
598
See id. ¶ 62.
599
Id. See also AT&T Response to Sept. 9, 2014, Information Request, Exhibit 68.e.1, [BEGIN HIGHLY CONF.
INFO.] [END HIGHLY CONF. INFO.] .
600
See Stankey Decl. ¶ 63.
601
Application at 37-38. See Moore Decl. ¶ 23; DIRECTV Response to Sept. 9, 2014, Information Request at 72-
73.
602
The Commission has previously recognized the incentive of Internet access providers such as AT&T to
discriminate against OVDs. See Fourteenth Annual Report, 27 FCC Rcd at 8731, ¶ 271, 8733, ¶ 274 (“MVPDs
have the ability and incentive to degrade the broadband service available to unaffiliated OVDs.”); 2010 Open
Internet Order, 25 FCC Rcd at 17916, ¶ 22 (“[B]roadband providers have incentives to interfere with the operation
of third-party Internet-based services that compete with the providers’ revenue-generating telephony and/or pay-
television services.”).
603
See Cogent Comments at 11-16; Netflix Comments at 14-25; WGAW Petition at 24; COMPTEL Reply at 7;
WGAW Reply at 17-20.
604
See Netflix Comments at 23; see also Cogent Comments at 12-13; Cogent Reply at 14. Cogent states that AT&T
and Cogent peered historically on a settlement-free basis. After Cogent started carrying Netflix traffic, however,
(continued….)
Federal Communications Commission FCC 15-94
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customers to access the Netflix OVD service.
605
Netflix asserts that AT&T refused to allow Netflix’s
Open Connect content delivery network (“CDN”) platform to interconnect without payment to AT&T.
606
Netflix also asserts that it paid AT&T to directly connect to avoid degradation of its service.
607
Netflix
and Cogent claim that AT&T’s strategy is to refrain from augmenting capacity on settlement-free routes
in order to force traffic onto paid routes.
608
They also maintain that AT&T is one of only four broadband
Internet access service providers that can extract such interconnection fees.
609
215. The Applicants dispute the claim that AT&T intentionally degraded Netflix’s service by
allowing congestion to build up at the interconnection points with AT&T’s last mile network.
610
As
(Continued from previous page)
Cogent claims that AT&T suggested that they reassess the settlement-free nature of their relationship based on “the
purported significance of traffic ratios.” Cogent Comments at 13.
605
See Netflix Comments at 23-25; see also Cogent Comments at 13-14. According to Netflix, its service using
DSL and U-verse declined to 1.0 Mbps and 1.5 Mbps, respectively, at their lowest points, far below Netflix’s
recommended 3 Mbps for DVD quality video. See Netflix Comments at 23.
606
See Netflix Comments at 22-23; see also Cogent Comments at 13. Netflix states that Open Connect allows
Netflix content to be stored at interconnection exchange points or at any location a terminating access network
requests. See Netflix Comments at 19-20 (“By placing popular Netflix content closer to those [broadband Internet
access service] provider’s subscribers who are seeking access to it (either through embedded cache servers or by
interconnecting at public Internet exchange points) Netflix can help terminating access networks avoid creating
unnecessary traffic ‘up the chain’ – either over the middle-mile or at the [broadband Internet access service]
provider’s interconnection points.”).
607
See Netflix Comments at 24; see also Cogent Comments at 14. Netflix states that, after the agreement was
implemented, AT&T subscribers were able to access Netflix content at bit rates approximately 63 percent (for DSL)
or 85 percent (for U-verse) higher than at its lowest ebb. See Netflix Comments at 25. The Applicants contend that
the direct interconnection agreement between AT&T and Netflix is very favorable to Netflix and is working well for
its customers. See Joint Opposition at 44; Joint Opposition, Declaration of Scott Mair, Senior Vice President of
Technology Planning and Engineering, AT&T Services, transmitted by letter from Maureen R. Jeffreys, Counsel for
AT&T, to Marlene H. Dortch, Secretary, FCC, MB Docket No. 14-90, ¶¶ 7, 25-30 (filed Oct. 16, 2014) (“Mair
Decl.”) (“AT&T is rapidly closing in on the fastest average download speeds among all large U.S. ISPs for Netflix
traffic. This contract thus demonstrates both that AT&T is interested in ensuring that Netflix receives the level of
Internet access necessary to provide a good experience for AT&T customers that use Netflix’s service, and that
Netflix has a means of recourse if AT&T failed to do so.”).
608
See Netflix Reply at 9; Cogent Reply at 14-16; see also Cogent Reply at 16 (“The AT&T-Netflix agreement
highlights the manner in which a combined AT&T/DIRECTV can be expected to use a technical problem of its own
making – congestion at interconnection points – as a lever to force edge and/or transit providers to pay for access to
the merged firm’s broadband subscribers.”).
609
See Netflix Comments at 14, 24 (“AT&T’s substantial broadband footprint (approximately 10 million
subscribers) and its status as a Tier 1 network operator give it the ability to demand terminating access fees from
edge providers such as Netflix.”); see also Cogent Comments at 12, 14. On June 23, 2015, New America’s Open
Technology Institute (“OTI”) expressed its concern to FCC staff that millions of Americans experienced persistent
degradation of their Internet connections over the past month, according to the results of the Internet Health Test
conducted by M-Lab. OTI noted that congestion was particularly acute at interconnection points with transit
providers GTT Communications, Inc. (“GTT”) and Tata Communications. Letter from Joshua Stager, Policy
Counsel, New America’s Open Technology Institute, to Marlene H. Dortch, Secretary, FCC, MB Docket No. 14-90,
at 2 (filed June 24, 2015). AT&T responded that it recently reached long-term interconnection agreements with
Level 3, Cogent, and GTT and that to “address consumers’ needs today and in the future, AT&T remains open to
negotiating with any similarly situated provider and reaching similar commercial agreements that properly align the
incentives of all parties for the benefit of end users.” Letter from Maureen R. Jeffreys, Counsel for AT&T, to
Marlene H. Dortch, Secretary, FCC, MB Docket No. 14-90, at 2 (filed June 25, 2015).
610
See Joint Opposition at 39-49; Mair Decl. ¶ 3. The Applicants state that the Commission has decided previously
not to regulate backbone interconnection and peering and that any change in that approach should be handled in an
(continued….)
Federal Communications Commission FCC 15-94
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evidence, the Applicants assert that AT&T has peering arrangements with 23 partners as well as direct
connections with CDNs and other entities and that Netflix and any other OVD can choose any
combination of these services to send traffic to AT&T.
611
The Applicants argue that the only way a
“degradation by congestion” strategy could work would be for AT&T to congest or block all of its
interconnection points, which would have the effect of degrading all Internet traffic headed to AT&T
customers and would thereby harm the performance of AT&T’s broadband service.
612
Even if AT&T
blocked only Cogent, AT&T states that Netflix could switch to another backbone provider that delivers
traffic to AT&T.
613
Thus, the Applicants argue, Netflix’s prior experience with congestion could have
been avoided if it used a different mix of backbone providers.
614
Netflix disputes the Applicants’ claims,
arguing that there are only six competitive options for transit to high-bandwidth customers in the United
States and that Netflix used all options reasonably available.
615
216. Commenters contend that the combined entity’s commitment to abide by the 2010 Open
Internet Order protections for three years would not address these concerns because such protections do
not extend to “existing arrangements for network interconnection, including existing paid peering
arrangements.”
616
Accordingly, Netflix
617
and Cogent
618
suggest conditions to address their concerns,
(Continued from previous page)
industry-wide proceeding. See Joint Opposition at 40-41 (citing 2010 Open Internet Order, 25 FCC Rcd at 17944,
¶ 67 n.209).
611
See Joint Opposition at 40; Katz Reply Decl. ¶ 63; Mair Decl. ¶¶ 4, 10, 15, 19-20, 23.
612
See Joint Opposition at 42; Katz Reply Decl. ¶ 64 (“[B]ecause transit providers and CDNs generally deliver the
content of many different edge providers, including those that do not compete with AT&T and DIRECTV’s video
services (and may even be complementary to them), the degradation strategy would harm the quality of AT&T’s
broadband services broadly.”); Mair Decl. ¶¶ 5, 24.
613
See Joint Opposition at 42; Katz Reply Decl. ¶ 64; Mair Decl. ¶¶ 4, 19-20.
614
See Joint Opposition at 42-43; Mair Decl. ¶¶ 4, 19-21 (“Just as Netflix has the flexibility to shift its traffic to
different providers to avoid congestion, if it concentrates its traffic on too few links, it can create congestion. That
is precisely what Netflix has done. Over the past several years, Netflix has concentrated the traffic it sends to
AT&T’s network among a relatively small number of AT&T’s peers, and thus among a small number of ingress
points into AT&T’s network. These interconnection points were not designed to handle the very large traffic
volumes Netflix was attempting to send through them and, predictably, congestion began to occur.”) (emphasis in
original).
615
See Netflix Reply at 6-7.
616
See Cogent Comments at 16-17 (citing 2010 Open Internet Order, 25 FCC Rcd at 17944, ¶ 67 n.209 (“We do not
intend our rules to affect existing arrangements for network interconnection, including existing paid peering
arrangements.”)); Franken Comments at 4; WGAW Petition at 24, 27-28; Cogent Reply at 19-20. Indeed,
commenters contend that Comcast was involved in a similar dispute with Netflix despite Comcast’s commitment to
abide by the 2010 Open Internet Order. See Cogent Comments at 16 n.51 (“Comcast, itself bound by the Open
Internet Order as a result of conditions associated with its acquisition of NBC Universal, engaged in precisely the
same sort of interconnection strategy as AT&T.”).
617
See Netflix Comments at 34 (“the combined entity should be prohibited from charging a content provider a
terminating access fee to interconnect”). But see Joint Opposition at 49 (stating that this condition would be
“contrary to industry norms and would be extremely costly to AT&T and its customers”); Mair Decl. ¶ 50.
618
See Cogent Comments at 20-22; Cogent Reply at 20-25 (stating that: (i) AT&T-DIRECTV should be subject to
enhanced transparency requirements to aid in detection of discriminatory behavior; (ii) if any interconnection point
between AT&T-DIRECTV and another network reaches 70 percent capacity, then AT&T-DIRECTV should
upgrade capacity to avoid congestion; (iii) for a period of seven years following consummation of the transaction,
AT&T-DIRECTV should be required to maintain settlement-free peering relationships with any network with whom
AT&T had such a relationship as of May 18, 2014, the date AT&T and DIRECTV announced the proposed
transaction; and (iv) AT&T-DIRECTV should not be permitted to engage in unreasonable network management
practices with respect to interconnection); see also WGAW Reply at 36. But see Joint Opposition at 48-49 (stating
(continued….)
Federal Communications Commission FCC 15-94
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including that the Applicants be required to interconnect on a “bill-and-keep” basis with other network
operators or edge providers for the exchange of Internet traffic between the Applicants’ broadband
customers and the other network or the edge provider, provided that the party requesting interconnection
agrees to localize the exchange of traffic, and that if any interconnection port reaches 70 percent capacity
average utilization for more than three hours in any 24-hour period on more than five separate occasions
within any 30-day period, then the Applicants must upgrade the ports and augment capacity to avoid
congestion, with the interconnecting parties each bearing the costs associated with upgrades to their own
networks.
619
The Applicants counter that, today, private commercial negotiations balance the interests of
broadband access and edge providers and that commenters seek to shift a disproportionate share, if not the
entire share, of the burden of maintaining broadband access upon the Applicants and that it would be
unprecedented and unjustified to require that the Applicants provide free backbone service to other
backbone carriers and edge services.
620
In addition, the Applicants assert that while a 70 percent
utilization was often the trigger point for augmentation, provisioning processes have now become more
streamlined, and software has become more sophisticated, so that it is reasonable to implement
augmentation at 85 percent utilization.
621
217. Discussion. As stated in the 2015 Open Internet Order, “consumers bear the harm when
they experience degraded access to the applications and services of their choosing due to a dispute
between a large broadband provider and an interconnecting party.”
622
Also, because OVD subscribers
expect high-quality video, OVDs are vulnerable to degradation at the interconnection point with a
broadband Internet access service provider’s last mile network.
623
Thus, as stated in the 2015 Open
Internet Order, we find that “broadband Internet access providers have the ability to use terms of
interconnection to disadvantage edge providers and that consumers’ ability to respond to unjust or
unreasonable broadband provider practices are limited by switching costs.”
624
We appreciate
commenters’ concerns in this area.
218. We believe that in this particular case the protections in the 2015 Open Internet Order,
coupled with certain conditions we impose today, will best address any potential for anticompetitive
activity by the combined entity in its interconnection practices that affects OVDs. In the 2015 Open
Internet Order, the Commission decided to take a case-by-case approach to considering whether an ISP’s
interconnection practices constitute unjust, unreasonable, or unjustly discriminatory practices under
Sections 201 and/or 202 of the Act.
625
Parties such as interconnecting OVDs that believe that an ISP’s
interconnection practices are not consistent with Sections 201 or 202 are able to file complaints under
Section 208. Thus, if any interconnection concerns with the combined entity rise to that level, OVDs
(Continued from previous page)
that the settlement-free peering condition would require AT&T to subsidize Cogent, and other members of a closed
group of current peers, for years on end, regardless of potentially drastic changes in traffic balances, the terms of
those parties’ freely negotiated agreements, and the existence of numerous alternative backbone providers, and that
the free upgrade condition would be contrary to industry norms, encourage inefficient routing, and impose enormous
uncompensated costs on AT&T); Mair Decl. ¶¶ 44-49, 51-52.
619
Cogent et al. May 12, 2015, Ex Parte Letter at 5.
620
Conditions Ex Parte Presentation at 3-4.
621
Id. at 4.
622
2015 Open Internet Order, 30 FCC Rcd at 5689-90, ¶ 199.
623
See Netflix Comments at 17-18 (citing a study that found that viewers of streaming video begin to abandon a
video if it takes more than two seconds to start, with each incremental delay resulting in a 5.8 percent increase in the
abandonment rate); Cogent Reply at 16.
624
2015 Open Internet Order, 30 FCC Rcd at 5694-95, ¶ 205.
625
Id. at 5693, ¶ 203.
Federal Communications Commission FCC 15-94
85
have this vehicle available to have their specific concerns adjudicated by the Commission.
626
We also
note that AT&T entered into long-term interconnection agreements with Cogent and Level 3 to provide
added capacity and new interconnection points for their IP networks.
627
In addition, on June 18, 2015,
GTT Communications, Inc. (“GTT”) and AT&T entered into a long-term interconnection agreement to
provide added capacity and new interconnection points for their IP networks.
628
219. We have not identified in the record any evidence that would support blanket restrictions
on all interconnection arrangements between the Applicants and OVDs.
629
However, given our
heightened concern where ISPs compete with third-party Internet-based services (i.e., OVDs), we impose
additional conditions that require the combined entity to file all interconnection agreements with the
Commission and to provide the Commission with certain interconnection performance metrics, which we
will use in combination to monitor the terms and effects of such interconnection arrangements. To the
extent we determine that the interconnection performance metrics are not competitively sensitive or that
they should be released in the public interest, we will make them publicly available.
D. Harm to Supply, Quality, and Diversity in Video Programming
220. In this section, we consider whether the transaction would increase the Applicants’
incentive or ability to engage in behavior that is likely to reduce the supply, quality, or diversity of video
programming. After considering structural factors affecting the likelihood of competitive harms to
programmers, we examine how the combined entity’s increased size may confer greater leverage when
negotiating with programmers and what effects that might have on consumer welfare. We then address
concerns raised by two specific types of programmers: public, educational, and governmental (“PEG”)
channels and local broadcast stations. We do not find that any increased bargaining power of the
combined entity is likely to harm consumer welfare, nor do we find any transaction-specific harms that
necessitate the adoption of conditions related to program carriage, PEG channels, or the carriage of local
broadcast stations.
1. Background on Video Programming
221. Many of the potential public interest harms raised in the record relate to the video
programming industry. We provide this background that informs our analysis of those harms.
222. Content providers, including cable networks and over-the-air broadcasters, may both
produce their own programming and acquire programming produced by others.
630
They package and sell
626
Id. at 5638-39, ¶¶ 93-94.
627
See Letter from Maureen R. Jeffreys, Counsel for AT&T, to Marlene H. Dortch, Secretary, FCC, MB Docket No.
14-90 (filed June 10, 2015); see also Cogent Communications, Inc., Cogent and AT&T Enter Into Interconnection
Agreement (press release), June 10, 2015, available at http://www.cogentco.com/en/news/press-releases/741-cogent-
and-at-t-enter%20-into-interconnection-agreement (visited June 18, 2015) (Cogent’s CEO stated “[b]oth Cogent and
AT&T’s customers will benefit from this agreement for years to come. We are putting customer needs at the
forefront by enabling an expanded, secure and resilient interconnection environment.”); Level 3 Communications,
Level 3 and AT&T Enter Into Interconnection Agreement (press release), May 11, 2015, available at
http://level3.mediaroom.com/index.php?s=23600&item=137034 (visited June 18, 2015) (Level 3’s Chief Marketing
Officer stated “[t]his agreement will benefit Level 3’s and AT&T’s customers for years to come. With customer
needs at the forefront, you enable a growing, secure and resilient interconnection environment.”).
628
See Letter from Maureen R Jeffreys, Counsel to AT&T, to Marlene H. Dortch, Secretary, FCC, MB Docket No.
14-90, at 1 & Exhibit 75.2.28 (filed June 24, 2015).
629
See 2010 Open Internet Order, 25 FCC Rcd at 17944, ¶ 67 n.209 (“We do not intend our rules to affect existing
arrangements for network interconnection, including existing paid peering arrangements.”).
630
Liberty Media-DIRECTV Order, 23 FCC Rcd at 3281, ¶ 33; Adelphia Order, 21 FCC Rcd at 8236, ¶ 65; News
Corp.-Hughes Order, 19 FCC Rcd at 502, ¶ 54; EchoStar-DIRECTV HDO, 17 FCC Rcd at 20653, ¶ 248.
Federal Communications Commission FCC 15-94
86
this programming as a network or networks to MVPDs for distribution to consumers.
631
To provide
multichannel video services to subscribers, MVPDs combine broadcast television signals and (non-over-
the-air) programming networks for distribution on their cable, satellite, fiber, or wireless systems.
632
MVPDs compensate owners of programming networks through license fees that are based in part on the
number of subscribers that receive the programming from the MVPD.
633
Similarly, broadcast station
owners may receive retransmission consent fees from MVPDs. Discounts of such fees often are
negotiated based on the number of MVPD subscribers and on other factors, such as placement of the
network on a particular programming tier.
634
Most programming networks, broadcasters, and MVPDs
also derive revenue by selling advertising time during the programming.
635
223. Video programming comes in a wide variety of characteristics, focus, and subject
matter.
636
Programming is offered by over-the-air broadcast stations; RSNs; national program networks,
including news, entertainment and hobby networks; and various non-sports regional networks.
637
Moreover, the Commission has found that at least a proportion of MVPD subscribers views certain types
of programming as so vital or desirable that they are willing to switch to a different MVPD in order to
gain or retain access to that programming.
638
These findings inform our current analysis.
224. When considering potential harms involving video programming in prior transactions, the
Commission considered the geographic area in which the program owner licenses the programming, and
we do so here.
639
For national programming networks, such areas are at least national in scope.
640
Such
networks generally are licensed to MVPDs nationwide, and, in some cases, they are licensed
internationally.
641
In contrast, with respect to RSNs and other regional networks, the Commission
considered the effects in regional markets.
642
Contracts between sports teams and RSNs generally are
limited to the “distribution footprint” established by the owner of the programming.
643
631
Id.
632
Id.
633
Liberty Media-DIRECTV Order, 23 FCC Rcd at 3281-82, ¶ 34; Adelphia Order, 21 FCC Rcd at 8236, ¶ 65; News
Corp.-Hughes Order, 19 FCC Rcd at 502, ¶ 55; EchoStar-DIRECTV HDO, 17 FCC Rcd at 20654, ¶ 249.
634
Id.
635
Id.
636
Liberty Media-DIRECTV Order, 23 FCC Rcd at 3282, ¶ 35; Adelphia Order, 21 FCC Rcd at 8236, ¶ 66; News
Corp.-Hughes Order, 19 FCC Rcd at 504, ¶ 59.
637
Id.
638
Comcast-NBCU Order, 26 FCC Rcd at 4285, ¶ 117; Liberty Media-DIRECTV Order, 23 FCC Rcd at 3282, ¶ 35;
Adelphia Order, 21 FCC Rcd at 8236-37, ¶ 66; News Corp.-Hughes Order, 19 FCC Rcd at 504, ¶ 59; see also
Adelphia Order, 21 FCC Rcd at 8270-71, ¶ 146.
639
Liberty Media-DIRECTV Order, 23 FCC Rcd at 3282, ¶ 37; Adelphia Order, 21 FCC Rcd at 8237, ¶ 68; News
Corp.-Hughes Order, 19 FCC Rcd at 506, ¶ 64.
640
Liberty Media-DIRECTV Order, 23 FCC Rcd at 3282, ¶ 37; Adelphia Order, 21 FCC Rcd at 8237, ¶ 68; News
Corp.-Hughes Order, 19 FCC Rcd at 506, ¶ 66.
641
Id.
642
Id.
643
Id. In the case of broadcast television programming, we have found DMAs to define the relevant geographic
market for each individual broadcast station. See Liberty Media-DIRECTV Order, 23 FCC Rcd at 3283, ¶ 37 n.116;
News Corp.-Hughes Order, 19 FCC Rcd at 506, ¶ 65.
Federal Communications Commission FCC 15-94
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2. Potential Competitive Harms
a. Increased Leverage of Combined Entity in Programming
Negotiations
225. As discussed below, several commenters contend that the combined entity’s subscriber
base would afford the Applicants increased leverage in negotiations with programmers, leading to several
harms to programmers, including reduced carriage opportunities, below-market licensing fees,
anticompetitive contractual conditions, and less investment in programming. The Applicants disagree,
contending that the transaction would not alter their bargaining power with programmers.
226. Positions of the Parties. Several commenters claim that the Applicants would gain
substantial leverage in their negotiations with programmers due to the size of their combined share of the
video distribution market.
644
ACA observes that AT&T’s expansion from approximately 6 million to 26
million video subscribers would give it a national reach approaching the Commission’s previous 30
percent cable horizontal ownership limit.
645
Other commenters contend that a national programmer
would not survive without the combined entity’s distribution regardless of whether its subscribership
remains below 30 percent of pay-TV households nationwide.
646
644
See, e.g., DISH Petition at 12 (arguing that the combined entity could use its enhanced position as a “‘must-have’
distribution outlet” to extract unfavorable prices, terms, and conditions from programmers); Franken Comments at
5-6 (expressing concern that the increased market power of the combined entity would enable it to negotiate below-
market programming rates); NAB Comments at 3-7 (arguing that the proposed transaction would strengthen the
Applicants’ bargaining power in retransmission consent negotiations with broadcasters and urging the Commission
to redress the imbalance, in part, by relaxing its media ownership rules); WGAW Petition at 7, 9-14 (asserting that
the combined entity would have greater leverage to reduce license and retransmission consent fees below
competitive levels); WGAW Reply at 4-10 (arguing that consolidation in the video distribution market would give
the Applicants greater leverage over programmers and local broadcasters).
645
ACA Comments at 17-20; see also ACA Reply at 10 (noting that the Applicants’ economist acknowledges that
the combined entity would be able to exert greater leverage over programmers than either Applicant can on its own).
Consistent with the 1992 Cable Act, in 1993, the Commission set the cable horizontal ownership limit at 30 percent
of all cable homes passed nationwide, which it subsequently modified in 1999 to limit a cable operator from serving
more than 30 percent of all MVPD subscribers. See Implementation of Sections 11 and 13 of the Cable Television
Consumer Protection and Competition Act of 1992, Horizontal and Vertical Ownership Limits, MM Docket No. 92-
264, Second Report and Order, 8 FCC Rcd 8565 (1993); Implementation of Section 11(c) of the Cable Television
Consumer Protection and Competition Act of 1992, Horizontal Ownership Limits, MM Docket No. 92-264, Third
Report and Order, 14 FCC Rcd 19098 (1999); 47 U.S.C. § 533(f). In 2001, the D.C. Circuit remanded the limit for
inadequate support. Time Warner Entm’t Co. v. FCC, 240 F.3d 1126 (D.C. Cir. 2001). The Commission
reestablished the horizontal ownership limit at 30 percent in 2008. The Commission’s Cable Horizontal and
Vertical Ownership Limits, MM Docket No. 92-264, Fourth Report and Order and Further Notice of Proposed
Rulemaking, 23 FCC Rcd 2134 (2008) (“Cable Horizontal and Vertical Ownership Limits Order”). However, the
D.C. Circuit vacated that decision the following year, and the Commission has not reinstated the horizontal limit.
See Comcast Corp. v. FCC, 579 F.3d 1 (D.C. Cir. 2009) (vacating the limit as arbitrary and capricious).
646
DISH Petition at 12 (asserting that the transaction would make the combined entity a “‘must-have’ distribution
outlet” for any programmer seeking national coverage); Letter from F. William LeBeau, Holland & Knight LLP,
Counsel for ReelzChannel, LLC, to Marlene Dortch, Secretary, FCC, MB Docket No. 14-90, at 2 (July 30, 2014)
(“ReelzChannel July 30, 2014, Ex Parte Letter”) (claiming that a national programming network cannot be viable
today unless it is carried on each of the top-four MVPDs, including DIRECTV); Reply Comments of Hubbard
Broadcasting, Inc., MB Docket 14-90, at 4 (filed Jan. 7, 2015) (“Hubbard Reply”) (stating that programming
carriage under reasonable terms and conditions on the nation’s largest four or five MVPDs already is essential for
success); WGAW Reply at 7-8 (arguing that the survival of national broadcast and programming networks would
depend on distribution by the combined entity, which could become the nation’s largest MVPD).
Federal Communications Commission FCC 15-94
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227. Some commenters claim that the increased consolidation in the video distribution market
resulting from the transaction would make it more difficult for programmers to obtain carriage.
647
In
addition, commenters contend that the combined entity’s bargaining power would lead to lower license
fees and retransmission consent fees than what the Applicants separately pay today to programmers and
broadcasters, which in turn would result in less investment in programming in the future.
648
WGAW
disputes that the Applicants’ projected 20 percent decrease in programming costs would stem from
volume discounts that programmers would willingly offer the combined entity due to its larger subscriber
base.
649
WGAW argues that the Applicants’ projected programming cost savings instead would derive
from the monopsony power the combined entity would hold post-transaction.
650
WGAW provides annual
data from 2008 to 2013 purporting to show that license fees have not increased at a higher rate than
programmers’ investment in content.
651
WGAW concludes that programmers do not have an expanding
profit margin that can accommodate a volume discount and that any reduction in license fees would result
in less revenue to invest in content production, to the ultimate detriment of the consumer.
652
In an effort
to reduce the risk that the combined entity would extract below-market rates, WGAW asks the
Commission to impose a condition on the transaction that would require binding arbitration when the
combined entity and a programmer fail to reach a carriage agreement.
653
228. Several commenters contend that the combined entity’s increased leverage in
programming negotiations would strengthen the Applicants’ ability to demand anticompetitive carriage
terms. In particular, commenters express concern with MFN contract clauses,
654
which give the MVPD
647
See, e.g., Franken Comments at 5-6 (warning that the removal of a video distributor from the market would
reduce opportunities for independent programmers to obtain MVPD carriage); Letter from Burt A. Braverman,
Davis Wright Tremaine LLP, Counsel for INSP, LLC, to Marlene H. Dortch, Secretary, FCC, MB Docket No. 14-
90, at 1 (Nov. 20, 2014) (“INSP Nov. 20, 2014, Ex Parte Letter”) (claiming that consolidation exacerbates the
disadvantages independent programmers already face in vying for limited channel capacity in competition with large
content producers); Comments of RFD-TV, MB Docket 14-90, at 1-2, 7-9, 10-12 (filed Sept. 16, 2014) (“RFD-TV
Comments”) (arguing that consolidation in the MVPD industry reduces carriage options for independent
programmers while acknowledging that AT&T and DIRECTV have been supportive of independent rural
programming).
648
See Franken Comments at 5-6 (asserting that the combined entity could exert its enhanced market power to force
unaffiliated content providers to accept artificially low programming rates, which would harm the development of
new and independent content); WGAW Petition at 7, 9-14 (warning that the increased incentive and ability of the
combined entity to reduce license and retransmission consent fees below competitive levels could diminish an
essential revenue stream that supports the production of original programming); WGAW Reply at 8-10 (concerned
that local broadcasters, which continue to offer the most popular content, would be forced to accept lower
retransmission consent fees); see also WGAW Reply at 6-8; DISH Petition at 12.
649
WGAW Petition at 9-10. WGAW claims that programming cost savings generally are not linked to an MVPD’s
volume of subscribers because content production costs are the same regardless of the number of MVPD subscribers
and because transmission costs are paid by the MVPDs. See id.
650
Id.; see also WGAW Reply at 6-7 (positing that the Applicants’ intended goal is “to cut AT&T’s costs below
competitively negotiated rates”); DISH Petition at 12 (suggesting that the combined entity would gain monopsony
power over programmers).
651
WGAW Petition at 11, 13; see also WGAW Reply at 6-7 (claiming that “the growth in content spending has
outpaced growth in [license] fees”).
652
WGAW Petition at 12-14; see also WGAW Reply at 6 (noting that the Applicants “offer no evidence to suggest
that programming fees overvalue content”).
653
WGAW Reply at 33-34.
654
See, e.g., Franken Comments at 6; DISH Petition at 12; ReelzChannel July 30, 2014, Ex Parte Letter at 2; INSP
Nov. 20, 2014, Ex Parte Letter at 1; ACA Reply at 10-11; Letter from Mark J. Coleman, Senior Partner and General
Counsel, InterMedia Partners, to Marlene H. Dortch, Secretary, FCC, MB Docket No. 14-90, at 2 (Sept. 25, 2014)
(“InterMedia Partners Sept. 25, 2014, Ex Parte Letter”).
Federal Communications Commission FCC 15-94
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the right to modify the programming agreement to incorporate more favorable rates, terms, or conditions
that the programmer subsequently may negotiate with another MVPD.
655
Typically, an MFN clause
specifies the type of term that may be substituted, such as a more favorable pricing term. ReelzChannel
claims, however, that independent program networks increasingly are forced to comply with more
demanding MFN provisions, including unconditional clauses that allow the MVPD to import any term
from any other contract that the programmer has with another MVPD, without being bound by the
conditions agreed to by that MVPD.
656
ReelzChannel argues that this type of “cherry picking” MFN
provision hampers competition, innovation, content diversity, and viewpoint diversity by allowing
carriage agreements to be composed of all the worst terms the programmer has been forced to accept from
any MVPD.
657
ReelzChannel suggests that, as a condition to transaction approval, the Commission
prohibit the Applicants from subjecting independent program networks to unreasonable MFN
provisions.
658
Similarly, INSP argues that the Commission’s current rules do not protect independent
programmers sufficiently from an MVPD’s enormous leverage and asks the Commission to consider
measures to ensure the fair and reasonable treatment of independent program networks.
659
229. In response to commenters’ arguments, the Applicants state that the combined entity’s
subscribership share would be “considerably less” than the 30 percent permitted under the Commission’s
previous cable horizontal ownership limit.
660
Further, the Applicants assert that the D.C. Circuit, when
striking down that limit, suggested that an MVPD’s subscribership share even above that level is not in
itself indicative of excessive market power.
661
The Applicants also point to antitrust precedent finding
that a market share below 30 percent is presumed not to confer market power.
662
In addition, DIRECTV
maintains that there is no one particular MVPD or OVD on which carriage is required to ensure the
viability of a new programming network.
663
230. The Applicants dispute the notion that the transaction would alter relative bargaining
power to an extent that would affect the quantity and variety of programming.
664
They note that
655
MFN rights can be conditional or unconditional. A conditional MFN provision entitles a distributor to certain
contractual rights that the programmer has granted to another distributor, subject to the acceptance of related terms
and conditions contained in that other distributor’s agreement. An unconditional MFN provision, by contrast,
contains no such requirement that the distributor entitled to MFN rights accept related terms and conditions.
656
ReelzChannel July 30, 2014, Ex Parte Letter at 2.
657
Id.
658
Id.; see also ACA Reply at 57-58 (arguing that the Commission should prohibit the combined entity from using
its increased leverage in ways that interfere with a programmer’s ability to negotiate more favorable terms with
other MVPDs). ReelzChannel subsequently submitted a letter supporting the proposed transaction and arguing that
it would cause no material harm to the marketplace. See Letter from Charles R. Naftalin, Holland & Knight LLP,
Attorney for ReelzChannel, LLC, to Marlene Dortch, Secretary, FCC, MB Docket No. 14-90, at 1 (Feb. 13, 2015)
(“ReelzChannel Feb. 13, 2015, Ex Parte Letter”).
659
INSP Nov. 20, 2014, Ex Parte Letter at 1; see also Letter from Mark DeVitre, Executive Vice President and
General Counsel, Entertainment Studios, Inc., to Marlene H. Dortch, Secretary, FCC, MB Docket No. 14-90, at 1
(March 30, 2015) (detailing ex parte meeting with the Office of the Chairman regarding a complaint filed by the
National Association of African American Owned Media against AT&T and DIRECTV for alleged racial
discrimination in contracting under Section 1981 of the Civil Rights Act with regard to the companies’ “unilateral
refusal to contract with [Entertainment Studios Networks] for cable channel carriage, license fees, and advertising”).
660
Joint Opposition at 51.
661
Id. at 51-52 n.185 (citing Comcast Corp. v. FCC, 579 F.3d at 8).
662
Id. (citing Commercial Data Servers, Inc. v. Int’l Bus. Machs. Corp., 262 F. Supp. 2d 50, 74-75 (S.D.N.Y.
2003)).
663
DIRECTV Response to Sept. 9, 2014, Information Request at 47.
664
Joint Opposition at 51-53.
Federal Communications Commission FCC 15-94
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programmers control a critical input to MVPD services and contend that ownership of the most popular
content is highly concentrated.
665
They argue that programmers therefore enjoy far more bargaining
power than video distributors, as evidenced by rapidly rising programming rates.
666
231. The Applicants also disagree with commenters that the transaction would result in less
investment in programming. According to the Applicants’ economist, Dr. Katz, AT&T’s anticipated
programming cost savings of 20 percent, while significant from AT&T’s perspective, would not have a
material effect on programming investment because the corresponding reduction in content providers’
revenues, if achieved, would represent a very small share, approximately [BEGIN CONF. INFO.]
[END CONF. INFO.] percent, of programmers’ overall programming revenues.
667
The Applicants assert
that content providers’ revenues instead would increase due to the greater scale and efficiencies stemming
from the proposed transaction that would enable both content providers and the combined entity “to offer
more competitive, cost-effective, and integrated services to consumers.”
668
The Applicants conclude that,
as a result, the proposed transaction would spur investment in programming.
669
232. In addition, the Applicants deny that their projected programming cost savings would
result from an exercise of monopsony power, and they argue that a monopsony model does not apply to
the bargaining context in which content providers sell programming to MVPDs.
670
Free State argues
further that a monopsony threat is unlikely given the number of other video programming purchasers,
such as cable MVPDs, DISH, telephone MVPDs (Verizon, CenturyLink, Frontier), broadband service
providers such as Google Fiber, and an increasing number of Internet-based providers.
671
Similarly, the
Applicants point to increasing competition from OVDs, particularly Netflix, as a constraint on the
bargaining power of MVPDs in programming negotiations.
672
233. Several programmers agree with the Applicants that the proposed transaction would not
lessen supply or diversity in the video programming market. RFD-TV praises both AT&T and
DIRECTV for their carriage of its network and support of rural programming.
673
Likewise, Herring
Networks, Inc., an independent owner of two national programming networks, commends AT&T for its
history of fair dealing with independent programmers and claims that expanding AT&T’s reach would
665
Id. at 50.
666
Id.
667
Katz Reply Decl. ¶ 32.
668
Joint Opposition at 52-53.
669
Id.
670
Id. at 51-52 (pointing to the Comcast-AT&T transaction as an example where the Commission found that the
merger of the nation’s then-largest and third largest cable operators would not gain monopsony power over the
programming market); see also Katz Decl. ¶ 111 n.195 (arguing that carriage negotiations should be analyzed under
the bargaining theory rather than under the standard theory of monopsony because an MVPD has an incentive to
increase the amount of programming purchased when it succeeds in negotiating a lower price, as opposed to the
output-reducing effects of a monopsony); Katz Reply Decl. ¶ 31 (asserting that the standard monopsony model does
not apply to carriage negotiations).
671
Free State Comments at 23-24.
672
Joint Opposition at 51-52.
673
RFD-TV Comments at 10-12. In its Reply, however, RFD-TV reports that DIRECTV recently declined to carry
RFD-TV HD or RURAL TV/FamilyNet. In addition, RFD-TV is concerned that DIRECTV may decide to move
RFD-TV SD from its basic channel tier to a more expensive tier with a smaller subscribership. RFD-TV asks the
Commission to be vigilant in protecting the interests of independent rural programmers. Reply Comments of RFD-
TV, MB Docket 14-90, at 2-4 (filed Jan. 7, 2015) (“RFD-TV Reply”); see also InterMedia Partners Sept. 25, 2014,
Ex Parte Letter at 2 (noting the particular vulnerabilities of independent programmers, including being subject to re-
tiering without good cause).
Federal Communications Commission FCC 15-94
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promote competition and benefit consumers and independent programmers.
674
Similarly, NUVOtv lauds
AT&T for distributing NUVOtv’s independent programming network serving the Latino community and
for dealing with the network fairly.
675
In addition, BabyFirst, an independently owned network focused
on child development programming, supports the transaction and applauds both AT&T and DIRECTV
for their “strong commitment to ensuring consumer access to diverse programming.”
676
Despite
ReelzChannel’s concerns about the leverage of large MVPDs to impose unreasonable MFN provisions,
677
Hubbard Broadcasting, Inc. (“Hubbard”), the owner and operator of ReelzChannel, supports the proposed
transaction, claiming that it would promote competition, innovation, and rural broadband access.
678
Although it encourages the Commission to take appropriate steps to redress the market imbalance
between small independent programming networks and large MVPDs, at the same time Hubbard argues
that the proposed transaction has little import for programmers given that a programming network’s
success already requires carriage on the largest four or five MVPDs.
679
234. Discussion. Given the Commission’s interest in promoting supply and quality of
programming, we consider carefully the potential harms that could arise from the loss of a potential video
programming distributor, including the harms raised on the record relating to the increase in leverage that
the combined entity may gain in contract negotiations. We are particularly attentive to whether the
transaction would decrease consumer welfare by reducing the output or quality of programming.
However, we find that the record does not establish that the proposed transaction is likely to result in such
a consumer welfare decrease. We decline to impose a condition specifically to address the potential for a
reduction in programming rates or the use of MFN provisions, which some commenters allege would
flow from the combined entity’s increased leverage.
235. To support the argument that the combined entity would coerce programmers and
broadcasters into accepting lower license fees and lower retransmission consent fees, programmers offer
only generalized assertions of harm to their business operations without sufficiently demonstrating how
such rate reduction would harm consumer welfare through the decrease in output or quality of
programming.
680
Commenters have not provided adequate empirical evidence to show that the reduction
674
Comments of Herring Networks, Inc., MB Docket 14-90, at 1-3 (filed Sept. 16, 2014) (“Herring Comments”);
see also id. 2, 3-5 (stating that AT&T is an “important counterweight” to vertically integrated MVPDs, such as
Comcast and Time Warner Cable, and that the transaction could cause vertically integrated cable providers “to
rethink their discriminatory practices” toward independent programmers).
675
Letter from Michael Schwimmer, CEO, NUVOtv, to Marlene H. Dortch, Secretary, FCC, MB Docket No. 14-90,
at 1, 3-4 (Oct. 8, 2014).
676
Letter from Sharon Rechter, Co-Founder and EVP, BabyFirst, to FCC Chairman and Commissioners, MB
Docket No. 14-90, at 1-2 (Jan. 7, 2015) (touting its “strong partnership” with AT&T, which it calls “forward
thinking, visionary, and fair in [its] negotiations” and noting that DIRECTV was the first major distributor to carry
BabyFirst’s programming).
677
But see ReelzChannel Feb. 13, 2015, Ex Parte Letter at 1 (supporting the proposed transaction).
678
Hubbard Reply at 2-3, 4-5 (lauding the Applicants, particularly DIRECTV, for their support of its program
networks).
679
Id. at 3-4.
680
We note that Northwest Broadcasters, et al. (collectively, “The TV Station Group”) recently filed an Informal
Objection, more than five months after the close of the pleading cycle, see supra n.27 (initial comments and
petitions to deny due September 16, 2014; replies due January 7, 2015), asking the Commission to deny the
Application or suspend its review until it has resolved a retransmission complaint that they recently filed against
DIRECTV. Northwest Broadcasting, L.P., et al. Informal Objection and Request to Hold Applications in Abeyance,
MB Docket No. 14-90 (filed June 12, 2015) (“The TV Station Group Informal Objection and Request”). These
broadcasters have already availed themselves of the appropriate process for resolving disputes about retransmission
consent by filing a complaint. Further, for the reasons discussed in this section, we find that the record as a whole
regarding potential effects on retransmission consent negotiations does not present a substantial and material
(continued….)
Federal Communications Commission FCC 15-94
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in programming rates that the combined entity might achieve would curtail investment in content
production.
681
Thus, we find that the record here does not allow us to conclude that a decrease in
programming rates would have the net effect of lowering the quality or quantity of programming.
236. Similarly, commenters’ unsupported argument that the Applicants would gain
monopsony power in the video programming market post-transaction fails to establish that competitive
harm would occur as a result of this transaction.
682
In addition, the Commission has determined
previously that, for several reasons, the monopsony model is not useful in analyzing the impact of an
MVPD’s market power on programming rates and that “the usual incentive for a firm to exercise
monopsony power does not occur in this market.”
683
237. With respect to MFN provisions, the record does not establish that the proposed
transaction would result in programming contract provisions that harm competition. The MFN provisions
in the record cover both price and non-price terms and involve programmers of all types,
684
but we do not
have a record that establishes the competitive impact of MFNs sufficient to support a general condition
restricting the use of such contractual provisions. In addition, the record does not establish that the
proposed transaction is likely to limit the ability of new programmers to enter the market, particularly
given the relatively recent rollout of AT&T’s U-verse video service within the past decade and the fact
that it has fewer than 6 million subscribers. To the extent that some commenters allege that carriage on
DIRECTV already is essential today, the transaction does not change that conclusion.
685
Thus, based on
our record, we cannot find that the subscribership of the combined entity is likely to prevent the entry of a
(Continued from previous page)
question of fact as to whether the Application will serve the public interest. See Applications of Capital Cities/ABC,
Inc. (Transferor) & the Walt Disney Co. (Transferee), et al., 11 FCC Rcd 5841, 5862, ¶ 31 (1996) (separate
enforcement proceeding was the appropriate forum for resolution of allegations that applicant violated certain
broadcasting rules). Thus, we deny The TV Station Group Informal Objection and Request.
681
Although WGAW offers some annual data regarding license fees and programming costs, we find that the data do
not show that lower license fees will harm programming investment. WGAW Petition at 10-14. We note further
that the Applicants estimate that content providers’ revenues would decrease by only [BEGIN CONF. INFO.]
[END CONF. INFO.] percent, assuming that the Applicants’ anticipated programming cost savings are accurate
and actually achieved. See Katz Reply Decl. at ¶ 32. We acknowledge that our review of the evidence included
data that was not available to third-parties. However, we also find that none of the commenters in this proceeding
was prejudiced by the unavailability of this data. The Applicants’ estimate of their reduced programming costs – the
amount of revenues the content providers will lose – is an extremely small percentage of the programmers’ total
revenues. Moreover, we find that the Applicants have overestimated their cost savings from reduced programming
costs – and hence overestimated the amount of revenues the programmers would lose. For these reasons, as well as
the fact that we independently reviewed the record in this respect, we do not find that commenters’ review of the
programming contracts and negotiation materials would provide them with any support for a plausible argument that
the difference in programming costs that could be achieved as a result of this transaction would be substantial
enough to have a non-insignificant effect on programming companies’ investment.
682
See WGAW Petition at 10; DISH Petition at 12.
683
Cable Horizontal and Vertical Ownership Limits Order, 23 FCC Rcd at 2150, ¶¶ 32-33; see also Comcast-AT&T
Order, 17 FCC Rcd at 23265, ¶ 53 n.126 (finding that the complexity and confidentiality of programming rate
information available at that time made it impossible to determine “a unique point at which a firm’s subscriber reach
allows the firm to exercise monopsony power over programmers”).
684
See DIRECTV Response to Sept. 9, 2014, Information Request, Schedule 44(d) (providing an extensive list of
sample MFN provisions from its programming contracts).
685
See, e.g., ReelzChannel July 30, 2014, Ex Parte Letter at 2 (claiming that a national programming network
cannot be viable today unless it is carried on each of the top-four MVPDs, including DIRECTV); Hubbard Reply at
3-4.
Federal Communications Commission FCC 15-94
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new programming network or, for that matter, to cause the exit of an existing programming network.
686
We also note that the Commission currently is exploring whether to define MVPD in a technology-neutral
way that could provide expanded opportunities for new programmers by promoting competition between
incumbent video providers and Internet-based providers of multiple linear video programming streams.
687
238. We do not find based on the record before us that the Commission should impose
company-specific program carriage conditions. The program carriage rules prohibit an MVPD from
exerting its leverage as a distributor to require a financial interest in, or exclusive rights to, any program
service as a condition for carriage.
688
The program carriage rules also proscribe an MVPD from engaging
in conduct that unreasonably restrains the ability of unaffiliated video programming providers to compete
by discriminating in the distribution of programming based on the programmer’s affiliation or non-
affiliation with the MVPD.
689
Moreover, we note that the instant transaction raises few, if any, vertical
integration concerns that the combined entity would discriminate against unaffiliated programmers.
Given that AT&T and DIRECTV hold only minor programming interests, they have few affiliated
programming interests to protect. Thus, we conclude that the existing program carriage rules address the
concerns raised in this record.
690
b. PEG Channels
239. Background. Cable systems are subject to special carriage requirements for PEG
channels under the Communications Act.
691
Congress afforded PEG channels special status in order to
promote localism and diversity.
692
Congress has noted that “PEG channels serve a substantial and
compelling government interest in diversity, a free market of [ideas], and an informed and well-educated
citizenry.”
693
Accordingly, a cable operator is required to allocate channel capacity to PEG channels in its
local market if a local franchising authority requests carriage pursuant to a franchising agreement.
694
686
The Applicants also note that their combined MVPD subscribership of approximately 26 million would be less
than 30 percent of the country’s total MVPD subscribers, a measurement that has guided the Commission in past
transactions in determining the potential impact on the flow of video programming from the programmer to the
consumer.
Joint Opposition at 51. See, e.g., Comcast-AT&T Order, 17 FCC Rcd at 23263-69, ¶¶ 48-65; Adelphia
Order, 21 FCC Rcd at 8283-84, ¶ 179.
687
See MVPD Definition NPRM, 29 FCC Rcd at 15996-97, ¶¶ 1, 5 (noting that permitting certain Internet-based
providers to qualify as MVPDs, and granting them rights and responsibilities attendant to that status, may encourage
new investment and entry in online video programming distribution).
688
47 C.F.R. § 76.1301(a)-(b).
689
Id. § 76.1301(c).
690
In previous transactions, the Commission has, on occasion, adopted conditions, or accepted the applicants’
voluntary commitments, to supplement the Commission’s existing program carriage rules. Typically, such
conditions were prompted by a concern that the vertical integration of programming and distribution assets would
increase the new entity’s incentives or abilities to discriminate against unaffiliated programmers. See, e.g.,
Comcast-NBCU, 26 FCC Rcd at 4284-89, ¶¶ 116-124 (imposing additional program carriage obligations as a
condition of approval of the transaction resulting in vertical integration of two companies that, combined, owned 26
broadcast television stations, two broadcast television networks, more than 20 non-broadcast programming
networks, a variety of regional sports and news networks, and the nation’s largest cable operator).
691
See 47 U.S.C. § 531.
692
See, e.g., id. §§ 531, 543(b)(7); H.R. REP. NO. 102-628, at 183 (1992) (“Making over-the-air broadcast and PEG
access channels available on a separate tier promotes the time-honored principle of localism.”).
693
H.R. REP. NO. 102-628, at 85.
694
47 U.S.C. § 531. AT&T does not consider itself a cable operator with PEG obligations, but AT&T nevertheless
provides PEG programming to its video subscribers. See Joint Opposition at 60-62 & n.222 (referencing, inter alia,
Comments of AT&T, MB Docket No. 09-13, at 19-21 (filed March 9, 2009)).
Federal Communications Commission FCC 15-94
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DBS providers are not subject to PEG requirements, but they are subject to a carriage obligation for
“noncommercial, educational, state public affairs, and informational programming.”
695
240. Positions of the Parties. Several commenters contend that the proposed transaction
would harm PEG channel programming.
696
Noting that DBS providers are not subject to PEG
requirements, they contend that AT&T might replace its U-verse video service with DIRECTV’s video
service and thereby escape its PEG obligations.
697
Commenters argue that the proposed transaction could
result in the elimination of PEG programming from all markets where AT&T currently offers its U-verse
video service.
698
Alliance for Community Media, the Alliance for Communications Democracy, and
Common Cause (“ACM et al.”) further question AT&T’s commitment to PEG programming in light of
its past conduct and ask that the Commission deny the Application.
699
ACM et al. argue in the alternative
that, before acting on the AT&T-DIRECTV Application, the Commission should act on their petition
seeking a declaratory ruling regarding whether AT&T’s “Channel 99 PEG Product” violates the Cable
Act and Commission rules.
700
NATOA also states that AT&T should voluntarily commit to remove
restrictions on PEG operators’ use of PEG funds.
701
241. The Applicants represent that the proposed transaction would have no adverse effect on
PEG programming.
702
AT&T states that it has supported and will continue to support PEG
programming.
703
AT&T reiterates that the combined entity would operate both U-verse and satellite
video services and would comply with the respective regulatory obligations of each service.
704
The
Applicants characterize as baseless the suggestion that AT&T would offload U-verse video services to
DIRECTV so as to escape PEG obligations.
705
ACM et al. respond that the Applicants have not provided
a minimum time frame for how long the Applicants plan to offer both U-verse video and DIRECTV after
695
47 U.S.C. § 335; see also 47 § C.F.R. 25.701 (listing DBS providers’ requirements for political and
noncommercial programming). Because of technological differences between satellite and cable, the public interest
programming carried by satellite providers is national in focus as opposed to the local focus of PEG channels. See
S
TEVEN WALDMAN AND THE WORKING GROUP ON INFORMATION NEEDS OF COMMUNITIES, FCC, THE INFORMATION
NEEDS OF COMMUNITIES: THE CHANGING MEDIA LANDSCAPE IN A BROADBAND AGE 180 (2011), available at
http://transition.fcc.gov/osp/inc-report/The_Information_Needs_of_Communities.pdf (visited June 18, 2015). This
difference results in satellite public interest programming being an imperfect substitute for PEG programming.
696
See ACM et al. Petition at 19-25; NATOA Comments at 2-3; Letter from Tillman L. Lay, Counsel for the
Alliance for Community Media, to Marlene H. Dortch, Secretary, FCC, MB Docket No. 14-90, Attachment at 2-3
(Feb. 24, 2015) (“ACM Feb. 24, 2015, Ex Parte Letter”); see also Public Knowledge-ILSR Petition at 11 (“[T]o
ensure that viewers have access to diverse voices, [the Commission] should ensure that AT&T and DIRECTV give
adequate access to Political, Educational, and Government (PEG) programming.”).
697
ACM et al. Petition at 24-25; NATOA Comments at 2-3; ACM Feb. 24, 2015, Ex Parte Letter, Attachment at 2.
698
See ACM et al. Petition at 24; ACM Feb. 24, 2015, Ex Parte Letter, Attachment at 2; see also NATOA
Comments at 2-3 (“Because DIRECTV is under no obligation to carry or financially support PEG programming, any
potential efforts by AT&T to eliminate its U-verse video product and replace it with satellite video service would
necessarily undercut these local services and is problematic for local governments.”).
699
ACM et al. Petition at 19-26. ACM et al. state that AT&T’s “Channel 99 PEG Product” on U-verse makes
accessing PEG channels more difficult and burdensome than accessing other linear programming. Id. at 19-20.
700
Id. at 20.
701
NATOA Comments at 3-4.
702
Joint Opposition at 60-62.
703
Id. at 60.
704
Id.
705
Id.
Federal Communications Commission FCC 15-94
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closing the proposed transaction.
706
ACM et al. state that nothing would prevent the Applicants from
enticing their subscribers to switch from U-verse to DIRECTV and then terminating U-verse video.
707
242. Despite the Applicants’ refutation that they would migrate viewers from U-verse video to
DIRECTV in order to limit or avoid PEG obligations, ACM et al. nonetheless contend that the Applicants
do not deny the observations that AT&T has strong incentives to do so.
708
ACM et al. state that should
the Commission decide to grant the Application, the Commission should impose a condition that would
require AT&T to continue offering U-verse video with PEG programming, and inform subscribers of the
availability of U-verse video, for at least five years after closing the transaction.
709
ACM et al. also
request conditions requiring AT&T to carry PEG channels in the same manner with the same
functionalities and accessibility as other linear local broadcast channels.
710
243. Discussion. While we reaffirm the importance of PEG programming, the record does not
establish a transaction-related harm to PEG programming, and we find it unnecessary to impose PEG
programming-related conditions on the proposed transaction. We recognize that PEG channels serve
important public interest objectives by providing a platform for causes and organizations that might
otherwise not receive carriage on cable systems.
711
Among other things, PEG channels educate the local
electorate by providing opportunities for local candidates to address the public during local elections.
712
Further, we acknowledge the argument of ACM et al. that the programming provided on PEG channels is
unique and would likely be limited or nonexistent on commercial television channels.
713
244. To the extent that the harm alleged by the commenters results from a dissatisfaction with
the disparate public interest programming obligations imposed on different types of MVPDs, rather than
with a public interest harm resulting from the proposed transaction, we do not find a transaction-specific
harm.
714
Furthermore, we note that, to the extent that commenters take issue with the manner in which
AT&T currently offers PEG programming, such concerns are properly addressed in the docket
specifically designated to that issue.
715
Finally, while commenters have alleged that AT&T could
terminate its entire U-verse video service in an effort to avoid providing PEG channels, AT&T has stated
706
ACM et al. Reply at 4.
707
Id. Moreover, several parties, including the Applicants themselves, point out that AT&T would be able to free up
more capacity for its broadband service by shutting off its U-verse video product and relying solely on DIRECTV
for video. See id. at 4; ATT-FCC-03377455, [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF.
INFO.] ; DTVFCC-01487673, [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] ; see also
NATOA Comments at 2-3 (discussing “potential efforts by AT&T to eliminate its U-verse video product and
replace it with satellite video service”); ACM Feb. 24, 2015, Ex Parte Letter, Attachment at 2-3 (stating that AT&T
has “obvious economic incentives” to migrate U-verse video subscribers to DIRECTV’s DBS service and that
reduced MVPD capacity demands on AT&T’s landline U-verse network would reduce AT&T’s incentive to invest
in a higher-capacity landline broadband network).
708
ACM et al. Reply at 4-5; ACM Feb. 24, 2015, Ex Parte Letter, Attachment at 2.
709
Letter from Tillman L. Lay, Counsel for the Alliance for Community Media, to Marlene H. Dortch, Secretary,
FCC, MB Docket No. 14-90, at 3 (March 3, 2015).
710
Id. at 2.
711
ACM et al. Petition at 14.
712
Id.; see also H.R. REP. NO. 102-628, at 85.
713
ACM et al. Petition at 14-18.
714
After the transaction, the combined entity will remain subject to the same carriage obligations for PEG and public
interest programming on its U-verse video and DBS video services, respectively, as AT&T and DIRECTV were
subject to prior to the transaction.
715
We do not agree with ACM et al. that the MB Docket No. 09-13 proceeding should be resolved before we take
action on the instant transaction. See ACM et al. Petition at 20.
Federal Communications Commission FCC 15-94
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clearly in its Application that it intends to continue offering its U-verse video service (including PEG
channels) alongside DIRECTV after closing the transaction.
716
Similarly, we have found no evidence in
the record that AT&T is planning to modify how it provides PEG programming on U-verse video
following the proposed transaction.
c. Local Broadcast Television Stations
245. Background. The Communications Act requires satellite providers to carry all broadcast
television stations in a local television market, defined by the Commission’s rules using Nielsen’s DMA
determinations, if they carry one local television signal in that market under the compulsory copyright
license.
717
With the exception of Alaska and Hawaii, a satellite carrier is not required to carry local
television signals in a market where it carries no other local television signals.
718
246. Positions of the Parties. One commenter, the National Association of Broadcasters
(“NAB”), states that DIRECTV does not carry local broadcast stations in 13 of the DMAs in which it
operates.
719
NAB states that, as part of its decision on the proposed transaction, the Commission should
require the Applicants to commit to expanding local television offerings to all 210 of the DMAs where
the combined entity would operate.
720
The Applicants respond that this request is unrelated to the
proposed transaction because DIRECTV’s incentives and capability to carry local television signals
would not be affected by the transaction.
721
They also note that broadcasters attempted to impose a
similar requirement in a previous transaction involving DIRECTV.
722
247. The Commission has previously declined to do so because such a requirement did not
716
See Application at 72; Joint Opposition at 60-62.
717
See 47 U.S.C. § 338. This obligation is often referred to as the “carry-one, carry-all” requirement. Satellite video
providers may choose to carry a television station’s signal pursuant to a compulsory copyright license, in which case
the satellite distributor makes statutorily calculated payments to the U.S. Register of Copyrights, which then
distributes payments to the individual copyright holder. See 17 U.S.C. §§ 119(b), 122.
718
See 47 U.S.C. § 338(a)(4) (mandating satellite carriers to retransmit the analog and digital signals of each
television station in local markets in Alaska and Hawaii); Implementation of Section 210 of the Satellite Home
Viewer Extension and Reauthorization Act of 2004 to Amend Section 338 of the Communications Act, MB Docket
No. 05-181, Report and Order, 20 FCC Rcd 14242 (2005).
719
NAB Comments at 7. In addition, on June 18, 2015, several television affiliates (the “Joint Television Network
Affiliates”) jointly filed a brief ex parte letter in support of NAB’s Comments. Letter from John R. Feore et al.,
Counsel for FBC Television Affiliates Association et al., to Marlene H. Dortch, Secretary, FCC, MB Docket No.
14-90, at 1-3 (June 18, 2015). The Joint Television Network Affiliates’ belated filing asserts generally that the
proposed transaction will reduce competition and “create new threats to localism” such that the Commission should
require DIRECTV to carry local broadcast television stations in all 210 DMAs to offset the harms to competition
and localism. Id. at 2. The Joint Television Network Broadcast Affiliates’ general assertions that the transaction
will harm local television and “exaggerate [DIRECTV]’s disinterest in providing local service to markets throughout
the country” are ultimately vague and unsupported. See id. Furthermore, as discussed below, we do not find the
requested condition to be transaction specific nor necessary to remedy a substantiated harm. Because we find that
issues relating to DIRECTV’s carriage of local broadcast television stations are not transaction specific, we decline
to provide the remedies requested by broadcasters through their ex parte filings in this proceeding. See id. at 1; see
also Letter from Francisco M. Montero, Counsel for ZGS Commc’ns Inc. (“ZGS”), to Marlene H. Dortch, Secretary,
FCC, MB Docket No. 14-90 (July 16, 2015) (requesting Commission assistance in a matter relating to DIRECTV’s
refusal to carry ZGS’s local television stations) (“ZGS July 16, 2015, Ex Parte Letter”). We also note that ZGS
does not allege that DIRECTV has violated the Communications Act or any Commission rule, and ZGS takes no
position on whether the Application should be granted. ZGS July 16, 2015, Ex Parte Letter at 5.
720
NAB Comments at 7-8.
721
Joint Opposition at 66.
722
See id. at 65-66 (citing Liberty Media-DIRECTV Order, 23 FCC Rcd at 3330, ¶ 137).
Federal Communications Commission FCC 15-94
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remedy any transaction-specific harm.
723
The Applicants ask the Commission to reach the same result
here.
724
The Applicants note further that the Commission has previously recognized that limits in satellite
capacity and infrastructure costs are challenges for DBS providers for providing local broadcast
signals.
725
The Applicants state that DIRECTV provides local-into-local service in the vast majority of
DMAs in the United States despite these challenges and the absence of any statutory requirement to do
so.
726
In its reply comments, NAB attempts to distinguish the proposed transaction from Commission
precedent by noting the difference in the scale of the transactions and the alleged harms.
727
248. Discussion. We do not find that the proposed transaction gives rise to a harm that would
require us to expand DIRECTV’s local television signal carriage obligations.
728
We agree with the
Applicants that nothing in the record indicates that the transaction would affect DIRECTV’s incentives or
capability to carry local broadcast channels.
729
Therefore we agree with the Applicants that the issue of
DIRECTV’s carriage of local television signals is unrelated to the proposed transaction.
E. Video Device Market
249. Background. Consistent with Section 629(a) of the Act, the Commission adopted
regulations in 1998 requiring MVPDs to allow unaffiliated navigation device manufacturers access to
their video programming and security systems.
730
These “set-top box” rules were later augmented by a
2003 Memorandum of Understanding between the cable industry and the consumer electronics
industry.
731
When the set-top box rules were adopted, the Commission concluded that DBS operators,
723
See Liberty Media-DIRECTV Order, 23 FCC Rcd at 3330, ¶ 137.
724
Joint Opposition at 65-66.
725
Id. at 66.
726
Id.
727
Reply Comments of National Association of Broadcasters, MB Docket 14-90, at 3-5 (filed Jan. 7, 2015) (“NAB
Reply”) (distinguishing the proposed transaction from the Liberty Media-DIRECTV transaction).
728
Although NAB states that its proposed requirement is necessary to “mitigate” a transaction-specific harm, the
harm cited by NAB – that the transaction would result in competitive advantages and greater negotiating leverage
for the combined entity to the detriment of local broadcast stations – would not be remedied by NAB’s proposed
condition to expand DIRECTV’s local television signal carriage obligations. See NAB Comments at 4-6; NAB
Reply at 3, 5-6. Furthermore, the alleged harm of greater negotiating leverage by the combined entity in
retransmission consent negotiations is addressed above. See Section X.D.2.a.
729
The Applicants state that “DIRECTV’s satellite capacity” and the “infrastructure costs of collecting and
uplinking broadcast signals” are the key factors affecting DIRECTV’s local signal carriage decisions. Joint
Opposition at 66. The Applicants maintain that the proposed transaction would not affect either factor. Id. NAB
does not refute this claim.
730
Implementation of Section 304 of the Telecommunications Act of 1996: Commercial Availability of Navigation
Devices, CS Docket No. 97-80, Report and Order, 13 FCC Rcd 14775 (1998) (“First Navigation Device Report and
Order”); see also Section 629(a) of the Communications Act of 1934, as amended, 47 U.S.C. § 549(a) (requiring the
Commission to “adopt regulations to assure the commercial availability, to consumers of multichannel video
programming and other services offered over multichannel video programming systems, of converter boxes,
interactive communications equipment, and other equipment used by consumers to access multichannel video
programming and other services offered over multichannel video programming systems, from manufacturers,
retailers, and other vendors not affiliated with any multichannel video programming distributor”); see also
Telecommunications Act of 1996, Pub. L. No. 104-104, § 304, 110 Stat. 56, 125-126 (1996).
731
Implementation of Section 304 of the Telecommunications Act of 1996: Commercial Availability of Navigation
Devices, CS Docket No. 97-80, Second Report and Order and Second Further Notice of Proposed Rulemaking, 18
FCC Rcd 20885, 20886-87, ¶ 2 (2003) (“Second Navigation Device Report and Order”). The D.C. Circuit vacated
the Second Navigation Device Report and Order in EchoStar Satellite L.L.C. v. FCC, 704 F.3d 992 (D.C. Cir.
2013), on the grounds that DBS operators were not party to the Memorandum of Understanding. Regulations
(continued….)
Federal Communications Commission FCC 15-94
98
such as DIRECTV, should be subject to the navigation device regulations. However, the Commission
exempted from the rules MVPDs – such as DBS providers at the time – that supported nationally operable
navigation devices made available at retail throughout the United States from vendors unaffiliated with
the MVPD.
732
At the time the rules were adopted, major MVPDs using novel network technologies
different from cable systems, such as AT&T U-verse, did not exist, and the Commission has never
addressed directly if, and how, such MVPDs should comply with these rules.
250. Positions of the Parties. Commenters have raised questions regarding the Applicants’
responsibilities under the Commission’s set-top box rules in light of the proposed transaction. TiVo Inc.
(“TiVo”) argues that the transaction would create the largest MVPD in the country and that the
Commission’s earlier rationale for exempting DBS operators from the navigation device regulations no
longer applies.
733
TiVo further contends that AT&T should be required to comply fully with the rules.
734
Accordingly, TiVo requests that the Commission impose conditions that would require the Applicants to
grant TiVo and other retail device manufacturers access to the Applicants’ conditional access systems,
subject to certain expressly limited conditions.
735
Specifically, TiVo requests that the Commission
require the Applicants to comply with Section 629 of the Act and Sections 76.1201, 76.1203, and 76.1205
of the Commission’s rules.
736
251. In addition, Public Knowledge-ILSR argue that the combined entity would have greater
incentive to discriminate against competing video providers.
737
Public Knowledge-ILSR assert that the
Commission should ensure that consumers can access OVDs through operator-leased set-top boxes to
encourage OVD development because set-top boxes are still the consumers’ default video platform.
738
Public Knowledge-ILSR further argue that because MVPD-provided content remains indispensable to
most consumers, third-party device manufacturers must have access to a video distributor’s signals and
security system in order to ensure consumers have meaningful choices for video devices and their
attendant user interfaces and features.
739
252. The Applicants respond that the set-top box conditions proposed by TiVo and Public
Knowledge-ILSR are unnecessary and not transaction specific.
740
The Applicants argue that the TV
Everywhere model, under which they authenticate applications provided by either the video programmers
or by themselves, offers the kind of device competition envisioned by Congress and the Commission, and
(Continued from previous page)
adopted in the First Navigation Device Report and Order, however, are unaffected by the ruling and remain in
effect.
732
First Navigation Device Report and Order, 13 FCC Rcd at 14783, ¶ 22; see also 47 C.F.R. § 76.1204(a)(2)(ii).
The Commission effectively granted an exemption from Section 629 regulations to DBS operators for as long as
they offer navigation devices at retail.
733
Comments of TiVo Inc., MB Docket 14-90, at 2-6 (filed Sept. 16, 2014) (“TiVo Comments”).
734
Id. at 5-7; Letter from Henry Goldberg and Devendra T. Kumar, Attorneys for TiVo Inc., to Marlene H. Dortch,
Secretary, FCC, MB Docket No. 14-90, at 1 (Nov. 19, 2014) (“TiVo Nov. 19, 2014, Ex Parte Letter”).
735
See TiVo Comments at 7-9; TiVo Nov. 19, 2014, Ex Parte Letter at 2. Consistent with longstanding
Commission policy, TiVo acknowledges the need to prevent the attachment of devices that may physically harm the
network or facilitate theft of service. TiVo Comments at 8-9; see also 47 C.F.R. § 76.1201.
736
TiVo Comments at 7-9.
737
Public Knowledge-ILSR Petition at 5.
738
Id. at 9-11.
739
Id.
740
Joint Opposition at 62-64.
Federal Communications Commission FCC 15-94
99
thus complies with the Commission’s rules.
741
DIRECTV also argues that its RVU technology
742
provides the kind of device competition envisioned by Congress.
743
TiVo replies, however, that the
Applicants merely provide the ability to watch video over multiple screens but do not demonstrate
competition in retail consumer devices used to navigate video programming – that is, devices that allow a
manufacturer to innovate in the way consumers view, search for, and discover programming – as the rules
originally intended.
744
Public Knowledge clarifies that it does not ask the Commission to impose
conditions in lieu of its Section 629 rulemaking authority, but it requests conditions to protect device
manufacturers – including those not covered by Section 629 – from possible anticompetitive behavior
arising from the Applicants’ increased incentive to discriminate against rival video providers.
745
253. Discussion. We agree with the Applicants that the transaction does not create a public
interest harm with respect to set-top boxes. Rather we find that commenters raise broader regulatory
policy questions that are more appropriately addressed in the rulemaking context. In addition, there is
nothing about the record in this transaction to demonstrate a change in the Applicants’ incentive or ability
to limit competition in the market for navigation devices. Given the lack of a transaction-related harm,
and noting the Commission’s other activities related to these rules, discussed further below, we decline to
adopt the conditions requested by the commenters or to take other action in this context.
254. Congress recently enacted the STELA Reauthorization Act of 2014,
746
which directed the
Commission to host an advisory committee comprised of representatives from MVPDs, content
providers, and the consumer electronics industry, as well as related public interest organizations and
academics, “to identify, report, and recommend performance objectives, technical capabilities, and
technical standards of a not unduly burdensome, uniform, and technology- and platform-neutral software-
based downloadable security system” to promote the competitive availability of navigation devices in
furtherance of Section 629 of the Communications Act.
747
The newly created Downloadable Security
Technology Advisory Committee (“DSTAC”) must file a report with the Commission by September 4,
2015, to detail its findings and recommendations.
748
Accordingly, many of the regulatory policy issues
raised by the parties, which we find do not raise transaction-specific public interest harms, will likely be
addressed in a broader, industry-wide context, both through the DSTAC and possible future Commission
proceedings.
F. Potential Loss of DIRECTV as a Partner for MDU Broadband Entrants
255. Positions of the Parties. The Independent Multifamily Communications Council
(“IMCC”) expresses concern that the proposed transaction would result in the loss of DIRECTV as a
741
Id. Additionally, we note that AT&T has asserted that its U-verse video service is not a cable system, but it
maintains that it is in compliance with the navigation device regulations. See Letter from Robert W. Quinn, Jr.,
Senior Vice President – Federal Regulatory, AT&T, to Marlene H. Dortch, Secretary, FCC, MB Docket 09-13,
Attachment at 4 (Sept. 17, 2009); Joint Opposition at 62-64.
742
RVU technology allows consumers to access DIRECTV’s user interface and programming on smart televisions
and other devices, as long as they have a DIRECTV gateway set-top box in their home. See, DIRECTV, What is
DIRECTV Ready TV and How Does it Work, available at
https://support.directv.com/app/answers/detail/a_id/3992/~/what-is-a-directv-ready-tv-and-how-does-it-work%3F
(visited June 18, 2015).
743
Joint Opposition at 63-64.
744
Reply Comments of TiVo Inc., MB Docket 14-90, at 3 (filed Jan. 7, 2015) (“TiVo Reply”).
745
Public Knowledge Reply at 6.
746
H.R. 5728, 113th Cong., § 106 (2014) (STELAR).
747
See Downloadable Security Technology Advisory Committee, www.fcc.gov/DSTAC (visited June 18, 2015).
748
See id.
Federal Communications Commission FCC 15-94
100
potential partner for broadband providers.
749
Specifically, IMCC raises concerns about the potential
impact of the transaction on private cable operators (“PCOs”) that offer voice, video, and data services to
residents of MDUs and compete with AT&T in the provision of voice and data services to MDUs.
750
IMCC argues that the proposed transaction would make it difficult for PCOs to acquire programming,
which, as acknowledged by the Applicants, is necessary for broadband deployment.
256. IMCC states that PCOs can acquire video programming content from only DIRECTV
and DISH and that the PCO industry requires at least two sources of video programming content to
effectively serve MDUs.
751
IMCC also emphasizes that PCOs increasingly can provide high-speed
Internet access services to MDU customers,
752
offering a competitive alternative to franchised cable
operators and telephone MVPDs, particularly at connectivity speeds greater than 20 Mbps.
753
However,
IMCC indicates that there are significant barriers to entry that undermine a PCO’s ability to build out its
Internet access services.
754
IMCC explains that PCOs are developing the infrastructure required to deliver
video, Internet, and telephone services to MDU communities. It is concerned that if the combined entity
terminates DIRECTV’s contracts with PCOs such that they can no longer access DIRECTV
programming, this outcome would impair the PCOs’ ability to accelerate deployment of advanced
services in the MDU marketplace.
755
IMCC argues that AT&T, unlike DIRECTV, would view the PCOs
as rivals.
756
IMCC contends that, post-transaction, AT&T might exercise its right to terminate
programming contracts with PCOs, or it might refuse to allow existing programming contracts to renew,
in an attempt to force PCOs out of MDUs.
757
257. IMCC asserts that the elimination of PCOs would “leave many MDU residents with
inadequate Internet services (often, maximum speeds at between 3 and 6 Mbps) and in many cases, few or
no options for access” to indispensable broadband services.
758
IMCC accordingly requests that the
Commission impose conditions to modify existing contracts between DIRECTV and PCOs, including
provisions relating to contract period, termination of rights, compensation, and protection of confidential
and subscriber information.
759
749
See Comments of Independent Multifamily Communications Council, MB Docket 14-90, at 6 (filed Sept. 12,
2014) (“IMCC Comments”); see also supra ¶¶ 194-195, 197; infra ¶¶ 260-261.
750
IMCC Comments at 3-4. PCOs were formerly known as satellite master antenna, or SMATV, systems. PCOs
use a satellite master antenna to distribute video programming throughout a property (e.g., an apartment building,
hotel, hospital, or commercial property with multiple tenants) from a single satellite feed.
751
Id. at 5-6. IMCC explains that many PCOs have existing agreements with DIRECTV to obtain video
programming to serve their properties. These PCOs also compete with AT&T and other providers at such
properties. Id. at 6; Letter from Gary I. Resnick, Counsel for Independent Multi-Family Communications Council,
to Marlene H. Dortch, Secretary, FCC, MB Docket No. 14-90, at 2 (Nov. 25, 2014).
752
Letter from Valerie Sargent, Managing Director, Independent Multi-Family Communications Council, to Staff,
FCC, MB Docket No. 14-90, at 3 (Dec. 16, 2014) (“IMCC Dec. 16, 2014, Ex Parte Letter”) (“particularly [PCOs
offer Internet service to MDUs] in less desirable communities that do not attract significant investment from the
franchised cable operators and telecommunications providers”).
753
Id. at 3-4.
754
Id. at 4.
755
Id.
756
IMCC Comments at 6; IMCC Dec. 16, 2014, Ex Parte Letter at 3.
757
IMCC Comments at 7.
758
IMCC Dec. 16, 2014, Ex Parte Letter at 4.
759
IMCC Comments at 12-13; IMCC Dec. 16, 2014, Ex Parte Letter at 4-9.
Federal Communications Commission FCC 15-94
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258. The Applicants argue that the concerns raised by IMCC are not related to the transaction
and urge that the Commission reject the proposed conditions.
760
They contend that IMCC merely seeks to
amend the terms of existing contracts between DIRECTV and PCOs.
761
The Applicants assert that the
contracts were privately negotiated with DIRECTV and their terms would govern post-transaction.
762
259. Discussion. The Commission has previously determined that Commission proceedings
are not the proper forum for the adjudication of private contractual disputes or the modification of
contract terms between parties,
763
and therefore, we decline to adopt IMCC’s proposed conditions, which
request that the Commission modify terms of the existing agreements in effect between DIRECTV and
various PCOs. Although we acknowledge that the PCO business model relies on satellite antennas to
receive video programming from a DBS provider, we find no basis for prohibiting AT&T from
competing for the business of providing its broadband service to MDUs, nor do we have a basis to
conclude that PCOs would be unable to acquire programming as a result of the transaction. The record
does not support a finding that AT&T intends to preclude DIRECTV from bundling its services with
those of an unaffiliated broadband service provider or private cable operator.
G. Increased Incentive of Combined Entity to Hinder Competition for Broadband in
MDUs
260. Positions of the Parties. Cox claims that, prior to the announcement of this transaction,
DIRECTV engaged in conduct that interfered with Cox’s deployment of broadband services to MDUs
and that the combined entity would have an increased incentive to engage in this conduct.
764
Cox’s
concern relates to subscribers who switch to DIRECTV for video services but retain their existing cable
operator for broadband.
765
In that situation, Cox claims that DIRECTV insists on attaching diplexers
760
See Joint Opposition at 70.
761
Id.
762
Id. at 71.
763
See Verizon Communications, Inc., Transferor, and América Móvil, S.A. DE C.V., Transferee, Application for
Authority to Transfer Control of Telecomunicaciones de Puerto Rico, Inc. (TELPRI), WT Docket No. 06-113,
Memorandum Opinion and Order and Declaratory Ruling, 22 FCC Rcd 6195, 6208-09, ¶ 29 (2007) (“Moreover, to
the extent that certain conditions are being negotiated in ongoing contract disputes … we decline, as we did in the
Verizon/MCI Order, to address them in this proceeding.”); Telefuture Fresno LLC v. Echostar Communications
Corp., Memorandum Opinion and Order, DA 03-3509, 18 FCC Rcd 22940, 22944, ¶ 12 (MB 2003) (“[W]e will not
interject ourselves into specific arguments concerning private agreements between broadcasters and satellite carriers.
… Contractual issues are to be resolved by the parties or by courts of proper jurisdiction.”); AirTouch Paging, Inc.,
Application for Consent to Partial Assignment of Station KCC485 to Schuylkill Mobile Fone, Inc., Order, DA 99-
1175, 14 FCC Rcd 9658, 9660, ¶ 5 (WTB 1999) (“The Commission … is not the proper forum for the adjudication
of private contractual disputes.” (citing Listener’s Guild, Inc. v. FCC, 813 F.2d 465, 469 (D.C. Cir. 1987);
Application of WorldCom, Inc. and MCI Communications Corporation for Transfer of Control of MCI
Communications Corporation to WorldCom, Inc., Memorandum Opinion and Order, 13 FCC Rcd 18025, 18148,
¶ 214 (1998); PCS 2000, L.P., Memorandum Opinion and Order, 12 FCC Rcd 1681, 1691, ¶ 23 (1997); Applications
of Centel Corporation and Sprint Corporation for Consent to the Transfer of Control of Authorizations in the
Domestic Public Cellular Radio Telecommunications Service and Other Common Carrier Services, Memorandum
Opinion and Order, 8 FCC Rcd 1829, 1831, ¶ 10 (CCB 1993))). See also SoftBank-Sprint Order, 28 FCC Rcd at
9676, ¶ 85 (“We agree with Sprint that these intercarrier compensation disputes are not merger specific, are based on
arguments about prior conduct by Sprint, and are more appropriately resolved through the contractual provisions
between the parties or through the Commission’s complaint process under section 208 of the Act. As the
Commission has repeatedly held, we will generally not impose conditions to remedy pre-existing harms or harms
that are unrelated to the transaction at issue.”) (citations omitted).
764
See Cox Petition at 29-34; Cox Reply 13-14; see also Cox Dec. 22, 2014, Ex Parte Letter, Attachment at 2; Cox
Dec. 4, 2014, Ex Parte Letter, Attachment at 2; Cox Nov. 7, 2014, Ex Parte Letter at 2-3.
765
See Cox Petition at 29-30. The Commission’s inside wiring rules pertain to the disposition of inside wiring
installed by the cable operator within the premises of the subscriber after a subscriber voluntarily terminates cable
(continued….)
Federal Communications Commission FCC 15-94
102
(splitters) to the MDU’s inside wiring that cause harmful interference to Cox’s DOCSIS 3.0 broadband
signals.
766
Cox contends that DIRECTV has insisted that Cox install a second MDU wire if it wants to
provide interference-free broadband service.
767
Cox states that, post-transaction, the combined entity
would have an increased incentive to use DIRECTV video service installations at MDUs as a means of
assuming control over internal MDU wiring and thereby would hinder competition to the combined
entity’s bundled offering.
768
261. Cox proposes that the Commission adopt conditions to address its concerns.
769
In
particular, Cox seeks restrictions on the combined entity’s ability to “commandeer” cable wiring in
MDUs and to employ technologies that preclude competitors from using that wire to provide standalone
broadband services.
770
Cox also asks the Commission to adopt conditions that would require the
combined entity to either employ technologies that can successfully coexist with existing inside wiring or
to run their own wiring to new customer units.
771
262. The Applicants oppose Cox’s requests for conditions and assert that the transaction
would enhance competition for consumers who reside in MDUs.
772
The Applicants assert that Cox’s
concerns are not transaction-related, but are issues of general industry concern.
773
The Applicants also
assert that any “interference” between the diplexers installed by DIRECTV and Cox’s equipment is the
fault of Cox, not DIRECTV, and that Cox has refused all of DIRECTV’s efforts to cooperate to avoid
disruption of service.
774
The Applicants state that Cox and other incumbent cable operators continue to
dominate the MDU market in most areas, “[d]espite efforts by Congress and the Commission to remove
barriers to video competition for [MDUs], and despite DIRECTV’s diligent attempts to enter the MDU
(Continued from previous page)
service. 47 C.F.R. §§ 76.800-06. Cox claims, however, that there is “no specific FCC rule” governing the treatment
of cable operator-deployed MDU wiring when an MDU resident switches to DIRECTV for video but retains the
cable operator for broadband. Cox Petition at 30.
766
See Cox Petition at 29. Cox indicates that these diplexers would also interfere with DOCSIS 3.1 signals. Id. at
30; Cox Reply at 13-14 (noting that “[b]ecause DIRECTV has been unwilling to consider reasonable solutions to the
interference problems caused by its diplexers on shared MDU internal wiring in which both sides bear burdens in
order to preserve consumer choice, Cox must either decline to serve units that wish to receive [Cox’s] DOCSIS 3.0
cable modem service or incur the costs of running a second wire” and that this is “not a sustainable method of
providing DOCSIS 3.0 at MDUs”).
767
See Cox Petition at 30; Cox Reply at 14 n.39.
768
See Cox Petition at 32-33; Cox Reply at 14. Cox asserts that because AT&T offers a broadband Internet access
service, it “will therefore have even less incentive to act reasonably in circumstances where MDU tenants wish to
retain Cox as their broadband provider. Those circumstances may be particularly prevalent in areas where AT&T’s
broadband offering consists only of DSL service, given the disparity in service quality between DOCSIS 3.0
broadband and convention and DSL speeds.” Cox Reply at 14.
769
See Cox Petition 34-35; see also Cox Dec. 22, 2014, Ex Parte Letter, Attachment at 2; Cox Dec. 4, 2014, Ex
Parte Letter, Attachment at 2; Cox Nov. 7, 2014, Ex Parte Letter at 3.
770
Cox Dec. 22, 2014, Ex Parte Letter, Attachment at 2; Cox Dec. 4, 2014, Ex Parte Letter, Attachment at 2; Cox
Nov. 7, 2014, Ex Parte Letter at 2-3; see also Cox Petition at 35; Cox Reply at 13.
771
Cox Nov. 7, 2014, Ex Parte Letter at 3; see also Cox Petition at 34-35. Cox also proposes that any disputes
arising between AT&T-DIRECTV and any service provider covered by these conditions should initially be
presented to the Commission or its designee for mediation. If the parties are unable to resolve the dispute via
mediation, either party should be permitted to seek review of the dispute by the Media Bureau, subject to procedures
established by the Commission. Cox Petition at 35.
772
See Joint Opposition at 69-70.
773
See id.
774
See id. at 72 n.265; Conditions Ex Parte Presentation at 11 (footnote omitted).
Federal Communications Commission FCC 15-94
103
market.”
775
According to the Applicants, Cox’s proposed condition is an attempt to hinder competition
from a new rival in the MDU space, rather than an attempt to promote competition.
776
263. Moreover, the Applicants state, DIRECTV designed its equipment to share inside wiring
based on the assumption that cable operators such as Cox would use an industry-standard frequency range
for their broadband service.
777
The Applicants assert that DIRECTV shared its diplexer design
specifications with Cox before beginning installation and that Cox “unilaterally” changed the frequency
range used for its broadband service after DIRECTV began installing these devices in MDUs.
778
The
Applicants state that DIRECTV’s efforts to work with Cox to avoid disruption to either service “met with
little cooperation,” leading DIRECTV to transfer rights of entry to the MDUs in which Cox provided
broadband and focus on other properties where it did not face a similar issue.
779
The Applicants argue
that adopting Cox’s proposed condition simply would add another disincentive to competitive MVPD
entry.
780
The Applicants therefore urge the Commission to reject Cox’s proposed conditions.
781
264. Discussion. We acknowledge that Cox’s allegations that DIRECTV is intentionally
causing harmful interference to Cox’s broadband service, if established, would be an anticompetitive
harm. However, any such claims, which arise from a pre-existing dispute with DIRECTV and are not
established on the record in this proceeding, are not related to this transaction. The Commission does not
impose conditions to remedy pre-existing disputes between parties that are unrelated to the transaction at
issue,
782
and therefore, we decline to adopt Cox’s proposed conditions regarding internal wiring in
MDUs.
783
If any pre-existing disputes give rise to violations of the Commission’s rules, those could be
addressed through complaints to or investigations by the Enforcement Bureau.
775
Conditions Ex Parte Presentation at 11.
776
Id.
777
Id. at 12.
778
Id.
779
Id.
780
Id.
781
Joint Opposition at 70; Conditions Ex Parte Presentation at 12.
782
See, e.g., AT&T-Leap Wireless Order, 29 FCC Rcd at 2767, 2805, ¶¶ 74, 171 (rejecting proposed conditions as
they were not narrowly tailored or necessary to remedy any purported harms arising out of the transaction);
Applications of AT&T Inc. and Atlantic Tele-Network, Inc. for Consent to Transfer Control of and Assign Licenses
and Authorizations, WT Docket No. 13-54, Memorandum Opinion and Order, DA 13-1940, 28 FCC Rcd 13670,
13704, ¶¶ 62-63 (WTB, IB 2013) (“AT&T-ATN Order”) (rejecting request to place interoperability conditions on
AT&T because alleged harms were not transaction specific); Applications of Cellco Partnership d/b/a Verizon
Wireless and SpectrumCo LLC and Cox TMI, LLC for Consent to Assign AWS-1 Licenses, WT Docket No. 12-4,
Memorandum Opinion and Order and Declaratory Ruling, 27 FCC Rcd 10698, 10734, ¶ 94 (2013) (“Verizon
Wireless-SpectrumCo Order”); Application of AT&T Inc. and Qualcomm Incorporated for Consent to Assign
Licenses and Authorizations, WT Docket No. 11-418, Order, 26 FCC Rcd 17589, 17622, ¶ 79 (2011); Verizon
Wireless-ALLTEL Order, 23 FCC Rcd at 17463, ¶ 29; Sprint Nextel Corporation and Clearwire Corporation,
Applications for Consent to Transfer Control of Licenses, Leases, and Authorizations, WT Docket No. 08-94,
Memorandum Opinion and Order, 23 FCC Rcd 17570, 17582, ¶ 22 (2008) (“Sprint Nextel-Clearwire Order”);
AT&T-Cingular Order, 19 FCC Rcd at 21545-46, ¶ 43.
783
Cox also argues that the Commission should require AT&T to commit to compliance with all Section 251 and
252 interconnection obligations as AT&T transitions from delivering telephone traffic over its existing time-division
multiplexed (“TDM”) networks to all-IP networks. Cox Petition at 21-25; Cox Nov. 7, 2014, Ex Parte Letter at 2.
Cox’s concerns regarding these requirements do not raise any transaction-specific harms and are not appropriately
addressed in this proceeding. See, e.g., Applications for Consent to the Transfer of Control of Licenses from
Comcast Corporation and AT&T Corp., Transferors, to AT&T Comcast Corporation, Transferee, WT Docket No.
02-70, Order, 17 FCC Rcd 22633, 22637, ¶ 11 (2002) (“Comcast-AT&T Broadband Order”) (“merger review is
(continued….)
Federal Communications Commission FCC 15-94
104
H. Increased Incentive of Combined Entity to Hinder Competition in Mobile Wireless
Sector
265. Positions of the Parties. DISH claims that the transaction would allow AT&T-
DIRECTV to bundle fixed and mobile video, data, and voice in direct competition to DISH and that such
bundling could give the combined entity the incentive to stifle wireless competition by refusing to enter
into data roaming agreements with DISH.
784
DISH argues that the Data Roaming Order is not adequate
to protect new entrants and asserts that the Commission instead should require AT&T-DIRECTV to
provide low-cost data roaming on the company’s networks to mobile providers, including DISH, with
unbuilt facilities.
785
ACM et al. argue that the transaction would eliminate any incentive DIRECTV
might otherwise have to participate in upcoming Commission spectrum auctions.
786
Further, ACM et al.
argue that a bundle of AT&T’s wireless broadband service with DIRECTV’s video service would
strengthen AT&T’s dominant wireless position and further entrench the Verizon Wireless and AT&T
wireless duopoly.
787
266. In response, the Applicants state that “the Commission’s data roaming rules already make
certain that entities like DISH can obtain data roaming agreements on commercially reasonable terms and
conditions.”
788
The Applicants argue that DISH’s claim that the combined entity would see DISH as a
competitive threat and seek to thwart it is speculative, as it is based on potential services DISH may offer
in the future.
789
267. Discussion. We find that DISH’s position that the transaction would limit competition
for bundling wireless services with broadband and video products and that such bundling could give the
combined entity the incentive to stifle wireless competition by refusing to enter into data roaming
agreements with DISH is not supported on the basis of the record in front of us.
790
We note that the
Commission’s general roaming policies and rules are intended to enable entities to obtain roaming
agreements on reasonable terms and conditions.
791
Further, if an entity were to face difficulties in
(Continued from previous page)
limited to consideration of merger-specific effects”); Verizon Wireless-ALLTEL Order, 23 FCC Rcd at 17463, ¶ 29
(The Commission “will not impose conditions to remedy pre-existing harms or harms that are unrelated to the
transaction.”); Applications of AT&T Inc. and Centennial Communications Corporation for Consent to Transfer
Control of Licenses, Authorizations, and Spectrum Leasing Arrangements, WT Docket No. 08-246, Memorandum
Opinion and Order, 24 FCC Rcd 13915, 13969, ¶ 133 (2009) (“AT&T-Centennial Order”) (The Commission will
“impose conditions only to remedy harms that arise from the transaction (i.e., transaction-specific harms) ….”).
784
DISH Petition at 30-31.
785
Id.
786
See ACM et al. Petition at 7-8.
787
Id. at 10.
788
Joint Opposition at 67.
789
Id.
790
In contrast, the Commission has previously conditioned consent in certain cases on the ability of service
providers to have access, on behalf of their customers, to roaming services in the areas affected by the transaction in
order to assure an orderly transition where service providers intend to change network technology (e.g., a change
from Code Division Multiple Access (“CDMA”) to Global System for Mobile Communications (“GSM”)
technology) because the assignee might not sufficiently preserve or maintain the assignor’s original network
technology. See, e.g., AT&T-Verizon Wireless Order, 25 FCC Rcd at 8742-43, 8746, ¶¶ 89, 96; Verizon Wireless-
ALLTEL Order, 23 FCC Rcd at 17501, 17254, ¶¶ 126-127, 178. See also AT&T-Leap Wireless Order, 29 FCC Rcd
at 2783-85, ¶¶ 105, 108; AT&T-ATN Order, 28 FCC Rcd at 13703, ¶ 60.
791
See Reexamination of Roaming Obligations of Commercial Mobile Radio Service Providers and Other Providers
of Mobile Data Services, WT Docket No. 05-265, Second Report and Order, 26 FCC Rcd 5411, 5451, ¶ 81 (2011),
aff’d sub nom. Cellco P’ship v. FCC, 700 F.3d 534 (D.C. Cir. 2012); Reexamination of Roaming Obligations of
(continued….)
Federal Communications Commission FCC 15-94
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negotiating roaming agreements, such entity may rely on the protections afforded by the Commission’s
general roaming policies and rules as well as on the availability of relief under the Commission’s
complaint procedures. While ACM et al. assert that the transaction would eliminate any incentive
DIRECTV might have to participate in spectrum auctions, we find this concern speculative. Neither
ACM et al. nor any other party offered evidence in the record suggesting that DIRECTV is likely to be a
participant in any of the Commission’s upcoming auctions.
I. Increased Incentive and Ability of Combined Entity to Shift Wired Subscribers to
FWLL
268. Positions of the Parties. Public Knowledge-ILSR claim that AT&T may have an
increased incentive as a result of the transaction to shift its wired subscribers to its FWLL network post-
transaction and that this action would harm consumers by limiting their options for Internet service and
forcing them onto a technology that does not best suit their needs.
792
Public Knowledge-ILSR argue that
the Commission should impose conditions to alleviate these concerns. Specifically, Public Knowledge-
ILSR request that the Commission impose the following conditions within AT&T’s wireline service
territory: (1) an adequate process for handling complaints about the quality of service of both copper and
wireless service; (2) copper repair deadlines; (3) public reports on complaints; (4) assurance that a person
who finds that a wireless product is unsuitable can get wired service back; (5) public reporting on the
results of IP transition trials; and (6) clarity about the future of wired service for businesses and the
interconnection rights of competitive carriers.
793
269. The Applicants respond that the vast majority of AT&T’s planned FWLL deployment is
outside AT&T’s wireline region.
794
Further, the Applicants argue that the Commission has open dockets
to address Public Knowledge-ILSR’s concerns and that those dockets are the appropriate place to address
any such concerns.
795
270. Discussion. We find that the evidence does not support a finding that AT&T would have
an increased incentive or ability to shift wired subscribers to its planned FWLL deployment. Specifically,
our analysis verifies that the majority of the FWLL deployment will be outside of AT&T’s wireline
territory.
796
Finally, the Commission has open dockets on these issues that are the appropriate forum for
the issues raised by Public Knowledge-ILSR.
797
Thus, we decline to impose additional conditions.
J. Use of Orbit and Spectrum Resources
271. Background. DISH asks that we condition any consent to the proposed transaction on
DIRECTV divesting, to DISH, its three DBS channels at the 110° W.L. orbital location.
798
DISH argues
(Continued from previous page)
Commercial Mobile Radio Service Providers and Other Providers of Mobile Data Services, WT Docket No. 05-265,
Declaratory Ruling, DA 14-1865, 29 FCC Rcd 15483, 15486, ¶ 8 (WTB 2014); 47 C.F.R. § 20.12(e)(1).
792
Public Knowledge-ILSR Petition at 11-12; Public Knowledge Reply at 4.
793
Public Knowledge-ILSR Petition at 12.
794
Joint Opposition at 72 (claiming that 85 percent of the combined entity’s FWLL deployment would be outside its
wireline region).
795
Id. at 73. See Pleading Cycle Established on AT&T and NTCA Petitions, GN Docket No. 12-353, Public Notice,
DA 12-1999, 27 FCC Rcd 15766 (WCB 2013) (“AT&T and NTCA Petitions PN”); Technology Transitions Policy
Task Force Seeks Comment on Potential Trial, GN Docket No. 13-5, Public Notice, DA 13-1016, 28 FCC Rcd 6346
(2013) (“Technology Transitions PN”).
796
See infra Section XI.G.
797
See AT&T and NTCA Petitions PN, 27 FCC Rcd 15766; Technology Transitions PN, 28 FCC Rcd 6346.
798
DISH Petition at 27; see also DISH Reply at 5. Eight orbital locations are assigned to the United States under an
international plan for the provision of broadcasting-satellite service, known as DBS service domestically, found in
(continued….)
Federal Communications Commission FCC 15-94
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that DIRECTV has underutilized its three licensed DBS channels at this location because they are used to
provide service to only Puerto Rico.
799
DISH claims that it could put the three DBS channels to more
productive use by adding them to the 29 DBS channels it already uses at this orbital location.
800
DISH
asserts that DIRECTV’s use of these channels is inconsistent with Commission policies on efficient
spectrum use, and it alleges that their main value to DIRECTV is to block DISH’s access to the full 32-
channel assignment at this orbital location.
801
DISH argues that DIRECTV already enjoys other orbital
resources that are superior to DISH’s own.
802
The Applicants, in response, state that DIRECTV has
operated continuously at the 110° W.L. orbital location since 1999, that the three channels are fully
integrated into its long-term plans, and that DISH’s claims are unrelated to the proposed transaction and
designed solely to benefit DISH.
803
272. Discussion. We decline to impose the condition requested by DISH. The potential
concern DISH describes relates to DIRECTV’s ongoing orbital location use and an authorization that has
(Continued from previous page)
Appendices 30 and 30A of the International Telecommunication Union Radio Regulations. The 110° W.L. orbital
location is one of three of these orbital locations capable of providing coverage of the 48 contiguous United States.
See Amendment of the Commission’s Policies and Rules for Processing Applications in the Direct Broadcast
Satellite Service, Feasibility of Reduced Orbital Spacing for Provision of Direct Broadcast Satellite Service in the
United States, IB Docket No. 06-160, Notice of Proposed Rulemaking, 21 FCC Rcd 9443, 9444-46, ¶¶ 3-6 (2006).
The license to operate the DIRECTV 5 DBS space station at the 110.1° W.L. orbital location, within the 110° W.L.
“orbital cluster,” is held by DIRECTV Enterprises, LLC, a wholly owned subsidiary of DIRECTV. See DIRECTV
Enterprises, LLC, IBFS File No. SAT-MOD-20131114-00133 (granted Feb. 20, 2014).
799
DISH Petition at 21-22; DISH Reply at 3-5. DBS space stations transmit to subscriber antennas in the 12.2-12.7
GHz frequency band. The spectrum used for DBS service is divided into 32 frequency channels, each nominally 24
megahertz in bandwidth. DIRECTV Enterprises, LLC is authorized to operate on DBS channels 28, 30, and 32 at
the 110° W.L. orbital location. See United States Satellite Broadcasting Co., Inc., Transferor, and DIRECTV
Enterprises, Inc., Transferee, for Consent to Transfer of Control of the USSB II, Inc. Authorization to Operate a
Direct Broadcast Satellite System Using Five Channels at the 101° W.L. Orbital Location; Authorization to
Construct, Launch, and Operate a Direct Broadcast Satellite System Using Three Channels at the 110° W.L. Orbital
Location; and the Related Earth Registration (Call Sign E930437), Order and Authorization, DA 99-633, 14 FCC
Rcd 4585 (IB 1999); DIRECTV Enterprises, LLC, Application for Authorization to Operate DIRECTV 5, a Direct
Broadcast Satellite, at the 109.8° W.L. Orbital Location, Order and Authorization, DA 05-2654, 20 FCC Rcd 15778
(IB 2005). Each DBS channel at a given orbital location can transmit multiple channels of video programming to
customers, depending on the bandwidth required for each program. (High Definition (“HD”) program channels
require more bandwidth than Standard Definition (“SD”) channels.) For example, DIRECTV states that the
DIRECTV 5 satellite at 110.1° W.L. uses the three DBS channels to transmit 30 channels of programming. See
Joint Opposition at 69.
800
DISH Petition at 22-23; id., Attachment A, Confidential Declaration of Vivek Khemka (“Khemka Statement”) at
1-2. DISH Operating L.L.C., a wholly owned subsidiary of DISH, operates on DBS channels 1-27, 29, and 31 at the
110° W.L. orbital location using the EchoStar 10 and EchoStar 11 satellites. See EchoStar Satellite Corp.,
Application for Modification to Direct Broadcast Satellite Authorization and for Operation Authority, Memorandum
Opinion and Order, DA 99-1758, 15 FCC Rcd 6727, 6730, ¶ 7 (IB 1999); DISH Operating L.L.C., IBFS File No.
SAT-MOD-20090909-00095 (granted Nov. 1, 2012) (EchoStar 10); EchoStar Satellite Operating Corporation,
IBFS File No. SAT-LOA-20070622-00085 (granted Jan. 11, 2008) (EchoStar 11).
801
DISH Petition at 21-22. DISH also argues that the combined entity would have a reduced incentive to make
“efficient” use of the three channels. DISH Reply at 4.
802
DISH Petition at 2, 18-20; DISH Reply at 4.
803
Joint Opposition at 68-69.
Federal Communications Commission FCC 15-94
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existed for nearly 25 years.
804
There is no evidence in the record to support DISH’s contention that the
transaction would harm operations at the 110° W.L. orbital location.
805
XI. ANALYSIS OF POTENTIAL BENEFITS
A. Analytical Framework
273. In determining whether approval of a transaction is in the public interest, the Commission
evaluates whether the transaction is likely to produce public interest benefits. The Commission applies
several criteria in deciding whether a claimed benefit is cognizable. First, the claimed benefit must be
transaction specific. That is, the claimed benefit must be likely to occur as a result of the transaction but
unlikely to be realized by other practical means having less anticompetitive effect.
806
274. Second, the claimed benefit must be verifiable.
807
Because much of the information
relating to the potential benefits of a transaction is in the sole possession of the Applicants, they have the
burden of providing sufficient evidence to support each claimed benefit to enable the Commission to
verify its likelihood and magnitude.
808
The Commission will discount or dismiss speculative benefits that
it cannot verify.
809
As the Commission explained in the EchoStar-DIRECTV HDO, “benefits that are to
occur only in the distant future may be discounted or dismissed because, among other things, predictions
about the more distant future are inherently more speculative than predictions about events that are
expected to occur closer to the present.”
810
275. Third, the Commission calculates the magnitude of benefits net of the cost of achieving
them.
811
Fourth, benefits must flow through to consumers, and not inure solely to the benefit of the
company.
812
For example, the Commission will more likely find marginal cost reductions to be
804
See Application of United States Satellite Broadcasting Company, Inc. for Modification of Construction Permit
for Direct Broadcast Satellite System, Memorandum Opinion and Order, 5 FCC Rcd 7576, 7577, ¶ 6 (1990)
(creating the three-DBS-channel authorization at the 110° W.L. orbital location later transferred to DIRECTV).
805
We also note that we may not take into account in this proceeding whether the public interest would be better
served by the transfer of the three-channel DBS license to DISH, rather than to AT&T. See 47 U.S.C. § 310(d) (In
acting on a transfer application, “the Commission may not consider whether the public interest, convenience, and
necessity might be served by the transfer, assignment, or disposal of the permit or license to a person other than the
proposed transferee or assignee.”).
806
See Comcast-NBCU Order, 26 FCC Rcd at 4330-31, ¶ 226; Sirius-XM Order, 23 FCC Rcd at 12383, ¶ 75;
Liberty Media-DIRECTV Order, 23 FCC Rcd at 3330, ¶ 140; News Corp.-Hughes Order, 19 FCC Rcd at 610, ¶ 317;
EchoStar-DIRECTV HDO, 17 FCC Rcd at 20630, ¶ 189.
807
See Comcast-NBCU Order, 26 FCC Rcd at 4331, ¶ 226; Sirius-XM Order, 23 FCC Rcd at 12383, ¶ 75; Liberty
Media-DIRECTV Order, 23 FCC Rcd at 3331, ¶ 140; News Corp.-Hughes Order, 19 FCC Rcd at 610, ¶ 317;
EchoStar-DIRECTV HDO, 17 FCC Rcd at 20630, ¶ 190.
808
See id.
809
See Sirius-XM Order, 23 FCC Rcd at 12383, ¶ 75; Liberty Media-DIRECTV Order, 23 FCC Rcd at 3331, ¶ 140;
News Corp.-Hughes Order, 19 FCC Rcd at 611, ¶ 317; EchoStar-DIRECTV HDO, 17 FCC Rcd at 20630, ¶ 190.
810
EchoStar-DIRECTV HDO, 17 FCC Rcd at 20630-31, ¶ 190. See Comcast-NBCU Order, 26 FCC Rcd at 4331,
¶ 226; Sirius-XM Order, 23 FCC Rcd at 12383, ¶ 75; Liberty Media-DIRECTV Order, 23 FCC Rcd at 3331, ¶ 140;
News Corp.-Hughes Order, 19 FCC Rcd at 611, ¶ 317.
811
See Comcast-NBCU Order, 26 FCC Rcd at 4331, ¶ 226; Sirius-XM Order, 23 FCC Rcd at 12383, ¶ 75; Liberty
Media-DIRECTV Order, 23 FCC Rcd at 3331, ¶ 140; News Corp.-Hughes Order, 19 FCC Rcd at 610-11, ¶ 317;
EchoStar-DIRECTV HDO, 17 FCC Rcd at 20630, ¶ 190.
812
See Comcast-NBCU Order, 26 FCC Rcd at 4331, ¶ 226; Sirius-XM Order, 23 FCC Rcd at 12383, ¶ 75; Liberty
Media-DIRECTV Order, 23 FCC Rcd at 3331, ¶ 140.
Federal Communications Commission FCC 15-94
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cognizable than reductions in fixed cost because reductions in marginal cost are more likely to result in
lower prices for consumers.
813
276. The Commission applies a “sliding scale approach” to evaluating benefit claims.
814
Under this sliding scale approach, where potential harms appear both substantial and likely, the
Applicants’ demonstration of claimed benefits must reveal a higher degree of magnitude and likelihood
than the Commission would otherwise demand.
815
On the other hand, where potential harms appear less
likely and less substantial, the Commission will accept a lesser showing.
816
277. As discussed below, we recognize that the transaction offers certain benefits as a result of
efficiencies associated with improved bundling opportunities. This conclusion is supported by the
economic analysis and documentary evidence discussed above. We also acknowledge that the transaction
likely will result in some amount of programming payment reductions, although these constitute a public
interest benefit only to the extent the reductions are passed on to consumers in the form of lower prices.
Other claimed benefits that result from efficiencies such as improved video programming and user
interfaces are unquantified and not verified, and therefore are only minimally credited as a public interest
benefit. Furthermore, as discussed in more detail below, we find that the transaction reduces the
Applicants’ incentives to increase fiber deployment and, therefore, we impose a condition that AT&T
build out FTTP to 12.5 million customer locations to mitigate this reduced incentive.
B. Improved Bundles
278. As noted in our analysis of the competitive effects of the transaction above, the
Applicants state that one of the significant public interest benefits from the transaction is that the new
entity would be able to offer new and more competitive bundled services
817
that can offer consumers an
alternative to cable broadband and video bundles.
818
The Applicants argue that consumers prefer to buy
broadband and video services as a bundle, which limits the Applicants’ ability to compete because neither
company can provide both services to all their customers. In addition, and as analyzed above,
819
the
Applicants assert that the transaction would result in lower prices and better broadband and video
bundles.
279. AT&T currently offers an integrated bundle of AT&T broadband and U-verse video
service only in locations within its 22-state footprint where AT&T has deployed FTTN or FTTP
technologies,
820
and to fewer than one-quarter of all U.S. households.
821
DIRECTV does not have any
813
See News Corp.-Hughes Order, 19 FCC Rcd at 611, ¶ 317; EchoStar-DIRECTV HDO, 17 FCC Rcd at 20631, ¶
191.
814
See Comcast-NBCU Order, 26 FCC Rcd at 4331, ¶ 227; Sirius-XM Order, 23 FCC Rcd at 12384, ¶ 76; Liberty
Media-DIRECTV Order, 23 FCC Rcd at 3331, ¶ 141; News Corp.-Hughes Order, 19 FCC Rcd at 611, ¶ 318;
EchoStar-DIRECTV HDO, 17 FCC Rcd at 20631, ¶ 192.
815
See id.
816
See Comcast-NBCU Order, 26 FCC Rcd at 4331, ¶ 227; Sirius-XM Order, 23 FCC Rcd at 12384, ¶ 76; Liberty
Media-DIRECTV Order, 23 FCC Rcd at 3331, ¶ 141.
817
See supra ¶ 56 (describing the difference between “synthetic” and “integrated” bundles). This section analyzes
bundles that include wireline broadband. Wireless broadband bundles are discussed in Section XI.G.4.
818
See, e.g., Application at 4.
819
See supra Section IX.A.4.
820
Application at 3, 53. In addition, AT&T offers the synthetic bundle of AT&T broadband and DIRECTV video
within this service territory. See Lee Decl. ¶ 50. See also Competition White Paper at 18-19.
821
Application at 3. In a couple of markets where it offers integrated bundles, AT&T also bundles its “Mobile Share
Value” mobile broadband plans with its wireline broadband and video services. Lee Decl. ¶ 17.
Federal Communications Commission FCC 15-94
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broadband capabilities of its own, so it does not offer an integrated bundle of DIRECTV video and
broadband.
822
To compensate for their inability to offer integrated bundles in a substantial number of
locations, the Applicants have contracted to offer a synthetic bundle of AT&T’s broadband service and
DIRECTV’s video service.
823
280. Positions of the Parties. In support of their position, the Applicants argue that consumers
prefer to purchase integrated bundles of video and broadband.
824
They note that, among the basic cable
subscribers served by six of the nation’s largest cable operators, 78 percent purchase a bundle of
services
825
and that “more than 97 percent of AT&T’s 5.7 million video customers subscribe to bundled
services.”
826
The Applicants disclose that “approximately [BEGIN HIGHLY CONF. INFO.] [END
HIGHLY CONF. INFO.] percent of the subscribers leaving DIRECTV reported that they will purchase
a bundle of video and broadband services from their new provider, which they assert is “ a marked
increase” from the level reported three years earlier.
827
AT&T also states that “[f]ocusing on bundles is
also an efficient way for us to do business. Bundles allow U-verse to deliver [BEGIN HIGHLY CONF.
INFO.] [END HIGHLY CONF. INFO.] video services by recovering the content-acquisition costs
from a larger revenue base.”
828
In particular, the “ [BEGIN HIGHLY CONF. INFO.] [END HIGHLY
CONF. INFO.] .”
829
281. As explained in more detail elsewhere,
830
the Applicants claim that their synthetic
bundles are not competitive “because they cannot match either the discounts on price or the seamless
customer service offered by cable companies.”
831
In addition to satisfying consumer preferences and
improving the overall customer experience, the Applicants state that another benefit of the post-
transaction integrated bundles is that customers “will be able to purchase these bundled products in more
places . . . [because] AT&T will use DIRECTV’s retail channels to offer these new bundled products” in
addition to its own stores and authorized dealers and agents.
832
Furthermore, more integrated bundles
822
Application at 1, 13-14, 62-63; Doyle Decl. ¶ 5; Guyardo Decl. ¶¶ 10-11.
823
The Applicants have also created synthetic bundles with other companies. See, e.g., Application at 14, 23-26;
Guyardo Decl. ¶ 19; Katz Decl. ¶ 65; Lee Decl. ¶¶ 50-52; Moore Decl. ¶ 27; Video and Broadband
Complementarity White Paper at 14; Double Moral Hazard White Paper at 22-26.
824
See, e.g., Application at 55; Doyle Decl. ¶ 4; Katz Decl. ¶ 28; Moore Decl. ¶¶ 27-29; Bundles Ex Parte
Presentation at 4-6, 7-9. The Applicants also note that “[i]ncreasingly, the selection of a broadband provider also
determines consumers’ choices of video services.” Application at 18; Doyle Decl. ¶ 17. The Applicants argue that
“although consumers value broadband as their highest priority, ‘a compelling [v]ideo product is needed to preserve
and expand [a company’s] broadband sales.’” Video and Broadband Complementarity White Paper at 10.
825
Application at 21; Doyle Decl. ¶ 16. In addition, two recent studies commissioned by AT&T found that
consumers prefer to purchase video and broadband services in a single, integrated bundle. One study, conducted by
Professor Ravi Dhar, found that “all other things being equal, over 80 percent of respondents preferred an integrated
bundle to a synthetic one.” Bundles Ex Parte Presentation at 2. A second study found that consumers of video and
broadband “strongly prefer more integrated offers.” Id. at 9.
826
Application at 2. See also Application at 70; Lee Decl. ¶ 12; Competition White Paper at 6.
827
Guyardo Decl. ¶ 11. See also Application at 63; Katz Decl. ¶ 31.
828
Lee Decl. ¶ 15.
829
Lee Decl. ¶ 15.
830
See supra ¶¶ 112-115.
831
Lee Decl. ¶¶ 4, 53-58. See also Application at 20, 52; Doyle Decl. ¶¶ 24-25; Guyardo Decl. ¶¶ 7, 21, 41-45; Katz
Decl. ¶¶ 26-27, 29-32, 68-71, 97-106; Stankey Decl. ¶¶ 26-29; Double Moral Hazard White Paper at 17-21. The
Applicants also note that competition “for video/broadband bundles occurs primarily between the competitors
offering integrated bundles.” Application at 56-62.
832
Stankey Decl. ¶ 31. See also Application at 52; Katz Decl. ¶ 63; Moore Decl. ¶ 29.
Federal Communications Commission FCC 15-94
110
may be available because AT&T expects to offer integrated bundles of DIRECTV video and AT&T
wireless service after the transaction is consummated.
833
282. Discussion. As discussed in detail in our competitive effects analysis, we find that the
Applicants’ ability to offer an integrated bundle is an important public interest benefit of the transaction,
and we accord it significant weight in our balancing of the public interest harms and benefits.
C. Reduced Payments for Programming and Bundling Efficiencies
1. Reduced Payments for Content Acquisition
283. Positions of the Parties. According to the Applicants, video programming payments are
largely a function of scale, and, typically, larger MVPDs are able to obtain lower per subscriber rates
from video content providers.
834
The Applicants claim that AT&T’s programming payments account for
a substantial portion of U-verse video recurring costs and consume a substantial portion of video
subscriber revenues.
835
The Applicants also claim that AT&T pays significantly more for programming
content than video distributors with larger subscriber bases.
836
The Applicants contend that AT&T’s per
subscriber payments for programming have been growing at a rate of [BEGIN HIGHLY CONF. INFO.]
[END HIGHLY CONF. INFO.] percent per year from 2011 to 2014 and project that these payments
would increase by [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] percent over
2013 levels by 2023.
837
The Applicants argue that, because programming payments are closely tied to
scale, AT&T needs to expand its customer base significantly to reduce these payments.
838
284. The Applicants estimate that the transaction enables AT&T to lower its programming
payments by 20 to [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] percent within
[BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] years by [BEGIN HIGHLY
833
Application at 33; Joint Opposition at 11; Katz Decl. ¶ 107; Stankey Decl. ¶ 30.
834
Application at 21; Moore Decl. ¶ 14; Stankey Decl. ¶¶ 6, 23-24; Lee Decl. ¶ 19; Katz Decl. ¶ 114. The
Applicants note that Time Warner Cable claimed that its programming costs fell after its merger with Insight
Communications. See Application at 21-22 n.50. Dr. Katz notes that some theoretical literature identifies
circumstances under which large video service providers may have less bargaining power and pay higher content
fees. However, industry participants and analyst reports support the conclusion that large video distributors
generally pay less for content. See Katz Decl. ¶ 114 & nn.200-201.
835
Application at 22; Moore Decl. ¶ 6; Stankey Decl. ¶ 15; Lee Decl. ¶ 18; Katz Decl. ¶ 110 & n.194; Katz Reply
Decl. ¶ 18 n.35. The Applicants claim that in 2014 AT&T’s programming payments accounted for approximately
[BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] percent of its video subscriber revenues and
[BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] percent of U-verse video variable recurring
costs. Lee Decl. ¶ 18.
836
See Application at 22; Stankey Decl. ¶ 15; Lee Decl. ¶ 20. The Applicants estimate that AT&T’s payment per
video subscriber is more than [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] percent and
[BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] percent higher than Comcast’s and Time
Warner Cable’s, respectively. Lee Decl. ¶ 20. Dr. Katz provides programming payments per subscriber per month
for several different MVPDs. He estimates that Comcast’s average programming payments per subscriber per
month in 2013 were about [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] percent lower
than AT&T’s. Katz Decl. ¶ 114, Figure 1. Comparing the seven non-premium channel license agreements that
make up the largest share of AT&T’s programming payments, the Applicants claim that DIRECTV’s per subscriber
rates are approximately [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] percent lower than
AT&T’s rates for those seven agreements. See Katz Decl. ¶ 115 n.206.
837
Lee Decl. ¶ 18.
838
Application at 25; Joint Opposition at 17-18. According to the Applicants, [BEGIN HIGHLY CONF. INFO.]
[END HIGHLY CONF. INFO.] due to high and rising programming payments. See Application at 24; Stankey
Decl. ¶ 42; Lee Decl. ¶ 15.
Federal Communications Commission FCC 15-94
111
CONF. INFO.] [END HIGHLY CONF. INFO.] .
839
The Applicants claim that the reduction in
programming payments would begin in [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF.
INFO.] .
840
The Applicants assert that the savings would exceed [BEGIN HIGHLY CONF. INFO.]
[END HIGHLY CONF. INFO.] .
841
The Applicants estimate that AT&T’s programming payment per
video subscriber at closing would be [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF.
INFO.] .
842
The Applicants claim that these estimated programming payment reductions are conservative
because they are based on [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] .
843
285. The Applicants argue that they would pass on a portion of the programming payment
reductions to consumers, and also use those savings to improve the profitability of their video product.
844
The Applicants contend that, because programming payments are marginal costs, some of the savings
would be passed through to consumers in the form of lower prices.
845
The Applicants also note that the
BH Simulation projects that more than [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF.
INFO.] percent of programming payment reductions would be passed on to consumers.
846
Further, the
Applicants claim that the programming payment reductions and other cost savings would allow them to
deploy FTTP to an additional 2 million customer locations than could be justified financially absent the
transaction.
847
286. Some commenters agree with the Applicants that a larger subscriber base would allow
AT&T to lower its programming payments.
848
Commenters argue, however, that lower programming
payments should be considered a benefit of the transaction only if the payment reductions are passed on
839
Application at 36; Katz Decl. ¶ 115; Joint Opposition at 16; Katz Reply Decl. ¶ 32. AT&T Response to Sept. 9,
2014, Information Request at 244. Dr. Katz estimates that DIRECTV’s average programming payments per
subscriber per month in 2013 were approximately [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF.
INFO.] percent less than AT&T’s. Katz Decl. ¶ 115.
840
Application at 36.
841
Id.; Moore Decl. ¶ 16; Stankey Decl. ¶ 22; Joint Opposition at 16; AT&T Response to Sept. 9, 2014, Information
Request at 226, 231. AT&T estimates that the per subscriber savings would be over [BEGIN HIGHLY CONF.
INFO.] [END HIGHLY CONF. INFO.] . These savings are estimated by [BEGIN HIGHLY CONF. INFO.]
[END HIGHLY CONF. INFO.] . See Moore Decl. ¶¶ 16-17; AT&T Response to Sept. 9, 2014, Information
Request at 231, 244.
842
Moore Decl. ¶ 18; AT&T Response to Sept. 9, 2014, Information Request at 231, 243. AT&T expects that
[BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] . See AT&T Response to Sept. 9, 2014,
Information Request at 243-244.
843
Application at 36-37; Katz Decl. ¶ 115; Moore Decl. ¶ 15; Stankey Decl. ¶¶ 23-24; Joint Opposition at 17;
AT&T Response to Sept. 9, 2014, Information Request at 231-232, 241-242, 244-245. Programming payment
reductions are based on only the [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] . See
Moore Decl. ¶¶ 15, 17; AT&T Response to Sept. 9, 2014, Information Request at 241.
844
Content Cost White Paper at 8; Joint Opposition at 18-19; Katz Reply Decl. ¶¶ 20-26.
845
Katz Reply Decl. ¶¶ 21-23; Content Cost White Paper at 9-10.
846
Content Cost White Paper at 8, 11-14; Katz Reply Decl. ¶ 24. The Applicants claim that the Katz and Berry and
Haile merger simulations show that there is no consumer harm to offset and that the pass-through of reduced
programming payments is over and above the benefits that would accrue because of the complementarities in the
products supplied by the combined firms. See Content Cost White Paper at 10-11. For further discussion of the
Berry and Haile merger simulation and pass-through of content costs, see Appendix C ¶¶ 87-88, 94.
847
Application at 41; Stankey Decl. ¶¶ 38-46; Joint Opposition at 22-23; AT&T Response to Sept. 9, 2014,
Information Request at 217-218, 221, 232-234. See also Section XI.F.
848
ACA Comments at 17-19; Biglaiser Statement at 14-15; CWA Comments at 6-7; Cox Petition at 16; DISH
Petition at 11-12; ACA Reply at 10; COMPTEL Reply at 6; see also Wave Reply at 2.
Federal Communications Commission FCC 15-94
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to consumers and that AT&T has not sufficiently proven such pass-through.
849
In addition, Free Press
argues that recent research suggests that rising payments for sports programming, broadcast
retransmission consent, and digital rights may erode the benefit achieved in reducing programming
payments through scale.
850
287. Discussion. We find that AT&T’s programming payments may be reduced as a result of
the proposed transaction, but we decline to attribute this possibility as a benefit unless the savings accrue
to consumers. Our analysis of the record indicates that AT&T currently pays approximately [BEGIN
HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] on a per subscriber basis. However, our
analysis also finds that [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] is due to
differences in the number of channels offered by the two providers and the relative distribution of
subscribers over those channels, i.e., channel tiering.
851
288. The Applicants’ calculations of potential programming payment reductions use an
average per subscriber per month programming payment for both AT&T and DIRECTV. The Applicants
calculated the [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] .
852
The
Applicants’ estimated monthly per subscriber programming payment reductions range from [BEGIN
HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] .
853
The Applicants estimate that the
reductions in programming payments would be phased in over several years, starting at [BEGIN
HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] .
854
The record does not provide details on
how the phase-in percentages were calculated but notes that they are based on [BEGIN HIGHLY
CONF. INFO.] [END HIGHLY CONF. INFO.] .
855
Additionally, while AT&T has indicated that it is
interested in providing content on mobile devices, it does not appear that the Applicants have accounted
for the provision of such new services in calculating AT&T’s estimated programming payments post-
transaction.
856
289. Using data submitted by the Applicants, we calculated programming payments per
subscriber per month for AT&T and DIRECTV in 2014.
857
As noted elsewhere, based on our analysis of
849
WGAW Petition at 27; WGAW Reply at 12-13; Free Press Petition at 26-28; ACM et al. Petition at 12-13; DISH
Petition at 12; Franken Comments at 6.
850
Free Press Petition at 24-25.
851
For a discussion of these differences, see supra ¶¶ 99-102; Appendix C Section IV.C.
852
AT&T Response to Sept. 9, 2014, Information Request, Exhibit 69.c.2, tab “Content Cost (output)”; ATT-FCC-
01645622, [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] .
853
AT&T Response to Sept. 9, 2014, Information Request, Exhibit 69.c.2, tab “Content Cost (output)”; Content
Cost White Paper at 12-13; see also ATT-FCC-01645622, [BEGIN HIGHLY CONF. INFO.] [END HIGHLY
CONF. INFO.] .
854
AT&T Response to Sept. 9, 2014, Information Request, Exhibit 69.c.2, tab “Content Cost (output)”; ATT-FCC-
01645622, [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] ; AT&T Response to Sept. 9,
2014, Information Request, Exhibit 68.e.1 at 52, Exhibit 69.c.1. This analysis excludes programming payments for
NFL Sunday Ticket.
855
See AT&T Response to Sept. 9, 2014, Information Request, Exhibit 68.e.1 at 52, Exhibit 69.c.1. Further, the
documents estimate that the annual increase in programming payments [BEGIN HIGHLY CONF. INFO.] [END
HIGHLY CONF. INFO.] . See AT&T Response to Sept. 9, 2014, Information Request, Exhibit 68.e.1 at 52,
Exhibit 69.c.1; id., Exhibit 69.c.2, tab “Content Cost (output)”; ATT-FCC-01645622, [BEGIN HIGHLY CONF.
INFO.] [END HIGHLY CONF. INFO.] .
856
See Application at 33; Katz Decl. ¶ 107; Stankey Decl. ¶ 30; Joint Opposition at 11; AT&T Response to Sept. 9,
2014, Information Request, Exhibit 68.e; ATT-FCC-01070922, [BEGIN HIGHLY CONF. INFO.] [END
HIGHLY CONF. INFO.] .
857
Our analysis also compares AT&T’s and DIRECTV’s programming payments with Comcast. For a detailed
discussion of our programming payment analysis, see Appendix C Section IV.C.
Federal Communications Commission FCC 15-94
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the data submitted by AT&T and DIRECTV, we estimate that the programming payment per subscriber
per month for [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] .
858
Our analysis
also indicates that to fully achieve the claimed programming payment reductions, certain adjustments
such as re-tiering of channels may need to occur. Without such adjustments, the per subscriber [BEGIN
HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] .
859
There is no evidence in our record that
the Applicants have considered these types of adjustments in calculating the programming payment
reductions. Therefore, while we find that AT&T is likely to achieve some programming payment
reductions, [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] which may similarly
affect the amount of the reduction.
290. As noted above, in analyzing the potential competitive effects arising from the
transaction, we considered the effect of programming payment reductions and the pass-through of such
reductions in the merger simulation.
860
We also considered programming payment reductions that are not
passed through to consumers when analyzing the FTTP buildout, which the Applicants claim is a benefit
of the transaction.
861
We find it likely that some of the programming payment reductions will be passed
through to subscribers and, as discussed below, that some portion of such reductions may help in funding
FTTP expansion.
291. We credit as a benefit only the portion of any programming payment reduction that is
passed on to consumers and not any programming payment reduction that is retained by the Applicants.
As the Commission has found previously, to the extent a change in video programming costs of this
nature is a transfer of surplus between video programmers and video distributors, it generally is not a
public interest benefit.
862
There is no evidence in this record that would lead us to a different conclusion.
The record also does not establish that the reduction in AT&T’s programming costs would have a
negative effect on consumer welfare such that we would consider such reductions to be a public interest
harm of this transaction. In particular, we do not have evidence that the programming payment reductions
would result in increased programming payments by other MVPDs or reduced investment in the quality
or quantity of programming.
863
2. Other Cost Savings and Efficiencies
292. Positions of the Parties. In addition to content cost savings, the Applicants assert that the
transaction would result in other cost savings of more than [BEGIN HIGHLY CONF. INFO.] [END
HIGHLY CONF. INFO.] .
864
These savings result from consolidating the two companies’ installation
and service operations, among other efficiencies.
865
For example, if the Applicants are able to perform
multiple installation services, such as DBS service, broadband, and voice, with a single truck roll, they
estimate savings of approximately [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.]
858
For a detailed discussion of this analysis, see supra ¶¶ 98-102; see also Appendix C ¶ 58, Table 1.
859
See supra ¶ 102.
860
See supra ¶¶ 96-103; Appendix C Section V.B.
861
See, e.g., Application at 41; Stankey Decl. ¶¶ 38-46; Joint Opposition at 22-23. See also infra ¶¶ 332-334.
862
EchoStar-DIRECTV HDO, 17 FCC Rcd at 20637, ¶ 211.
863
See supra Section X.A.4 and Section X.D.2.a.
864
See Moore Decl. ¶ 20; AT&T Response to Sept. 9, 2014, Information Request at 226. These estimates include
savings from the adoption of DIRECTV’s set-top box technology for U-verse customers, which is discussed below.
See infra Section XI.E.
865
See Application at 38; Moore Decl. ¶ 24; Katz Decl. ¶¶ 104-106; AT&T Response to Sept. 9, 2014, Information
Request at 238; DIRECTV Response to Sept. 9, 2014, Information Request at 73.
Federal Communications Commission FCC 15-94
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.
866
They also intend to integrate AT&T’s IP distribution network and DIRECTV’s satellite network,
consolidate the two companies’ broadcast centers, and achieve additional cost savings in operation of
their super hub offices,
867
all of which they estimate would result in cost savings of approximately
[BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] .
868
293. The combined entity also plans to [BEGIN HIGHLY CONF. INFO.] [END HIGHLY
CONF. INFO.] .
869
They further claim cost savings in customer call center operations, integration of
information technology (“IT”) systems, and other general administrative and headquarter functions.
870
The Applicants estimate that the elimination of duplicative systems and operations would reduce
expenses by [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] .
871
Moreover, the
Applicants explain that the transaction would provide them with additional marketing and sales
channels.
872
Specifically, AT&T would be able to market AT&T Mobility products to existing
DIRECTV subscribers and also to use DIRECTV’s retail distribution network to market those services.
873
Similarly, DIRECTV would be able to utilize AT&T retail distribution channels for DIRECTV video
products.
874
294. Discussion. While the transaction may result in certain cost savings and efficiencies
alleged by the Applicants, we ascribe minimal weight to these benefits. As discussed above, because
much of the information relating to the potential benefits of a transaction is in the sole possession of the
Applicants, they are required to provide sufficient evidence supporting each claimed benefit to enable the
Commission to verify its likelihood and magnitude.
875
The Applicants have failed to do so for the
efficiencies listed above.
876
For example, the Applicants have failed to distinguish claimed cost savings
that would result in a reduction in marginal cost from cost savings that would result in a reduction in fixed
866
See AT&T Response to Sept. 9, 2014, Information Request at 238; see also Application at 38; Moore Decl. ¶ 24;
Katz Decl. ¶ 104.
867
The Applicants explain that “‘[s]uper hub offices’ are where video programming is gathered and redistributed to
network facilities for delivery to subscribers.” Application at 38 n.114.
868
See id. at 38; Moore Decl. ¶ 25; AT&T Response to Sept. 9, 2014, Information Request at 238; DIRECTV
Response to Sept. 9, 2014, Information Request at 73.
869
See Application at 37-38; Moore Decl. ¶ 23; AT&T Response to Sept. 9, 2014, Information Request at 238-239;
DIRECTV Response to Sept. 9, 2014, Information Request at 72-73.
870
See Application at 38; Moore Decl. ¶ 25; AT&T Response to Sept. 9, 2014, Information Request at 237-238;
DIRECTV Response to Sept. 9, 2014, Information Request at 73.
871
See AT&T Response to Sept. 9, 2014, Information Request at 238.
872
See Application at 39; Stankey Decl. ¶ 31; Moore Decl. ¶ 29; Katz Decl. ¶ 108; AT&T Response to Sept. 9,
2014, Information Request at 228-229.
873
See id.
874
See id.
875
See supra ¶ 274.
876
As discussed above, the Commission has stated previously that it will discount or dismiss speculative benefits
that it cannot verify. See supra ¶ 274 & n.809; see also Sirius-XM Order, 23 FCC Rcd at 12383, ¶ 75; Liberty
Media-DIRECTV Order, 23 FCC Rcd at 3331, ¶ 140; News Corp.-Hughes Order, 19 FCC Rcd at 611, ¶ 317;
EchoStar-DIRECTV HDO, 17 FCC Rcd at 20630, ¶ 190. Here, AT&T’s calculations for many of the purported
savings note a number of “key considerations” or “key assumptions” that call into question the extent to which
certain purported savings or synergies would be achieved. See AT&T Response to Sept. 9, 2014, Information
Request, Exhibit 68.e.1, [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] at 57, 61-62.
Federal Communications Commission FCC 15-94
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cost.
877
As noted above, we generally find reductions in fixed cost to be less cognizable than reductions
in marginal costs because the former are less likely to result in lower prices for consumers.
878
3. Innovation in Video Services
295. The Applicants claim that the transaction would enable them to combine their research
and development efforts and to spread the cost of those efforts over a more extensive customer base.
879
Moreover, the Applicants state that the transaction would combine DIRECTV’s expertise in acquiring
content and assembling programming packages, as well as its video engineering talent and resources, with
AT&T Labs’ innovative technology leadership.
880
The Applicants believe that this combination would
equip the combined entity with the tools to respond to changing consumer demand and to develop new
services and product features.
881
a. Traditional Video
296. Positions of the Parties. The Applicants state that the proposed transaction would utilize
the complementary nature of their separate video services to create a higher quality video service than
either AT&T or DIRECTV could offer independently.
882
The Applicants note that DIRECTV today must
rely on third parties for the delivery of most of its VOD content.
883
The Applicants claim that, after the
transaction, “DIRECTV will be able to use AT&T’s Internet backbone and broadband infrastructure to
provide higher-quality service at reduced cost, through measures such as more efficient use of caching to
store content closer to the customer.”
884
297. Similarly, the Applicants state that DIRECTV has been developing Ultra HD (“UHD”)
video with its focus on new compression technologies that allow for the highest video quality with the
least amount of bandwidth.
885
They contend that the proposed transaction would enable AT&T to take
advantage of DIRECTV’s expertise and to deploy UHD faster than would otherwise have been
possible.
886
877
The Sept. 9, 2014, Information Request to AT&T specifically asked AT&T to state, for each purported cost
savings, whether it is a fixed cost savings or a variable cost savings and to explain the reasoning. See Sept. 9, 2014,
Information Request to AT&T at Question 68.d. AT&T responded that “[d]etail regarding a break-down of
estimated cost savings between fixed and variable cost is not available at this time beyond what is set forth in
[Exhibit 68.d].” See AT&T Response to Sept. 9, 2014, Information Request at 240. Exhibit 68.d, however, does not
break down cost savings between fixed costs and variable costs.
878
See supra ¶ 275 & n.813.
879
Application at 46; Stankey Decl. ¶¶ 6, 20 (“The combined company’s increased scale will provide a broader
customer base across which to spread the fixed costs associated with developing [new] services and features. As a
result of these and other synergies, the combined company will offer consumers greater value, better and more
flexible programming packages, and enhanced interactivity.”).
880
Stankey Decl. ¶¶ 6, 32 (“[W]ith technology leadership from both DIRECTV and AT&T Labs, the combined
company will be well-situated to devote the resources necessary to innovate in additional ways that cannot even be
foreseen today.”).
881
See id.
882
Katz Decl. ¶ 122 (“By allowing complementarities between the parties’ video services to be realized, the
proposed transaction will create a higher-quality video offering than either firm could provide alone.”).
883
Stankey Decl. ¶ 21.
884
Id.; Application at 31.
885
Stankey Decl. ¶ 32 (“[W]ith its focus on new compression technologies that yield the highest quality video with
the least bandwidth, DIRECTV is leading the development of ‘ultra high definition’ (‘UHD’) television.”).
886
Id.
Federal Communications Commission FCC 15-94
116
298. The Applicants also state that the proposed transaction would enable DIRECTV to extend
its programming lineup to AT&T U-verse video customers.
887
AT&T would also use DIRECTV’s
experience to build on the lineup and to design a broader range of best-in-class video programming
packages tailored to a variety of tastes and price levels.
888
299. The Applicants also argue that the proposed transaction would allow the combined entity
to develop more sophisticated interactive services and a more advanced user interface than either
company would alone.
889
They state that a migration to a single video platform would create a common
development and operating environment as well as a more uniform consumer experience.
890
The
Applicants believe that a combined entity would also be better positioned to bear the fixed costs
associated with the development of interactive user interfaces and other capabilities.
891
300. Several commenters assert that the Applicants could have achieved the purported benefit
of improved video services absent the transaction through internal organic growth.
892
Free Press argues
that the resources AT&T has devoted to acquiring DIRECTV could have been used for internal
improvement.
893
ACM et al. argue that allowing AT&T to acquire DIRECTV eliminates AT&T’s
incentives to expand and enhance its U-verse footprint.
894
301. Discussion. We ascribe minimal weight to the purported benefits of the transaction for
traditional video services. The Commission has stated in previous transaction review proceedings that the
deployment of improved video services is a recognized public interest benefit.
895
We find that the
proposed transaction will enable the Applicants to combine their resources and share their expertise to
improve their MVPD offerings to the benefit of consumers.
896
We also find that DIRECTV’s
programming lineup will likely be extended to AT&T’s video service
897
and may improve AT&T’s U-
verse video programming. The question before us is whether such benefits could have been achieved
absent the transaction through a means less harmful to competition.
898
We note that the extent to which
887
Application at 30; Stankey Decl. ¶ 19.
888
Application at 30; Katz Decl. ¶ 122 (“[DIRECTV has] greater experience in providing content packaging
services, as AT&T was a relatively recent entrant into packaging and has small scale. AT&T will benefit from
DIRECTV’s superior software and, more generally, greater experience in providing content packaging services.”).
889
Katz Decl. ¶ 123.
890
Id. (“Migration to a single TV platform also will allow the achievement of a common development and operating
environment, and uniform customer experience.”).
891
Id. (“Because there are fixed costs associated with the development of interactive capabilities and the user
interface, the combined company will be better positioned to develop more sophisticated interactive services and a
more advanced user interface than would either company alone.”).
892
See ACM et al. Petition at 7-9; see also WGAW Petition at 17-19; Free Press Petition at 37-40; ACM Feb. 24,
2015, Attachment at 1-2.
893
See Free Press Petition at 37-40.
894
See ACM et al. Petition at 8-10; ACM Feb. 24, 2015, Ex Parte Letter, Attachment at 1-2.
895
See Adelphia Order, 21 FCC Rcd at 8312, ¶ 256; Comcast-AT&T Order, 17 FCC Rcd at 23316-17, ¶¶ 182-185;
Applications for Consent to the Transfer of Control of Licenses and Section 214 Authorizations from MediaOne
Group, Inc., Transferor, to AT&T Corp., Transferee, CS Docket No. 99-251, Memorandum Opinion and Order, 15
FCC Rcd 9816, 9886, ¶ 160 (2000); News Corp.-Hughes Order, 19 FCC Rcd at 614-615, ¶ 327.
896
See DTVFCC-03667643, [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] .
897
See DTVFCC-03667643, [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] .
898
Liberty Media-DIRECTV Order, 23 FCC Rcd at 3330-31, ¶ 140; News Corp.-Hughes Order, 19 FCC Rcd at 610,
¶ 317; EchoStar-DIRECTV HDO, 17 FCC Rcd at 20630, ¶ 189; Applications of NYNEX Corp., Transferor, and Bell
Atlantic Corp., Transferee, for Consent to Transfer Control of NYNEX Corp. and Its Subsidiaries, Memorandum
(continued….)
Federal Communications Commission FCC 15-94
117
such benefits could have resulted from organic growth is limited given AT&T’s competitive position
relative to the larger cable MVPDs and its relatively limited MVPD assets.
899
DIRECTV also lacks the
infrastructure for broadband delivery of its VOD content and is unlikely to have developed broadband on
its own without partnering with a broadband provider.
900
302. While we recognize that the proposed transaction could enable innovation in traditional
video services greater than what either Applicant could have achieved independently, we find any benefit
difficult to verify or quantify.
901
Furthermore, we question the degree to which these innovations would
be driven by the proposed transaction rather than by market forces.
902
For example, [BEGIN HIGHLY
CONF. INFO.] [END HIGHLY CONF. INFO.] .
903
The record indicates that industry conditions were
already pushing Applicants to innovate and improve their video services. Therefore, although we accept,
in theory, that benefits might result from the Applicants combining their video innovation efforts, we are
unable to determine the extent to which their combined efforts would have outpaced the market-
influenced efforts of each Applicant separately. Accordingly, we ascribe minimal weight to the purported
benefit.
904
b. OVD
303. Positions of the Parties. The Applicants state that the proposed transaction creates
potential for innovation to result in enhanced video options across all screens, including an OVD
offering.
905
The Applicants claim that the improved cost structure and large video subscriber base would
justify more risky investments in the infrastructure necessary to create an OVD product.
906
The
Applicants also state that the proposed transaction would allow AT&T to obtain more attractive terms for
digital content rights because the increase in scale makes AT&T more attractive as a partner for online
video providers.
907
The Applicants also claim that the proposed transaction would allow the combined
(Continued from previous page)
Opinion and Order, 12 FCC Rcd 19985, 20063-64, ¶ 158 (1997); Comcast-AT&T Order, 17 FCC Rcd at 23313, ¶
173.
899
See ATT-FCC-02898059, [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] .
900
See DTVFCC-00254236, [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] ; DTVFCC-
03677960, [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] .
901
See Comcast-NBCU Order, 26 FCC Rcd at 4333, ¶ 231 (stating that the benefit of cooperation between
applicants was “difficult to quantify aside from specific commitments and contexts”).
902
See ATT-FCC-02898059, [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] .
903
See ATT-FCC-01816620, [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] .
904
See Comcast-NBCU Order, 26 FCC Rcd at 4333, ¶ 231; News Corp.-Hughes Order, 19 FCC Rcd at 619, ¶ 344.
905
Application at 46-49; Stankey Decl. ¶¶ 9, 56-64.
906
Stankey Decl. ¶ 58 (“The improved cost structure and much larger video subscriber base enabled by this
transaction will allow us to justify the more risky investments in software, platforms and service development
necessary to create a world-class OTT customer experience.”). But see Free Press Petition at 35-37 (claiming that
the proposed transaction would decrease the incentives of the Applicants to invest in OVD services). Free Press also
argues that absent the transaction both AT&T and DIRECTV would have entered the online video market as
competitors and that the ensuing competition would have strengthened the viability of online video services in the
video distribution market. Free Press Petition at 35-36. We find that such concerns have been properly addressed
by our discussion of potential harm to competition in the MVPD market. See supra Section VIII and Section
IX.A.5.
907
Stankey Decl. ¶ 58 (“At the same time, the increase in video scale will make AT&T a much more attractive OTT
partner for content providers and thus allow AT&T to obtain more attractive terms for the new types of digital
content rights necessary to provide innovative OTT offerings.”); see also Stankey Decl. ¶ 61 (“AT&T projects that
its annual spending with content providers will increase from approximately [BEGIN HIGHLY CONF. INFO.]
[END HIGHLY CONF. INFO.] today to nearly [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF.
(continued….)
Federal Communications Commission FCC 15-94
118
entity to build on DIRECTV’s longstanding relationships with content providers to negotiate flexible
digital rights for new OVD services.
908
304. Discussion. While we accept that the proposed transaction may allow the Applicants to
improve their ability to launch OVD services by pooling their assets and efforts,
909
we do not find that the
transaction creates a significant, quantifiable public interest benefit, and as noted above, we are concerned
that any such improvement in the Applicants’ OVD services creates an incentive to limit competition
from competing OVD services. We also note that [BEGIN HIGHLY CONF. INFO.] [END HIGHLY
CONF. INFO.] .
910
Accordingly, we do not find that the transaction itself would necessarily or uniquely
accelerate innovation in OVD services overall, and we ascribe only minimal weight to this benefit.
c. Improved Advertising Capabilities
305. Positions of the Parties. AT&T states that it would be able to enhance the combined
entity’s ability to reach consumers through tailored, compelling advertisements by improving
DIRECTV’s advertising platform.
911
AT&T states that the combined entity would be better able to
customize its advertisements and [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.]
.
912
AT&T predicts that the improvements to DIRECTV’s advertising platform would bring DIRECTV’s
[BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] due to advertisers placing more
value on DIRECTV’s advertising time.
913
306. Discussion. We do not find improved advertising capabilities to be a significant benefit
of the transaction. The record reflects that AT&T [BEGIN HIGHLY CONF. INFO.] [END HIGHLY
CONF. INFO.] and that DIRECTV [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF.
INFO.] .
914
Given that DIRECTV does not currently have a two-way connection to all of its subscribers,
however, we agree with the Applicants that the proposed transaction may enable AT&T [BEGIN
HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] .
915
That said, absent specific commitments
and defined plans we are unable to quantify the benefit of improved advertising capabilities to video
services.
916
While there may be a potential efficiency from the Applicants’ combined advertising
(Continued from previous page)
INFO.] post-transaction. That level of spending will substantially increase AT&T’s attractiveness to content
providers and allow it to secure more innovative content rights arrangements. As a much more important distributor
of content to MVPD customers, AT&T will be a more attractive partner for a broader and more innovative set of
content agreements to facilitate new OTT services.”); Katz Decl. ¶ 121.
908
Application at 23, 48-49, 77; see also Stankey Decl. ¶¶ 56-64.
909
See DTVFCC-03678259, [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] .
910
See DTVFCC-03726077, [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] ; DTVFCC-
03726039, [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] ; DTVFCC-00173673, [BEGIN
HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] ; ATT-FCC-00518651, [BEGIN HIGHLY CONF.
INFO.] [END HIGHLY CONF. INFO.] ; ATT-FCC-00356035, [BEGIN HIGHLY CONF. INFO.] [END
HIGHLY CONF. INFO.] ; ATT-FCC-00934828, [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF.
INFO.] .
911
Moore Decl. ¶ 30.
912
Id.
913
Id.
914
See ATT-FCC-01816620, [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] ; DTVFCC-
02051720, [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] .
915
See Moore Decl. at ¶ 30; DTVFCC-01320042, [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF.
INFO.] .
Federal Communications Commission FCC 15-94
119
development efforts, we do not find that the Applicants have established how such efficiency translates
into a measurable benefit to consumers. Therefore, we ascribe minimal weight to this benefit.
D. Video Programming Market
307. Positions of the Parties. The Applicants claim that the proposed transaction would
benefit the video programming market in two ways. First, they argue that it would expand their own
opportunities to produce original video programming, which they contend is becoming an increasingly
important strategy for video service providers.
917
They assert that large economies of scale are needed to
cover the high fixed costs of producing original content.
918
They explain that a large subscriber base, by
generating greater revenues to support those fixed costs, increases the net present value of investment in
original content.
919
The Applicants argue that the combined entity’s large scale would enable it to launch
and market original programming and to invest in new programming ventures.
920
They note that
DIRECTV has existing production facilities that can be used to create original content, with a few
projects already underway, and that AT&T plans to acquire and develop OVD services through its joint
venture with The Chernin Group.
921
The Applicants argue that consumers would benefit directly from the
new supply of programming and indirectly from the ensuing competitive pressures on other video
providers and content creators.
922
308. Second, the Applicants assert that other content producers would benefit from access to
the broader subscriber reach of the combined entity. They argue that the value of the program networks
they carry would increase due to the programmers’ ability to offer a larger audience to advertisers.
923
In
addition, the Applicants state that the combined entity’s multiple video platforms would benefit content
owners by providing them with “new opportunities to gain exposure for and to monetize content, while
preserving the value of the core pay TV revenue stream.”
924
In addition, they argue that the broadband
expansion facilitated by the transaction would increase the demand for content, thereby improving its
value.
925
309. Discussion. We ascribe minimal weight to the purported benefits of the transaction for
the video programming market. We agree with the Applicants that to the extent the combined entity
(Continued from previous page)
916
See Application of Whitehall Enterprises, Inc., Assignor, and Clear Channel Broadcasting Licenses, Inc.,
Assignee, for Consent to Assignment of License of WAAM(AM), Ann Arbor, MI, MB Docket No. 02-284, Hearing
Designation Order, 17 FCC Rcd 17509, 17525, ¶ 49 (2002) (indicating that commitments to improve advertising
services may be considered public interest benefits to the extent they support the Commission’s public policy goals).
917
Katz Decl. ¶ 120.
918
Id.
919
Id.
920
Stankey Decl. ¶ 63.
921
Application at 49; Stankey Decl. ¶ 63; see also Katz Decl. ¶ 120 n.211.
922
Katz Decl. ¶ 120.
923
Stankey Decl. ¶¶ 23-24; see also Katz Decl. ¶ 112; Katz Reply Decl. ¶ 33; see also supra Section X.A.4. But see
ACA Reply at 13-14 (noting that the Applicants provide no evidence that any gains to programmers in advertising
revenue would be sufficient to compensate for the revenue losses from lower programming rates); Cox Reply at 8-9
(estimating that, based on licensing and advertising revenues in 2014, basic cable networks would have to boost
advertising revenues by 29 percent to make up for a 20 percent decrease in programming rates); Cox Nov. 7, 2014,
Ex Parte Letter at 2 (arguing that no evidence suggests that advertising revenues could fill the “revenue hole” that
would be created).
924
Stankey Decl. ¶ 23; see also Katz Decl. ¶ 112; Katz Reply Decl. ¶ 33.
925
Joint Opposition at 52-53; see also Katz Reply Decl. ¶ 33.
Federal Communications Commission FCC 15-94
120
becomes a new competitor in the video programming market by producing original content for the first
time, consumers potentially would benefit from a greater selection of content and a boost in competition
among programmers. Such a benefit, however, is not quantified in the record. We note that the
Applicants make no specific commitment about the creation of original programming. Rather, they assert
generally that approval of the transaction would “enhance the combined company’s ability to develop
original programming.”
926
We note further that the Applicants indicate that, absent the transaction, each
already has plans to create original programming. Thus, in addition to being vague, it is not clear how the
benefit is transaction specific.
310. Similarly, we find that the Applicants’ generalized assertion that the proposed transaction
would benefit programmers by affording them access to larger audiences across the combined entity’s
multiple platforms, and thus enhancing a network’s attractiveness to advertisers, is not quantified in the
record. Additionally, the Applicants’ assertion that the combined entity’s broadband expansion might
increase the demand for a programmer’s content is not quantified. For these reasons, we assign little
weight to the purported benefit that content producers may receive from the broader subscriber reach of
the combined entity.
927
E. Video Device Market
311. Positions of the Parties. The Applicants state that the transaction would improve
AT&T’s and DIRECTV’s set-top box offerings.
928
They state that [BEGIN HIGHLY CONF. INFO.]
[END HIGHLY CONF. INFO.] .
929
The Applicants claim that the combined entity would integrate and
enhance DIRECTV’s set-top box technology to develop a user interface with a consistent appearance and
channel lineup regardless of platform or device.
930
The Applicants also state that the transaction would
“allow the combined company to obtain more flexible digital rights to deliver content to additional
devices.”
931
The Applicants assert that the expanded broadband deployment enabled by the transaction’s
efficiencies would stimulate demand for new and innovative set-top devices.
932
312. TiVo argues that the set-top box improvements claimed by the Applicants only benefit
the Applicants.
933
TiVo states that the Commission and Congress have favored competition as the
preferred way to ensure innovation and improved consumer choice.
934
313. Discussion. The Commission regards a robust and competitive video device market to be
a benefit to consumers.
935
We recognize that the transaction would potentially enable innovation in set-
top boxes to the extent that the transaction facilitates the adoption of DIRECTV’s set-top box technology
by AT&T.
936
However, the transaction would also potentially reduce the number of participants in the
video device market. Thus, we find this benefit difficult to quantify as a transaction-specific benefit.
926
Stankey Decl. ¶ 63.
927
See also supra Section X.D. (discussing potential harms to unaffiliated video programmers).
928
Joint Opposition at 63-64; see also Stankey Decl. ¶¶ 9, 20, 23, 59; Katz Decl. ¶ 121.
929
Moore Decl. ¶ 21. The Applicants estimate a one-time cost saving of [BEGIN HIGHLY CONF. INFO.] [END
HIGHLY CONF. INFO.] . Id.
930
Application at 30; see also Stankey Decl. ¶ 20; Katz Decl. ¶¶ 5, 122-123.
931
Joint Opposition at 64.
932
Id.
933
TiVo Reply at 4.
934
Id.
935
See First Navigation Device Report and Order, 13 FCC Rcd at 14776, ¶ 2.
936
See DTVFCC-03677960, [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] .
Federal Communications Commission FCC 15-94
121
Furthermore, prior to the transaction, [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF.
INFO.] .
937
Thus, it appears that the transaction merely would allow [BEGIN HIGHLY CONF. INFO.]
[END HIGHLY CONF. INFO.] .
938
Therefore, we ascribe minimal weight to this purported benefit
because, while the transaction may facilitate integration between different video device technologies, the
record indicates that much of the impetus for improvement occurred prior to the transaction.
314. Similarly, we do not find the potential for innovation in video devices to be a meaningful
benefit of the transaction. Aside from AT&T implementing its equipment enhancement plans with
DIRECTV’s technology, the Applicants have not made any measurable commitments or estimates from
which we could determine how the transaction would foster innovation in the video device market.
939
AT&T [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] .
940
While we recognize
the potential for additional innovation through the Applicants’ combined set-top box development efforts,
we find the benefit to the video device market from the transaction unquantified. Accordingly, we afford
minimal weight to this potential benefit in our balancing of potential public interest harms and benefits.
941
F. Expanded Deployment of Fiber to the Premises
315. In this section, we assess whether the Applicants’ commitment to provide FTTP wireline
broadband service to “2 million more customer locations,” within four years after the closing of the
transaction,
942
as a result of savings and synergies associated with the transaction reflects a likely outcome
of the transaction.
943
We conclude that the financial model submitted by the Applicants in support of
their buildout claims suggests that while the transaction may increase the net incentive to deploy FTTP, a
significant amount of potential FTTP deployment may not occur because such deployment would
937
Application at 37; Moore Decl. ¶ 21; DTVFCC-00523721, [BEGIN HIGHLY CONF. INFO.] [END
HIGHLY CONF. INFO.] ; DTVFCC-02825583, [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF.
INFO.] .
938
See Application at 37; Moore Decl. ¶ 21.
939
See id.; see also Stankey Decl. ¶¶ 9, 23, 59; Katz Decl. ¶ 121.
940
See ATT-FCC-01816620, [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] .
941
See News Corp.-Hughes Order, 19 FCC Rcd at 620, ¶ 344; see also Section X.E.
942
Application at 5, 41, 50; Stankey Decl. ¶¶ 35, 39, 44; Joint Opposition at 2, 7, 19 n.51; AT&T Response to Nov.
14, 2014, Information Request at 1-2; Letter from Maureen R. Jeffreys, Counsel for AT&T, to Marlene H. Dortch,
Secretary, FCC, MB Docket No. 14-90, Attachment (“FTTP Ex Parte Presentation”) at 2 n.2 (April 21, 2015)
(submitting written ex parte presentation on FTTP technology); Letter from Maureen R. Jeffreys, Counsel for
AT&T, and William M. Wiltshire, Counsel for DIRECTV, to Marlene H. Dortch, Secretary, FCC, MB Docket No.
14-90, at 2 (April 30, 2015) (“AT&T April 30, 2015, Ex Parte Letter”); Letter from Maureen R. Jeffreys, Counsel
for AT&T, to Marlene H. Dortch, Secretary, FCC, MB Docket No. 14-90, at 2 (June 1, 2015) (“AT&T June 1, 2015,
Ex Parte Letter”); Letter from Maureen R. Jeffreys, Counsel for AT&T, and William M. Wiltshire, Counsel for
DIRECTV, to Marlene H. Dortch, Secretary, FCC, MB Docket No. 14-90, at 2 (June 8, 2015) (“AT&T June 8,
2015, Ex Parte Letter”); Letter from Maureen R. Jeffreys, Counsel for AT&T, to Marlene H. Dortch, Secretary,
FCC, MB Docket No. 14-90, at 1, 4-5, 7 (June 15, 2015) (“AT&T June 15, 2015, Ex Parte Letter”). See also AT&T
June 25, 2014, Ex Parte Letter at 1. Customer locations are the count of living units (“LUs”), consumer and
business, to which AT&T is technically capable of providing service, including occupied and unoccupied locations.
See AT&T Response to Nov. 14, 2014, Information Request, Attachment at 1 n.1. Customer locations are derived
from [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] . See Letter from Maureen R. Jeffreys,
Counsel for AT&T, to Marlene H. Dortch, Secretary, FCC, MB Docket No. 14-90, Attachment (“Overview of
AT&T FTTP Investment Model”) at 47 (July 28, 2014) (submitting paper entitled “Overview of AT&T FTTP
Investment Model” and associated files).
943
Application at 5, 41; Katz Decl. ¶ 126 n.222; Stankey Decl. ¶¶ 35, 39, 44; Joint Opposition at 8-9, 20, 22 n.62;
Katz Reply Decl. ¶¶ 34, 38; FTTP Ex Parte Presentation at 2 n.2; AT&T April 30, 2015, Ex Parte Letter at 2;
AT&T June 1, 2015, Ex Parte Letter at 2; AT&T June 8, 2015, Ex Parte Letter at 2; AT&T June 15, 2015, Ex Parte
Letter at 4-5, 7.
Federal Communications Commission FCC 15-94
122
cannibalize DIRECTV subscribers and revenue – a transaction-specific effect the Applicants
acknowledge.
944
In addition, any pass-through to consumers of realized reductions in programming
payments would further reduce the incentives to deploy FTTP, as the profitability associated with the
video product would be lower.
945
The resulting reduction in the profitability of video provided over
FTTP, in conjunction with the desire to avoid cannibalizing DIRECTV subscribers and revenues, could
lead to a net decrease in the planned deployment of FTTP after the transaction, particularly if the quality
improvements from an integrated bundle do not sufficiently increase customer retention. To address this
potential decreased incentive to build out FTTP, we impose as a condition of the transaction that the
Applicants deploy FTTP to 12.5 million locations, which include the prior planned deployment as well as
the 2 million locations that they committed to deploy in connection with the transaction.
316. Positions of Parties. Prior to this transaction, AT&T announced certain plans to expand
its fiber network. Specifically, AT&T had approved a multiyear, multibillion dollar plan, dubbed Project
Velocity IP (“Project VIP”) to expand and improve its “wireless and fixed broadband networks.”
946
The
Applicants state that a limiting factor in AT&T’s FTTP deployment to date has been the challenging
economics of AT&T’s video service, which means that broadband must bear [BEGIN HIGHLY CONF.
INFO.] [END HIGHLY CONF. INFO.] of the burden of repaying any FTTP investment.
947
According
to the Applicants, this transaction fundamentally changes the economics of FTTP deployment [BEGIN
HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] .
948
AT&T maintains that “the improved
products enabled by the transaction will translate directly into more sales, reduced churn, and improved
margins” and that such changes “enhance the business case for AT&T to expand the reach and quality of
its broadband networks beyond what would be possible otherwise.”
949
Also, the Applicants claim that
increased broadband deployment by AT&T would make OVD services available to millions of people
that currently lack sufficient connectivity to enjoy these services.
950
317. Pursuant to Project VIP, AT&T stated that it planned, among other things, to deploy its
U-verse service using FTTP offering speeds up to 1 Gbps (GigaPower) in up to 25 metropolitan areas,
944
Katz Decl. ¶¶ 126, 129-130 & n.222; Katz Additional Detail ¶¶ 56-65.
945
Lower video revenues from increased pass-through reduce the profitability of FTTP deployment in IPDSL, DSL,
and “no-broadband” distribution areas (“DAs”) (where AT&T does not currently offer video service) because the
return on adding video capability to these areas is, generally, lower. Additionally, the opportunity cost of
cannibalization of DIRECTV subscribers (were FTTP to be deployed) would be higher for all DAs under higher
pass-through, as pass-through would result in U-verse video becoming less profitable relative to the profitability of
DIRECTV. This situation is especially true in FTTN areas where AT&T already offers a video service. In those
areas, there is no benefit to adding FTTP video service because AT&T’s FTTP Investment Model (“FIM”) assumes
that [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] FTTN and FTTP. See Letter from
Maureen R. Jeffreys, Counsel for AT&T, to Marlene H. Dortch, Secretary, FCC, MB Docket No. 14-90,
Attachment, [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] (“FIM Programs”) (July 28,
2014) (submitting for the record files associated with the FTTP Investment Model). A DA is a predefined
geography within the AT&T wireline footprint that is considered for the purposes of investment decisions. Each
DA contains approximately [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] customer
locations on average. The FTTP model covers a total of [BEGIN HIGHLY CONF. INFO.] [END HIGHLY
CONF. INFO.] DAs. See Overview of AT&T FTTP Investment Model at 4 n.2, 6 n.9.
946
Application at 10-11; Lee Decl. ¶¶ 9-10.
947
Stankey Decl. ¶¶ 16, 39, 42; FTTP Ex Parte Presentation at 1-2.
948
Stankey Decl. ¶¶ 7, 39; Katz Decl. ¶ 126; FTTP Ex Parte Presentation at 2.
949
Stankey Decl. ¶ 34.
950
Application at 5, 40-41; Stankey Decl. ¶ 9; see also Moore Decl. ¶ 8.
Federal Communications Commission FCC 15-94
123
including Dallas; Raleigh-Durham, N.C.; and Winston-Salem, N.C.
951
Further, AT&T states that
approximately [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] customer locations
had been approved for FTTP deployment prior to GigaPower expansion decisions.
952
AT&T claims that
the previously approved FTTP deployment and the GigaPower FTTP expansion brings planned FTTP
deployment to approximately [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.]
FTTP customer locations.
953
318. In connection with this transaction, the Applicants state that they would commit to
expand FTTP because the transaction improves the economics of AT&T’s investment in broadband.
954
Applicants assert that, due to the programming payment reductions and other synergies of the transaction,
AT&T would be able to deploy FTTP to at least an additional 2 million more customer locations than
could be economically justified without the transaction’s synergies.
955
The Applicants explicitly
acknowledge predicted cannibalization of profits that would otherwise go to DIRECTV because of the
expanded subscribership to U-verse’s video service that the FTTP expansion would facilitate.
956
The
951
Application at 11-12; Stankey Decl. ¶ 43; Lee Decl. ¶ 8; Joint Opposition at 21; AT&T June 1, 2015, Ex Parte
Letter at 2-3; AT&T June 15, 2015, Ex Parte Letter at 2-4, 7; AT&T Response to Sept. 9, 2014, Information
Request at 180-182, 217-218; see also, AT&T Eyes 100 U.S. Cities and Municipalities for its Ultra-Fast Fiber
Network, AT&T
NEWSROOM, April 21, 2014, available at
http://about.att.com/story/att_eyes_100_u_s_cities_and_municipalities_for_its_ultra_fast_fiber_network.html
(visited June 18, 2015) (“AT&T NEWSROOM, AT&T Eyes 100 U.S. Cities for Ultra-Fast Fiber Network”).
GigaPower is the brand name for AT&T’s U-verse service that uses FTTP technology to deliver speeds up to 1
Gbps. See AT&T June 1, 2015, Ex Parte Letter at 2; Stankey Decl. ¶ 38 n.20; Lee Decl. ¶ 8; Katz Reply Decl. ¶ 40.
The Applicants used a version of the FIM that was [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF.
INFO.] . See AT&T Response to Sept. 9, 2014, Information Request at 180-182. For these metropolitan areas, the
FIM projected approximately [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] . AT&T June
15, 2015, Ex Parte Letter at 2 n.3.
952
AT&T June 15, 2015, Ex Parte Letter at 2, 6-7. AT&T plans to make [BEGIN HIGHLY CONF. INFO.]
[END HIGHLY CONF. INFO.] . See AT&T June 1, 2015, Ex Parte Letter at 3. Of these [BEGIN HIGHLY
CONF. INFO.] [END HIGHLY CONF. INFO.] . See AT&T April 30, 2015, Ex Parte Letter at 2 n.4. Further,
an AT&T document breaks out these [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] . See
ATT-FCC-00372418, [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] ; AT&T June 15,
2015, Ex Parte Letter at 2 n.4. See also Lee Decl. ¶ 8. We also note that since AT&T conducted its analysis of the
profitability of FTTP deployment, [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] .
953
AT&T June 15, 2015, Ex Parte Letter at 2-3. See also Stankey Decl. ¶ 43; Katz Reply Decl. ¶¶ 38-39; Joint
Opposition at 21; FTTP Ex Parte Presentation at 2 n.2; AT&T April 30, 2015, Ex Parte Letter at 2; AT&T June 1,
2015, Ex Parte Letter at 2; AT&T June 15, 2015, Ex Parte Letter at 2, 6-7. See also AT&T Response to Sept. 9,
2014, Information Request at 180-182, 217-218. AT&T projects that the [BEGIN HIGHLY CONF. INFO.]
[END HIGHLY CONF. INFO.] of these customer locations will be GigaPower locations. See AT&T June 1,
2015, Ex Parte Letter at 2-3.
954
Application at 41, 50; Stankey Decl. ¶¶ 34-35, 38-39, 43; Katz Decl. ¶ 126 n.222; Moore Decl. ¶¶ 8, 32; Joint
Opposition at 8-9, 19-20; Katz Reply ¶¶ 34, 38; Katz Additional Detail ¶ 48; AT&T Response to Sept. 9, 2014,
Information Request at 181; FTTP Ex Parte Presentation at 2 n.2; AT&T April 30, 2015, Ex Parte Letter at 2;
AT&T June 1, 2015, Ex Parte Letter at 2; AT&T June 8, 2015, Ex Parte Letter at 2; AT&T June 15, 2015, Ex Parte
Letter at 4-5, 7.
955
Application at 5, 41; Stankey Decl. ¶¶ 35, 39, 44; Katz Decl. ¶ 126 n.222; Joint Opposition at 8-9, 20, 22 n.62;
Katz Reply Decl. ¶¶ 34, 38; FTTP Ex Parte Presentation at 2 n.2; AT&T April 30, 2015, Ex Parte Letter at 2;
AT&T June 1, 2015, Ex Parte Letter at 2; AT&T June 8, 2015, Ex Parte Letter at 2; AT&T June 15, 2015, Ex Parte
Letter at 4-5, 7.
956
See Katz Additional Detail ¶¶ 56-65; Katz Decl. ¶¶ 126, 129-130 & n.222.
Federal Communications Commission FCC 15-94
124
Applicants assert that of these 2 million additional customer locations, most have access only to AT&T’s
IPDSL or legacy DSL services, or no AT&T wireline broadband service at all.
957
319. Further, AT&T claims that as a result of the transaction it would be profitable to deploy
FTTP to an [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] .
958
These customer
locations [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] .
959
As a result of the
transaction, AT&T contends that these customer locations are [BEGIN HIGHLY CONF. INFO.] [END
HIGHLY CONF. INFO.] .
960
Therefore as a result of the transaction, AT&T claims that it would be
economically viable to deploy an [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.]
customer locations.
961
AT&T asserts that these claims capture ( [BEGIN HIGHLY CONF. INFO.]
[END HIGHLY CONF. INFO.]
962
prior planned deployment plus [BEGIN HIGHLY CONF. INFO.]
[END HIGHLY CONF. INFO.] as a result of the transaction).
320. To support these assertions, the Applicants state that they relied on the FTTP Investment
Model (“FIM”), which AT&T asserts that it uses in the ordinary course of business to evaluate the
profitability of FTTP.
963
The Applicants’ expert, Dr. Katz, modified the FIM to quantify the incremental
incentives to invest in FTTP that would result from the transaction.
964
Based on his modifications, Dr.
Katz concludes that the FIM predicts that approximately [BEGIN HIGHLY CONF. INFO.] [END
957
Application at 41-42; Stankey Decl. ¶ 46; Katz Reply Decl. ¶ 38; AT&T Response to Sept. 9, 2014, Information
Request at 219-220; FIM Programs.
958
Joint Opposition at 22 n.62; AT&T Response to Sept. 9, 2014, Information Request at 180-181, 217-218; FTTP
Ex Parte Presentation at 2 n.2; AT&T June 1, 2015, Ex Parte Letter at 3 n.6; AT&T June 15, 2015, Ex Parte Letter
at 3-4, 6-7. These [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] . See Joint Opposition at
22 n.62; AT&T Response to Sept. 9, 2014, Information Request at 180-181; AT&T June 1, 2015, Ex Parte Letter at
3 n.6; AT&T June 15, 2015, Ex Parte Letter at 4, 6-7. The difference between [BEGIN HIGHLY CONF. INFO.]
[END HIGHLY CONF. INFO.] . See AT&T June 15, 2015, Ex Parte Letter at 4 n.9.
959
Joint Opposition at 22 n.62; AT&T Response to Sept. 9, 2014, Information Request at 180-181, 217-218; FTTP
Ex Parte Presentation at 2 n.2; AT&T June 1, 2015, Ex Parte Letter at 3 n.6; AT&T June 15, 2015, Ex Parte Letter
at 3-4, 6-7.
960
Joint Opposition at 22 n.62; AT&T Response to Sept. 9, 2014, Information Request at 180-181.
961
Joint Opposition at 22 n.62.
962
Letter from Maureen R. Jeffreys, Counsel for AT&T, to Marlene H. Dortch, Secretary, FCC, MB Docket No. 14-
90, at 1 (June 18, 2015) (“AT&T June 18, 2015, Ex Parte Letter”). This figure includes the [BEGIN HIGHLY
CONF. INFO.] [END HIGHLY CONF. INFO.] customer locations that have already been deployed. See supra
n.952. AT&T estimates that approximately [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.]
of these customer locations will receive GigaPower and, for the remaining approximately [BEGIN HIGHLY
CONF. INFO.] [END HIGHLY CONF. INFO.] customer locations, AT&T will offer speed tiers up to either
[BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] . AT&T June 18, 2015, Ex Parte Letter at
1-2. AT&T states that FTTP without Gigabit Passive Optical Network technology and metro network upgrades can
deliver [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] . See AT&T June 1, 2015, Ex Parte
Letter at 2 n.3.
963
See Katz Decl. ¶ 127; Joint Opposition at 20-21; Katz Reply Decl. ¶ 34; Overview of AT&T FTTP Investment
Model at 4; AT&T Response to Sept. 9, 2014, Information Request at 160. [BEGIN HIGHLY CONF. INFO.]
[END HIGHLY CONF. INFO.] See Overview of AT&T FTTP Investment Model at 4; AT&T Response to Sept.
9, 2014, Information Request at 160.
964
Katz Decl. ¶¶ 128-131; Katz Additional Detail ¶¶ 49-68. Dr. Katz modified the [BEGIN HIGHLY CONF.
INFO.] [END HIGHLY CONF. INFO.] customer locations that were approved pre-transaction. See FIM
Programs. See also supra ¶ 317. The Baseline FIM, [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF.
INFO.] customer locations that meet the profitability hurdle ( [BEGIN HIGHLY CONF. INFO.] [END
HIGHLY CONF. INFO.] ), and this is the baseline number of deployments that Dr. Katz uses to calculate the
effects from the transaction of FTTP deployment. See FIM Programs. See also supra ¶¶ 317, 319.
Federal Communications Commission FCC 15-94
125
HIGHLY CONF. INFO.] customer locations clear AT&T’s profitability hurdle, approximately 2 million
more locations than clear the hurdle absent the transaction.
965
321. Several commenters support the proposed transaction, at least in part due to the proposed
FTTP deployment.
966
Other commenters, however, challenge whether the Applicants’ commitment to
deploy FTTP is a benefit of the transaction.
967
ACA states that AT&T’s commitment to expand
broadband service is a public interest benefit only if AT&T does not receive Universal Service Fund
(“USF”) support to serve the locations and, further, that AT&T should not receive any future legacy
support and should return certain support it already received.
968
ACM et al. state that the Applicants
cannot promise to pass their cost savings on to consumers while also promising to use those savings to
fund the FTTP expansion,
969
and that AT&T could have used the money spent to acquire DIRECTV to
instead expand its fiber network.
970
322. Some commenters contend that AT&T’s FTTP commitment is something that AT&T
was already planning to do in response to market conditions and competitive pressures.
971
WGAW
argues that AT&T’s MVPD service does not need to be profitable for it to expand its broadband network
and that it has no shortage of funds that it could use for broadband deployment.
972
WGAW also argues
that because AT&T’s broadband business is larger than its video business, this “counters the notion that
965
See Katz Additional Detail ¶ 70, Table 2. Dr. Katz runs the FIM under a number of assumptions regarding
AT&T video churn reductions, AT&T-DIRECTV diversion, and the timing of programming payment reductions.
Depending on the specification, the FIM predicts a net increase of [BEGIN HIGHLY CONF. INFO.] [END
HIGHLY CONF. INFO.] locations that are marked as profitable for FTTP deployment after the transaction. See
Katz Decl. ¶ 133; Katz Additional Detail ¶ 70, Table 2.
966
See Free State Comments at 17-18; Comments of Microsoft, MB Docket 14-90, at 2 (filed Sept. 16, 2014)
(“Microsoft Comments”); CWA Comments at 12; CWA Feb. 3, 2015, Ex Parte Letter at 1; Letter from Jim Goetz,
Sequoia Capital, and Ted Schlein, Kleiner Perkins Caufield & Byers, to Chairman Tom Wheeler, Commissioner
Mignon Clyburn, Commissioner Jessica Rosenworcel, Commissioner Ajit Pai, and Commissioner Michael O’Reilly,
MB Docket No. 14-90, at 2 (Oct. 15, 2014); Letter from Marc Andreessen, Co-Founder and General Partner,
Andreessen Horowitz, to Chairman Tom Wheeler, Commissioner Mignon Clyburn, Commissioner Jessica
Rosenworcel, Commissioner Ajit Pai, and Commissioner Michael O’Reilly, MB Docket No. 14-90, at 2 (Oct. 16,
2014); Letter from Karen Kerrigan, President and CEO, SBE Council, to Marlene H. Dortch, Secretary, FCC, MB
Docket No. 14-90, at 2 (Oct. 29, 2014).
967
Free Press Petition at 23-24, 30. See also WGAW Petition at 5, 26; Public Knowledge-ILSR Petition at 13-14;
Greenlining Petition at 8-9; WGAW Reply at 2, 25-28; Letter from John Bergmayer, Senior Staff Attorney, Public
Knowledge, to Marlene H. Dortch, Secretary, FCC, MB Docket No. 14-90, at 1-2 (March 31, 2015) (“Public
Knowledge March 31, 2015, Ex Parte Letter”); Letter from John Bergmayer, Senior Staff Attorney, Public
Knowledge, to Marlene H. Dortch, Secretary, FCC, MB Docket No. 14-90, at 2 (April 24, 2015).
968
ACA Comments at 29-30. ACA proposes that the Commission conduct a two-part analysis to determine whether
AT&T broadband services meet the Phase I and Phase II broadband performance standards. See id. at 30-31.
969
ACM et al. Petition at 12-13; Public Knowledge March 31, 2015, Ex Parte Letter at 2; ACM Feb. 24, 2015, Ex
Parte Letter, Attachment at 4.
970
ACM et al. Petition at 13. Free Press similarly states that for far less than the cost of this transaction, AT&T
could extend U-verse to the remaining 24 million homes in its footprint. Free Press Petition at 38-40. See also
WGAW Petition at 15-16; ACM Feb. 24, 2015, Ex Parte Letter, Attachment at 4.
971
Free Press Petition at 30-31; Public Knowledge-ILSR Petition at 14; WGAW Reply at 2, 26-28. Free Press notes
that in AT&T’s Second Quarter 2014 SEC filing AT&T expects its peak investment for Project VIP to occur in
2014. See Free Press Petition at 30 n.63.
972
WGAW Reply at 30-32.
Federal Communications Commission FCC 15-94
126
video revenues subsidize broadband for AT&T.”
973
Further, some commenters claim that AT&T is
planning only an incremental FTTP upgrade to AT&T’s existing FTTN network.
974
323. ACM et al. also assert the proposed transaction actually reduces the broadband
investment incentives for the Applicants. Specifically, these commenters state that but for the transaction,
competition with cable would have driven AT&T to expand and aggressively market its U-verse
service.
975
They further state that AT&T would have less incentive to expand broadband capacity after
acquiring DIRECTV.
976
324. Some commenters claim that AT&T’s past claims and commitments in previous
transactions should make the Commission skeptical of the Applicants’ claims of increased FTTP
deployment.
977
Some commenters argue that the Commission should impose a condition that requires the
Applicants to abide by their FTTP commitment because AT&T has stated that it would stop investing in
fiber broadband because of potential Internet regulation.
978
WGAW proposes that the Commission adopt
an enforceable condition and require FTTP deployment within three years of the closing date of the
transaction.
979
Public Knowledge argues that the Commission should condition the transaction on AT&T
building out the planned pre-transaction FTTP deployment and the additional 2 million locations within
four years in order to ensure that AT&T builds the additional 2 million locations.
980
Public Knowledge-
ILSR argue that if future broadband deployment is a public interest benefit, then it must be paired with a
permanent commitment to upgrade, maintain, and invest in the network.
981
325. The Applicants respond that the expansion to an additional 2 million customer locations
is over and above what would be economically justified without the transaction and that claims by
commenters are not based on any reasonable analysis.
982
Further, the Applicants contend that capital
investments may vary from year to year due to many factors and that incremental capital investment to
expand FTTP deployment would begin in [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF.
INFO.] .
983
The Applicants also contend that AT&T’s current upgrade strategy focuses [BEGIN
HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] that AT&T [BEGIN HIGHLY CONF.
INFO.] [END HIGHLY CONF. INFO.] and therefore that the appropriate comparison in evaluating
FTTP deployment as a benefit is the number of additional locations with and without the transaction.
984
The Applicants acknowledge that, although an AT&T-DIRECTV bundle would free up more of the U-
973
Id. at 32.
974
See id. at 26; Free Press Petition at 30. Free Press also claims that AT&T’s marginal capital outlay on FTTP
would be relatively minor compared to its routine investment. See Free Press Petition at 30.
975
ACM et al. Petition at 7-8; ACM Feb. 24, 2015, Ex Parte Letter, Attachment at 4. ACM et al. state that AT&T’s
acquisition of DIRECTV would enable AT&T to acquire a video market share and MVPD market capacity from
DIRECTV rather than gaining it through investing in and expanding its own U-verse video/broadband service
throughout its ILEC footprint. ACM et al. Petition at 9.
976
ACM et al. Petition at 9-10.
977
Free Press Petition at 28-29; Public Knowledge-ILSR Petition at 14-16; Greenlining Petition at 8-9.
978
Public Knowledge Reply at 3-4; WGAW Reply at 34-35. See also infra ¶ 343.
979
WGAW Reply at 34.
980
Public Knowledge Reply at 2-4.
981
Public Knowledge-ILSR Petition at 15-16.
982
Joint Opposition at 23; Katz Reply Decl. ¶ 35.
983
Katz Reply Decl. ¶ 36.
984
Katz Decl. ¶ 126 n.219, ¶128 n.224; Katz Reply Decl. ¶ 39. The Applicants state that they are [BEGIN
HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] . See Katz Decl. ¶ 128 n.224.
Federal Communications Commission FCC 15-94
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verse line capacity for broadband service, the amount of freed up capacity is not significant and would not
reduce the combined entity’s incentive to deploy FTTP in favor of a slower technology.
985
The
Applicants also claim that the majority of incremental locations would not be upgrades from FTTN to
FTTP and that even locations being upgraded from FTTN to FTTP would see considerable performance
improvements.
986
The Applicants assert that [BEGIN HIGHLY CONF. INFO.] [END HIGHLY
CONF. INFO.] .
987
Finally, the Applicants claim that they met past transaction commitments and would
meet the commitments they have made in this transaction.
988
326. Discussion. Our analysis of the FIM indicates that the Applicants’ claim that the
transaction increases the profitability of FTTP buildout to an additional 2 million customer locations does
not account for the decrease in AT&T’s incentive to deploy FTTP due to the pass-through of
programming payment reductions to consumers, for example, as accounted for in the merger simulation
supplied by the Applicants.
989
In addition, we find that, relative to the baseline of approximately [BEGIN
HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] locations that the Applicants stated cleared
the hurdle absent the transaction, there is a greater incentive to reduce FTTP deployment to avoid
cannibalizing DIRECTV subscribers and revenues than the Applicants suggest. This incentive may not
be completely offset by factors that may incentivize the combined entity to increase FTTP deployment.
990
To address this potential transaction-specific harm, we impose a condition that requires the Applicants to
deploy a total of 12.5 million customer locations. This increased FTTP deployment also improves the
ability of alternative video distribution methods to replace the loss of a horizontal MVPD competitor.
1. Analysis of the FIM
327. The Applicants state that AT&T uses the FIM in its ordinary course of business to
evaluate the profitability of expanding FTTP wireline services under various financial and industry
assumptions.
991
The Applicants also claim that AT&T considers other factors when deciding to deploy
FTTP.
992
These include [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] .
993
985
FTTP Ex Parte Presentation at 2-3. The Applicants estimate that, at best, offloading video to satellite could
allow a [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] percent increase in the top speeds of
FTTN broadband services, which would not move the speed much closer to the higher speeds offered by rival
broadband providers. See id. at 3.
986
Katz Reply Decl. ¶¶ 38-40; AT&T Response to Sept. 9, 2014, Information Request at 219-220. See also
Application at 41-42; Stankey Decl. ¶ 46.
987
AT&T Response to Sept. 9, 2014, Information Request at 220-221. AT&T states that it will not use Connect
America Fund subsidies to deploy FTTP to the 2 million additional customer locations. AT&T June 1, 2015, Ex
Parte Letter at 3-4; AT&T June 8, 2015, Ex Parte Letter at 2. Further, AT&T as part of its broadband deployment
commitment in this transaction proposes in its deployment status reports to verify that locations built to fulfill the
commitment are not funded with Connect America Fund support. See AT&T June 1, 2015, Ex Parte Letter at 3-4;
AT&T June 8, 2015, Ex Parte Letter at 2.
988
Joint Opposition at 23 n.67; AT&T Response to Sept. 9, 2014, Information Request at 222-223.
989
See supra ¶ 103.
990
We agree with the Applicants’ claims that the majority of locations would not be upgrades from FTTN to FTTP.
See FIM Programs.
991
See Katz Decl. ¶ 127; Overview of AT&T FTTP Investment Model at 4; Katz Additional Detail ¶ 47; Joint
Opposition at 21. See also AT&T Response to Sept. 9, 2014, Information Request at 160-182. The FIM is
performed separately for each DA, with the results subsequently aggregated to include AT&T’s full footprint. See
Overview of AT&T FTTP Investment Model at 4-5; Katz Decl. ¶ 127. The FIM is run in two stages. In the first
stage, the FIM relies on a number of assumptions about prices, expenses, capital costs, penetration rates, churn,
taxes, and depreciation to calculate iteratively a number of financial metrics for each DA under both the current
delivery technology and the alternative FTTP technology. Next, the FIM determines which of the DAs exceed
AT&T’s internal rate of return (“IRR”). In the second stage, the FIM rolls up the DA-level analysis to the wire-
(continued….)
Federal Communications Commission FCC 15-94
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a. Modification of FIM
328. Dr. Katz modified the FIM to account for the potential increase in the profitability of
deploying FTTP after the transaction and focused on three primary factors: (1) improvements in the
quality of the AT&T video product; (2) programming payment reductions; and (3) internalization of lost
profits from those customers leaving DIRECTV and subscribing to AT&T’s FTTP video service (effects
of cannibalization).
994
Below, we evaluate each of Dr. Katz’s modifications and describe our further
adjustments.
Reduced Churn from Quality Improvements.
329. The Applicants argue that the transaction would improve the quality of AT&T’s video
product through enhancements in video content and improvements to the video interface.
995
Specifically,
the Applicants claim that AT&T would benefit from DIRECTV’s video engineering expertise and
resources as well as DIRECTV’s expertise in acquiring and assembling programming packages.
996
The
improvements in video quality potentially could make AT&T’s services (both video and broadband) more
attractive and consequently increase the profitability of deploying FTTP.
997
Dr. Katz incorporates these
effects in the FIM by reducing the churn rate of AT&T’s bundled U-verse video product.
998
Further, Dr.
Katz contends that the transaction results in potential benefits of bundling FTTP and FTTN broadband
with an improved video product, and therefore it reduces the churn rates for the underlying FTTP and
FTTN broadband services (the technologies over which AT&T distributes its video service).
999
330. With respect to video churn, Dr. Katz employs two separate estimates of video-churn
reductions in the post-transaction FIM analysis: a 90 basis point reduction that would reduce AT&T’s
churn rate to [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] and a more
conservative reduction of 50 basis points.
1000
Although the Applicants generally claim that the transaction
(Continued from previous page)
center level to account for the additional capital costs of upgrading a wire center to FTTP capability, and then the
FIM determines whether the wire center exceeds the wire center IRR. For a DA to be considered a profitable
investment, it must clear both IRR hurdles. See Katz Decl. ¶ 127; Overview of AT&T FTTP Investment Model at
4-5; Joint Opposition at 21. For the baseline pre-transaction case submitted by the Applicants, the FIM identifies
approximately [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] locations that would be
considered profitable for FTTP expansion. See FIM Programs; supra n.965.
992
See Overview of AT&T FTTP Investment Model at 5 n.8; Katz Additional Detail ¶ 47 n.45.
993
See Overview of AT&T FTTP Investment Model at 5 n.8.
994
See Katz Decl. ¶¶ 126, 129-132; Katz Additional Detail ¶ 48.
995
Application at 29-31; Katz Decl. ¶¶ 122-124, 126, 132; Stankey Decl. ¶¶ 19-21, 34; Katz Additional Detail ¶ 52.
996
See Application 30-31; Stankey Decl. ¶¶ 18-20.
997
See Katz Decl. ¶ 126; Katz Additional Detail ¶¶ 52-53. The improved quality of the U-verse video product may
also improve the profitability of AT&T’s FTTN service, which may reduce the incremental profitability of
deploying FTTP in areas where FTTN is available. The FIM as modified by Dr. Katz [BEGIN HIGHLY CONF.
INFO.] [END HIGHLY CONF. INFO.] . See Katz Additional Detail ¶53 n.56.
998
See Katz Decl. ¶ 132; Katz Additional Detail ¶ 53.
999
See Katz Decl. ¶ 132 n.232; Katz Additional Detail ¶ 54. Dr. Katz chooses to model these effects through churn
reductions. For the FTTN and FTTP churn reductions, Dr. Katz notes that [BEGIN HIGHLY CONF. INFO.]
[END HIGHLY CONF. INFO.] . See Katz Additional Detail ¶ 55. See also AT&T Response to Sept. 9, 2014,
Information Request at 191-193.
1000
See Katz Decl. ¶ 132; Katz Additional Detail ¶ 53. Therefore, Dr. Katz assumes that AT&T’s monthly video
churn would be between approximately [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.]
percent post-transaction. See Katz Additional Detail ¶ 53. Dr. Katz also assumes that DIRECTV’s average churn
(continued….)
Federal Communications Commission FCC 15-94
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would lead to enhancements in video content and the user interface, the Applicants do not value or
quantify these enhancements or provide persuasive evidence that any such improvements would increase
customer retention and subscribers.
1001
However, we recognize there may be some reduction in churn
from certain enhancements and the potential addition of NFL Sunday Ticket.
1002
To allow for some
reduction in churn in our adjustments, but without a basis to reduce the churn to the [BEGIN HIGHLY
CONF. INFO.] [END HIGHLY CONF. INFO.] , we employ the smaller 50 basis point reduction used
by the Applicants.
331. Further, to capture the effect of bundling broadband with an improved video product, Dr.
Katz reduced FTTP and FTTN broadband churn in the FIM by 25 basis points each.
1003
The Applicants
do not provide any underlying rationale for reducing the FIM churn by 25 basis points. There is no
evidence in our record that provides a different reduction, and because we acknowledge that there is some
benefit to the improved bundle, we use the 25 basis point reduction in our analysis.
Programming Payment Reductions.
332. The Applicants claim that the reduction of their programming payments would improve
the business case for additional FTTP deployment.
1004
The FIM accounts for video programming
payments by building in an overall, monthly recurring expense for video service.
1005
Dr. Katz models the
reduced programming payment effect in the FIM by reducing this recurring expense associated with video
service.
1006
Dr. Katz relied on projections of programming payments from AT&T’s Corporate Financial
Planning department to multiply the projected programming payments by the estimated percentage
reduction in programming payments each year.
1007
He then subtracted that amount from the monthly
recurring video expense in the FIM.
1008
(Continued from previous page)
would decrease to 1.25 percent post-transaction because the combined entity would offer an enhanced fully
integrated bundle. See id.
1001
See supra Section XI.C.3. (discussion of claimed benefits to video services).
1002
See ATT-FCC-01018530, [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] ; ATT-FCC-
01681777, [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] .
1003
Dr. Katz lowers FTTP churn from about [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.]
percent and FTTN churn from about [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.]
percent. See Katz Additional Detail ¶ 54 n.59.
1004
See Application at 41; Stankey Decl. ¶ 45; Katz Decl. ¶¶ 126, 131; Katz Additional Detail ¶ 48. The
programming payment reduction is based on AT&T’s programming payments being reduced to [BEGIN HIGHLY
CONF. INFO.] [END HIGHLY CONF. INFO.] . See AT&T Response to Sept. 9, 2014, Information Request,
Exhibit 69.c.2, tab “Content Cost (output).” See also supra ¶ 284.
1005
See Katz Additional Detail ¶ 50.
1006
Id.
1007
See id. ¶ 50 n.50; FIM Programs.
1008
See Katz Additional Detail ¶ 50; FIM Programs. We note that the programming payment estimates that Dr. Katz
uses in the FIM are lower than the estimated pre-transaction programming payments used elsewhere by the
Applicants to establish that the transaction would result in a [BEGIN HIGHLY CONF. INFO.] [END HIGHLY
CONF. INFO.] percent reduction in programming payments overall. This inconsistency in baseline programming
payments results in an understatement of the level of programming payments in both the no-transaction and post-
transaction scenarios in the FIM for the years 2015 through 2024. Specifically, in evaluating the transaction, the
Applicants project that [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] . See AT&T
Response to Sept. 9, 2014, Information Request, Exhibit 69.c.2. Using these baseline projections, they estimate a
[BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] . However, the FIM relies on a different set
of AT&T programming payment projections [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.]
. See Katz Additional Detail ¶ 50 n.50. Nonetheless, because [BEGIN HIGHLY CONF. INFO.] [END
(continued….)
Federal Communications Commission FCC 15-94
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333. In making adjustments to programming payments, Dr. Katz does not account for the
portion of the programming payment reductions that the combined entity would pass on to consumers.
This omission is very significant; the merger simulation submitted by the Applicants indicates that
[BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] percent of the programming
payment reductions would be passed on to consumers.
1009
For the FIM analysis, Dr. Katz assumes that
the full amount of the programming payment reductions would be applied to the profitability of additional
FTTP deployment.
1010
334. To understand the potential impact of programming payment reduction pass-through, we
evaluate the FIM under two alternative scenarios of pass-through.
1011
First, we apply the full [BEGIN
HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] percent programming payment reduction to
the incentives to build out FTTP and assume none of the reduction is passed through in the form of lower
U-verse video prices.
1012
Second, in the absence of any evidence that pass-throughs in areas with new
FTTP deployment would differ from those in the areas covered by the merger simulation, we apply the
same full programming payment reduction but assume the prices on U-verse video fall by [BEGIN
HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] percent of the reduction.
1013
In order to
implement this second scenario, we reduce the Average Revenue Per User (“ARPU”) on FTTP and FTTN
U-verse video products by [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.]
percent of the applied programming payment reduction, which is the pass-through rate in the BH
Simulation.
1014
This ensures that we do not double count the programming payment reductions by
allocating as a benefit both the consumer pass-through and the incentives to build out FTTP.
(Continued from previous page)
HIGHLY CONF. INFO.] are part of the ordinary course of business FIM, we decline to make any changes based
on these programming payment reduction discrepancies. However, based on our sensitivity analysis, such a change
in the cost of providing video service relative to the original AT&T and Dr. Katz modification models, in both the
“no-transaction” and “post-transaction” scenarios, reduces the number of FTTP locations that would be deemed
profitable using the FIM.
1009
See also supra ¶ 103.
1010
See Katz Decl. ¶ 131; Katz Additional Detail ¶¶ 49-50; FIM Programs.
1011
We tested the sensitivity of the pass-through assumption using pass-through rates ranging from 20 to 100
percent. The difference, relative to the baseline model of approximately [BEGIN HIGHLY CONF. INFO.] [END
HIGHLY CONF. INFO.] locations, ranges from [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF.
INFO.] additional locations for a 20 percent pass-through to approximately [BEGIN HIGHLY CONF. INFO.]
[END HIGHLY CONF. INFO.] additional locations for a 100 percent pass-through. The sensitivity testing finds
that reducing the pass-through results in fewer locations that meet the internal rate of return.
1012
See supra ¶¶ 96-102.
1013
We also adopt the full [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] percent pass-
through from the BH Simulation in the FIM because, as a practical matter, it is more straightforward to adjust pass-
through rates in the FIM than in the BH Simulation, which would require adjusting the assumed nested-logit demand
model. See supra ¶ 103 & n.289. As we note in our competitive effects analysis, we recognize that AT&T may
pass through less of the programming payment reduction to consumers than the BH Simulation predicts and
potentially apply more of those reductions to FTTP deployment. See supra ¶ 290.
1014
Alternatively, the pass-through could be modeled by maintaining the original ARPU levels in the FIM but
subtracting a smaller portion of the programming payment reductions from the [BEGIN HIGHLY CONF. INFO.]
[END HIGHLY CONF. INFO.] of video service. We performed the analysis under each of these methods and
found the results to be nearly identical. Consequently, in the discussion that follows, we report only the results from
the specifications that adjust pass-through with adjustments to ARPU. We also note the likelihood that the
combined entity could choose some other method of modeling the pass-through to consumers in the FIM after the
transaction.
Federal Communications Commission FCC 15-94
131
Cannibalization Effects.
335. We find that the transaction may reduce the incentives to deploy FTTP services because
FTTP, by making U-verse video more attractive, would likely attract customers (and revenues) away from
DIRECTV, which creates lost revenues that would be internalized by AT&T post-transaction.
1015
The
extent to which consumers are attracted away from DIRECTV to AT&T video service after FTTP
deployment represents an opportunity cost to the combined entity because increases in profits on AT&T’s
FTTP services are partially offset by losses in profits on DIRECTV services.
1016
We conclude that this is
a transaction-specific harm because post-transaction it could be profitable for the Applicants to reduce
output below pre-transaction levels as the combined entity captures the increase in profits that DIRECTV
would obtain absent that buildout.
336. Dr. Katz acknowledges this cannibalization effect in his analysis.
1017
To incorporate the
potential cannibalization of DIRECTV subscribers from the deployment of FTTP, Dr. Katz increases the
[BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] of each new AT&T video
subscriber by an amount equal to the lifetime value of a DIRECTV subscriber, multiplied by the projected
migration rate of DIRECTV subscribers to AT&T FTTP video services.
1018
We find that the estimated
lifetime value used by the Applicants for DIRECTV may be too low, and as a consequence the Applicants
underestimate the cost of cannibalization.
1019
Although we do not change the way Dr. Katz modeled the
cannibalization assumption in our analysis, we adjusted the lifetime value of DIRECTV customers to the
2014 profit margins, resulting in an increased opportunity cost of cannibalization of approximately 15
percent, which, in turn, increases the effect of cannibalization on the number of profitable FTTP locations
in the FIM.
1020
1015
Katz Additional Detail ¶ 56; Katz Decl. ¶ 126.
1016
Id. This situation is essentially the horizontal harm identified in the BH Simulation – that AT&T would reduce
its output and raise its price because it would capture profits from the consequent boosts in demand for DIRECTV’s
video service. See supra ¶¶ 59-62, 83-84, 127-133; Appendix C Section III.A, Section V.C.2.
1017
Katz Decl. ¶ 129; Katz Additional Detail ¶¶ 56-65. Also, Dr. Katz modifies the FIM to account for the increased
opportunity costs of cannibalization of current AT&T IPDSL and DSL subscribers after the transaction. The
baseline FIM does not account for the potential increase in attractiveness of fully integrated bundles of AT&T
IPDSL and DSL broadband with DIRECTV video. To capture this potential increase in the profitability of current
IPDSL and DSL subscribers, Dr. Katz reduces the churn rates of both of these services by 25 basis points from the
baseline values. We do not dispute Dr. Katz’s IPDSL/DSL modification, and we use this churn reduction in our
own modifications of the FIM. See Katz Decl. ¶ 130; Katz Additional Detail ¶¶ 66-68.
1018
See Katz Additional Detail ¶¶ 63-64; Katz Decl. ¶ 129. The appropriate migration rate to capture the movement
of DIRECTV subscribers to AT&T video services is the AT&T-to-DIRECTV diversion rate. The diversion rate
captures the following: the fraction of new AT&T video subscribers that come from DIRECTV when AT&T
deploys FTTP in a specific area. See Katz Additional Detail ¶ 57. Dr. Katz runs the FIM under estimates of the
lifetime value of a DIRECTV subscriber for the time period [BEGIN HIGHLY CONF. INFO.] [END HIGHLY
CONF. INFO.] . The lifetime value estimate of a DIRECTV subscriber ranges from [BEGIN HIGHLY CONF.
INFO.] [END HIGHLY CONF. INFO.] in 2024. See id. ¶ 61, Table 1.
1019
Katz Additional Detail ¶ 61. The Applicants base their estimates on a 2012 calculation of DIRECTV’s
subscriber lifetime value, which is based on, among other inputs, ARPU, margin, and customer acquisition costs.
See id. ¶61 & n.65. However, DIRECTV’s margins have grown significantly since 2012, leading to an increase in
the lifetime value estimates of their subscribers. See DIRECTV, Quarterly Results: 2014 DIRECTV Quarterly
Reports (First Quarter – Fourth Quarter), http://investor.directv.com/financial-information/quarterly-
results/default.aspx (visited June 24, 2015).
1020
The opportunity cost of cannibalization when the lifetime value of DIRECTV customers is updated to 2014
levels is approximately [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] per new AT&T
subscriber, relative to the [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] cost assumed by
Dr. Katz. See Katz Additional Detail Table 1.
Federal Communications Commission FCC 15-94
132
337. Dr. Katz also uses two diversion rates, [BEGIN HIGHLY CONF. INFO.] [END
HIGHLY CONF. INFO.] percent, to adjust the lifetime value to account for potential
cannibalization.
1021
The higher diversion rate is based on relative video shares between AT&T and
DIRECTV.
1022
Dr. Katz claims that this estimate is conservative because it is unlikely that AT&T would
encourage DIRECTV customers to switch to AT&T.
1023
To account for this variability, Dr. Katz reduces
the diversion by five percentage points.
1024
Dr. Katz states that these two diversion rates are consistent
with the diversion rates based on results from his merger simulation.
1025
The Modified Simulation
calculates a diversion rate from AT&T to DIRECTV of just over [BEGIN HIGHLY CONF. INFO.]
[END HIGHLY CONF. INFO.] percent.
1026
Therefore, to maintain consistency with that analysis, we
use the [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] percent diversion rate in
our modified version of the FIM.
1027
b. Results from Modifications
338. As noted above, we estimate the FIM under the assumption of no pass-through of
programming payments as well as an [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF.
INFO.] percent pass-through found in the merger simulation. We also report the post-transaction results
assuming zero opportunity cost of cannibalization in order to quantify the extent to which the
cannibalization effect reduces FTTP deployment incentives.
1028
In all, we have reviewed three post-
transaction scenarios: (1) the Katz version with investment of all programming payment reductions in
FTTP deployment (“Katz Full FIM”); (2) a version with U-verse video ARPU reduced to account for
pass-through of programming payment reductions to consumers and cannibalization (“Reduced
Investment FIM”); and (3) a version with pass-through and no cannibalization (“No Cannibalization
FIM”).
1021
See Katz Decl. ¶ 129; Katz Additional Detail ¶ 60, Table 1.
1022
Katz Decl. ¶ 129; Katz Additional Detail ¶ 58.
1023
Katz Decl. ¶ 129 n.226; Katz Additional Detail ¶ 59.
1024
Katz Decl. ¶ 129; Katz Additional Detail ¶ 60.
1025
Katz Additional Detail ¶ 60.
1026
This diversion rate is generated as output by the Modified Simulation.
1027
We tested the sensitivity of the diversion rate assumption using diversion rates of [BEGIN HIGHLY CONF.
INFO.] [END HIGHLY CONF. INFO.] percent. The difference, relative to the baseline model of approximately
[BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] customer locations, ranges from
approximately [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] customer locations for a
[BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] percent diversion rate to approximately
[BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] for a [BEGIN HIGHLY CONF. INFO.]
[END HIGHLY CONF. INFO.] percent diversion rate. The results from the sensitivity testing indicate that the
cannibalization effect increases with an increase in the diversion rate, leading to fewer locations that clear the
profitability hurdle in the FIM.
1028
Our analysis of Dr. Katz’s modifications finds that there is some nonlinearity in the interactions between the
simultaneously adjusted assumptions; however, the individual effects can be approximated in an additive manner.
For example, under the scenario of [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] percent
investment of the reduction in programming payments, a 90 basis point decrease in video churn, a 25 basis point
decrease in broadband churn, and cannibalization under the assumption of [BEGIN HIGHLY CONF. INFO.]
[END HIGHLY CONF. INFO.] percent diversion, the full model predicts an increase of approximately [BEGIN
HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] customer locations that clear the profitability hurdle.
By comparison, simply adding the individual impacts of these changes in assumptions found in Table 1, below,
results in an increase of slightly more than [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.]
locations that clear the hurdle.
Federal Communications Commission FCC 15-94
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Profitability With and Without Consumer Pass-through of Programming Payment Reductions.
339. In comparing the results of the Katz Full FIM (see Table below) with the results from the
Reduced Investment FIM, it is evident that the pass-through of the programming payment reductions has
a significant impact on FTTP investment incentives. Specifically, the Reduced Investment FIM (pass-
through) projects [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] of fewer
locations that would be profitable for FTTP deployment post-transaction compared to the Katz Full FIM
(no pass-through) and fewer locations than were considered profitable absent the transaction.
1029
340. As discussed above, we find it likely that some of the programming payment reductions
would be passed on to consumers,
1030
although the record does not establish the exact pass-through rate.
In the Reduced Investment FIM, which considers pass-through of programming payment reductions to
consumers, we find a significant reduction in the number of locations that would be profitable for
investment. Therefore, we find it possible that the FIM would find fewer profitable FTTP customer
locations than claimed by the Applicants as a result of the transaction, and we note that the incremental
effect of the transaction on deployment may be negative given a high enough pass-through.
Magnitude of Cannibalization Effect.
341. The results from the No Cannibalization FIM indicate that cannibalization of DIRECTV
subscribers and revenues has a significant negative effect on AT&T’s FTTP deployment incentives. The
number of locations clearing the profitability hurdle is approximately [BEGIN HIGHLY CONF.
INFO.] [END HIGHLY CONF. INFO.] locations are profitable. The combined results indicate the
impact of cannibalization extends to almost [BEGIN HIGHLY CONF. INFO.] [END HIGHLY
CONF. INFO.] locations.
Table 1
[BEGIN HIGHLY CONF. INFO.]
[END HIGHLY CONF. INFO.]
2. Non-FIM Factors
342. The Applicants acknowledge that the decision to deploy FTTP services is [BEGIN
HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] .
1031
Further, the Applicants claim that
competition from Cable DOCSIS 3.1 and overbuilders such as Google Fiber affects FTTP deployment
decisions.
1032
Although the Applicants claim that the FIM is used to evaluate the profitability of FTTP
deployment in the normal course of business, we are unable to determine, based on the record before us,
the weight relative to other factors that AT&T would consider in its investment decision to deploy FTTP
to additional locations.
1033
1029
The Reduced Investment FIM projects [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] .
The cannibalization effect tends to dominate the post-transaction change in FTTP profitability predicted by the FIM
when video ARPU is reduced by the full [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.]
percent.
1030
See supra ¶ 290.
1031
Overview of AT&T FTTP Investment Model at 5 n.8.
1032
FTTP Ex Parte Presentation at 4-5, 7; Application at 58-61; Katz Rely Decl. ¶ 39 n.77; Lee Decl. ¶¶ 24, 31-37.
1033
See supra ¶ 327.
Federal Communications Commission FCC 15-94
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343. Indeed, on November 12, 2014, Randall Stephenson, AT&T’s CEO, announced that
AT&T would pause its investments to bring fiber connections to 100 cities until the Commission resolved
issues related to the Open Internet proceeding.
1034
Mr. Stephenson is quoted as saying, “We can’t go out
and invest that kind of money deploying fiber to 100 cities not knowing under what rules those
investments will be governed.”
1035
On November 14, 2014, the Commission sent a letter to AT&T
requesting an explanation of AT&T’s statement.
1036
In response, AT&T stated that it is not limiting its
FTTP deployment to 2 million homes and that, in fact, it plans to complete its previously announced
FTTP expansion in 25 major metropolitan areas nationwide.
1037
AT&T stated, however, that the
uncertainty regarding regulatory treatment of broadband “makes it prudent to pause consideration of any
further investments – beyond those discussed … AT&T simply cannot evaluate additional investment
beyond its existing commitments until the regulatory treatment of broadband service is clarified.”
1038
3. Conclusion
344. We find that the transaction harms the public interest to the extent that, compared to a
non-merger, it creates a disincentive to build out FTTP due to the cannibalization effect from a loss of
DIRECTV subscribers. This cannibalization effect is potentially larger than other factors that would
incentivize AT&T to increase FTTP deployment as a result of the transaction. To address this
transaction-specific harm, we impose a condition to preserve the pre-transaction FTTP buildout plans,
future projections, and the transaction-specific incremental commitment.
1039
1034
See Brian Fung, AT&T is Putting its Fiber Deployment on Ice Over Net Neutrality – For Now, WASH. POST,
Nov. 12, 2014, available at http://www.washingtonpost.com/blogs/the-switch/wp/2014/11/12/att-is-putting-its-fiber-
deployment-on-ice-over-net-neutrality-for-now/ (visited June 24, 2015) (“Fung, AT&T Putting Fiber Deployment on
Ice”). In response to a Commission inquiry about this statement, AT&T affirmed that it is not limiting its FTTP
deployment to 2 million homes, and in fact, it plans to complete its previously announced FTTP expansion in 25
major metropolitan areas nationwide. See AT&T Response to Nov. 14, 2014, Information Request at 2.
1035
See Fung, AT&T Putting Fiber Deployment on Ice.
1036
Nov. 14, 2014, Information Request to AT&T.
1037
AT&T Response to Nov. 14, 2014, Information Request at 1-2. AT&T had previously announced its plan to
expand its GigaPower network in Raleigh-Durham, N.C., and Winston-Salem, N.C., and on April 21, 2014, it
announced plans to expand its ultra-fast fiber network (GigaPower) to up to 100 candidate cities and municipalities
nationwide, including 21 new major metropolitan areas and adjoining communities (Atlanta; Augusta, Ga.;
Charlotte, N.C.; Chicago; Cleveland; Fort Worth, Texas; Fort Lauderdale, Fla.; Greensboro, N.C.; Houston;
Jacksonville, Fla.; Kansas City; Los Angeles; Miami; Nashville, Tenn.; Oakland, Calif.; Orlando, Fla.; San Antonio;
San Diego; St. Louis; San Francisco; and San Jose, Calif.). AT&T
NEWSROOM, AT&T Eyes 100 U.S. Cities for
Ultra-Fast Fiber Network. See also Application at 11-12. Currently, GigaPower is available in the following
metropolitan areas and in some adjoining communities – Austin, Texas; Atlanta; Chicago; Dallas; Fort Worth,
Texas; Houston; Kansas City; Raleigh-Durham, N.C.; San Jose, Calif.; and Winston-Salem, N.C. See AT&T Inc.,
U-Verse with AT&T GigaPower, http://www.att.com/att/gigapowercities/ (visited June 24, 2015).
1038
AT&T Response to Nov. 14, 2014, Information Request at 2 (emphasis added). See also FTTP Ex Parte
Presentation at 5-6.
1039
The 12.5 million FTTP customer locations that will be deployed as a result of this condition include:
(1) [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] locations were approved before the
expansion plans, and [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] were newly approved
as part of the expansion to 25 metropolitan area locations; (2) [BEGIN HIGHLY CONF. INFO.] [END HIGHLY
CONF. INFO.] that were previously determined to be profitable but were not funded as part of the GigaPower
expansion; (3) 2 million additional locations that the Applicants determined were profitable as a result of this
transaction; and (4) an additional [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] greenfield
locations to which AT&T estimates it would deploy FTTP during the four year FTTP deployment commitment
period.
Federal Communications Commission FCC 15-94
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345. Finally, we note that the deployment of FTTP may have a positive effect on broadband
competition. At least one third-party report, which estimated the differences in cable market share
depending on competitors’ technology, found that cable market share declines by approximately 40
percent when facing competition from FTTP instead of DSL.
1040
In addition, our own analysis of data
submitted in the record indicates that Comcast’s prices are [BEGIN HIGHLY CONF. INFO.] [END
HIGHLY CONF. INFO.] in areas where FTTP has been deployed compared to where DSL has been
deployed.
1041
These price differences for Comcast broadband plans for speeds equal to or greater than 25
Mbps range from [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] per month.
1042
G. Evaluation of Applicants’ Claimed Fixed Wireless Local Loop Benefits
1. Introduction
346. The Applicants also claim that the proposed transaction would benefit consumers by
enabling AT&T to deploy fixed wireless broadband services in the local loop (“Fixed Wireless Local
Loop” service or “FWLL”) to 13 million households, in largely rural areas across the United States.
1043
The Applicants have committed to complete the FWLL deployment within four years of the close of the
transaction.
1044
The Applicants state that the proposed FWLL service would offer specific coverage,
speeds, and capacity and would be competitive both in areas with and without existing terrestrial
broadband service, either as a standalone broadband service or as part of a bundle with wireless, video,
and VoIP.
1045
The Applicants also state that FWLL would allow each of the Applicants to offer integrated
bundles that combine FWLL with DIRECTV video.
1046
They assert that the FWLL buildout is possible
only because of synergies that result from the transaction.
1047
347. We find that the Applicants have not provided sufficient information in the record to
enable us to determine whether any or all of the claimed benefits of the proposed FWLL are a direct result
of the transaction. In addition, without challenging the assertion that FWLL deployment may provide
1040
CRAIG MOFFETT ET AL., MOFFETT NATHANSON RESEARCH, U.S. CABLE AND U.S. TELECOM: THE BROADBAND
REPORT, 24, Exhibit 21 (July 8, 2014) (“MOFFETT NATHANSON BROADBAND REPORT”). The Moffett Nathanson
Broadband Report estimates that Cable’s Share facing DSL is 80 percent, IPDSL is 60 percent, FTTN is 55 percent
and FTTH is 40 percent. See M
OFFETT NATHANSON BROADBAND REPORT at 24, Exhibit 21.
1041
Comcast Response to Jan. 8, 2015, Information Request.
1042
To derive Comcast prices when faced with FTTP or DSL service, we regressed Comcast’s monthly recurring
revenue of a plan in a zip code on the percent of households in the zip code with access to competing broadband
technologies and zip code demographic variables. We also included a piecewise linear spline for the percent of
Comcast homes facing FTTP competition in the zip code and controlled for plan and month-year fixed effects.
Reported price differences are based on the predicted prices from the regression for Comcast’s broadband plans
predicted as if Comcast faced either Verizon FiOS or Verizon DSL competition at every household in the zip code.
1043
Application at 5, 44-45; Stankey Decl. ¶¶ 36, 48, 53. AT&T initially described the potential reach of FWLL as
13 million “customer locations,” which AT&T never defined. However, AT&T later determined that the correct
term should be “households.” AT&T nonetheless continued to use the terms interchangeably. For the purposes of
our analysis, we use the term “households.” See Appendix D, Analysis of AT&T’s FWLL Coverage and
Performance Claims and Claim Rural Benefits, n.1 (“Appendix D”).
1044
Application at 5, 45.
1045
See id. at 43-45; Stankey Decl. ¶¶ 48-49, 53.
1046
Application at 44-45; Stankey Decl. ¶ 36; ATT-FCC-02210352, [BEGIN HIGHLY CONF. INFO.] [END
HIGHLY CONF. INFO.] .
1047
See, e.g., Application at 43-45 (linking deployment of FWLL to rural customers to the financial attractiveness of
deploying FWLL); Stankey Decl. ¶¶ 50-52 (stating that the transaction would allow AT&T to [BEGIN HIGHLY
CONF. INFO.] [END HIGHLY CONF. INFO.] ). See also infra Section XI.G.5.
Federal Communications Commission FCC 15-94
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some benefits to consumers that have no access to terrestrial broadband or only one such option, the
record establishes that they may be smaller than the Applicants have claimed.
2. FWLL Coverage and Performance Claims
348. Positions of the Parties. The Applicants assert that, post-transaction, the FWLL service
would offer specific coverage and speeds in areas outside AT&T’s wireline footprint (or “franchise”) and
in “areas within that footprint that currently do not receive the U-verse broadband and video bundle.”
1048
349. The FWLL would use fixed LTE technology.
1049
The Applicants claim that it would
provide 15-20 Mbps and perform “as well as wireline broadband services advertised today.”
1050
The
FWLL service would be deployed in dedicated licensed spectrum already part of AT&T’s holdings on
[BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] in locations that meet highly
specific deployment criteria.
1051
Thus, deployment would occur on a cell-by-cell basis with the result
that, rather than uniform coverage over large areas, coverage would be non-contiguous in many areas.
Each cell site would use “the same basic equipment, spectrum and technological configuration”
1052
and
performance would be enhanced with professionally installed outdoor high-gain antennas (“HGAs”).
1053
350. Discussion. We find limited support for the Applicants’ coverage and performance
claims in the record. For example, coverage characteristics can differ between technologies and
spectrum, and a network deployment would typically be closely engineered to the propagation
characteristics of the spectrum being used. Here, however, the Applicants plan to deploy FWLL [BEGIN
HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] that is uncommon and is not generally in
use. They plan to use HGAs to compensate for any differences in coverage that result from using the
FWLL spectrum.
1054
351. To support these claims, the Applicants initially submitted lab data based on the existing
service that suggested the coverage of the FWLL deployment would not be as extensive as the Applicants
claimed. In response to Commission staff inquiries, the Applicants then submitted additional results from
four geographically disparate FWLL field trials using a frequency band near the band they plan to use for
FWLL.
1055
While based on a different technology and using existing infrastructure, these data do show
1048
Application at 5.
1049
LTE is an acronym for Long Term Evolution, which is the latest mobile network technology standard set by the
3rd Generation Partnership Project (“3GPP”). See LTE Encyclopedia,
https://sites.google.com/site/lteencyclopedia/home (visited June 17, 2015). See also 3GPP, The Mobile Broadband
Standard, Technologies, Keywords & Acronyms, LTE, http://www.3gpp.org/technologies/keywords-acronyms/98-lte
(visited June 17, 2015) (providing an overview of LTE). LTE is typically used in so-called “4G” networks.
1050
Application at 5, 43; Stankey Decl. ¶ 49; AT&T Sept. 9, 2014, Response to Information Request at 194 (stating
that “even customers at the cell edge will experience speeds greater than 10 Mbps more than 90 percent of the
time”).
1051
AT&T’s deployment criteria consist of four factors, each based on considerations such as location, spectrum
availability, and the number of potential subscribers. See Appendix D ¶ 18.
1052
AT&T Response to Sept. 9, 2014, Information Request at 194.
1053
See id. at 194, 197, 202; AT&T Response to Dec. 15, 2014, Information Request, Exhibit 4.1 at 26; Appendix D
¶¶ 9, 20.
1054
See AT&T Response to Sept. 9, 2014, Information Request at 197, 202; AT&T Response to Dec. 15, 2014,
Information Request, Exhibit 4.1 at 26; Appendix D ¶¶ 9, 20.
1055
See AT&T Response to Dec. 15, 2014, Information Request, Exhibit 4.2 at 4, 9, Exhibit 4.4 at 23, 24, 47-48,
Supplemental Exhibit 58.b.1, FWLL coverage maps. See also AT&T Response to Sept. 9, 2014, Information
Request at 3-4, 197 (describing lab modeling); AT&T Response to Dec. 15, 2014, Information Request at 5 (stating
that AT&T has conducted “further lab modeling” since its first predictions). See generally Appendix D ¶¶ 33-34.
Federal Communications Commission FCC 15-94
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that, when compensated by other factors, the actual FWLL network coverage could be comparable to the
lab-generated coverage predictions, as the Applicants have claimed. However, while these data are
relevant and support the Applicants’ claims, this is a small sample in the context of a large and
geographically diverse network deployment.
1056
352. In addition, the record suggests that the Applicants have proposed a FWLL network
design based on several assumptions that may not be realized in the actual deployed network.
Specifically, Applicants have assumed that: (1) subscriber usage patterns would be consistent with a
significantly lower speed tier than the Applicants propose to offer on the FWLL service; (2) they can
[BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] .
1057
The Applicants provide no
evidence to explain how they would address practical, technical issues affecting performance that could
plausibly arise as a result of differences between their assumptions and actual deployment and operating
conditions.
353. Of particular concern is the lack of evidence to explain how the Applicants would
overcome network performance challenges that could result from the difference between the conservative
parameters chosen for the lab data submitted to support the FWLL performance and the more optimistic
parameters at which the Applicants propose to market and operate FWLL. Similar concerns result from
the evidence on FWLL capacity. The Applicants assumed that network capacity would [BEGIN
HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] if certain technical features are
incorporated during the FWLL deployment, but their own analysis does not appear to support this
result.
1058
In addition, the Applicants’ analysis shows that these technical features may not be realized for
all sites because [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] .
1059
354. Network challenges could be mitigated by using additional spectrum or increased
cell-site deployment. However, there is no evidence in the record that explains how AT&T might expand
FWLL network capacity. Any required expansion, either through use of additional spectrum or increased
cell count would increase both capital and operating expense.
1060
In the absence of quantifiable financial
data that support a different conclusion, we believe this expense could have a negative impact on the
financial viability of the FWLL business model.
1061
3. Claims that FWLL Would Benefit 13 Million Rural Customers
355. Positions of the Parties. The Applicants claim that post-transaction the FWLL
deployment would reach 13 million mostly rural households.
1062
AT&T claims that of these, [BEGIN
HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] would be rural, in-franchise households
that do not have access to terrestrial broadband service.
1063
The Applicants elsewhere claim that within
1056
See AT&T Response to Sept. 9, 2014, Information Request at 4; AT&T Response to Dec. 15, 2014, Information
Request at 6.
1057
See AT&T Response to Sept. 9, 2014, Information Request at 3, 200, 202, 235, Exhibit 58.g.2 at 8; AT&T
Response to Dec. 15, 2014, Information Request, Exhibit 6.1 at 4.
1058
See AT&T Response to Sept. 9, 2014, Information Request, Exhibit 58.i.1 at 13.
1059
See ATT-FCC-02208834, [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] .
1060
See generally, AT&T Response to Sept. 9, 2014, Information Request, Exhibit 59.a.1 (showing net present
values for various numerical ranges of subscribers), Exhibit 59.l.1 (showing lifetime value (“LTV”) calculations for
FWLL).
1061
See AT&T Response to Sept. 9, 2014, Information Request, Exhibit 58.f.6 at 4.
1062
See supra n.1043.
1063
See ATT-FCC-02210352, [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] . Specifically,
AT&T estimates that there are [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] households in
no-broadband or “IP red” territories, of which [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF.
(continued….)
Federal Communications Commission FCC 15-94
138
the planned FWLL deployment area, almost 20 percent of the 13 million households (i.e., 2.6 million
households) have no access to terrestrial broadband and an additional 27 percent of the 13 million
households (i.e., 3.5 million households) have only one terrestrial option today, “and in most instances
that single option is DSL or a relatively slow cable modem service.”
1064
356. Discussion. The record provides no basis to conclude either that AT&T would deploy
FWLL to 13 million “largely rural” homes or that the Applicants have used the proper methodology to
estimate how many of these homes are unserved by terrestrial broadband providers or have only one
terrestrial broadband option.
1065
AT&T’s rural coverage estimates are based on its own rural population
density assumptions that we do not accept as appropriate. Applying the Commission’s standard
“guideline” definition of “rural”
1066
and broadband deployment estimates from the National Broadband
Map data (commonly called SBI Data),
1067
the Commission staff estimates that approximately 4.5 million
rural households would be within AT&T’s proposed FWLL deployment area.
1068
This estimate is
substantially fewer than half of AT&T’s claim of 13 million “largely rural” households.
357. Using the Commission’s definition of rural, there are many fewer rural households with
zero or one terrestrial broadband provider than AT&T claims in the FWLL deployment areas. According
to AT&T, 2.6 million households within the projected FWLL deployment have no existing terrestrial
broadband service.
1069
Using the census block level SBI data for the projected FWLL deployment area,
1.5 million total households, of which 1.0 million are rural, are estimated to have no terrestrial broadband
option.
1070
Two million rural households would have only one terrestrial broadband option.
1071
These
numbers are significantly lower than AT&T’s estimates.
4. Competitive Standalone FWLL and DIRECTV Integrated Bundles Would
Be a Benefit of the Transaction
358. Positions of the Parties. AT&T asserts that an additional benefit of this transaction
would be allowing it to provide a competitive broadband service on a standalone basis both in rural areas
where there is no terrestrial broadband option and in areas where broadband competition already
(Continued from previous page)
INFO.] are rural and [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] are rural and included
in its FWLL deployment. Id.
1064
Application at 44. AT&T describes its methodology as follows: “ [BEGIN HIGHLY CONF. INFO.] [END
HIGHLY CONF. INFO.] .” AT&T Response to Sept. 9, 2014, Information Request at 205.
1065
See Application at 44-45; Stankey Decl. ¶¶ 36, 54-55.
1066
See Facilitating the Provision of Spectrum-Based Services to Rural Areas and Promoting Opportunities for
Rural Telephone Companies to Provide Spectrum-Based Services, WT Docket No. 02-381, Report and Order and
Further Notice of Proposed Rulemaking, 19 FCC Rcd 19078, 19087-88, ¶ 12 (2004) (“We recognize, however, that
the application of a single, comprehensive definition for ‘rural area’ may not be appropriate for all purposes. . . .
Rather than establish the 100 persons per square mile or less designation as a uniform definition to be applied in all
cases, we instead believe that it is more appropriate to treat this definition as a presumption that will apply for
current or future Commission wireless radio service rules, policies and analyses for which the term ‘rural area’ has
not been expressly defined. By doing so, we maintain continuity with respect to existing definitions of ‘rural’ that
have been tailored to apply to specific policies, while also providing a practical guideline.”). We see no reason to
revisit this guideline at this time.
1067
Commission staff determines broadband availability in rural areas at the census-block level. See Appendix D
¶¶ 45-49.
1068
See Appendix D ¶ 48.
1069
See Application at 44; Appendix D ¶¶ 42, 50, Table 1.
1070
See Appendix D ¶¶ 49-50, Table 1.
1071
See id.
Federal Communications Commission FCC 15-94
139
exists.
1072
In addition, noting consumers in these areas lack access to integrated bundles that include
broadband, video, and voice services, the Applicants also claim that they would offer competitive satellite
video, home broadband, and home VoIP bundles featuring FWLL service.
1073
The Applicants intend to
price FWLL competitively with existing comparable wireline broadband offerings.
1074
In addition, AT&T
plans to impose limits on the amount of data a customer may use, which could affect the competitiveness
of its pricing. AT&T currently expects to offer a usage cap between [BEGIN HIGHLY CONF. INFO.]
[END HIGHLY CONF. INFO.] per month that it expects to satisfy most customers.
1075
359. WGAW and Netflix challenge whether FWLL would offer significant benefits, and other
commenters question whether FWLL is a public benefit at all.
1076
WGAW states that FWLL would offer
inferior broadband technology for an expensive price.
1077
Netflix is concerned that the Applicants did not
specify the usage allowance.
1078
Public Knowledge-ILSR assert that unless FWLL competes with cable
broadband in all material respects, it should only be considered as a partial substitute or complement to
other terrestrial broadband offers.
1079
Free Press states that FWLL is “the same expensive, capped, fixed
4G wireless services that it currently offers in areas where it refuses to upgrade its wired networks.”
1080
360. The Applicants respond that by offering higher speeds compared to most terrestrial
services available in rural areas,
1081
the FWLL service would be a “dramatic improvement for customers
that currently do not have access to any high-speed fixed broadband.”
1082
The Applicants also assert that
introduction of FWLL broadband service can “exert important competitive pressure on rival broadband
providers, which can lead to lower prices and greater investments in [broadband] infrastructure. . . .”
1083
361. Discussion. While the record is limited, we do not now dispute the assertion that if
AT&T deploys FWLL to areas without a fixed broadband provider, FWLL would be of greater benefit to
consumers than in other areas. Moreover, for customers who prefer bundles, new FWLL and DIRECTV
video bundles may be more attractive than available alternative standalone services. Consequently, there
is no need to dispute the assertion that there may be a benefit to deploying FWLL to customers where
there is currently no terrestrial broadband service, depending on the pricing and data caps on such a
service.
362. In addition, we estimate that approximately 3 million target FWLL households are served
by DSL only, of which 1.6 million are in rural areas.
1084
For these 3 million households, FWLL could
1072
Application at 43- 44; Stankey Decl. ¶ 55; ATT-FCC-02210352, [BEGIN HIGHLY CONF. INFO.] [END
HIGHLY CONF. INFO.] .
1073
Application at 42-45.
1074
Id. at 43 (stating that the FWLL would be priced as a home broadband service); AT&T Response to Sept. 9,
2014, Information Request at 198-199 (“AT&T . . . intends to price [FWLL] competitively with existing comparable
wireline broadband offerings.”).
1075
See ATT-FCC-01969908, [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] ; AT&T
Response to Sept. 9, 2014, Information Request at 199.
1076
WGAW Petition at 16; Netflix Comments at 26 (citing Application at 43).
1077
WGAW Petition at 5-6.
1078
Netflix Comments at 26 (citing Application at 43).
1079
See Public Knowledge-ILSR Petition at 17.
1080
Free Press Petition at 31.
1081
Katz Reply Decl. ¶ 45.
1082
Id. ¶ 44.
1083
Id.
1084
See Appendix D n.72.
Federal Communications Commission FCC 15-94
140
offer better speeds, because DSL speeds on average tend to be slower than those potentially offered by the
Applicants’ FWLL service.
1085
However, when factoring for the typically lower price of DSL
(approximately $29.95 per month for 6 Mbps service), FWLL – which would be priced at [BEGIN
HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.]
1086
– may not be competitive.
363. Our evaluation of the Applicants’ related claims about the benefits that would flow to
consumers from the ability of FWLL broadband service to compete with cable broadband in those areas
where cable broadband exists is also limited. The Applicants’ merger simulation does not incorporate
FWLL, and the record otherwise lacks substantial quantitative data. By contrast, the record does suggest
that data rate performance is an important element of a broadband service offering.
1087
The record
suggests that FWLL offerings would be at [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF.
INFO.] with a [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] usage limit.
1088
And, as discussed, the Applicants may not be able to meet these speed claims due to the number of
subscribers, the location of subscribers, the time of day, and other factors. With uncertainties about the
actual users’ speeds on the record, and without additional information from the Applicants regarding how
the price of these offerings would compare to prices of faster services from other broadband providers, we
cannot determine the extent of the benefit FWLL would provide in areas where there is existing cable or
FTTP competition.
1089
364. We also do not have a basis to assess the potential increase in value of integrated bundles
of FWLL and DIRECTV video or how it could support the funding of FWLL deployment. In areas
where there is competition from cable, consumers already have access to bundled products from cable
companies, which they may prefer to the integrated FWLL and DIRECTV bundle. On the other hand, the
Applicants may be able to realize sufficient efficiencies to price the FWLL/DIRECTV bundle to compete
effectively with cable bundles. However, pricing at those levels could jeopardize the revenue stream that
the Applicants claim is a necessary input to build out FWLL.
1090
The record offers no evidence; therefore
we do not consider this claim in our overall analysis.
1085
DSL speeds range between 768 kbps – 8.5 Mbps and depend on multiple factors including the length of the
phone wiring and the thickness of the wire. For example, AT&T advertises 768 kbps – 6 Mbps for its DSL service.
See AT&T Inc., Internet, DSL High Speed Internet, Internet Speeds That Meet Your Needs,
http://www.att.com/shop/internet/internet-service.html (visited June 15, 2015). See generally Bradley Mitchell, DSL
Availability – DSL Lookup Services and Factors Affecting DSL Availability,
http://compnetworking.about.com/od/dsldigitalsubscriberline/a/availability.htm (visited June 15, 2015) (describing
technical factors that limit the coverage of DSL service); Bradley Mitchell, DSL Speed – How Fast is DSL Internet
Service?, http://compnetworking.about.com/od/dsldigitalsubscriberline/f/dslspeed.htm (visited June 15, 2015)
(discussing the speed of DSL service, including factors that may affect speed).
1086
ATT-FCC-01969908, [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] .
1087
See generally Lee Decl. ¶¶ 28-37 (discussing deployments and rates).
1088
ATT-FCC-01969908, [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] .
1089
We also are unable to assess the validity of the Applicants’ competitive claims because at the same time that the
Applicants claim the speeds of FWLL are sufficient to provide broadband Internet access that is competitive with
existing cable and FTTP providers, the Applicants also claim that FWLL [BEGIN HIGHLY CONF. INFO.]
[END HIGHLY CONF. INFO.] . Katz Reply Decl. ¶ 34 n.64. This calls into question the ability of FWLL to
provide broadband Internet access service that is robust enough to satisfy trends in consumer demand for Internet
access.
1090
See infra ¶¶ 372-374.
Federal Communications Commission FCC 15-94
141
5. FWLL Deployment is Transaction Specific
365. Positions of the Parties. The Applicants claim that the FWLL deployment is only
feasible due to synergies resulting from the proposed transaction.
1091
These include a single “truck roll”
to install DBS video and FWLL services as well as marketing and sales synergies.
1092
The “recovery” of
FWLL deployment costs would have the effect of benefitting consumers through “expanded offerings,”
including FWLL services as part of new bundles.
1093
366. The Applicants also assert that the ability to offer an integrated FWLL and DIRECTV
video bundle would contribute to market conditions that would allow AT&T to deploy FWLL under more
favorable circumstances than those available to AT&T as a standalone company.
1094
367. Several petitioners and commenters assert that the Applicants’ claimed benefits are not
transaction specific. WGAW suggests that the Applicants’ offer to expand broadband Internet service
through FWLL is not new and speculates that FWLL deployment would happen regardless of whether the
transaction is approved.”
1095
WISPA asserts AT&T’s planned roll out of FWLL is not a transaction-
specific benefit but rather an incremental outgrowth of its existing spectrum and infrastructure.”
1096
Free
Press disputes AT&T’s claim that the transaction is necessary to allow AT&T to realize the synergies it
would need to make FWLL service deployment economically feasible,
1097
and it asserts that AT&T’s
FWLL commitment is not transaction specific because AT&T already offers fixed LTE service
nationwide.
1098
368. By contrast, CWA supports the transaction, echoing the Applicants’ claim that the
combined entity would have the economic incentive to increase investment in high-capacity networks and
FWLL.
1099
1091
Application at 45 (stating that bundling FWLL, DIRECTV video, and VoIP would attract more subscribers with
lower churn outside the U-verse footprint); AT&T Response to Sept. 9, 2014, Information Request at 205 (stating
that AT&T expects more subscribers and greater revenue from a broadband/MVPD/voice bundle than from a
“standalone FWLL bundle”), 235 (stating that the transaction improves the business case for deploying FWLL
because “[i]t brings a new revenue source (MVPD services) and a more compelling offering (a seamless
broadband/MVPD/voice bundle available nationwide) that will increase per-customer revenues”).
1092
AT&T Response to Sept. 9, 2014, Information Request at 209; Joint Opposition at 12. The Applicants claim
that the key impediments to deploying FWLL include the “high deployment costs.” Application at 44. These costs
include the expense of installing new antennas at households and cell sites. Application at 44; see also AT&T
Response to Sept. 9, 2014, Information Request at 209 (“Deploying fixed WLL requires incremental equipment at
existing LTE cell sites, including new antennas, radios, and base band units.”). In its analysis, AT&T assumes
FWLL deployment capital expenditures total “approximately [BEGIN HIGHLY CONF. INFO.] [END HIGHLY
CONF. INFO.] .” AT&T Response to Sept. 9, 2014, Information Request at 209.
1093
See Joint Opposition at 12 (citing Application at 29-33; Stankey Decl. ¶¶ 6, 19, 26-32; Moore Decl. ¶¶ 26-29;
Katz Decl. ¶¶ 4, 98-99; Katz Reply Decl. ¶¶ 2-3, 26).
1094
AT&T Response to Sept. 9, 2014, Information Request at 205; Katz Decl. ¶ 135; Stankey Decl. ¶¶ 36, 52-53;
Joint Opposition at 24-25.
1095
WGAW Petition at 25. WGAW further argues that claims about broadband deployment, including FWLL, are
not transaction specific. See WGAW Reply at 24-32.
1096
Comments of the Wireless Internet Service Providers Association, MB Docket 14-90, at 4-8 (filed Sept. 16,
2014) (“WISPA Comments”).
1097
Free Press Petition at 31-32.
1098
Id. at 31. DISH also asserts that AT&T’s FWLL claims are not transaction specific. DISH Reply at 13.
1099
Reply Comments of Communications Workers of America, MB Docket 14-90, at 7-8 (filed Oct. 16, 2014)
(“CWA Reply”). CWA also argues that the transaction would create good jobs, create a stronger competitor to
cable in video and broadband markets, improve the economics for high-speed broadband expansion, and facilitate an
(continued….)
Federal Communications Commission FCC 15-94
142
369. As discussed above in connection with the FTTP deployment, ACA argues that AT&T’s
commitment to deploy the FWLL “may have significant value but only if AT&T is not receiving
universal service support to serve the same locations.”
1100
WISPA similarly states that the Commission
should condition any approval of the transaction with a requirement that AT&T not accept Connect
America Phase II support.
1101
370. Discussion. The Applicants have not provided sufficient quantitative financial evidence
to support the assertion that the ability to deploy FWLL is a transaction-specific benefit; nor have they
adequately substantiated their cost and efficiency claims in their FWLL financial deployment model. In
particular, the Applicants have not provided any simulations or financial modeling that link the cost
savings and bundling efficiencies to the deployment of FWLL post-transaction. Therefore, we are limited
in our ability to effectively evaluate the feasibility of FWLL deployment.
371. The Applicants’ financial model analyzing FWLL deployment does not include
quantitative information on its asserted post-transaction cost savings or revenue increases.
1102
Key
financial assumptions for the FWLL business cases both with and without the transaction appear to be the
same.
1103
Furthermore, AT&T has not elsewhere provided any specific quantitative assessments on how
the deployment of FWLL service would become profitable with the transaction.
372. A critical element of that profitability is the uptake of their service by consumers. A
central claim by the Applicants is that the bundling made possible by the transaction would improve the
lifetime value (or “LTV”) of FWLL customers and would reduce churn. However, evidence used to
support this claim is inconsistent with other assumptions in the record that suggest that a lower churn is
not needed to support the financial feasibility of FWLL service.
1104
In addition, the Applicants use
different video penetration rates in the same spreadsheet to calculate post-transaction churn and lifetime
value.
1105
These discrepancies undermine the Applicants’ claims that these benefits are transaction
specific.
373. The Applicants also argue that the ability to offer integrated bundles improves churn and
penetration rates, and therefore creates additional value.
1106
However, the data provided in the record do
not provide any direct evidence of what customer churn or penetration rates would be post-transaction. In
fact, some of the Applicants’ FWLL financial analysis assumes that churn for FWLL services would be
unchanged by the transaction.
1107
Thus, we cannot conclude that there is a difference in the pre- and post-
transaction churn rates. As described elsewhere, we also question the Applicants’ assumption on the
(Continued from previous page)
open Internet through AT&T’s commitment to offer standalone retail video and broadband for three years after
closing of the transaction. Id. at 1-8.
1100
ACA Comments at 29-30. See also supra n.968.
1101
WISPA Comments at 9.
1102
AT&T Response to Sept. 9, 2014, Information Request, Exhibit 59.a.1.
1103
Compare AT&T Response to Sept. 9, 2014, Information Request, Exhibit 58.g.1 [BEGIN HIGHLY CONF.
INFO.] [END HIGHLY CONF. INFO.] at 3, 6, 9 with AT&T Response to Sept. 9, 2014, Information Request at
204, 214 (narrative response assuming the same market share, churn, and average revenue per user post-transaction).
1104
AT&T Response to Sept. 9, 2014, Information Request at 215 (“ [BEGIN HIGHLY CONF. INFO.] [END
HIGHLY CONF. INFO.] .”).
1105
AT&T Response to Dec. 15, 2014, Information Request at 11 n.18 (“ [BEGIN HIGHLY CONF. INFO.]
[END HIGHLY CONF. INFO.] .”); id. at 10 n.16 ( [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF.
INFO.] ).
1106
Application at 45.
1107
See supra nn.1103-1104.
Federal Communications Commission FCC 15-94
143
attractiveness of integrated bundles that rely on the FWLL product as the broadband alternative,
especially in cable competitive areas, and hence the claimed impact on customer churn and penetration
rates that would make FWLL deployment feasible.
374. As discussed in greater detail above, the Applicants have proposed to deploy a FWLL
service that is designed to perform at a much lower capacity and throughput levels than they plan to
deploy.
1108
To the extent the Applicants are successful in marketing the FWLL service, a large number of
customers attempting (or expecting) to use the network at advertised throughput and capacity limits could
cause degraded network performance – making it less competitive. The financial viability of the network
would necessarily be affected if the result were that the FWLL service lost customers or the Applicants
were forced to upgrade the network with more spectrum and/or cell sites to improve performance. The
Applicants have submitted no data to show how they would manage this potential situation, but we
believe it is a possibility that could add to the other challenges to financial viability discussed above.
375. Finally, with regard to ACA’s and WISPA’s concerns about AT&T using USF or
Connect America Fund support to satisfy its FWLL deployment commitment, as discussed above, the
Applicants assert that [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] .
1109
6. Conclusion
376. The Applicants are proposing to deploy a network that would need to meet specific
coverage, capacity, and throughput benchmarks to provide the benefits claimed by the Applicants. While
the Applicants have provided some evidence that their FWLL coverage and performance estimates are
appropriate, the record presented is limited and raises unanswered questions about potential technical
issues that could adversely affect network performance. Due to the technical characteristics of the
network the Applicants would deploy, any failure to meet those standards would have a direct impact on
the viability of the FWLL service. In addition, the Applicants have used rural coverage estimates that do
not follow the Commission’s guideline metric for identifying rural areas. More importantly, the
Applicants do not adequately establish the extent of the benefits they have claimed for FWLL in rural
areas. Even if there were to be some consumer benefit in areas where there is currently no terrestrial
broadband or only a DSL terrestrial broadband provider, the extent of those benefits would depend on the
speed-price offerings available and consumer preferences for higher speeds. The Applicants have not
demonstrated that the FWLL would be a meaningful competitor to existing cable broadband providers in
the proposed FWLL deployment areas.
377. Finally, there is no evidence in the record to show that the Applicants would offer
competitive bundles in areas where there is existing terrestrial broadband service. For these reasons, we
ascribe minimal weight to the claimed benefit of FWLL deployment in our analysis of the transaction.
H. Other Potential Public Interest Benefits
1. Cybersecurity
378. Positions of the Parties. The Applicants assert that the transaction would “enable [the
combined entity] to provide even better security going forward” due to smooth cybersecurity integration
efforts that use the National Institute of Standards and Technology (“NIST”) Cybersecurity
Framework
1110
as a resource, and that expand the AT&T internal security and supply chain security
protocols.
1111
Through these efforts, the Applicants emphasize that the combined entity would ensure that
1108
See supra ¶¶ 352-353.
1109
AT&T Response to Sept. 9, 2014, Information Request at 220.
1110
See NATIONAL INSTITUTE OF STANDARDS AND TECHNOLOGY, FRAMEWORK FOR IMPROVING CRITICAL
INFRASTRUCTURE CYBERSECURITY (Feb. 12, 2014) (“NIST CYBERSECURITY FRAMEWORK”), available at
http://www.nist.gov/cyberframework/upload/cybersecurity-framework-021214-final.pdf (visited June 23, 2015).
1111
See AT&T Response to Sept. 9, 2014, Information Request at 271-273.
Federal Communications Commission FCC 15-94
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“no gaps are created through the combination of two different systems” and that the “best practices of
each company are adopted to facilitate stronger security efforts going forward.”
1112
In addition, AT&T
asserts that the integration of the two companies would enhance the effectiveness of AT&T Security
Operation Center’s (“SOC”)
1113
centralized function to achieve real-time awareness of cybersecurity
threats by “providing a larger footprint to draw upon in assessing overall cybersecurity risks.”
1114
379. AT&T affirms that as part of the integration planning process, a high priority is the
“smooth integration of cybersecurity integration efforts.”
1115
First, as part of its due diligence, AT&T
requested that DIRECTV identify and submit documents related to [BEGIN HIGHLY CONF. INFO.]
[END HIGHLY CONF. INFO.] .
1116
380. Second, AT&T asserts that the NIST Cybersecurity Framework would be an “an
important resource” to draw upon once the “full-fledged integration efforts begin following the closing of
the proposed [t]ransaction.”
1117
Prior to the transaction, AT&T publicly supported the NIST
Cybersecurity Framework and promised to review the details and assess how the document complements
its existing cyber-risk management program.
1118
DIRECTV states that the company “currently uses” the
NIST Cybersecurity Framework.
1119
381. Third, AT&T developed, and submitted for the record, the company’s security policy and
program written prior to the release of the NIST Cybersecurity Framework in February of 2014.
1120
AT&T asserts that it would expand this security policy and program to cover DIRECTV.
1121
In addition,
AT&T affirms that its prior history of incorporating acquired businesses into its risk management
program includes working with the AT&T Chief Security Office.
1122
382. Fourth, AT&T asserts that, as part of the AT&T security efforts, supply chain security is
an “important aspect” and, furthermore, that this security process would be a “critical aspect of
integration efforts with DIRECTV.”
1123
This process includes: careful selection of well-established
1112
See id. at 273; see also DIRECTV Response to Sept. 9, 2014, Information Request at 84-85 (stating that
“integration planning efforts are still preliminary . . . [i]mplementation of all integration plans . . . may be amended
based on information gained following the closing of the transaction”).
1113
The AT&T Security Operations Center is a “centralized function that continuously monitors and analyzes traffic
through AT&T’s backbone, providing near-real-time and advance notification of different types of security events
across multiple devices and device types.” See AT&T Response to Sept. 9, 2014, Information Request at 273.
1114
See id.
1115
See id.
1116
DTVFCC-02406508, [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] ; see also ATT-
FCC-01689359, [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] .
1117
See AT&T Response to Sept. 9, 2014, Information Request at 272.
1118
ATT-FCC-03375051, “Protecting our Nation’s Critical Infrastructure,” Ed Amoroso, AT&T Senior Vice
President and Chief Security Officer (Feb. 12, 2014) (blog posted upon the release of the NIST Cybersecurity
Framework, with AT&T’s promise to review and “see how it best complements [AT&T’s] existing cyber-risk
management program”).
1119
See DIRECTV Response to Sept. 9, 2014, Information Request at 84-85.
1120
ATT-FCC-03375006, “AT&T Information & Network Security Customer Reference Guide, v.5.1” (Feb. 2013)
(providing an introduction to AT&T’s global security organization, a review of AT&T’s security roles and
responsibilities, and overview of AT&T’s security policy and comprehensive programs).
1121
See AT&T Response to Sept. 9, 2014, Information Request at 273.
1122
See ATT-FCC-01259171, [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] .
1123
See AT&T Response to Sept. 9, 2014, Information Request at 273-274.
Federal Communications Commission FCC 15-94
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infrastructure vendors, evaluation of hardware and software, equipment testing ensuring against the
interception or redirection of data transfers, software testing ensuring data transmission security,
examination of manufacturers’ provenance and business history, and the consultation with NIST or the
Department of Commerce.
1124
383. Furthermore, AT&T asserts that the combined entity would provide a “larger footprint”
to assess overall cybersecurity risk, thereby enhancing the effectiveness of the AT&T SOC,
1125
which
monitors and analyzes traffic through AT&T’s backbone infrastructure and provides “near-real-time and
advance notification of different types of security events across multiple devices and device types.”
1126
384. Discussion. The Applicants, in their response to the Commission’s request for
information, state that the public would benefit from increased security and from the combined entity’s
increased real-time awareness of cybersecurity threats across a larger footprint. No commenter raised
objections to the transaction based on cybersecurity issues, and therefore, the analysis is based on
documents submitted by the Applicants. AT&T provides information about its current security and
privacy program, but the record reveals little information about DIRECTV’s current programs and
policies for cybersecurity and privacy.
385. The Applicants assert that the NIST Cybersecurity Framework would be a resource
during the full-fledged integration efforts. The NIST Cybersecurity Framework is focused on using
“business drivers to guide cybersecurity activities” and is considering cybersecurity risks as “part of the
organization’s risk management processes.”
1127
Part of this work includes the development of
“organizational understanding to manage cybersecurity risk to systems, assets, data, and capabilities.”
1128
The record shows that AT&T initiated efforts to develop an organizational understanding to manage the
cybersecurity risk to DIRECTV’s systems, assets, data, and capabilities,
1129
but it does not reveal
additional relevant evidence to show what information DIRECTV provided, how AT&T analyzed the
information, or what are the planned development efforts to follow the NIST Cybersecurity Framework.
386. AT&T asserts that the combined entity would use the best practices of both companies to
facilitate “stronger security efforts going forward.”
1130
Further, the Applicants state that “integration
planning efforts are still preliminary,” that implementation of these plans is “subject to completion of the
1124
See id.; see also ATT-FCC-03375006, “AT&T Information & Network Security Customer Reference Guide,
v.5.1” (Feb. 2013), at 03375022-03375023 (explaining that suppliers undergo background check requirements as
part of supplier agreements with AT&T to ensure proper screening and to make suppliers aware of responsibilities).
1125
See ATT-FCC-03375006, ”AT&T Information & Network Security Customer Reference Guide, v.5.1” (Feb.
2013), at 03375024 (describing AT&T SOC as a centralized command and control facility that monitors and
analyzes traffic through the AT&T IP backbone, providing real-time advance notifications of security events, and
that produces AT&T-specific security reports and alerts).
1126
See AT&T Response to Sept. 9, 2014, Information Request at 273 (outlining the role of the AT&T SOC,
including providing “alerts, situational awareness, incident response, and proactive threat vulnerability analysis to
manage threats and clean harmful traffic”).
1127
NIST CYBERSECURITY FRAMEWORK at 1. The Framework Core presents the core functions: identify, protect,
detect, respond, and recover, with the goal of helping enable risk management decisions, addressing threats, and
improving from previous practices. Id. at 7.
1128
Id. at 8.
1129
DTVFCC-02406508, [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] ; see also ATT-
FCC-01689359, [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] .
1130
AT&T Response to Sept. 9, 2014, Information Request at 273.
Federal Communications Commission FCC 15-94
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regulatory review process and consummation of the transaction,”
1131
and that “full-fledged integration
efforts begin following [the] closing of the proposed Transaction.”
1132
The record, therefore, does not
reveal how DIRECTV would implement its ongoing security protocol; how the two companies would
integrate with respect to cybersecurity assets and policies; or how AT&T plans to expand its security
policy and program, supply chain protocols, or the reach of the AT&T SOC.
387. AT&T claims that the combined entity would assess overall cybersecurity risks over a
larger footprint, which would enhance the effectiveness of the AT&T SOC.
1133
While we agree that
economies of scale may contribute to better cybersecurity through improved information sharing, threat
detection, and response, a company’s size does not necessarily indicate the strength of its cyber defenses.
We also note that DIRECTV’s technical operations includes equipment and procedures for which AT&T
may not have direct experience with and absent new training, workforce, or defensive systems, AT&T
may not be initially postured to defend with AT&T’s existing capabilities. The increased footprint,
therefore, would not necessarily result in an increased strength in cyber defenses. A new combined entity
faces interoperability and coordination challenges and may create new vulnerabilities for both systems.
388. The record does not provide sufficient information about the past security performance or
independent security offered by each party in comparison to what would be offered by the combined
entity to determine whether there would be a net benefit to the public in this area. Therefore, based on the
currently available information, we ascribe minimal weight to the claimed cybersecurity benefit in our
analysis of the transaction.
2. Diversity Practices
389. AT&T states that a diverse workforce and a commitment to inclusion in all business
practices allow it to best serve its customers, suppliers, and investors.
1134
AT&T states that it intends to
extend its “best-in-class diversity values” to the combined entity.
1135
The Applicants, however, have not
demonstrated that DIRECTV does not already employ similar diversity practices or that it would not do
so absent the transaction. Indeed, we note that Section 25.601 of the Commission’s rules extends certain
equal employment opportunities (“EEO”) requirements to DBS providers such as DIRECTV.
1136
Accordingly, we ascribe minimal weight to the claimed diversity practices benefit in our analysis of the
transaction.
1137
3. Labor Practices
390. AT&T states that the combined entity would continue AT&T’s practice of working
responsibly with the unions representing its workforce.
1138
AT&T notes that over half of its workforce is
union-represented, resulting in AT&T having the largest full-time union workforce of any company in
America.
1139
CWA, a labor organization representing 700,000 workers, including 110,000 AT&T
1131
See DIRECTV Response to Sept. 9, 2014, Information Request at 84-85 (stating that AT&T, as the acquirer, can
provide detail regarding AT&T’s plans with “respect to investment in communications security and cybersecurity
technologies and practices post-closing”).
1132
See AT&T Response to Sept. 9, 2014, Information Request at 274.
1133
See id. at 273.
1134
Application at 29; Stankey Decl. ¶ 64.
1135
Application at 9, 29; Stankey Decl. ¶ 64.
1136
See 47 C.F.R. § 25.601.
1137
See News Corp.-Hughes Order, 19 FCC Rcd at 623-624, ¶ 357.
1138
Application at 9, 29; Stankey Decl. ¶ 64.
1139
Stankey Decl. ¶ 64.
Federal Communications Commission FCC 15-94
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employees, contends that the transaction would benefit the combined entity’s employees.
1140
CWA notes
that its collective bargaining agreements with AT&T guarantee that AT&T’s labor policies would extend
to DIRECTV’s non-management employees after the transaction, providing DIRECTV employees with
the opportunity to select union representation free from management intimidation, and that this
opportunity would ultimately benefit the workers, “their families, communities, and consumers with the
quality service provided by a skilled, trained, career workforce.”
1141
391. As a general matter, we believe that labor issues are best addressed by the National Labor
Relations Board.
1142
Further, there is no evidence in the record that DIRECTV, too, does not have a
“skilled, trained, career workforce” that provides quality service to consumers. Therefore, while AT&T
asserts that it has good labor relations with its employees and CWA and that those relations will continue
following the acquisition of DIRECTV, we ascribe minimal weight to these labor relations benefits in our
analysis of the transaction.
XII. REMEDIES
A. Introduction
392. The Commission’s review of a proposed transaction entails a thorough examination of
the potential public interest harms and any verifiable, transaction-specific benefits, including any
commitments made by the Applicants to further the public interest. As part of this process, the
Commission may impose additional remedial conditions to address potential harms likely to result from
the proposed transaction or to help ensure the realization of any promised potential benefits.
1143
If, on
balance, after taking into consideration these additional remedial conditions, the potential benefits
associated with the proposed transaction outweigh any remaining potential harms, the Commission will
find that the proposed transaction serves the public interest.
393. As described above, we find that the transaction as proposed has the potential to cause
public interest harms as well as public interest benefits. Under our sliding-scale approach, we cannot
conclude based on this record that the potential benefits are sufficiently large, specific, and imminent to
outweigh all potential harms. However, we have imposed several conditions, which as explained below
1140
See CWA Comments at 1-2, 13-14; CWA Reply at 1-3.
1141
CWA Comments at 13-14; CWA Reply at 3. See also Letter from Richard L. Trumka, President, American
Federation of Labor and Congress of Industrial Organizations (AFL-CIO), to The Honorable Thomas Wheeler,
Chairman, FCC, MB Docket No. 14-90, at 1-2 (Sept. 11, 2014) (transaction would benefit employees); Letter from
Joshua D. Sword, Secretary-Treasurer, West Virginia AFL-CIO, to The Honorable Thomas Wheeler, Chairman,
FCC, MB Docket No. 14-90, at 1-2 (Sept. 15, 2014) (same); Letter from Ken Sagar, President, Iowa Federation of
Labor, to The Honorable Thomas Wheeler, Chairman, FCC, MB Docket No. 14-90 (Sept. 16, 2014) (same); Letter
from Shar Knutson, President, Minnesota AFL-CIO, to FCC, MB Docket No. 14-90 (Sept. 16, 2014) (same); Letter
from Mike Williams, President, Florida AFL-CIO, to The Honorable Thomas Wheeler, Chairman, FCC, MB Docket
No. 14-90 (Oct. 13, 2014) (same); Letter from Bill Gerhard, President, Iowa Building and Construction Trades, to
FCC, MB Docket No. 14-90 (Sept. 16, 2014) (same); Letter from Johanna Hester, President, and Gregory A.
Cendana, Executive Director, Asian Pacific American Labor Alliance, to Marlene H. Dortch, Secretary, FCC, MB
Docket No. 14-90 (Oct. 15, 2014) (same); Letter from Milton Rosado, President, Labor Council for Latin American
Advancement, to The Honorable Thomas Wheeler, Chairman, FCC, MB Docket No. 14-90 (Oct. 16, 2014) (same).
1142
See Comcast-NBCU Order, 26 FCC Rcd at 4329, ¶ 223; Applications of AT&T Inc. and Deutsche Telekom AG
for Consent to Assign or Transfer Control of Licenses and Authorizations, WT Docket No. 11-65, Order, DA 11-
1955, 26 FCC Rcd 16184, 16293, ¶ 259 (WCB 2011).
1143
Verizon Wireless-SpectrumCo Order, 27 FCC Rcd at 10739-40, ¶ 111; AT&T-Verizon Wireless Order, 25 FCC
Rcd at 8717-18, ¶ 25; AT&T-Centennial Order, 24 FCC Rcd at 13929, ¶ 30. With respect to remedying harms, the
Commission has held that it will impose conditions only to remedy harms that arise from the transaction (i.e.,
transaction-specific harms) and that are related to the Commission’s responsibilities under the Communications Act
and related statutes. AT&T-Verizon Wireless Order, 25 FCC Rcd at 8747, ¶ 101.
Federal Communications Commission FCC 15-94
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allow us to find that the proposed transaction overall would be in the public interest. As discussed in
detail above, we find that in light of the conditions, the public interest benefits of the proposed transaction
outweigh the likelihood of significant public interest harms, such that overall, the proposed transaction is
in the public interest.
B. Fiber to the Premises Deployment Commitment
394. We find that the transaction reduces the combined entity’s incentive to deploy FTTP
service because the resulting increase in U-verse video or other online video subscriptions will depress
demand for DIRECTV’s services and thus “cannibalize” the combined entity’s profits. We therefore
adopt as a condition of this transaction the Applicants’ commitment to expand FTTP broadband
deployment. This condition is intended to capture all of AT&T’s pre-transaction planned deployment,
projected deployment absent the transaction, and any additional deployment that the record suggests is
profitable as a result of the transaction. This condition also provides an opportunity for increased
competition from services that rely on fixed broadband Internet access service to deliver video by creating
more customer locations that can receive broadband service at speeds capable of delivering video service.
By creating pathways for alternative video distribution methods, this condition also helps to mitigate the
harm of the loss of a video competitor in areas where AT&T and DIRECTV had directly competed prior
to the transaction. Accordingly, as a condition of this transaction, AT&T will deploy its highest-speed
fiber connections (U-verse FTTP) to at least 12.5 million more customer locations within four years of the
transaction closing. In addition, to ensure that schools and libraries also benefit from the increased
competition that will result from this fiber deployment, AT&T will offer gigabit service to any E-rate
eligible school or library located within, or contiguous to, a distribution area in which AT&T deploys
FTTP service. This commitment is estimated to include at least 6,000 E-rate eligible schools and
libraries.
C. Non-Discriminatory Usage-Based Practices
395. We find that the transaction increases the risk that the combined entity will use its fixed
broadband Internet access service to engage in practices, such as discriminatory usage-based allowances,
that favor its owned or affiliated online video content and online video services over competing online
video content and OVDs. As AT&T currently imposes usage-based allowances on its broadband
customers, more broadly than other large ISPs,
1144
we conclude that a condition is necessary to address
any increased incentive AT&T will have to use these practices to hinder the development of third-party
OVDs as a competitive option to its own video offerings. Accordingly, as a condition of this transaction,
we require the combined entity to refrain from discriminatory usage-based allowance practices for its
fixed broadband Internet access service.
D. Internet Interconnection Disclosure Requirement
396. We find that the transaction increases the risk that the combined entity will use
interconnection agreements to limit competing online video content and OVDs. AT&T’s recent
interconnection agreements, submitted in the record of this proceeding,
1145
have greatly advanced our
understanding of the current marketplace and the developments that may affect broadband providers’
interconnection practices. Therefore, we conclude that future disclosures of such agreements to the
Commission are necessary to address the increased risk of anticompetitive practices by the combined
entity. Accordingly, as a condition of this transaction, we require that the combined entity disclose all of
its interconnection agreements to the Commission for four years after closing. This condition will enable
the monitoring of the combined entity’s future interconnection agreements’ terms to determine whether
the combined entity is using such agreements to deny or impede access to its networks in ways that limit
competition from third-party online video content providers. In addition, this condition requires the
1144
Conditions Ex Parte Presentation at 6.
1145
See supra ¶ 218.
Federal Communications Commission FCC 15-94
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combined entity to work with an independent measurement expert to report certain Internet
interconnection performance metrics, and to the extent possible, make such metrics publicly available.
E. Discounted Broadband Services for Low-Income Subscribers
397. While we find that the availability of better and lower priced bundles of video and
broadband service is a potential benefit of the merger, we also conclude that the public interest requires us
to ensure that a bundle of video and broadband services is not the only competitive choice for low-income
subscribers who may not be able to afford bundled services. Accordingly, we will require as a condition
of this transaction that the combined entity make available an affordable, low-price standalone broadband
service to low-income consumers in the combined entity’s wireline footprint.
F. Reporting and Outside Compliance Officer
398. Some commenters contend that AT&T has failed to comply with voluntary commitments
it has made in previous transaction proceedings or with conditions imposed by the Commission.
1146
AT&T disputes these claims.
1147
Given the important role that these conditions serve in securing the
public interest benefits of this transaction, we find that compliance with the conditions must be ensured.
Accordingly, to ensure that AT&T complies with the conditions of this Order, we require that AT&T
retain both an internal company compliance officer and an independent, external compliance officer that
will report and monitor, respectively, the combined entity’s compliance in accordance with the terms of
this Order. Enforcement responsibilities remain the sole province of the Commission.
XIII. BALANCING POTENTIAL PUBLIC INTEREST HARMS AND BENEFITS
399. After careful examination and analysis, we find that, while the transaction has the
potential to cause some competitive harm, the economic and documentary evidence submitted to the
Commission supports our conclusion that the transaction will result in greater competition for bundles of
video and broadband and that this increased competition will benefit consumers, thus serving the public
interest. We acknowledge that in certain overlap areas there will be a loss of an independent competitor,
but we conclude that the effect of that reduction does not outweigh the benefits of a stronger combined
competitor. Thus, on balance, we find that considering the imposition of the above-recited AT&T’s
conditions, in conjunction with the public interest benefits that we find will likely arise from the
transaction, there is sufficient evidence on this record for us to conclude that the Applicants have met
their burden of demonstrating that the likely public interest benefits outweigh the likely public interest
harms, such that we are able to approve the proposed transaction.
XIV. CONCLUSION
400. We have reviewed the proposed transaction, the Application of AT&T and DIRECTV,
and related pleadings and other submissions. We conclude that the Applicants are fully qualified and that
the public interest benefits promised by the proposed transaction are sufficient to support the grant of the
Application, pursuant to the public interest balancing test of Section 310(d) of the Act, subject to the
conditions specified in Appendix B.
XV. ORDERING CLAUSES
401. Accordingly, having reviewed the Application and the record in this matter, IT IS
ORDERED, pursuant to Sections 4(i) and (j), 303(r), 214, 309, and 310(d) of the Communications Act of
1934, as amended, 47 U.S.C. §§ 154(i), 154(j), 303(r), 214, 309, 310(d), and Section 25.119 of the
Commission’s rules, 47 C.F.R. § 25.119, that the Application for Consent to Assign or Transfer Control
1146
See Free Press Petition at 28-29, 32-33; Franken Comments at 8 n.32; see also Public Knowledge-ILSR Petition
at 14-16 (stating that it is difficult to pin down the exact nature of AT&T’s compliance with previous merger
commitments).
1147
See Joint Opposition at 23 n.67; AT&T Response to Sept. 9, 2014, Information Request at 222-223.
Federal Communications Commission FCC 15-94
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of various Commission licenses and authorizations from DIRECTV to AT&T Inc. IS GRANTED to the
extent specified in this Memorandum Opinion and Order and subject to the conditions and commitments
specified herein, including Appendix B.
402. IT IS FURTHER ORDERED that the above grant shall include authority for AT&T,
consistent with the terms of this Memorandum Opinion and Order, to acquire control of: (a) any
DIRECTV licenses and authorizations that may have been inadvertently omitted from the Application; (b)
any licenses and authorizations issued to DIRECTV or its subsidiaries during the Commission’s
consideration of the Application or during the period required for consummation of the transaction
following approval; and (c) any applications that have been filed by DIRECTV or its subsidiaries and that
are pending at the time of consummation.
403. IT IS FURTHER ORDERED that the conditions and commitments incorporated herein
shall continue to apply until the conditions expire by their own terms as expressly stated, or the
Commission determines that the conditions or commitments should be modified or removed.
404. IT IS FURTHER ORDERED, pursuant to Sections 4(i) and (j), 309, and 310(d) of the
Communications Act of 1934, as amended, 47 U.S.C. §§ 154(i), 154(j), 309, 310(d), that the Petitions to
Deny filed by Alliance for Community Media, the Alliance for Communications Democracy, and
Common Cause; Cox Communications, Inc.; DISH Network Corporation; The Greenlining Institute; Free
Press; Public Knowledge and Institute for Local Self-Reliance; Writers Guild of America, West, Inc. and
all similar petitions ARE DENIED.
405. IT IS FURTHER ORDERED, pursuant to Sections 4(i) and (j), 309, and 310(d) of the
Communications Act of 1934, as amended, 47 U.S.C. §§ 154(i), 154(j), 309, 310(d), that the requests that
the Application be denied or held in abeyance pending the completion of other proceedings or
investigation of allegations raised in the Petition for Investigation filed by New Networks Institute &
Teletruth, the Comments filed by Minority Cellular Partners Coalition, and the Informal Objection and
Request to Hold Applications in Abeyance filed by Northwest Broadcasting, L.P., et al., ARE DENIED;
that all similar petitions and requests ARE DENIED; and the Petition for Investigation filed by New
Networks Institute & Teletruth IS DISMISSED.
406. IT IS FURTHER ORDERED that this Memorandum Opinion and Order SHALL BE
EFFECTIVE upon release, in accordance with Section 1.103 of the Commission’s rules, 47 C.F.R. §
1.103.
FEDERAL COMMUNICATIONS COMMISSION
Marlene H. Dortch
Secretary
Federal Communications Commission FCC 15-94
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APPENDIX A
List of Licenses to be Transferred
Part 25 – SATELLITE COMMUNICATIONS LICENSES
Satellite Space Station Licenses
File No.
Licensee Name/Call Sign
Service
Authorized
SAT-T/C-20140611-00060 DIRECTV Enterprises, LLC DIRECTV 4S (S2430) DBS
DIRECTV 7S (S2455) DBS
DIRECTV 8 (S2632) DBS
DIRECTV 9S (S2669) DBS
DIRECTV 5 (S2673) DBS
SAT-T/C-20140611-00061 DIRECTV Enterprises, LLC DIRECTV 8 (S2132) FSS
SPACEWAY 2 (S2133) FSS
SPACEWAY 1 (S2191) FSS
DIRECTV 11 (S2640) FSS
DIRECTV 10 (S2641) FSS
DIRECTV 9S (S2689) FSS
DIRECTV RB-1/14 (S2711,
S2869)
17/24 GHz
BSS and FSS
DIRECTV RB-2/15 (S2712) 17/24 GHz
BSS
DIRECTV RB-2A/12
(S2796, S2797)
17/24 GHz
BSS and FSS
DIRECTV KU-79W (S2861) FSS
DIRECTV KU-76W (S2888) FSS
Satellite Space Station Licenses Granted During the Pendency of the Application
File No.
Licensee Name/Call Sign
Service
Authorized
SAT-LOA-20130205-00016 DIRECTV Enterprises, LLC DIRECTV KU-45W (S2893) FSS
SAT-LOA-20140825-00094 DIRECTV Enterprises, LLC DIRECTV 15 (S2930) FSS
Transmit/Receive Earth Station Licenses
File No.
Licensee Call Sign
SES-T/C-20140611-00505 DIRECTV Enterprises, LLC E020172
E020241
E020242
E030105
E030117
E050112
E050113
E050121
E050122
Federal Communications Commission FCC 15-94
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E050255
E060014
E060236
E060441
E930229
E930304
E930485
E950349
SES-T/C-20140611-00506 DIRECTV Enterprises, LLC E010129
E010130
E010237
E050229
E050230
E050286
E060187
E060188
E060298
E060299
E070002
E070023
E070027
E070073
E070074
E070111
E070122
E070123
E080025
E080026
E080027
E080028
E080056
E080057
E090024
E090025
E090068
E090069
E090076
E090107
E090173
E100079
E100080
E100119
E100120
E100121
E100122
E110004
E120108
E120109
E120110
Federal Communications Commission FCC 15-94
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E120148
E130081
E930191
E980285
E990159
SES-T/C-20140611-00509 California Broadcast Center, LLC E020091
Transmit/Receive Earth Station Licenses Granted During the Pendency of the Application
File No.
Licensee Call Sign
SES-LIC-20140617-00524 DIRECTV Enterprises, LLC E140057
SES-LIC-20141106-00844 DIRECTV Enterprises, LLC E140115
SES-LIC-20141112-00848 DIRECTV Enterprises, LLC E140116
SES-LIC-20141112-00849 DIRECTV Enterprises, LLC E140117
SES-LIC-20150408-00198 DIRECTV Enterprises, LLC E150029
Transmit-Only Earth Station Licenses
File No.
Licensee Call Sign
SES-T/C-20140611-00510 DIRECTV Enterprises, LLC E050340
Receive-Only Earth Station Registrations
File No.
Registration Holder Call Sign
SES-T/C-20140611-00507 DIRECTV Enterprises, LLC E040179
E040180
SES-T/C-20140611-00508 DIRECTV Enterprises, LLC E980170
E980341
PART 74, 87, 90, AND 101 – PRIVATE WIRELESS LICENSES
ULS File No.
Licensee Call Sign
0006302429 DIRECTV Enterprises, LLC WPTZ691
WPZC401
WQHM919
WQIU946
WQTE840
0006312383 DIRECTV Sports Net Rocky
Mountain, LLC
WQPB424
0006302465 The DIRECTV Group, Inc. 71TV
Federal Communications Commission FCC 15-94
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APPENDIX B
Conditions
I. INTRODUCTION
To address the potential harms posed and confirm certain benefits offered by the transaction, the
Company will be subject to certain conditions imposed by the Commission.
II. DEFINITIONS
“Company” means AT&T and DIRECTV, both individually and collectively, including the combined
entity of AT&T and DIRECTV, as well as any successor-in-interest, affiliate or subsidiary directly or
indirectly controlling, controlled by, or under common control with AT&T, DIRECTV, or the combined
entity of AT&T and DIRECTV.
“Broadband Internet Access Service” means a mass-market retail service by wire or radio that provides
the capability to transmit data to and receive data from all or substantially all Internet endpoints, including
any capabilities that are incidental to and enable the operation of the communications service, but
excluding dial-up Internet access service. This term also encompasses any service that the Commission
determines provides a functional equivalent of the service described in the previous sentence.
“Closing Date” means the date on which the acquisition of DIRECTV by AT&T occurs.
“Communications Laws” means collectively, the Communications Act of 1934, as amended, the
Telecommunications Act of 1996, the Rules, and the adopted and released orders and decisions of the
Commission.
“Company Compliance Officer” means a senior corporate manager that is part of AT&T’s Chief
Compliance Office who has the requisite corporate and organizational authority to discharge the
Company’s duties with respect to the conditions specified in this Appendix B and has specific knowledge
of the Company’s operations referred to in these conditions in addition to general knowledge of the
Communications Laws necessary to discharge his or her duties under this Order prior to assuming his or
her duties.
“Customer Service Representatives” means personnel at the Company’s Fixed Broadband Internet Access
Service call centers and the Company’s in-region retail locations employed to provide guidance to
existing and potential customers about Fixed Broadband Internet Access Service sales packages.
“Fiber to the Premises” or “FTTP” means the technology for providing Broadband Internet Access
Service by running fiber optic cable directly from an Internet Service Provider (“ISP”) to a subscriber’s
home or business location.
“Fixed Broadband Internet Access Service” means a Broadband Internet Access Service that serves end
users primarily at fixed endpoints using stationary equipment. Fixed Broadband Internet Access Service
includes fixed wireless services (including fixed unlicensed wireless services) and fixed satellite services.
“Geocodes” means the longitude and latitude of a specific location.
“Independent Compliance Officer” means an independent third party who is selected in accordance with
the selection process set forth herein and engaged by the Company at its own expense to perform the
duties set forth herein including an evaluation of the adequacy of the Company’s compliance with the
conditions specified in this Appendix B.
“Implementing Employees” means all employees and agents, including but not limited to Customer
Service Representatives, of the Company who perform, supervise, oversee, or manage the performance of
duties that relate to the Company’s responsibilities under the conditions specified in this Appendix B.
Federal Communications Commission FCC 15-94
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“Internet Interconnection Points” means the facilities over which traffic is exchanged between the
Company’s network that carries Broadband Internet Access Service traffic and (1) peering networks or
(2) customers that purchase on-net only services to deliver traffic to and from the Company’s end users
over the company’s network.
“Rules” means the Commission’s regulations found in Title 47 of the Code of Federal Regulations.
“Standalone” means a service that is offered to subscribers not bundled with other services.
“Video Programming” means programming provided by, or generally considered comparable to
programming provided by, a television broadcast station or cable network, regardless of the medium or
method used for distribution, and includes but is not limited to: programming prescheduled by the
programming provider (also known as scheduled programming or a linear feed); programming offered to
viewers on an on-demand, point-to-point basis (also known as video on demand (“VOD”), pay per view
(“PPV”) or transactional video on demand (“TVOD”)); short programming segments (also known as
clips); programming that includes multiple video sources (also known as feeds, including camera angles);
programming that includes video in different qualities or formats (including high-definition and 3D); and
feature-length motion pictures that have been theatrically released.
III. FIBER TO THE PREMISES (FTTP) DEPLOYMENT
1. Introduction. As noted by the Applicants, the transaction reduces the Company’s incentive to
deploy FTTP service because the resulting increase in U-verse video subscriptions will
depress demand for DIRECTV’s services, thus “cannibalizing” its profits.
1
The purpose of
this condition is to address this competitive harm. This condition also provides an
opportunity for increased competition from services that rely on Fixed Broadband Internet
Access Service to deliver video by creating more customer locations that can receive
broadband service at speeds capable of delivering video service. In addition, to ensure that
schools and libraries also benefit from the FTTP deployment and the increased competition
that will result from the FTTP deployment required by this condition, we also require the
Company to offer Gigabit FTTP service to E-rate eligible schools and libraries within and
contiguous to the distribution areas where the Company deploys FTTP service.
2. Condition.
a. Within four (4) years, in accordance with the timing requirements set forth in subparts
2.a.(i) through 2.a.(v), the Company shall deploy FTTP-based Broadband Internet Access
Service to at least 12.5 million mass-market customer locations,
2
such as those occupied
by residences, home offices, and very small businesses (and excluding locations solely
occupied by large enterprises and institutions), of which no more than 2.9 million may be
upgrades to customer locations that receive speeds of 45 Mbps or more using fiber to the
node (“FTTN”) technology:
(i) By December 31, 2015, the Company shall expand its FTTP coverage to at least
1.6 million of the aforementioned customer locations, including locations built as
of April 15, 2015;
1
Application, “An Economic Assessment of AT&T’s Proposed Acquisition of DIRECTV,” Declaration of Michael
L. Katz, transmitted by letter from Maureen R. Jeffreys, Counsel for AT&T, to Marlene H. Dortch, Secretary, FCC,
MB Docket No. 14-90, ¶¶ 126, 129-130 & n.222 (filed June 11, 2014).
2
Customer locations are defined as addresses to which the Company has the technical ability to provide Broadband
Internet Access Service and excluding broadband-connected locations such as gates, ATMs, and elevators.
Federal Communications Commission FCC 15-94
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(ii) By December 31, 2016, the Company shall expand its FTTP coverage to at least
2.6 million of the aforementioned customer locations;
(iii) By December 31, 2017, the Company shall expand its FTTP coverage to at least
5.0 million of the aforementioned customer locations;
(iv) By December 31, 2018, the Company shall expand its FTTP coverage to at least
8.3 million of the aforementioned customer locations; and
(v) Within four (4) years of the Closing Date the Company will complete the
aforementioned FTTP deployment to all 12.5 million customer locations and the
Company will offer speeds of 45 Mbps or more to at least 25.7 million customer
locations.
b. No more than 1.5 million greenfield locations (i.e., locations at which wire or fiber lines
have not been deployed previously) may be counted towards the 12.5 million customer
locations required in subsection 2.a.
c. The Company may not use, receive, or request any Connect America Funds (“CAF”) for
the investments required to satisfy the 12.5 million FTTP deployment transaction
commitment or for operating expenses for such locations after such are deployed.
Specifically, 12.5 million geocoded locations reported for purposes of this condition
cannot be counted towards satisfying any CAF requirements.
3
d. In addition to the 12.5 million FTTP locations required by this condition, the Company is
obliged to offer 1 Gbps FTTP Service (“Gigabit FTTP Service”) to any E-rate eligible
school or library located within or contiguous to a distribution area in which the
Company deploys FTTP-based service, including all of the distribution areas included
with the 12.5 million FTTP buildout, which includes approximately 6,000 E-rate eligible
schools and libraries (“covered schools and libraries”). Provided however, the Company
is not obliged to deploy Gigabit FTTP Service to schools and libraries outside of its
wireline footprint. In order to satisfy this condition, the Company must offer Gigabit
FTTP Service in response to a Form 470 seeking bids for Gigabit FTTP Service to any
covered school or library, pursuant to the E-rate rules, and it must engage in affirmative
and adequate outreach to make all covered schools and libraries aware of the opportunity
to purchase its Gigabit FTTP Services. The Company shall make adjustments to its
outreach efforts in response to reasonable requests from the Commission’s Office of
General Counsel.
3
This would include but is not limited to any of the Connect America Fund (“CAF”) programs, as well as any other
Universal Service Fund (“USF”) programs that the Commission may implement at a future date.
Federal Communications Commission FCC 15-94
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3. Reporting.
a. The Company shall submit a report in accordance with the filing and service
requirements set forth in Section VII.5. herein on a semi-annual basis that describes its
compliance with subsections 2.a.-c. of this condition, with the first such report to be
submitted six (6) months after the Closing Date, in a format similar to the report that the
Company submits in connection with receiving CAF Phase I support, and is expected to
submit in Phase II, which must include at least the following, in electronic format:
(i) The number of new customer locations to which FTTP service has been deployed
during the reporting period;
(ii) A CSV file (comma separated values file) or other form approved by the
Commission staff for each location to which FTTP service has been deployed in
satisfaction of this deployment condition, information presented in substantially
the format shown in the chart below (the same location information collected
from CAF Phase I recipients);
4
(iii) Any explanatory notes as required; and
(iv) Any other information the Independent Compliance Officer determines is
reasonably necessary to report on compliance with this condition.
4
The Company must provide LAT and LONG; however, if information for a column other than LAT/LONG is
unavailable for a given location, that column may be left blank.
Federal Communications Commission FCC 15-94
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Template for FTTP Deployment Reports
Field Name Description Type Example
GEOID10
2010 Census Block FIPS code of the
location
Text "511650120001030"
OCN
NECA-Assigned Company Code for the
operating company serving the location
Text "0233"
SAC Study Area Code of the location Text "190233"
CLLI
Telcordia-specified eight-character
Common Language Location Identifier
(“CLLI”) code for the ILEC wire center
of the location
Text "AAPKOKXA"
LAT
Latitude of the location to 6 decimal
places
Float 38.274538
LONG
Longitude of the location to 6 decimal
places
Float -78.688942
b. The Company shall submit a report in accordance with the filing and service
requirements set forth in Section VII.5. herein on an semi-annual basis that describes its
compliance with subsection 2.d. of this condition, with the first such report to be
submitted six (6) months after the Closing Date, which must include at least the
following, in electronic format:
(i) A list of the covered schools and libraries to which the Company has provided a
bid for FTTP services pursuant to this condition, the FCC Form 470 associated
with each such bid, and information about the monthly recurring charges and any
special construction charges associated with each such bid;
(ii) The number of covered schools and libraries to which Gigabit FTTP Service has
been deployed during the reporting period;
(iii) A CSV file (comma separated values file) or other form approved by the
Commission staff for each school or library location to which Gigabit FTTP
Service has been deployed in satisfaction of this deployment condition,
information presented in substantially the format shown in the chart below;
5
(iv) Any explanatory notes as required;
(v) A description of the Company’s outreach to covered schools and libraries to
notify them of the availability of Gigabit FTTP Service; and
(vi) Any other information the Independent Compliance Officer determines is
reasonably necessary to report on compliance with this condition.
5
The Company must provide LAT and LONG; however, if information for a column other than LAT/LONG is
unavailable for a given location, that column may be left blank.
Federal Communications Commission FCC 15-94
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Template for FTTP Schools and Libraries Deployment Reports
Field Name Description Type Example
GEOID10
2010 Census Block FIPS code of the
location
Text "511650120001030"
OCN
NECA-Assigned Company Code for
the operating company serving the
location
Text "0233"
SAC Study Area Code of the location Text "190233"
CLLI
Telcordia-specified eight-character
Common Language Location
Identifier (“CLLI”) code for the ILEC
wire center of the location
Text "AAPKOKXA"
LAT
Latitude of the location to 6 decimal
places
Float 38.274538
LONG
Longitude of the location to 6 decimal
places
Float -78.688942
NAME Name of School or Library Text Berkeley High School
DISTRICT NAME
Name of School District or Library
System
Text
Berkeley Unified School
District
MONTHLY
CHARGE
Monthly Recurring Charge for the
Gigabit FTTP Service
Text
$ [Amount]
SPECIAL
CONSTRUCTION
Non-Recurring Special Construction
Charge for Gigabit FTTP Service
Text $ [Amount]
4. Enforcement. In addition to the enforcement actions described in this Order, any material
failure to comply with the conditions identified in subsections 2.a.-c. of this condition will
result in extension of all of the conditions specified in this Appendix B until completion of
the required buildout.
Federal Communications Commission FCC 15-94
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IV. NON-DISCRIMINATORY USAGE-BASED PRACTICES
1. Introduction. As noted by the Applicants, a benefit of this transaction is the improved ability
to develop and launch the Company’s video offerings provided to customers, including
through Fixed Broadband Internet Access Service. At the same time, as a result of the
transaction, the Company has an increased incentive to discriminate against unaffiliated
online video distribution services. Following the transaction, the Company will have
additional incentives to use strategies that limit consumers’ access to online video distribution
services in order to favor the U-verse or DIRECTV Video Programming product or the
combined entity’s online Video Programming products. Further, the Company will have an
increased incentive to limit subscriber demand for competitors’ online video content,
including through discriminatory usage-based allowances, commonly known as “data caps.”
6
The purpose of this condition is to address the incentive and ability to use such practices to
discriminate against Video Programming services that provide content to customers through
Fixed Broadband Internet Access Services by eliminating the risk that the Company will use
its Fixed Broadband Internet Access Service to engage in practices, such as discriminatory
usage-based allowances, that favor its owned or affiliated video content or video distribution
services, which include a Company-operated online video distribution service and a
Company “TV Everywhere” service (whether operated by U-verse or DIRECTV or the
equivalent).
2. Condition. In the application of usage-based allowances or other retail terms and conditions
for its Fixed Broadband Internet Access Service, the Company shall not discriminate in favor
of its own Video Programming services, including a Company-operated online Video
Programming service or any Company “TV Everywhere” service (whether operated by
AT&T’s U-verse service, DIRECTV, or the equivalent), or any content or application
available through its own Video Programming services, including through the exemption of
one or more of its own Video Programming services from usage-based allowances. For the
avoidance of doubt and consistent with such prohibition, this condition does not prohibit the
Company from offering discounts for integrated bundles of the Company’s U-verse or
DIRECTV satellite Video Programming service or rebranded offerings of these services with
the Company’s Fixed Broadband Internet Access Services.
3. Reporting. The Company shall submit a report in accordance with the filing and service
requirements set forth in Section VII.5. herein on a semi-annual basis that details its
compliance with this condition, with the first such report to be submitted six (6) months after
the Closing Date, which will include at least the following: a description of all terms and
conditions associated with its usage-based allowances and any other information the
Independent Compliance Officer determines is reasonably necessary to report as required by
this condition.
6
AT&T currently imposes on its wireline broadband customers usage-based data allowances that provide for
overage charges if customers exceed applicable allowances.
Federal Communications Commission FCC 15-94
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V. INTERNET INTERCONNECTION DISCLOSURE REQUIREMENTS
1. Introduction. We find that AT&T’s recently entered Internet interconnection agreements
submitted in this proceeding advance our understanding of the current marketplace and
developments that may affect broadband providers’ interconnection practices. We also find
that the transaction increases the risk that the Company will use such agreements to limit
competing online video content or online video distribution services. The purpose of this
condition is to monitor the terms of the Company’s future Internet interconnection
agreements to determine whether the Company is using such agreements to deny or impede
access to the Company’s networks in ways that limit competition from other online video
content or online video distribution services.
2. Condition. Commencing on the Closing Date and ending on the fourth anniversary of that
date, absent any extension under the terms of this Appendix B, the Company shall comply
with the following conditions:
a. Disclosure of Internet Interconnection Agreements. Within thirty (30) days of the
execution of any agreement subject to this condition, in accordance with the filing and
service requirements set forth in Section VII.5. herein, the Company shall submit all
agreements entered during this period for the exchange of traffic at Internet
Interconnection Points located within the United States, unless the volume of traffic
exchanged with the interconnecting party is less than a de minimis threshold, as specified
by the Independent Measurement Expert, but no prior approval of such agreement by the
Commission under any circumstances is herein required.
b. Reporting Internet Interconnection Performance Metrics. Using a methodology
developed and implemented as subpart 2.c., the Company must report, in accordance with
the filing and service requirements set forth in Section VII.5. herein, on a schedule
established by an Independent Measurement Expert, but no more than on a monthly
basis, the following performance characteristics of traffic exchanged at Internet
Interconnection Points located within the United States, unless the volume of traffic
exchanged with the interconnecting party is less than a de minimis threshold, as specified
by the Independent Measurement Expert:
(i) The probability distribution of latency between the border router of the
interconnecting network and the Company’s border router (“Latency”), as
defined by the Independent Measurement Expert;
(ii) The percentage of packets dropped at or between the border router of the
interconnecting network and the Company’s border router (“Packet Loss”), as
defined by the Independent Measurement Expert; and
(iii) The percent usage of each Internet Interconnection Point (“Utilization”), as
defined by the Independent Measurement Expert.
c. Independent Measurement Expert.
(i) Within sixty (60) days of the Closing Date, an Independent Measurement Expert
shall be identified, whose selection is acceptable to the Company and approved
by the Commission’s Office of General Counsel, in consultation with the
Wireline Competition Bureau and the Chief Technologist. If the Company and
the Commission’s Office of General Counsel do not agree on the selection of an
Independent Measurement Expert within sixty (60) days, then the Commission’s
Federal Communications Commission FCC 15-94
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Office of General Counsel, in consultation with the Wireline Competition Bureau
and the Chief Technologist, shall select the Independent Measurement Expert.
(ii) The Independent Measurement Expert must be a neutral third-party organization,
including with respect to sources of funding, and must have demonstrated
expertise in the measurement, collection, and analysis of Internet performance
data, including network performance characteristics related to Internet traffic
exchange.
(iii) The Company shall engage the Independent Measurement Expert at its own
expense to perform the duties set forth in this condition, including the
development and implementation of a methodology to measure and disclose the
interconnection performance metrics set forth in subpart 2.b. of this condition.
The terms of the engagement shall be subject to approval by the Commission’s
Office of General Counsel, in consultation with the Wireline Competition Bureau
and the Chief Technologist.
(iv) Within sixty (60) days of engaging the Independent Measurement Expert, the
Company, in consultation with the Independent Measurement Expert, will submit
for approval by the Commission’s Office of General Counsel, in consultation
with the Wireline Competition Bureau and the Chief Technologist, a report
describing the Independent Measurement Expert’s proposed methodology for the
measurement of the performance metrics described herein. Such report shall also
be submitted to the Independent Compliance Officer. The proposed
methodology should, at a minimum, address the following criteria:
1) Identification of Internet Interconnection Points, including the identity of
the interconnecting parties and the location and capacity of each
interconnection point;
2) Identification of a disclosure exemption threshold for a de minimis
volume of traffic exchanged between the Company and interconnecting
parties;
3) A definition of “Latency,” which shall include the disclosure of the
probability distribution;
4) A definition of “Packet Loss”;
5) Time of measurements, which shall, at a minimum, include an identified
window within peak usage periods;
6) For any performance metric contingent upon an interconnecting party’s
participation in the selected measurement methodology, a process for
waiving the disclosure of that metric at points of interconnection where
the interconnecting party declines to participate;
7) Frequency and duration of measurements;
8) Any devices used for measurement;
9) End points of measurements;
10) Placement of any devices; and
11) Frequency of disclosures.
(v) Within one hundred and twenty (120) days following the Commission’s Office of
General Counsel’s approval of the proposed methodology, the Company will
Federal Communications Commission FCC 15-94
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implement the methodology and begin reporting in accordance with this
condition and the filing and service requirements set forth in Section VII.5.
herein.
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VI. DISCOUNTED BROADBAND SERVICES PROGRAM
1. Introduction. We find that the availability of better and lower priced bundles of video and
broadband service is a potential benefit of the transaction. However, it also is in the public
interest to ensure that a bundle of video and broadband services is not the consumer’s only
competitive choice, and this protection may be particularly important for low-income
subscribers who may not be able to afford bundled services. Thus, the purpose of this
condition is to make available an affordable, low-price Standalone broadband service to low-
income consumers in the Company’s wireline footprint.
2. Condition.
Within nine (9) months of the Closing Date, the Company shall establish and commence a
program to substantially increase broadband adoption in low-income households throughout
AT&T’s wireline footprint (the “Discounted Broadband Services Program”).
a. The Company shall offer wireline Broadband Internet Access Service with download
speeds of at least 10 Mbps, where technically available, to qualifying households in the
Company’s wireline footprint for no more than $10 per month. If 10 Mbps wireline
Broadband Internet Access Service is not technically available, the Company shall offer
wireline Broadband Internet Access Service with download speeds of at least 5 Mbps,
where technically available, to qualifying households in the Company’s wireline footprint
for no more than $10 per month.
b. Where AT&T has deployed broadband service at top speeds below 5 Mbps, the Company
shall offer wireline Broadband Internet Access Service at speeds of at least 3 Mbps,
where technically available, to qualifying households in the Company’s wireline footprint
for no more than $5 per month.
c. Qualifying households are those where at least one individual participates in the
Supplemental Nutrition Assistance Program (“SNAP”), subject to annual recertification,
and that do not have outstanding debt for AT&T’s Fixed Broadband Internet Access
Services that was incurred within the six (6) months prior to the individual’s request for
services under the Discounted Broadband Services Program or that is incurred for
services provided under the Discounted Broadband Services Program and that is subject
to the Company’s ordinary debt collection procedures.
d. The Company shall offer the discounts set forth in this condition for at least four (4) years
from the commencement of the Discounted Broadband Services Program. Qualifying
households who sign up for the Discounted Broadband Services Program in the fourth
year of the Discounted Broadband Services Program shall remain eligible for at least
twelve (12) months.
e. Qualifying households shall not be required to pay any installation or modem charges or
fees in order to participate in the Discounted Broadband Services Program.
f. For the period during which this condition is in effect, the Company shall clearly and
conspicuously market the Discounted Broadband Services Program, including but not
limited to undertaking the following actions:
(i) Providing on the Company’s consumer-facing homepage a link to a webpage
devoted to describing the Discounted Broadband Services Program; and
(ii) Ensuring that the Company’s Customer Service Representatives are trained prior
to the commencement of the program to inform consumers of the availability of
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the Discounted Broadband Services Program offerings, including pricing, and
terms and conditions as described in this condition.
g. The Company shall effectively engage in targeted outreach efforts, in coordination with
schools and community-based organizations serving low-income individuals and
families, including, but not limited to veterans, the elderly, and those who are non-
English speaking, to adequately publicize the availability of the Discounted Broadband
Services Program, to ensure that qualified individuals and households are informed about
and have access to the program. The Company shall make adjustments to its outreach
efforts in response to reasonable requests from the Commission’s Office of General
Counsel and, at a minimum, shall take the following actions during each year that the
program is in effect:
(i) Promote the Discounted Broadband Services Program, including through public
service announcements that shall have a minimum annual value of $15 million.
(ii) Distribute Discounted Broadband Services Program information to at least
twenty (20) organizations that work with low-income communities on a national
and local level.
(iii) Coordinate with state education departments and local school districts, including
requesting that all school districts within the Company’s wireline footprint
include information about the Discounted Broadband Services Program with
their communications to families in advance of the school year, including in each
communication relating to the National School Lunch Program (“NSLP”), as
feasible and appropriate, to ensure that families that qualify for the NSLP are
informed about the Discounted Broadband Services Program at the beginning of
the school year and have the opportunity to register.
(iv) Provide appropriate promotional and collateral materials to all public school
districts within the Company’s wireline footprint and requesting that the
materials be included in NSLP mailings.
(v) Educate school professionals about the Discounted Broadband Services Program,
including by conducting outreach to various education-related associations such
as parent-teacher associations and associations representing guidance counselors
and social workers, in order to reach those who are most likely to work closely
with students and families.
h. Prospective participants shall be directed to a Company phone number dedicated to the
Discounted Broadband Services Program to verify eligibility. Qualifying callers shall be
transferred to a centralized order-entry center.
i. The Company shall submit a report in accordance with the filing and service
requirements set forth in Section VII.5. herein on a semi-annual basis that includes a
description of the Company’s compliance with the condition, with the first such report to
be submitted six (6) months after the Closing Date. The report shall at least include the
following:
(i) The total number of households participating in the Discounted Broadband
Services Program;
(ii) A detailed description of outreach efforts made during the reporting period to
publicize the Discounted Broadband Services Program to schools and
community-based organizations, including a list of the community-based
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organizations participating, and representative examples of the promotional and
collateral materials provided; and
(iii) An analysis of the effectiveness of the Discounted Broadband Services Program,
describing any adjustments the Company has implemented during the reporting
period or plans to implement to improve its effectiveness.
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VII. COMPLIANCE PROGRAM AND REPORTING
1. Company Compliance Officer. Within thirty (30) calendar days after the Closing Date,
the Company shall designate a senior corporate manager with the requisite corporate and
organizational authority to serve as a Company Compliance Officer and to discharge the
Company’s duties with respect to the conditions specified in this Appendix B. The person
designated as the Company Compliance Officer shall be part of AT&T’s Chief Compliance
Office. In addition to the general knowledge of the Communications Laws necessary to
discharge his or her duties under this Order, the Compliance Officer shall have specific
knowledge of the Company’s operations referred to in these conditions prior to assuming the
duties required by this Appendix B.
2. Company Implementation and Compliance Plan. The Company agrees that it shall,
within sixty (60) calendar days after the Closing Date, develop and implement an
Implementation and Compliance Plan designed to ensure its implementation of and
compliance with the conditions specified in this Appendix B, establishing, inter alia,
mechanisms to provide, on an ongoing basis, adequate notice and training to all Company
personnel involved with the activities covered by the conditions in this Appendix B. This
Implementation and Compliance Plan shall be provided to the Independent Compliance
Officer for review upon the Independent Compliance Officer’s selection.
3. Independent Compliance Officer.
a. Within ninety (90) days of the Closing Date, an Independent Compliance Officer shall be
identified, whose selection is acceptable to the Company and approved by the
Commission’s Office of General Counsel, in consultation with the Wireline Competition
Bureau. If the Company and the Commission’s Office of General Counsel do not agree
on the selection of an Independent Compliance Officer within ninety (90) days, then the
Commission’s Office of General Counsel, in consultation with the Wireline Competition
Bureau, shall select the Independent Compliance Officer.
b. The Company shall engage the Independent Compliance Officer at its own expense to
perform the duties set forth herein, including an evaluation of the adequacy of the
Company’s compliance with the conditions specified in this Appendix B, and shall
designate the Commission as a third-party beneficiary to the engagement. The terms of
the engagement shall be subject to approval by the Commission’s Office of General
Counsel, in consultation with the Wireline Competition Bureau.
c. The Independent Compliance Officer and any persons retained by the Independent
Compliance Officer to effectuate this Appendix B may not (i) have had any business or
familial relationships with the Company within the past five (5) years; (ii) have been
employed by or affiliated with any competitor of the Company within the past two (2)
years; (iii) have been an employee of the Commission within the past two (2) years; (iv)
have submitted any comments or otherwise participated in this transaction proceeding or
have been employed by or affiliated with any entity that has submitted any comments or
otherwise participated in this transaction proceeding within the past two (2) years; or (v)
have any conflict of interest related to the duties of the Independent Compliance Officer
that could prevent him or her from performing his or her duties in a fair and unbiased
manner. In addition, for a minimum of five (5) years after the end of the Independent
Compliance Officer’s engagement, the Independent Compliance Officer shall not be
employed by, or have any business relationship with, the Company.
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d. The Independent Compliance Officer shall have the power and authority to review and
evaluate the Company’s Implementation and Compliance Plan and any related materials,
and recommend to the Company changes to address any perceived deficiencies in the
Plan. Any such recommendations shall be included in the Independent Compliance
Officer’s Compliance Reports.
e. The Independent Compliance Officer shall prepare and submit, in accordance with the
filing and service requirements set forth in Section VII.5. herein, a Compliance Report
within sixty (60) days of receiving the Company’s reports required under the conditions
specified in this Appendix B. Each such Compliance Report shall include a detailed
description of the Company’s efforts during the relevant period to comply with the
conditions and will specifically meet the reporting requirements for the conditions set
forth in this Appendix B. The Independent Compliance Officer shall provide a final copy
of all Compliance Reports to the Company’s Compliance Officer at least seven (7) days
before the report is submitted to the Commission, so that the Company may prepare a
request for confidential treatment if necessary.
f. The Company shall have thirty (30) days from submission of the Compliance Report to
the Commission to comment on and/or object to the Compliance Report and must submit
such comments and/or objections in accordance with the filing and service requirements
set forth in Section VII.5. herein. The Company’s comments and/or objections shall be
accompanied by a statement explaining the basis for its response and shall comply with
Section 1.16 of the Rules and be subscribed to as true under penalty of perjury in
substantially the form set forth therein.
7
g. If the Independent Compliance Officer in the exercise of his or her responsibilities
discovers or receives evidence that suggests to the Independent Compliance Officer that
the Company is materially violating or materially failing to comply with a condition
specified in this Appendix B, the Independent Compliance Officer shall promptly provide
that information to the Company and the Commission’s Office of General Counsel,
Wireline Competition Bureau, and Enforcement Bureau.
h. The Independent Compliance Officer shall not have the authority to direct the Company
to make changes to the Implementation and Compliance Plan, the Company’s efforts to
comply with the conditions specified in this Appendix B, or the Company’s business
practices or policies. The Commission (and its Bureaus and Offices in their delegated
authority) retains all rights to determine if a violation has occurred and to take whatever
action it deems appropriate. The Independent Compliance Officer also shall not have the
authority to participate in the business activities or management of the Company.
i. The Company shall assist the Independent Compliance Officer in the performance of the
duties of the Independent Compliance Officer set forth in this Order. The Company shall
take no action to interfere with or to impede the Independent Compliance Officer’s
accomplishment of his or her duties. The Independent Compliance Officer, and any
person retained by the Independent Compliance Officer, may, in connection with the
reasonable exercise of his or her responsibilities, subject to the Company’s privilege
rights, on reasonable notice to the Company during normal business hours, and in
coordination with the Company Compliance Officer:
(i) Interview any Company personnel for any purpose reasonably related to the
Independent Compliance Officer’s duties; any such interview will be subject to
7
47 C.F.R. § 1.16.
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the reasonable convenience of such personnel and the Company will make such
personnel available;
(ii) Have such access to the facilities of the Company as is reasonably required by
the Independent Compliance Officer’s duties;
(iii) Have full and complete access to and inspect and copy any document, email,
contract, and any other information in the possession, custody, or control of the
Company reasonably related to the Independent Compliance Officer’s duties; and
(iv) Require the Company to provide compilations of documents, data, or other
information reasonably related to the Independent Compliance Officer’s duties,
and to submit reports to the Independent Compliance Officer containing such
material, in such form as the Independent Compliance Officer may reasonably
direct.
j. Any objections by the Company to actions by the Independent Compliance Officer must
be conveyed in writing to the Commission’s Office of General Counsel, Wireline
Competition Bureau, Enforcement Bureau, and to the Independent Compliance Officer
within thirty (30) calendar days after the action giving rise to the objection or else such
objection may be considered waived at the discretion of the Commission’s Office of
General Counsel. Any such objections will be resolved by the Commission’s Office of
General Counsel within thirty (30) days of the date that the Company files the objection.
k. The Independent Compliance Officer may hire such persons as are reasonably necessary
to fulfill the Independent Compliance Officer’s duties, with prior notice and subject to the
approval of the Commission’s Office of General Counsel. The Independent Compliance
Officer and any persons hired to assist the Independent Compliance Officer shall serve at
the cost and expense of the Company, on such terms and conditions as the Commission’s
Office of General Counsel approves, and shall be subject to the execution of customary
confidentiality agreements. The compensation of the Independent Compliance Officer
and any persons hired to assist the Independent Compliance Officer shall be on
reasonable and customary terms commensurate with the individuals’ experience and
responsibilities and consistent with reasonable expense practices. The Independent
Compliance Officer shall submit a monthly expense report to the Company and the
Commission’s Office of General Counsel, with the first such report to be submitted
within thirty (30) days after the selection of the Independent Compliance Officer,
describing the total amounts expended.
l. The Commission’s Office of General Counsel may at any time require the Company to
replace the Independent Compliance Officer with a substitute Independent Compliance
Officer selected by the same selection process as used in the initial selection.
m. The Company may not refuse to pay the Independent Compliance Officer without first
receiving approval of the Commission’s Office of General Counsel. If the Company
determines that the Independent Compliance Officer has ceased to act or failed to act
diligently or in a cost-effective manner, it may submit a request to the Commission’s
Office of General Counsel proposing corrective actions to be taken by the Independent
Compliance Officer or the selection of a substitute Independent Compliance Officer.
n. The Independent Compliance Officer’s engagement will continue as long as one or more
of the conditions in this Appendix B are in effect.
4. Company Obligation to Report Noncompliance. The Company shall report, in
accordance with the filing and service requirements set forth in Section VII.5. herein, any
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material noncompliance with the conditions specified in this Appendix B within fifteen (15)
calendar days after discovery of such noncompliance. Such reports shall include a detailed
explanation of: (i) each instance of material noncompliance; (ii) the steps that the Company
has taken or will take to remedy such noncompliance; (iii) the schedule on which such
remedial actions will be taken; and (iv) the steps that the Company has taken or will take to
prevent the recurrence of any such noncompliance.
5. Confidentiality and Filing and Service Requirements. Any and all materials submitted by
any party pursuant to the conditions specified in this Appendix B shall be subject to the
Protective Orders already issued in this proceeding unless and until such Orders are modified
or replaced, at which point the modified or replacement provisions shall apply. In addition,
all such materials, unless otherwise provided in this Appendix B, shall be filed in this docket
with the Commission’s Secretary’s Office with an electronic copy submitted via email to the
addressees listed below.
a. Wireline Competition Bureau:
Christopher Sova (or his successor)
With a copy submitted electronically to Christopher.S[email protected].
b. Office of General Counsel:
Jamillia Ferris (or her successor)
With a copy submitted electronically to Jam[email protected].
c. Enforcement Bureau:
Chief, Investigations and Hearings Division (or his successor)
Enforcement Bureau
With a copy submitted electronically to [email protected] or his successor.
d. Independent Compliance Officer:
To be selected.
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VIII. ENFORCEMENT
Any material failure to comply with the requirements identified in this Appendix B may result in:
1. An appropriate forfeiture penalty under applicable law; and/or
2. Any other appropriate remedies allowed under the Communications Laws, including, but not
limited to, an award of damages for the benefit of consumers for any harm incurred, issuance
of cease-and-desist orders, modification of the conditions, and issuance of an order requiring
appropriate remedial action.
The enforcement and compliance programs established in these conditions are intended to
supplement the Commission’s usual enforcement and investigative powers, which remain fully
applicable, and do not replace such powers.
IX. VIOLATIONS
Any violation of these conditions shall be a violation of the Order.
X. TERM
These conditions shall remain in effect for four (4) years beginning on the Closing Date, except
as otherwise stated in this Appendix B, and if the Commission makes a formal finding that the Company
has violated any conditions, in whole or in part, in this Appendix B, the Commission shall have authority
to extend the terms of such conditions for two (2) additional years on its own motion.
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APPENDIX C
Analysis of Merger Simulation Models
TABLE OF CONTENTS
Heading Paragraph #
I. INTRODUCTION .................................................................................................................................. 1
II. THE SIMULATION MODEL ............................................................................................................... 6
A. Geographic Definition and Product Terminology ........................................................................... 9
B. Deriving Shares and a Measure of Price from Data ....................................................................... 12
1. Generating Shares .................................................................................................................... 13
2. Creating a Simple Price Measure ............................................................................................ 17
C. Modeling and Estimating Demand ................................................................................................ 22
1. Modeling Demand ................................................................................................................... 22
2. Estimating Demand Parameters .............................................................................................. 27
D. Modeling Pricing and Determining Marginal Cost ........................................................................ 29
E. Solving for Post-Merger Prices ...................................................................................................... 32
III. ECONOMIC EFFECTS CAPTURED BY THE SIMULATION MODEL ......................................... 33
A. Horizontal Overlap......................................................................................................................... 34
B. Programming Payment Reductions ................................................................................................ 36
C. Bundling Effects ............................................................................................................................ 38
IV. MODEL CORRECTIONS AND ADJUSTMENTS ............................................................................ 42
A. Corrections to Price Recentering Procedure .................................................................................. 45
B. Adjustments to Third-Party Prices ................................................................................................. 50
C. Programming Payment Reductions ................................................................................................
55
V. RESULTS ............................................................................................................................................. 78
A. Consumer Surplus Effects .............................................................................................................. 79
B. Price and Share Effects .................................................................................................................. 85
C. DMA Specific Effects .................................................................................................................... 95
1. Market-Level Welfare Effects ................................................................................................. 97
2. U-verse Household Penetration and Market Outcomes ........................................................ 101
3. Maps of Main Simulation Results ......................................................................................... 104
D. Robustness: Outliers and Price Winsorization ............................................................................ 108
E. Robustness: Appropriate Setting of the Pre-Merger Synthetic Bundle Discount ....................... 111
VI. COMPARISON WITH OTHER STUDIES ....................................................................................... 113
A. Studies of the U.S. Broadband Internet Service Market .............................................................. 115
B. Studies of the U.S. MVPD Market .............................................................................................. 121
VII.IMPLICATIONS ............................................................................................................................... 124
I. INTRODUCTION
1. This Appendix describes and presents our analysis of the merger simulation model (“BH
Simulation”) that was submitted by Professors Steve Berry and Phil Haile on behalf of AT&T Inc.
(“AT&T”) to evaluate the potential for unilateral effects that may arise as a result of its proposed
acquisition of DIRECTV. (We refer to the two entities, collectively, as the “Applicants.”)
2. Unilateral effects, in this context, concern the incentive for AT&T to impose post-
transaction price increases, particularly for video service. While the Applicants acknowledge the
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potential for these effects,
1
they claim that video and broadband services (the former of which are offered
by each of the Applicants – though DIRECTV’s footprint and subscriber base are much more extensive
than AT&T’s – and the latter of which are offered only by AT&T) are complements
2
and, therefore, that
the transaction would result in downward pricing pressure on the bundle that combines DIRECTV’s
video service with AT&T’s broadband service.
3
The Applicants argue that these marketplace-specific
factors need to be weighed against any potential competitive harms that would arise from the transaction.
4
3. In support of the above claims, the Applicants submitted two merger simulation models.
The initial submission included a merger simulation model submitted by Dr. Michael Katz, which is
described in the Katz Declaration.
5
Subsequent submissions were based on the BH Simulation submitted
by Professors Berry and Haile.
6
The Applicants represented the two models as closely related.
7
After
examining both models, we agreed with this assessment and focused on the BH Simulation, which is the
more detailed and economically rigorous variant of the commonly adopted modeling approach. We find
that the BH Simulation provides a good starting point to analyze potential unilateral effects. As discussed
in detail below, we find that, after some corrections and incorporation of additional data, including
information on potential programming payment reductions, the quantitative prediction of the model is that
the transaction is likely to produce modest benefits to consumers through downward pricing pressure on
the bundle that combines DIRECTV’s video service with AT&T’s broadband service, which, in turn, puts
downward pricing pressure on bundles provided by cable companies. The programming payment
reductions produce further consumer welfare gains, as those reductions will independently exert
downward pressure on the price of AT&T’s video service.
1
See Steve Berry & Phil Haile, “Quantitative Analysis of an AT&T-DIRECTV Merger,” transmitted by letter from
Maureen R. Jeffreys, Counsel for AT&T, to Marlene H. Dortch, Secretary, FCC, MB Docket No. 14-90, at 4 (filed
July 17, 2014) (“Berry-Haile Analysis”).
2
See id.
3
See id. at 4-7.
4
See Application, “An Economic Assessment of AT&T’s Proposed Acquisition of DIRECTV,” Declaration of
Michael L. Katz, transmitted by letter from Maureen R. Jeffreys, Counsel for AT&T, to Marlene H. Dortch,
Secretary, FCC, MB Docket No. 14-90, ¶ 4 (filed June 11, 2014) (“Katz Decl.”); Berry-Haile Analysis at 9-10;
Steve Berry & Phil Haile, “Quantitative Analysis of an AT&T-DIRECTV Merger: Additional Discussion of
Modeling Choices, Data, and Results,” transmitted by letter from Maureen R. Jeffreys, Counsel for AT&T, to
Marlene H. Dortch, Secretary, FCC, MB Docket No. 14-90, at 5 (filed Sept. 23, 2014) (“Berry-Haile Additional
Discussion”).
5
See Katz Decl. ¶¶ 85-95, Appendix I; Joint Opposition, “An Economic Assessment of AT&T’s Proposed
Acquisition of DIRECTV,” Reply Declaration of Michael L. Katz, transmitted by letter from Maureen R. Jeffreys,
Counsel for AT&T, to Marlene H. Dortch, Secretary, FCC, MB Docket No. 14-90, ¶¶ 52, 55 (filed Oct. 16, 2014)
(“Katz Reply Decl.”); Compass Lexecon, “Additional Detail on the Demand Estimation, Merger Simulation, and
Investment Model Analysis Performed by Professor Katz,” transmitted by letter from Maureen R. Jeffreys, Counsel
for AT&T, to Marlene H. Dortch, Secretary, FCC, MB Docket No. 14-90, ¶¶ 5-46 (filed July 28, 2014) (“Katz
Additional Detail”).
6
See Berry-Haile Analysis; Steve Berry & Phil Haile, “Quantitative Analysis of an AT&T-DIRECTV Merger:
Updated Results,” transmitted by letter from Maureen R. Jeffreys, Counsel for AT&T, to Marlene H. Dortch,
Secretary, FCC, MB Docket No. 14-90 (filed Sept. 23, 2014) (“Berry-Haile Updated Results:); Berry-Haile
Additional Discussion.
7
See Joint Opposition of AT&T and DIRECTV to Petitions to Deny and Condition and Reply to Comments,
transmitted by letter from Maureen R. Jeffreys, Counsel for AT&T, to Marlene H. Dortch, Secretary, FCC, MB
Docket No. 14-90, at 30-32 (filed Oct. 16, 2014) (“Joint Opposition”); Katz Reply Decl. ¶¶ 2, 56-58.
Federal Communications Commission FCC 15-94
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4. It is important to note that the question posed in any merger simulation is: “Assuming
that all industry participants’ product offerings remain the same, what price changes arise from the
changed pricing incentives created by the proposed transaction?” The simulation predicts the
transaction’s price effects, holding constant the industry product mix. The only dimension of adjustment
that the BH Simulation allows is in the prices at which industry participants offer their products. In
particular, while the BH Simulation captures the change in the combined firm’s pricing incentives as a
result of the merger – and thus allows the price of the bundle that combines DIRECTV’s video
programming service with AT&T’s broadband Internet access service to change endogenously – it does
not assume that consumers will obtain any additional exogenous benefit from the post-merger integration
of that (currently synthetic) bundle.
8
The simulation also does not address issues involving post-merger
anticompetitive incentives that AT&T and DIRECTV may have to reduce the ability of rivals to compete
effectively. Rather, the BH Simulation provides a focused lens through which to consider changing
pricing incentives created by the merger.
5. This Appendix proceeds as follows: In Section II, we describe the BH Simulation in
detail. Section III discusses the economic effects that the model captures. In Section IV, we discuss
adjustments that we made to the BH Simulation to address shortcomings of the original model. Section V
presents the results of our analysis. Section VI provides a comparison of the results with results from
previous studies in the economics literature. Finally, Section VII concludes.
II. THE SIMULATION MODEL
6. The BH Simulation is a sophisticated application of merger simulation techniques that are
well accepted in the economic literature.
9
The underlying structure of the BH Simulation builds on the
discrete choice modeling approach to demand estimation combined with assumptions about the structure
of a firm’s pricing decisions to arrive at a computationally feasible way to derive post-merger price
predictions.
10
7. Given the inevitable constraints imposed on parties by limited data and the current state
of the art in economic modeling, the submitted model is a very fine example of a merger simulation. This
assessment is reflected in our adoption of the framework in reviewing the transaction. While we differ
from the Applicants in the interpretation of certain simulation results and a few of the assumptions and
8
Because the BH Simulation ignores these possible benefits (which might include one-stop shopping, single
installation, single bill, single customer-service contact, enhanced video-on-demand services, dynamic advertising,
etc.), we do not discuss them in this Appendix. However, we acknowledge that, if – as the Applicants claim (see,
e.g., Katz Decl. ¶ 26; Letter from Maureen R. Jeffreys, Counsel for AT&T, to Marlene H. Dortch, Secretary, FCC,
MB Docket No. 14-90, Exhibit 1, “Expert Report of Dr. Ravi Dhar,” ¶¶ 9-17 (April 21, 2015); Letter from Maureen
R. Jeffreys, Counsel for AT&T, to Marlene H. Dortch, Secretary, FCC, MB Docket No. 14-90, Exhibit 2, “2020
Value Proposition: Summary of US Consumer Quant Findings,” at 24 (April 21, 2015); Letter from Maureen R.
Jeffreys, Counsel for AT&T, to Marlene H. Dortch, Secretary, FCC, MB Docket No. 14-90, Exhibit 3, “Consumer
Communication Services Preferences: Enter Broadband Network Service Operators,” at 11-12 (April 21, 2015)) –
such benefits exist, their presence would (all else being equal) tend to increase the transaction’s benefits for
consumers.
9
See Berry-Haile Analysis at 13, 35, 49-50; Berry-Haile Additional Discussion at 4; Steven T. Berry, Estimating
Discrete-Choice Models of Product Differentiation, 25 RAND
J. OF ECON. 242, 242-262 (1994) (“Berry (1994)”);
Steven Berry, James Levinsohn & Ariel Pakes, Automobile Prices in Market Equilibrium, 63 E
CONOMETRICA 841,
841-890 (1995) (“Berry et al. (1995)”); Aviv Nevo, A Practitioner’s Guide to Estimation of Random-Coefficients
Logit Models of Demand, 9 J.
OF ECON. AND MGMT. STRATEGY 513, 513-548 (2000); Aviv Nevo, Mergers with
Differentiated Products: The Case of the Ready-to-Eat Cereal Industry, 31 RAND
J. OF ECON. 395, 395-421 (2000)
(“Nevo, Mergers with Differentiated Products (2000)”).
10
See generally Berry-Haile Analysis.
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data sources, the underlying approach is accepted as persuasive and as representing current best practice
in merger simulation.
8. Merger simulation is typically a complex undertaking. The model can be thought of as a
series of computations. The inputs into these computations are data on firms’ actual prices, subscriber
shares, and product characteristics. The output is a set of prices for every type of product in the industry
based on the new pricing incentives arising from the merger. There are several parts to the computations
executed in the BH Simulation. These are: (1) deriving shares and a measure of price from data; (2)
modeling and estimating demand; (3) modeling pricing; (4) estimating marginal costs; and (5) solving for
post-merger prices. This section describes the key features of each of these steps. In this section, the
discussion of the BH Simulation does not include any potential cost reductions that may result from the
transaction. Because the simulation is somewhat complex, critical evaluation is left for subsequent
sections.
A. Geographic Definition and Product Terminology
9. In the simulation, the estimation is performed at the level of a Designated Market Area
(“DMA”).
11
Within a DMA, consumers have access to different sets of products according to the
availability of providers’ services. This access to different products is at the ZIP code level. The BH
Simulation aggregates product availability at the ZIP code level, with data on subscriber shares from
various sources, to generate product-level shares of the number of households purchasing that product at
the DMA level.
12
The BH Simulation also assumes that firm pricing of a product is fixed at the DMA
level.
13
10. It is important to note at the outset that this merger simulation differs from others in that
it includes a variety of products, not all of which compete with each other. The marketplace for
broadband Internet access and video programming services allows bundling; that is, consumers can
choose to purchase broadband only, video only, both from different providers, both from the same
provider, or neither service (i.e., the outside good). Discussing these services requires precision in
terminology. A consumer that chooses both broadband and video consumes a bundle. If the consumer
purchases both from the same provider at a bundle-specific price, he or she consumes an integrated
bundle at a bundle price. A synthetic bundle is purchased by a consumer that chooses two different
suppliers for broadband and video services.
14
An important consequence of this feature of the
marketplace is that the “shares” measured here are not shares within a relevant product market, but
percentages of consumers choosing a particular standalone service, synthetic bundle, or integrated
bundle.
15
11
A Designated Market Area (“DMA”) is a Nielsen-defined television market consisting of a unique group of
counties. The United States is divided into 210 non-overlapping DMAs.
12
See Berry-Haile Analysis at 20-33, 41.
13
See id. at 74.
14
A synthetic bundle can represent a contractual relationship between two providers, but this is not a requirement in
the simulation model. That is, AT&T and DIRECTV jointly market a bundle that can be purchased by a consumer,
but a consumer that simply chooses to purchase standalone AT&T broadband and standalone DIRECTV video
under separate agreements would also be included in the share of consumers in the model that purchase the AT&T-
DIRECTV synthetic bundle. Similarly, a consumer purchase of standalone cable video and standalone Telco
broadband would be counted under the cable-Telco synthetic bundle share in the BH Simulation.
15
In particular, we avoid using the term “market shares,” because not all products considered here are in the same
“market” (as the term is typically used in the antitrust context). In fact, the estimates show that standalone video
components and standalone broadband components combined in synthetic bundles are complements – where raising
(continued….)
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11. A product is defined from a consumer’s viewpoint. Broadband services and video
programming services each may be purchased as standalone services or may be bundled together, either
from a single provider or from two different providers. As noted before, consumers can choose to
purchase broadband only, video only, both from different providers, both from the same provider, or
neither service. That is, an integrated bundle from AT&T, a synthetic bundle that combines DIRECTV’s
video service with a cable provider’s broadband service, and a standalone broadband service offered by a
cable provider are all examples of products from the point of view of the consumer, as defined in the BH
Simulation. Individual firms, on the other hand, provide components (e.g., video component, broadband
component, integrated bundle component). A synthetic bundle is not a component but is instead a
product that comprises two components from different providers.
16
Firms price components (e.g., the
video component) that they offer, while consumers choose products (e.g., a synthetic bundle of broadband
and video). A benefit of the structure of the BH Simulation is that it allows for a comparison between the
harms from a reduction in competition in the video component and the potential benefits of strengthened
incentives to reduce the price of the AT&T broadband-DIRECTV video bundle following the merger.
B. Deriving Shares and a Measure of Price from Data
12. The BH Simulation uses data on shares, consumer demographics, prices, and component
characteristics. The data are drawn from several primary sources, including the Applicants’ information
and web-scraped pricing information.
17
As described below, Professors Berry and Haile use these data to
estimate shares of products and also to construct a simple price measure for each product in each DMA.
1. Generating Shares
13. Professors Berry and Haile develop a methodology to construct DMA-level shares for all
products. There is no single data source that provides this information. The primary data sources that
Professors Berry and Haile use in constructing their DMA-level shares are: (1) the Applicants’ subscriber
counts for all components; (2) aggregate video subscriber counts used for copyright payments from Cable
Data Corporation; (3) Nielsen survey of video services; (4) Nielsen survey of Internet services; and (5)
survey data, collected by Professor Ravi Dhar, from a large number of households on all video/broadband
services, which included demographic data on households.
18
Consumer demographics, other than those
obtained in the Dhar survey, were collected from the U.S. Census.
19
14. Each of the data sources listed above only partially captures the full picture of video and
broadband services that are purchased by consumers; no data source, by itself, gives a picture of the
subscriber shares for all possible products. Furthermore, shares implied by the different data sources
sometimes conflict. For instance, Nielsen survey data implies a subscriber count for DISH that exceeds
DISH’s reported number of subscribers.
20
Additionally, national video subscriber counts for AT&T were
higher than copyright payments from the Cable Data Corporation indicated.
21
(Continued from previous page)
the price of one reduces demand for the other – rather than substitutes in the same market, where raising the price of
one increases demand for the other.
16
See Berry-Haile Analysis at 73. Though the components in a synthetic bundle are priced separately, they may be
offered with a discount to consumers if they are marketed jointly by the providers.
17
As described in Section IV.B, we supplemented the pricing data submitted by the Applicants with third-party
information to implement what we refer to as the “Modified Simulation.”
18
See Berry-Haile Analysis at 21.
19
See id. at 28; Katz Additional Detail ¶ 11.
20
See Berry-Haile Analysis at 32.
21
See id.
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15. To reconcile these data sources and arrive at a coherent set of shares for each DMA,
Professors Berry and Haile conduct a preliminary estimation exercise in which they infer the shares for all
products implied by their data.
22
This estimation procedure seeks to produce the shares that best fit the
available data. It uses a weighted quadratic measure of fit across the five data sources. The weighted
feature of this measure puts more weight on those data sources that appear more informative, while the
quadratic feature penalizes large differences from observed data more severely than small deviations.
23
Finally, Professors Berry and Haile note that the conflicts among data sources discussed above result in a
differential bias, and they explore two approaches to correct for the bias.
24
16. We appreciate that dealing with multiple data sources is usually problematic. Nothing in
the submission suggests that the problems encountered in constructing share measures are unusual. The
solutions also seem reasonable. Further, the transparency with which the challenges are discussed is
notable.
2. Creating a Simple Price Measure
17. To conduct a merger simulation, it is necessary to have a single price per product.
25
This
requirement necessitates the construction of a simple price measure from the large array of prices, plans,
add-ons, and tiers offered by each firm in the industry. For the BH Simulation, price data come from two
sources: (1) prices and plans matched to subscribers from the Applicants; and (2) web-scraped data on
other firms’ prices and components.
26
Professors Berry and Haile note the challenges in obtaining good
price data. For example, they note the great variety of components, tiers, and add-ons, as well as
differences between introductory prices and prices for continuing customers.
27
Further, the collection of
web-scraped prices of competitors creates a number of challenges, notably from: (1) ZIP codes where
prices cannot be accessed but service is provided by a firm; (2) DMAs where pricing information was
collected for a provider but where coverage information is unavailable; and (3) missing data on
component characteristics.
28
In each case, the BH Simulation interpolates the missing information from
adjacent ZIP codes.
29
18. First, Professors Berry and Haile aggregate prices to the plan and ZIP code level. The
AT&T and DIRECTV subscriber-level data are aggregated to the ZIP-plan level for customers in their
first 12 months of service, and these data are combined with the web-scraped data collected at the ZIP-
plan level for all the other firms.
30
Professors Berry and Haile then regress price on quality measures (a
flexible specification of broadband speed and/or the number of channels) and a set of firm, DMA, and
22
See id. at 20-33, 131-135.
23
See id. at 30. The Dhar survey is not representative of the entire population in each DMA. Hence, Professors
Berry and Haile reweight the survey to make it representative. They do this by emphasizing some observations and
de-emphasizing others using an estimation procedure in which they fit the survey statistics to statistics from the
Consumer Price Survey conducted by the U.S. Census. See id. at 29-30.
24
See id. at 32-33; 131-135.
25
This requirement is recognized in the current approach to dealing with pricing in academic studies. See generally
Gregory S. Crawford & Ali Yurukoglu, The Welfare Effects of Bundling in Multichannel Television Markets, 102
A
M. ECON. REV. 643, 643-685 (2012) (“Crawford-Yurukoglu Study”).
26
See Berry-Haile Analysis at 34.
27
See id. at 34. Their web-scraping data “often reveals only ‘introductory prices.’” See id. at 34.
28
See id. at 38.
29
See id. at 38.
30
See id. at 136.
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firm-DMA fixed effects.
31
This regression was run separately for each of the component types (i.e.,
video-only, broadband-only, and integrated bundles).
32
For each of the specifications, the regression
estimates a set of firm-component-DMA fixed effects that are used as price indices.
33
These price indices
are intended to capture cross-market variation within each component.
34
19. Due to the adjustment for quality, the constructed price index can take on an arbitrary
value. As the Applicants point out, the level of the value does not reflect anything of economic interest.
35
However, the price index will accurately reflect the differences in price levels across firms, and, more
importantly, changes in the price index will enable calculation of the aggregate effects of the merger on
consumers. However, the use of this index approach has two economically relevant limitations.
20. First, the price index does not reflect the range of prices and plans offered by a firm. A
firm that offers both inexpensive, poor-quality plans and high-price, high-quality plans could well have
the same price index as a firm that offers only medium quality and price plans. The price index will not
reflect this difference in menu offerings, even if it is an important aspect of the competitive landscape.
21. Second, some normalization (or “recentering”) of the index is helpful to ensure that
prices are similar to the range of prices observed in the actual data. When done properly,
36
the
normalization has no effect on price movements and welfare measures in the BH Simulation, because any
change in the normalization will be fully reflected in the component, provider, and product fixed-effect
estimates included throughout each step of the simulation. As a result, the parameters of the conditional
indirect utilities (other than the fixed effects) that feed into the share calculations will not change based on
the normalization.
37
Professors Berry and Haile choose to center the index using the AT&T Average
Revenue per User (“ARPU”), so average prices for AT&T components in the model resemble their real-
world analogues.
38
C. Modeling and Estimating Demand
1. Modeling Demand
22. The demand model used in the BH Simulation assumes that each consumer chooses the
product – either standalone video service from some provider, standalone broadband service from some
provider, a bundle of both services from either a single or two separate providers, or the outside good –
that maximizes his or her utility (taking into account the available products’ prices) among all available
31
See id. at 35, 137.
32
See id.
33
See id. at 137.
34
See id. at 35.
35
See id. at 37.
36
As discussed in Section IV.A, the normalization procedure in the BH Simulation had a small coding error that we
identified and corrected.
37
See Berry-Haile Analysis at 37, 42; Steve Berry & Phil Haile, “Price Re-Centering in the Quantitative Analysis of
an AT&T-DIRECTV Merger,” transmitted by letter from Maureen R. Jeffreys, Counsel for AT&T, to Marlene H.
Dortch, Secretary, FCC, MB Docket No. 14-90, at 2-3 (filed October 1, 2014) (“Berry-Haile Price Re-Centering”).
38
See Berry-Haile Analysis at 35, 138; Berry-Haile Price Re-Centering at 1. The BH Simulation, as submitted by
the Applicants, contained a small coding error in the price recentering procedure. We discuss the recentering
procedure, and our correction to the coding error, in more detail in Section IV.A.
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alternatives.
39
This demand model takes a standard logit demand model and enriches it by imposing a
nesting structure. We discuss the basic logit demand model first and then discuss the nesting structure
that is added to it.
23. In the standard logit demand model, a consumer’s utility can be viewed as the sum of two
parts: the first is common to all consumers and is called the “mean utility” (a function of the price,
service quality, and other product and demographic characteristics).
40
The second part is an idiosyncratic
preference term, which captures the fact that individuals vary in their preferences for different products in
random ways.
41
This idiosyncratic component, which is unobserved by the econometrician, gives the
model the flexibility to account for differences in consumer choices.
24. The model then aggregates the individuals’ choices, resulting in formulae for DMA-level
shares for products that depend on prices (both the prices of the good and the prices of competitors’
goods) and product characteristics (such as broadband speed, number of video channels, and firm
dummies).
42
By assuming a particular distribution (which is the defining feature of the logit demand
system) for the idiosyncratic component of consumer preference, the model can be fit to DMA-level data
on shares, prices, product characteristics, and consumer characteristics (averaged over a DMA).
43
The
details of this aggregation in a logit-based merger simulation are standard in the literature.
44
25. The BH Simulation enriches the standard logit model described above by imposing a
nesting structure – whereby the product space is partitioned into subsets, called nests, of similar products
for which a consumer’s tastes are hypothesized to be positively correlated – to arrive at a nested logit
demand model. The nesting structure introduces an additional individual-specific element to consumer
utility and is an important feature that shapes the interactions among products.
45
Compared to the
39
This behavioral assumption is a characterizing feature of discrete choice models, of which logit and nested logit
(both discussed here) are two examples. See, e.g., KENNETH E. TRAIN, DISCRETE CHOICE METHODS WITH
SIMULATION (Cambridge Univ. Press 2009) (“TRAIN (2009)”).
40
See Berry-Haile Analysis at 42.
41
See TRAIN (2009); Berry-Haile Analysis at 42.
42
See Berry-Haile Analysis at 42, 50, 61; Katz Reply Decl. ¶ 57.
43
The aggregation rests heavily on the use of the extreme value type I distribution to capture the idiosyncratic
preferences of consumers. The use of this distribution has economic content. The set of values that a random
variable drawn from this distribution can take is unbounded. Consequently, no matter how bad a product is, there is
always some small chance that a consumer will buy it. This feature can lead to implausibly high prices for relatively
undesirable products, as a few consumers (who have very low idiosyncratic draws on other products and high
idiosyncratic draws on an undesirable product) will still find the undesirable product to be an attractive option. Of
particular relevance in this merger simulation are the implications for the pricing of bundles and the standalone
versions of their constituent components. If the price of the standalone version of a component that is sold as part of
a bundle exceeds the bundle’s price, then no consumer should buy the standalone version, as the bundle is a cheaper
way to get access to that component. (That is, consumers have free disposal.) By contrast, the modeling of
idiosyncratic preferences violates this intuition, because each consumer is allocated independent random values that
represent his or her idiosyncratic preferences for the bundle and each of the two standalone components.
Independence implies that, if a bundle is priced at $80 and the standalone component at $100, some consumers will
still buy the component. While the above situation is a theoretical possibility given this market structure, the BH
Simulation as estimated does not generate implausible pricing patterns as described above. Furthermore, on the
basis of a separate set of Monte Carlo simulations that we conducted, the BH Simulation’s results do not appear to
be driven by the distributional assumptions.
44
See generally Berry (1994); Berry et al. (1995); Nevo, Mergers with Differentiated Products (2000).
45
See Berry-Haile Additional Discussion at 6.
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standard logit model, the nested logit model allows substitution patterns between products to be more
flexible and for the data to better guide these substitution patterns.
46
The demand model in the BH
Simulation uses four nests – bundles, video only, broadband only, and neither (i.e., the outside good) –
and thus requires the estimation of three nesting parameters.
47
(Because choices are driven by relative
utility levels, the fourth nesting parameter, for the nest that contains the outside good, is pre-set to zero.
48
)
Thus, for example, a consumer that likes bundle A probably also likes bundle B.
26. Because product availability varies at a very local level, the demand model is formed at
the individual level, aggregated to the ZIP code level (where the variation in choice sets is assumed to
occur), and then further aggregated to the DMA level (where, in estimation, shares inferred by the model
are matched to those generated by the data).
49
These two steps of aggregation lead to a more complicated
estimation procedure than would normally be required, but they allow the model to take into account local
variation in product availability.
2. Estimating Demand Parameters
27. Due to the need to accommodate ZIP-code-level variation in product offerings, the
estimation procedure requires non-linear numerical optimization.
50
Cross-DMA price variation is
determined, in part, through variation in product availability across ZIP codes within a DMA. (This
variation is assumed to be exogenous).
51
Absent this variation, the BH Simulation could be estimated
linearly through standard (linear) instrumental variables techniques;
52
indeed, apart from this variation,
there is little that is unusual about the estimation procedure, which uses standard generalized method of
moments (“GMM”)-based techniques.
53
28. In the estimated BH Simulation, the variables that determine demand and, thus, shares of
demand are: (1) the DMA price indices of the components that make up the product (including any
relevant discounts on synthetic bundles); (2) maximum download speed for broadband and maximum
offered channels for video; (3) factors affecting Direct Broadcast Satellite (“DBS”) quality (such as
latitude measurement, urban share of a DMA, and homeowner share of a DMA); (4) firm dummies; (5)
interactions between DMA demographics (age, education, median household income) and nests; and (6)
product dummies.
54
Price is assumed to be endogenous, and instrumental variables are used to account
46
See Katz Reply Decl. ¶ 57. The standard logit demand model, in the absence of the nesting structure, has some
economically undesirable properties. Most problematic is the fact that substitution among products due to a price
change becomes a function solely of market shares. See Berry et al. (1995) for an extended discussion of this
feature of the logit demand model.
47
See Berry-Haile Analysis at 45, 47. Although three parameters must be estimated, a simple specification sets the
nesting parameter equal across nests.
48
See id. at 47-48.
49
See id. at 41.
50
See id. at 41, 50, 52, 55-60.
51
See id. at 41.
52
See id.
53
See id. at 140.
54
See id. at 51, 61; Katz Reply Decl. ¶ 57.
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for this endogeneity.
55
The instruments used follow those used in the 1995 analysis by Steven Berry,
James Levinsohn, and Ariel Pakes.
56
D. Modeling Pricing and Determining Marginal Cost
29. After estimating demand for all products, the next step in the merger simulation is to use
the prices at which each firm sells its components – a video-only component, a broadband-only
component, or an integrated bundle – to determine the marginal costs of providing those components.
The simulation assumes that each firm sets the prices that maximize its profits given its marginal costs,
with the additional assumption that it takes the prices that other firms set for their components and
bundles as given.
57
From this the BH Simulation infers the marginal costs for which the observed prices
would maximize profits for each firm.
58
Knowing these marginal costs, the BH Simulation then estimates
the profit-maximizing prices for all market participants following the merger, where the merging parties
(AT&T and DIRECTV) now maximize profits jointly rather than separately.
59
30. To make estimation feasible, the BH Simulation restricts the price for a component or
bundle to be constant within a DMA.
60
This means that the price responses to competitors’ footprints
occur at a DMA-wide level.
61
With that, a firm’s profits are determined by adding up the profit it obtains
from selling any particular component in any given DMA. The firm’s profit is derived by calculating the
per-unit profit – the difference between the price the firm chooses for that product in that DMA and the
marginal cost of providing that component in that DMA – and multiplying that times the quantity it would
sell, which is based on the demand model estimated above.
62
55
See Berry-Haile Analysis at 44, 51, 140.
56
See id. at 51; see also Berry et al. (1995).
57
This is known as the Bertrand model with product differentiation.
58
See Berry-Haile Analysis at 72, 84. This technique is standard in the academic literature. See generally Berry et
al. (1995); Nevo, Mergers with Differentiated Products (2000); Sofia Berto Villas-Boas, Vertical Relationships
between Manufacturers and Retailers: Evidence with Limited Data, 74 R
EV. OF ECON. STUDIES 625, 625-652
(2007); Céline Bonnet & Pierre Dubois, Inference on Vertical Contracts between Manufacturers and Retailers
Allowing for Nonlinear Pricing and Resale Price Maintenance, 41 RAND
J. OF ECON. 139, 139-164 (2007).
59
See Berry-Haile Analysis at 72.
60
See id. at 74.
61
Provider penetration is assumed to be constant within a DMA between the pre- and post-merger scenarios.
Penetration varies across DMAs, however, and firms may respond to higher competitor penetration by adjusting
prices in that DMA.
62
See Berry-Haile Analysis at 81. A firm f’s profit in a DMA m, as a function of component prices in that DMA, is:
That is, firm f’s profit is the sum over all components r offered in DMA m by firm f (with the set of components
denoted by
) of the price of that component less the marginal cost ( ) of providing it, all multiplied by
the share of consumers that purchase the component (
). Finally, where relevant, half of the discount d that is
offered on DIRECTV-AT&T and other DIRECTV-Telco or DIRECTV-cable synthetic bundles is subtracted and
then multiplied by the share of consumers (
) that choose options that include the discount. If a firm does not offer
a component that involves a discount, the last expression is equal to zero. The discount adjusts the price that is then
folded into the share calculation. Hence, it is also present on the demand side, albeit buried in this expression.
Optimal prices for a firm, given other firms’ prices, are given by the solutions to the firm’s first-order conditions,
(continued….)
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31. The BH Simulation accounts for discounts on synthetic bundles that combine
DIRECTV’s video component with other providers’ broadband components, both those offered with
AT&T broadband and those offered with broadband from other telecommunications and cable providers.
This discount is treated as fixed at [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.]
in the merger simulation, regardless of the firm providing the broadband service, and assumes that the
discount is split equally between the two firms – DIRECTV providing video services and the company
offering the broadband service.
63
This is modeled as decreasing the price of each component by half of
the discount [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] if bought as a
bundle, and the firm’s realized expenditure on the discount is treated as contributing to marginal cost.
64
E. Solving for Post-Merger Prices
32. Post-merger prices are derived by solving for the optimal prices of each firm, under the
hypothetical post-merger industry structure, using the estimated marginal costs and demand system
derived above, but where prices of AT&T’s and DIRECTV’s components are set to maximize joint
profits after the merger.
65
This changes the pricing incentives for these components and, as a result,
changes the prices post-merger. In response to the change in AT&T’s and DIRECTV’s prices post-
merger, prices adjust across the entire industry.
66
The BH Simulation captures the changes in AT&T’s
and DIRECTV’s pricing incentives and allows prices by all firms to adjust to the changed ownership.
The prices ultimately derived by the BH Simulation are such that every firm is maximizing profits, taking
as given the prices being offered by all other firms.
III. ECONOMIC EFFECTS CAPTURED BY THE SIMULATION MODEL
33. The merger simulation allows the estimation and comparison of three different economic
effects. The first two are standard parts of any merger simulation: (1) the harm from increased prices
resulting from eliminating competition between the merging parties and (2) the pass-through of any cost
reduction resulting from the merger to consumers in the form of lower prices. The third effect results
from the pricing incentives created by the fact that products include integrated bundles or synthetic
bundles of individual components offered by firms.
A. Horizontal Overlap
34. A merger between two firms that supply substitute products may reduce competition by
enabling the merged firm to increase joint profits by unilaterally raising the price of one or both products
(Continued from previous page)
which set the partial derivatives of the above expressions with respect to the firm’s components’ prices equal to
zero:
The full set of optimal prices, which is defined by the set of first-order conditions, does not have a closed-form
expression and is determined computationally.
63
See Berry-Haile Analysis at 77. The DIRECTV synthetic bundle discount is assumed to apply to all synthetic
bundles offered with Telco broadband service. The simulation also accounts for a [BEGIN HIGHLY CONF.
INFO.] [END HIGHLY CONF. INFO.] discount offered by DIRECTV with [BEGIN HIGHLY CONF. INFO.]
[END HIGHLY CONF. INFO.] .
64
See id. at 77.
65
See id. at 90.
66
See id. at 101-108.
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above the pre-merger price.
67
The merged firm may profit from this strategy, because some of the sales
lost due to the price increase would be diverted to the product of the merger partner.
68
The closer the
products are as substitutes, the greater the propensity for prices to increase following a merger.
69
In
addition, firms that compete against the merged firm now face a competitor with less incentive to offer
low prices. As a consequence, equilibrium prices across the industry may rise as well.
35. In 77 DMAs, both DIRECTV and AT&T offer video services.
70
(This figure represents
36.7 percent of the 210 total DMAs.) According to the Applicants, DIRECTV’s video subscriber share in
the areas in which AT&T U-verse is available to at least 90 percent of households is [BEGIN HIGHLY
CONF. INFO.] [END HIGHLY CONF. INFO.] percent, and AT&T’s share is approximately [BEGIN
HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] percent.
71
Although AT&T and DIRECTV
are not each other’s closest substitutes, the diversion rates between them are non-trivial.
72
The estimated
diversion rates imply that approximately [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF.
INFO.] percent of AT&T’s video subscribers that leave in response to an AT&T price increase would go
to DIRECTV’s video service. Furthermore, conditional on the availability of AT&T’s video service,
approximately [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] percent of
DIRECTV’s subscribers that leave in response to a DIRECTV price increase would go to AT&T for
video service. Therefore, AT&T’s and DIRECTV’s video services are substitutes to a degree that raises
the potential for the merger to reduce horizontal competition as described in the previous paragraph.
B. Programming Payment Reductions
36. The Applicants claim that the transaction would result in reductions in program payments
[BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] .
73
This effect can be thought of
67
See U.S. Department of Justice and the Federal Trade Commission Horizontal Merger Guidelines, August 19,
2010, § 6.1 at 20 (“DOJ/FTC 2010 Horizontal Merger Guidelines”).
68
Whether such a strategy would be profitable depends on the relative margins of the two products. See id.
69
See id.
70
In its filings, AT&T indicated that, in September 2014, AT&T U-verse video passed at least one home in 77
unique DMAs. See AT&T Inc. Response to Sept. 9, 2014, Information and Discovery Requests, transmitted by
letter from Maureen R. Jeffreys, Counsel for AT&T, to Vanessa Lemmé, Media Bureau, FCC, MB Docket No. 14-
90, Exhibit 5.a.1 (Oct. 7, 2014) (“AT&T Response to Sept. 9, 2014, Information Request”). Although some
commenters assert that U-verse video is available in more than 77 DMAs, we rely on data submitted by the
Applicants for our analysis herein. See, e.g., Petition to Deny of Writers Guild of America, West, Inc., MB Docket
14-90, at 4, 9 (filed Sept. 16, 2014); Reply Comments of Writers Guild of America, West, Inc. to Opposition, MB
Docket 14-90, at 1, 3 (filed Jan. 7, 2015) (stating that U-verse is available in 129 DMAs).
71
See Katz Additional Detail ¶ 58.
72
The diversion rates presented here were generated by the BH Simulation at pre-merger prices. For purposes of
comparison, the estimates at post-merger prices – based upon the Modified Simulation (as defined below) and an
assumed [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] reduction (also discussed below) in
the marginal cost of AT&T’s video component – are approximately [BEGIN HIGHLY CONF. INFO.] [END
HIGHLY CONF. INFO.] percent for the AT&T to DIRECTV diversion and [BEGIN HIGHLY CONF. INFO.]
[END HIGHLY CONF. INFO.] percent for the DIRECTV to AT&T diversion. Usually a substantial unilateral
post-merger price increase requires that a significant fraction of the customers purchasing one product view the
other product as the next best choice. However, this significant fraction does not need to approach a majority. See
DOJ/FTC 2010 Horizontal Merger Guidelines § 6.1 at 20-21.
73
See Application, Description of Transaction, Public Interest Showing, and Related Demonstrations, transmitted by
letter from Maureen R. Jeffreys, Counsel for AT&T, to Marlene H. Dortch, Secretary, FCC, MB Docket No. 14-90,
at 35 (filed June 11, 2014) (“Application”); Katz Decl. ¶ 115; Joint Opposition at 16; AT&T Response to Sept. 9,
2014, Information Request at 244.
Federal Communications Commission FCC 15-94
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as a reduction in the marginal cost of providing service. The extent to which this potential cost reduction
benefits consumers is a function of the extent to which the payment reductions are realized, and the extent
to which the cost reduction is passed through to consumers.
74
If the payment reductions are large and are
substantially passed through to consumers, consumers could see lower prices after the merger, even with
reduced competition. These lower prices offered by the merged entity, in turn, may induce other industry
participants to reduce their prices as well.
37. The BH Simulation incorporates the effect of lower programming payments that result
from the transaction by reducing the marginal cost of the AT&T video components by a flat [BEGIN
HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] .
75
C. Bundling Effects
38. The last economic effect is the way the merger changes pricing incentives when
integrated and synthetic bundles are available. Quantifying this effect is the novel feature of the BH
Simulation.
39. Consider two firms, each of which supplies one component of a synthetic bundle. Each
firm wants to set the price of its component so as to maximize its own profit. In doing so, it ignores the
impact of its own price on the other firm’s revenue. More specifically, when a firm sets a high price, it
ignores the fact that this high price will drive some consumers away from the other firm’s component,
thus reducing the other firm’s revenue. However, if the providers of the components of the synthetic
bundle merged, the combined firm would internalize the tendency of a high price on one component to
reduce the revenue earned by the other component. Provided that nothing else changed, the combined
firm would offer the newly integrated bundle at a price that is below the sum of the prices of the two
products making up the synthetic bundle. For this reason, a merger would put downward pressure on the
price of the bundle.
76
40. AT&T and DIRECTV offer a synthetic bundle.
77
By merging, the pricing incentives for
the parties would likely be to lower the price of the newly integrated bundle. If the price of the newly
integrated bundle of AT&T’s broadband service and DIRECTV’s video service falls, then this effect may
induce other industry participants that also offer bundles to lower those bundles’ prices.
78
41. The BH Simulation incorporates the effects of reduced horizontal competition, reduced
payments for programming, and the benefits from offering an integrated instead of a synthetic bundle.
74
In a merger simulation, the pass-through rate will be heavily influenced by the choice of functional form that is
used to model consumer demand, because the pass-through rate is a function of the second derivative of the demand
function.
75
See Berry-Haile Analysis at 109.
76
See Application at 65-67; Katz Decl. ¶¶ 66-69, 74; Guyardo Decl. ¶ 27; Joint Opposition at 14; Katz Reply Decl.
¶ 12; AT&T and DIRECTV, White Paper, Why the “Double Moral Hazard” Problem Cannot be Resolved by
Contract, at 4-6, transmitted by letter from Maureen R. Jeffreys, Counsel for AT&T, to Marlene H. Dortch,
Secretary, FCC, MB Docket No. 14-90 (filed Nov. 12, 2014). These distortions are a version of the standard
double-marginalization problem found in the economics literature on interactions between upstream and
downstream firms. See L
UIS M. B. CABRAL, INTRODUCTION TO INDUSTRIAL ORGANIZATION (The MIT Press 2000)
for a simple explanation.
77
See Katz Decl. ¶¶ 33-34. AT&T also currently offers an integrated bundle of U-verse video and broadband.
DIRECTV, however, does not provide a broadband service, and therefore is able to offer only synthetic bundles to
customers that want both broadband and video services. See id. ¶¶ 15, 28-29.
78
See Application at 64; Katz Decl. ¶¶ 3-4, 89, 92.
Federal Communications Commission FCC 15-94
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The data are guiding the relative strengths of these three effects. The output of the model is the impact on
consumers of the combination of these three economic factors.
IV. MODEL CORRECTIONS AND ADJUSTMENTS
42. In the next section, we report the basic results from two versions of the BH Simulation.
The first version, called the “Corrected Simulation,” is a modification of the version of the BH Simulation
that the Applicants submitted on September 23, 2014.
79
The Corrected Simulation corrects minor coding
errors that remained in the recentering procedure of the hedonic pricing model in both submitted versions
of the BH Simulation.
80
We describe this correction more fully in the paragraphs that follow, but the
primary economically important difference is that consumers are estimated to be slightly more price-
sensitive in the Corrected Simulation relative to the estimates derived from the September 2014 BH
Simulation.
43. The second version, called the “Modified Simulation,” uses billing data from third-party
cable providers (where possible) in place of the web-scraped pricing data in the BH Simulation. These
data are also described in this section. In the Modified Simulation, consumers are more price-sensitive
than in the Corrected Simulation.
81
44. Last, we discuss differences between the BH Simulation and our two models in the
handling of programming payment reductions. We find that the reduction in programming payments that
should be modeled in the simulation is likely lower than that claimed by the Applicants.
A. Corrections to Price Recentering Procedure
45. As described above, the BH Simulation requires a single price for each product in each
DMA.
82
Professors Berry and Haile construct a single price index for each product through a hedonic
regression of firm prices on component characteristics.
83
Three separate hedonic regressions are
performed, one each for standalone video, standalone broadband, and integrated bundles.
84
The hedonic
regressions are performed at the “provider-ZIP-service plan” level and include as regressors the speed of
the broadband service, the number of video channels, indicator variables for premium channels (e.g.,
HBO), and fixed effects for provider, DMA, and provider-DMA.
85
The fixed effects from these
regressions are saved, to be added later to the average prices centered on AT&T’s ARPU.
86
79
See Berry-Haile Updated Results. The BH Simulation that the Applicants submitted in September 2014 corrected
two errors from their initial submission: one was an error in the construction of some prices, and the second was a
coding error that affected the calculation of the Generalized Method of Moments (“GMM”) weight matrices and
standard errors. Professors Berry and Haile assert, in the September filing, that these corrections have no material
effect on the results or conclusions of their analysis. See Berry-Haile Additional Discussion at 1 n.1.
80
See Berry-Haile Analysis; Berry-Haile Updated Results.
81
Additionally, the estimated nesting parameters imply that, relative to consumers in the Corrected Simulation,
consumers in the Modified Simulation that buy bundles are more likely to substitute to other bundles following a
price change, and consumers in the Modified Simulation that buy standalone products are less likely to substitute to
standalone products of the same type following a price change.
82
See supra ¶¶ 17, 30.
83
See Berry-Haile Analysis at 35; Berry-Haile Price Re-Centering at 1.
84
See id.
85
See Berry-Haile Analysis at 137; Berry-Haile Price Re-Centering at 1.
86
See Berry-Haile Analysis at 35, 137–138; Berry-Haile Price Re-Centering at 1.
Federal Communications Commission FCC 15-94
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46. After each regression is estimated and the fixed effects are saved, Professors Berry and
Haile calculate a weighted-average fixed effect separately for each component for five provider types
(AT&T, DIRECTV, Cable, Telco, and DISH).
87
Professors Berry and Haile then calculate the weighted
average AT&T fixed effect by averaging the predicted values of the regression using only the AT&T
observations.
88
The AT&T fixed effect is then subtracted from the fixed effect of all other providers to
preserve the average differences in prices across provider types.
89
These differences are then added to
AT&T’s estimated video, broadband, and bundle ARPUs (calculated separately from AT&T list prices),
which give the new “center” for the price indices.
90
This center is then added to the fixed effects from the
original hedonic regression, which reintroduces the variation in product prices across DMAs.
91
47. In principle, this recentering of prices does not change the results produced by the
demand model estimation or merger simulation.
92
The reason is that the demand estimation contains a
full set of provider, DMA, and component dummies that control for the mean price level.
93
Additionally,
in the merger simulation, the estimates of markups and all estimated changes in prices are unaffected by
the price recentering as the level of prices passes directly through to marginal cost estimates.
94
However,
in our analysis of the BH Simulation, we found a small coding error in the way the recentering was done
for the bundles offered by non-AT&T “Telco” providers.
48. The error is due to the manner in which Professors Berry and Haile handle missing
observations in the web-scraped pricing data. In some ZIP codes, a single Telco offers an integrated
bundle, and the prices of those bundles were centered at the “bundle” center by the recentering procedure.
Likewise, the prices for standalone broadband and standalone video products offered by Telcos in these
ZIP codes were centered at the broadband and video “centers,” respectively. However, in order to allow
for the possibility of a synthetic Telco-Telco bundle where one Telco provides the video component and
another provides the broadband component (but neither offers an integrated bundle), Professors Berry and
Haile construct a synthetic bundle by summing the prices of the standalone components. However, they
create this synthetic bundle after performing the recentering procedure, which results in synthetic Telco-
Telco bundles being centered at a different mean than the integrated Telco-Telco bundles.
49. With Telco bundles being centered at two different locations, the original BH Simulation
results are sensitive to the choice of normalization, because Telco-Telco synthetic bundles and Telco-
Telco integrated bundles are not distinguished in the demand estimation and merger simulation.
Accordingly, we adjust the code to ensure all Telco-Telco bundles are recentered at the same location,
87
The weighted-average fixed effect is calculated by setting the regressors for broadband speed, number of
channels, and premium channels to zero, and taking the average of the predicted values (or “intercepts”) that come
out of the regression. The weights used to calculate the weighted-average fixed effect are the DMA coverage
percentages of each provider.
88
Again, the fixed effect is calculated by setting the regressors for broadband speed, number of channels, and
premium channels to zero, and taking the average of the predicted values that come out of the regression. As only
the AT&T observations are used, only the AT&T fixed effect is set to one in the predictions; all other provider fixed
effects are set to zero. The weights used to calculate the weighted average AT&T fixed effect are the total number
of AT&T subscribers across DMAs.
89
See Berry-Haile Price Re-Centering at 1.
90
See id.
91
See id.
92
See Berry-Haile Analysis at 37, 138; Berry-Haile Price Re-Centering at 2-3.
93
See Berry-Haile Analysis at 37; Berry-Haile Price Re-Centering at 2-3.
94
See id.
Federal Communications Commission FCC 15-94
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and we report these results as the “Corrected Simulation” below. The results in the Corrected Simulation
are not dramatically different from those from the BH Simulation, but the effect is that consumers are
estimated to be slightly more price-sensitive.
95
B. Adjustments to Third-Party Prices
50. The data used in the BH Simulation are described in Section II.B. Data used by
Professors Berry and Haile on prices, plans, add-ons, and tiers of service at the ZIP code level for third-
party providers were collected via web scraping. By contrast, information on AT&T and DIRECTV
prices, plans, add-ons, and tiers was drawn from own-party subscriber billing data. These data are used to
construct a price index for different components across DMAs and providers.
96
51. An examination of the pricing data described above raises three issues. First, there is an
extremely wide range of prices in the own-party subscriber data submitted by AT&T and DIRECTV, with
some of the prices taking on unrealistic values. The own-party subscriber-plan data exhibits variation
across ZIP codes, with prices that vary markedly within plan, sometimes by hundreds of dollars. In
addition, observations across the entire data set take values that seem inconsistent with established
industry pricing patterns. For example, individual plan prices span from less than a dollar to over $2,400
per month in some ZIP codes. Most web-scraped data did not exhibit these two features, though there is
one exception: the web-scraped data for Comcast also exhibited extreme variation in some instances
(both within plans and across ZIP codes).
52. A second issue is whether there exists sufficient variation in observed prices offered by
providers across DMAs to generate the price index that feeds into the demand estimation. Third-party
data scraped from the Web exhibit little to no fluctuations in plan prices across ZIP codes.
97
Of the 59
providers in the raw data, only Comcast (among the providers with web-scraped data) and AT&T and
DIRECTV (both with own-party subscriber data) showed meaningful variation in plan prices across ZIP
codes. The majority of the other third-party providers with web-scraped data had prices that showed very
little variation in the data which is fed into the hedonic regression. This raises the concern that the bulk of
the economically meaningful variation in the pricing data used in the simulation comes from only three
firms (the two Applicants and Comcast).
53. The third issue is that prices produced via web scraping were, by construction, advertised
introductory prices, whereas the Applicants’ subscriber data relied on actual prices. Actual and advertised
introductory prices may exhibit different patterns, and it was not immediately clear which would be the
more appropriate pattern on which to base the simulation.
54. A desire to improve the underlying data feeding into the demand estimation and merger
simulation led us to request ZIP-code-by-plan-level pricing data from Comcast, Time Warner Cable, and
Charter.
98
We replaced the web-scraped data in the original BH Simulation with the actual pricing data
95
Although the differences between the results of the BH Simulation and the Corrected Simulation are not
dramatically different, the consumer surplus benefits from the transaction are found to be less in the Corrected
Simulation than in the BH Simulation and are slightly negative in one specification. These results are described
further in the sections that follow.
96
See supra Section II.B.2.
97
For example, even though Verizon and DISH comprise [BEGIN HIGHLY CONF. INFO.] [END HIGHLY
CONF. INFO.] percent of total observations, prices for each plan offered by the two providers do not vary at all
across geographic areas.
98
See Comcast Corporation Response to Jan. 8, 2015, Information and Data Request, transmitted by letter from
Kathyrn A. Zachem, Senior Vice President – Regulatory and State Legislative Affairs, Comcast Corporation, to
Marlene H. Dortch, Secretary, FCC, MB Docket No. 14-90 (Jan. 23, 2015) (“Comcast Response to Jan. 8, 2015,
Information Request”); Time Warner Cable Inc. Response to Jan. 8, 2015, Information and Data Request,
(continued….)
Federal Communications Commission FCC 15-94
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submitted by the third-party cable companies.
99
In the results below, the versions of the merger
simulation run with the updated third-party data is referred to as the Modified Simulation. The third-party
data had fewer extreme values than the web-scraped data (particularly in the case of Comcast), exhibited
significantly more variation across ZIP codes than the web-scraped data (in the case of Time Warner
Cable and Charter), and better matched the patterns, in a qualitative sense, seen in the subscriber level
prices submitted by AT&T and DIRECTV and used in the BH Simulation.
C. Programming Payment Reductions
55. The last adjustment we make to the merger simulation is the size of the programming
payment reductions that accrue to, as a result of the transaction, products that include AT&T’s video
service. One of the central claims by the Applicants is that, following the transaction, AT&T’s
programming payments will be reduced to [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF.
INFO.] .
100
The Applicants have stated that they expect that AT&T’s programming payments will be
about [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] percent higher than
DIRECTV’s prior to the date that the transaction is expected to close, and that this difference will remain
at approximately [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] percent into
future years absent the transaction.
101
Additionally, in their evaluation of the transaction, the Applicants
use a model to estimate that AT&T’s programming payments will grow from [BEGIN HIGHLY CONF.
INFO.] [END HIGHLY CONF. INFO.] in 2014 to [BEGIN HIGHLY CONF. INFO.] [END
HIGHLY CONF. INFO.] by 2023, increasing at a rate of approximately [BEGIN HIGHLY CONF.
INFO.] [END HIGHLY CONF. INFO.] percent per year.
102
This model also estimates that
DIRECTV’s programming payments (excluding [BEGIN HIGHLY CONF. INFO.] [END HIGHLY
CONF. INFO.] ) will grow from [BEGIN VIDEO PROG. CONF. INFO.] [END VIDEO PROG.
CONF. INFO.] in 2014 to [BEGIN VIDEO PROG. CONF. INFO.] [END VIDEO PROG. CONF.
INFO.] in 2023, increasing by approximately [BEGIN HIGHLY CONF. INFO.] [END HIGHLY
CONF. INFO.] percent over the next two years before leveling off at approximately [BEGIN HIGHLY
CONF. INFO.] [END HIGHLY CONF. INFO.] to [BEGIN HIGHLY CONF. INFO.] [END
HIGHLY CONF. INFO.] percent growth thereafter.
103
AT&T’s modeling predicts a [BEGIN HIGHLY
(Continued from previous page)
transmitted by letter from Matthew A. Brill, Counsel for Time Warner Cable, to Marlene H. Dortch, Secretary, FCC,
MB Docket No. 14-90 (Jan. 23, 2015); Charter Communications, Inc. Response to Jan. 8, 2015, Information and
Data Request, transmitted by letter from John L. Flynn, Counsel for Charter, to Marlene H. Dortch, Secretary, FCC,
MB Docket No. 14-90 (Jan. 20, 2015).
99
We continue to use the web-scraped data in the estimation for all other third-party providers other than Comcast,
Time Warner Cable, and Charter.
100
See Application at 36; Katz Decl. ¶ 115; Application, Declaration of Rick L. Moore, Senior Vice President,
AT&T, transmitted by letter from Maureen R. Jeffreys, Counsel for AT&T, to Marlene H. Dortch, Secretary, FCC,
MB Docket No. 14-90, ¶ 15 (filed June 11, 2014); Joint Opposition at 16; Katz Reply Decl. ¶ 32; AT&T Response
to Sept. 9, 2014, Information Request at 244. The combined firm may also enjoy increased bargaining power due to
the loss of an independent video provider and the larger combined subscriber base, though the Applicants do not
consider the potential impact of these in terms of efficiencies of the transaction. See Katz Decl. ¶ 115.
101
See AT&T Response to Sept. 9, 2014, Information Request at 243; AT&T Response to Sept. 9, 2014,
Information Request, Exhibit 69.c.2, tab “Content Costs (Output).”
102
See AT&T Response to Sept. 9, 2014, Information Request, Exhibit 69.c.2, tab “Content Costs (Output).”
103
See id. [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] costs are projected to increase
absent the transaction from [BEGIN VIDEO PROG. CONF. INFO.] [END VIDEO PROG. CONF. INFO.] per
subscriber per month to [BEGIN VIDEO PROG. CONF. INFO.] [END VIDEO PROG. CONF. INFO.] over
the same time frame. See id.
Federal Communications Commission FCC 15-94
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CONF. INFO.] [END HIGHLY CONF. INFO.] percent difference in 2014 payments, which is lower
than the claimed [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] percent
difference found in the Applicants’ declarations.
56. AT&T claims that, after the transaction, programming payments for AT&T U-verse
video will fall to [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] , and that this
reduction will phase in over a [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.]
period.
104
The end result is that AT&T expects its programming payments to fall by approximately
[BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] percent per subscriber per month
(in 2015) to approximately [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.]
percent per subscriber per month in 2020 and thereafter, once the companies combine.
105
57. Although we are unable to assess the Applicants’ claims regarding the future growth in
the payments for video programming, we can assess the extent to which AT&T’s programming payments
are higher than those currently paid by DIRECTV. We requested channel-by-channel programming
payments for all channels the parties offer over their MVPD services.
106
We also requested similar data
from Comcast, which is currently the MVPD with the largest set of subscribers.
107
Using these data, we
compare the actual per-channel amounts that these providers pay to acquire video programming. The
results are presented in Table 1.
58. The first row in Table 1 reproduces AT&T’s own estimates of the programming
payments of the three MVPD providers, as reported in AT&T’s response to specification 69 of the
Commission’s Information Request.
108
AT&T has the highest estimated payments at [BEGIN HIGHLY
CONF. INFO.] [END HIGHLY CONF. INFO.] per subscriber per month, which is approximately
[BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] more than DIRECTV’s payments
and approximately [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] more than
Comcast’s payments. In percentage terms, AT&T’s modeling shows DIRECTV’s payments being
[BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] percent lower than AT&T’s
payments and that Comcast’s payments are [BEGIN HIGHLY CONF. INFO.] [END HIGHLY
CONF. INFO.] percent lower than AT&T’s payments.
59. The second row in Table 1 reports the programming payment per subscriber as estimated
from the channel-by-channel data submitted by the Applicants and Comcast in response to the
Information Requests. The totals include the payments from all channels offered by each provider,
regardless of whether the channels are offered by one of the other two providers.
109
The totals are also
104
The phase-in assumes that AT&T will realize [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF.
INFO.] and thereafter. See AT&T Response to Sept. 9, 2014, Information Request, Exhibit 69.c.2, tab “Content
Costs (Output).”
105
See AT&T Response to Sept. 9, 2014, Information Request, Exhibit 69.c.2, tab “Content Costs (Output).”
Percentages calculated by comparing the AT&T costs per subscriber to the “rebased” AT&T costs per subscriber in
the spreadsheet.
106
See id., Exhibit 40 a-c; Information and Discovery Requests, transmitted by letter from William M. Wiltshire,
Counsel for DIRECTV, to Marlene H. Dortch, Secretary, FCC, MB Docket No. 14-90, Schedule 37 (Oct. 7, 2014).
We use the data from March 2014 in our analysis, which corresponds to the time period analyzed by Professors
Berry and Haile in the merger simulation.
107
See Comcast Response to Jan. 8, 2015, Information Request.
108
See AT&T Response to Sept. 9, 2014, Information Request, Exhibit 69.c.2, tab “Content Costs.”
109
Retransmission consent fees paid to local broadcast television stations are excluded from these totals, as are the
fees for many of the premium channels (e.g., Showtime, Encore, etc.) which do not appear to be comparable across
(continued….)
Federal Communications Commission FCC 15-94
190
weighted by the share of customers subscribing to each channel so that they represent average per-
subscriber payments. AT&T’s estimated payment per subscriber from the channel-by-channel data is
[BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] . Similarly, the estimated per-
subscriber payment from the channel-by-channel data is [BEGIN HIGHLY CONF. INFO.] [END
HIGHLY CONF. INFO.] for DIRECTV (giving a difference of about [BEGIN HIGHLY CONF.
INFO.] [END HIGHLY CONF. INFO.] between AT&T and DIRECTV) and [BEGIN HIGHLY
CONF. INFO.] [END HIGHLY CONF. INFO.] for Comcast. In percentage terms, the difference
between AT&T and DIRECTV programming payments is approximately [BEGIN HIGHLY CONF.
INFO.] [END HIGHLY CONF. INFO.] percent, which is similar to the [BEGIN HIGHLY CONF.
INFO.] [END HIGHLY CONF. INFO.] percent reduction the Applicants expect in future years under
the transaction and nearly identical to the percentage difference estimated in AT&T’s model in 2014
(shown in row 1).
110
It is, however, lower than the current [BEGIN HIGHLY CONF. INFO.] [END
HIGHLY CONF. INFO.] percent difference claimed by the Applicants elsewhere in their filings.
60. The difference between the per subscriber payments for video programming between
AT&T and DIRECTV from the channel-by-channel data is likely driven by three separate factors. First,
for the channels that both AT&T and DIRECTV offer to their subscribers, AT&T typically pays a higher
price per subscriber for the content, likely because it has fewer subscribers (and a weaker bargaining
position) than DIRECTV. This effect can be seen in the second panel of Table 1, where we report the
per-channel fee that each provider pays for a subset of common national television networks.
111
As an
example, AT&T paid [BEGIN VIDEO PROG. CONF. INFO.] [END VIDEO PROG. CONF. INFO.]
per subscriber for the USA Network, while DIRECTV paid only [BEGIN VIDEO PROG. CONF.
INFO.] [END VIDEO PROG. CONF. INFO.] , and Comcast paid [BEGIN VIDEO PROG. CONF.
INFO.] [END VIDEO PROG. CONF. INFO.] .
61. A second factor that may contribute to differences in per-subscriber programming
payments across providers is that providers offer different sets of channels to their subscribers. All else
being equal, a provider that chooses not to offer certain channels on any of its service tiers will have
lower per-subscriber payments than a provider that does offer those channels. Although most providers
will offer the most popular national networks to their subscribers, there is significant variation among the
smaller niche and regional channels that each of the providers offer.
62. In the channel-by-channel data submitted by the providers, AT&T reports prices for 425
channels offered over its MVPD service, DIRECTV reports prices for 306 channels, and Comcast reports
prices for [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] channels. Of these
channels, 194 are reported by all three providers. We match the license fees and subscriber counts of
these 194 common channels and calculate the monthly payment per subscriber for each of the three
providers. The third row of Table 1 contains these estimates.
(Continued from previous page)
providers. For these reasons, the numbers presented in row 2 are likely to be lower than those presented in row 1,
and focus should be placed on the percentage differences between the providers within each row.
110
See Application at 36; Katz Decl. ¶ 115; Joint Opposition at 16; Katz Reply Decl. ¶ 32; AT&T Response to Sept.
9, 2014, Information Request at 244.
111
MVPD providers will sometimes purchase a bundle of channels from a content provider rather than paying for
each channel separately. For example, AT&T purchased the [BEGIN HIGHLY CONF. INFO.] [END HIGHLY
CONF. INFO.] channels as a bundle, reporting a single price for all of the channels. DIRECTV and Comcast,
however, reported most of these channels under separate prices. For comparison, we aggregate the prices of
individual channels to the bundle level when at least one of the providers makes a bundle purchase.
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Table 1: Programming Payments per Video Subscriber for AT&T, DIRECTV, and Comcast
[BEGIN VIDEO PROG. CONF. INFO.]
[END VIDEO PROG. CONF. INFO.]
63. Not surprisingly, after dropping the smaller channels that do not appear on all three
services, the estimated programming payments fall quite substantially. However, the payments fall more
for AT&T than they do for DIRECTV or Comcast. The monthly per-subscriber payments for AT&T for
the channels that are not offered across all three providers make up [BEGIN HIGHLY CONF. INFO.]
[END HIGHLY CONF. INFO.] of the total per-subscriber costs reported in row 2. However, the
incremental costs to DIRECTV and Comcast for the channels that are not offered across all three
providers are only [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] and [BEGIN
HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] , respectively. In the case of DIRECTV,
this may be partly due to the fact that a higher percentage of the channels reported by DIRECTV matched
with the channels reported by AT&T and Comcast. As a consequence of the higher cost of non-matched
AT&T channels, the percentage differences between AT&T’s per-subscriber payments and the per-
subscriber payments of the other two providers are lower than those reported in row 2 – though more so
for DIRECTV than for Comcast. AT&T pays [BEGIN HIGHLY CONF. INFO.] [END HIGHLY
CONF. INFO.] per subscriber per month for these [BEGIN HIGHLY CONF. INFO.] [END HIGHLY
CONF. INFO.] matched channels, and DIRECTV pays [BEGIN HIGHLY CONF. INFO.] [END
HIGHLY CONF. INFO.] per subscriber per month for those same channels. The relevant takeaway is
that, in percentage terms, the difference between the AT&T and DIRECTV payments for the channels
that all three companies offer is approximately [BEGIN HIGHLY CONF. INFO.] [END HIGHLY
CONF. INFO.] percent, about [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.]
percentage points lower than the claimed [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF.
INFO.] percent reduction the Applicants expect to eventually achieve, about [BEGIN HIGHLY CONF.
INFO.] [END HIGHLY CONF. INFO.] less than the
[BEGIN HIGHLY CONF. INFO.] [END
HIGHLY CONF. INFO.] percent difference in the channel-by-channel data when all channels are
considered, and about half of the [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.]
percent difference the Applicants claim in their filings currently exists between the two companies.
64. A third factor that contributes to the differences in the providers’ per-subscriber video
programming payments concerns the distribution (i.e., tiering) of subscribers across the full range of
channels offered by a provider. An MVPD that has a larger fraction of its subscribers receiving higher-
cost programming will have higher overall per-subscriber costs, even if the per-subscriber fee for each
channel is the same for all MVPDs. An MVPD decides the tiers, but a programmer may negotiate to have
its channel carried on a lower tier (to reach more subscribers) in return for a lower payment.
112
In this
sense, the tiering of programming by a particular provider (i.e., the bundling of channels into service tiers
112
A programmer may also negotiate with the MVPD to have one or more of its channels placed in a given
“neighborhood” as well as a specific tier. For example, a sports programmer may want to ensure that its channel is
grouped with the sports channels of other programmers on the MVPD’s channel lineup. Further, broadcast stations
have to be on the lowest tier and available to anyone buying cable. See generally Annual Assessment of the Status of
Competition in the Market for the Delivery of Video Programming, MB Docket No. 14-16, Sixteenth Annual Report,
30 FCC Rcd 3253, 3272, ¶ 41, 3294, ¶ 94 n.311 (2015).
Federal Communications Commission FCC 15-94
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that must be purchased by the customer as a package) can have a significant impact on the per-subscriber
payments for content.
65. To understand how this distributional effect affects video programming payments, we
recalculate AT&T’s per-subscriber payments of the 194 matched channels using AT&T’s current
subscriber-share weights, but setting the per-channel prices in this calculation to the lower of the two
prices currently received by AT&T and DIRECTV. This calculation estimates the per-subscriber fees
that AT&T may end up paying once it is folded under DIRECTV’s contracts after the transaction, were it
to keep the distribution of subscribers over these channels at current levels. The calculation allows
AT&T to benefit from the lower prices currently paid by DIRECTV but fixes the relative tiering of
channels that currently exists between AT&T’s and DIRECTV’s service offerings.
113
This estimate is
found in row 4 of Table 1.
66. When AT&T receives the more beneficial per-channel fees (but holding constant the
share of subscribers receiving each channel), AT&T’s estimated per-subscriber payments are [BEGIN
HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] for the [BEGIN HIGHLY CONF. INFO.]
[END HIGHLY CONF. INFO.] matched channels. This figure is lower than the [BEGIN HIGHLY
CONF. INFO.] [END HIGHLY CONF. INFO.] that AT&T pays for these channels under its current
prices by approximately [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] percent,
but higher than the [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] that
DIRECTV is currently paying for those same channels. In other words, of the [BEGIN HIGHLY
CONF. INFO.] [END HIGHLY CONF. INFO.] percent difference between the payments of the two
providers seen in row 3, [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.]
percentage points are attributable to lower per-channel prices, and [BEGIN HIGHLY CONF. INFO.]
[END HIGHLY CONF. INFO.] percentage points are attributable to DIRECTV offering these channels
to a smaller share of subscribers (most likely on higher service tiers).
67. As noted above, there appear to be three factors driving the estimated differences in
programming payments across MVPDs: differences in the per-subscriber fees paid for individual
channels, differences among the sets of channels that the MVPDs offer to their subscribers, and
differences in MVPDs’ distributions of subscribers across available channels (i.e., service tiers). It is
important to understand the impact of each of these factors, not only when predicting how AT&T’s
programming payments may potentially change as a result of the transaction but also when deciding how
to account for these changes in the merger simulation.
68. The BH Simulation implicitly assumes (as is standard in merger simulation analysis) that
product characteristics remain fixed between the pre- and post-merger scenarios. Thus, reductions in
programming payments that reflect reductions in programming quality should not be considered in the
calculation of transaction-related differences in consumer surplus.
69. Of the three factors presented above, only the first – the channel-by-channel differences
in fees – potentially represents an unambiguous benefit to consumers were it to be realized by AT&T
post-transaction. If, as claimed by AT&T, its per-subscriber programming payments would be reduced to
DIRECTV’s level as a result of the transaction, a portion of this savings may be passed on to consumers,
which would lead to an increase in consumer surplus.
70.
The second factor leading to differences in programming payments between AT&T and
DIRECTV (i.e., DIRECTV offering fewer channels to consumers) has an ambiguous consumer welfare
effect. Suppose that AT&T were to drop channels that DIRECTV does not offer. Consumers that do not
watch these channels may be better off to the extent that the payment reductions are passed through in the
113
For the channel-by-channel data, AT&T’s programming payments are lower than DIRECTV’s for approximately
[BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] .
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form of lower video prices. However, consumers that lose channels they previously were able to enjoy
would be worse off if the surplus gained from lower prices does not offset the surplus lost from a smaller
selection of channels.
71. Similarly, the third factor leading to differences in programming payments – the ability to
negotiate placing channels on higher service tiers – also results in an ambiguous consumer surplus impact.
Holding prices fixed, consumers that must subscribe to higher tiers to receive channels that they
previously received on lower tiers may be made worse off. However, consumers that already subscribed
to higher tiers (or that have no interest in channels moved to higher tiers) likely will be better off if the
reduced payments result in lower prices.
72. The results presented in Table 1 suggest that the difference in programming payments
with quality held constant are likely lower (but no larger) than those claimed by the Applicants. At one
extreme, if no consumers are assumed to be harmed if AT&T chooses to drop or move channels to higher
service tiers, the quality-constant reduction in programming payments may be up to [BEGIN HIGHLY
CONF. INFO.] [END HIGHLY CONF. INFO.] percent, assuming AT&T can close the full gap
between the payments of the two providers. We note, however, that this difference is still lower than the
current [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] percent difference that
AT&T claims in its filings.
73. At the other extreme, if only the payment reductions that result in an unambiguous
increase in consumer surplus are considered in the merger simulation (that is, if we completely exclude
any reductions AT&T could receive by dropping or retiering channels and consider only the individual
differences in prices of channels that are offered by all three MVPDs), the quality-constant payment
reductions would likely be significantly smaller, as they are estimated to be only [BEGIN HIGHLY
CONF. INFO.] [END HIGHLY CONF. INFO.] percent in the channel-by-channel data submitted by
the Applicants. This can be seen by comparing rows 3 and 4 in Table 1, which shows the estimated
difference between AT&T’s current payments for the [BEGIN HIGHLY CONF. INFO.] [END
HIGHLY CONF. INFO.] matched channels and AT&T’s hypothetical programming payments if it paid
DIRECTV’s per-channel fees (while excluding the reductions that may arise from adjusting channel
tiering).
74. The record in this proceeding provides no evidence quantifying the extent of consumer
harms from potential lineup changes, and the Applicants do not provide any evidence that they would be
able to achieve the full amount of payment reductions without adjusting their channel lineups. It is
possible that a large number of subscribers would not perceive any difference in video service quality if
AT&T drops or retiers channels, especially if the subscribers do not watch these affected channels
anyway. These subscribers would likely benefit from the payment reductions AT&T achieves through
adjusting their channel lineups. Yet some subscribers may perceive large quality changes if channels that
they currently enjoy are dropped or moved to higher-priced tiers. The consumer surplus harms to these
consumers would need to be subtracted from the consumer surplus gains that are derived from pass-
through of reduced programming payments. Because we are unable to determine the changes that the
merged entity may make in terms of tiers and channels for both AT&T and DIRECTV subscribers let
alone the number of subscribers that would be harmed by such potential changes, we are unable to
determine the exact reduction in programming payments that can be considered “quality-constant”
reductions as required by the merger simulation.
75. We conclude that it is reasonable to assume that the quality-constant reduction in post-
merger programming payments that AT&T could achieve if it could be folded under DIRECTV contracts
is likely to lie somewhere between [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF.
INFO.] percent and [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] percent of
AT&T’s current payments. In the BH Simulation, the programming payment reduction is modeled as a
flat [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] reduction in the marginal
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costs of the AT&T video component. This [BEGIN HIGHLY CONF. INFO.] [END HIGHLY
CONF. INFO.] reduction represents approximately [BEGIN HIGHLY CONF. INFO.] [END
HIGHLY CONF. INFO.] percent of the marginal costs attributable to programming payments in the
model.
114
Given that we find a similar [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF.
INFO.] percent difference in the per-subscriber costs of the two firms when considering all channels, we
continue to report the results under a [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF.
INFO.] programming payment reduction in our analysis.
115
This value can be viewed as an upper bound
of the potential quality-constant payment reductions AT&T could achieve post-transaction, which would
be the case if it is assumed that no consumers would be harmed from future changes in AT&T’s channel
tiering. Further, [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] is the
appropriate programming payment reduction for comparison of our analysis with the analysis submitted
by the Applicants.
76. We also report the results under the assumption of a [BEGIN HIGHLY CONF. INFO.]
[END HIGHLY CONF. INFO.] reduction in programming payments, which represents a likely lower
bound of the potential quality-constant payment reduction (for purposes of the merger simulation). This
lower bound is estimated by crediting only the difference between AT&T’s current per-subscriber
payments and the per-subscriber payments it would receive if it were able to receive DIRECTV’s per-
channel prices, but excluding payment reductions that would be achieved by dropping or retiering
channels. We estimate this difference to be approximately [BEGIN HIGHLY CONF. INFO.] [END
HIGHLY CONF. INFO.] percent, which is about half of the full [BEGIN HIGHLY CONF. INFO.]
[END HIGHLY CONF. INFO.] percent difference seen between AT&T and DIRECTV payments in
rows 1 and 2 of the table. Therefore, we use half of the full marginal cost reduction that is in the BH
Simulation to represent the minimum reduction that we feel that AT&T might receive if it obtained
DIRECTV’s fees and held its subscriber shares fixed.
116
77. Last, we report the results for no reduction in programming payments for purposes of
comparison with the results reported by the Applicants using the BH Simulation, which was also
114
See Berry-Haile Analysis at 109. Additionally, AT&T’s video marginal cost in the BH Simulation is calculated
to be approximately [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] per subscriber. In the
AT&T Financial Investment Model (“FIM”), the Applicants assume that payments to programmers for content
comprise approximately [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] percent of recurring
video expenses. See Katz Additional Detail ¶ 50, nn.49-51. If we apply this same percent factor to marginal costs
in the merger simulation, the [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] reduction in
marginal costs equates to approximately a [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.]
percent reduction in programming payments, similar to the future amount claimed by the Applicants absent the
transaction. See Application at 36; Katz Decl. ¶ 115; Joint Opposition at 16; Katz Reply Decl. ¶ 32; AT&T
Response to Sept. 9, 2014, Information Request at 244.
115
We note that, under the Modified Simulation, the estimated marginal cost for AT&T’s video component is higher
than it is under the Corrected Simulation. A reduction of [BEGIN HIGHLY CONF. INFO.] [END HIGHLY
CONF. INFO.] percent in the estimate of AT&T’s per-subscriber programming costs under the Modified
Simulation translates to a marginal cost reduction of [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF.
INFO.] , which is higher than the reduction of [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF.
INFO.] that the Applicants assumed. We ran the Modified Simulation under this higher marginal cost reduction and
obtained results that are very similar to the ones that we report in Section V for the [BEGIN HIGHLY CONF.
INFO.] [END HIGHLY CONF. INFO.] reduction. The main difference is that estimated consumer benefits are
greater under the more generous reduction in marginal cost.
116
This calculation implicitly assumes that, for the [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF.
INFO.] unmatched channels that AT&T offers but that do not match with the channels of the other two providers,
AT&T is able to achieve the same average percentage reduction in its payments as it does for the 194 matched
channels.
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performed for the case of no reduction in programming payments.
117
For brevity, we will refer to the
three cases of no programming payment reductions, [BEGIN HIGHLY CONF. INFO.] [END
HIGHLY CONF. INFO.] programming payment reductions, and [BEGIN HIGHLY CONF. INFO.]
[END HIGHLY CONF. INFO.] programming payment reductions as “No PPR,” “Low PPR,” and
“High PPR,” respectively.
V. RESULTS
78. In this section, we report the results of the Corrected Simulation and the Modified
Simulation, each under No PPR, Low PPR, and High PPR (as defined in paragraph 77). We first report
estimates of changes in the aggregate level of consumer surplus that are generated by the transaction,
118
followed by estimates of changes in prices and shares for a subset of products. We then analyze how
consumer surplus levels in individual DMAs are affected by the transaction, and finally we report the
results of a number of robustness checks we performed to check the sensitivity of the results to certain
assumptions and data quality.
A. Consumer Surplus Effects
79. Tables 2 and 3 report the consumer surplus effects of various iterations of the merger
simulation for the Corrected Simulation and Modified Simulation, respectively.
119
The results from the
117
Reporting this value is not meant to suggest that this is the result we expect to see post-transaction.
118
The change in consumer surplus can be viewed as the additional amount of money that each consumer would
have to pay each month following the merger to make him or her indifferent between the merger occurring and not
occurring. Thus, a positive change in consumer surplus – which implies that each consumer would be indifferent
between the status quo and a post-merger world in which he or she has to pay an additional positive amount –
indicates that the merger leads to an increase in consumer welfare. Conversely, a negative change in consumer
surplus indicates that the merger is detrimental to consumer welfare. As the change in consumer surplus increases in
magnitude, so does the change in consumer welfare.
119
In discrete choice settings, consumer surplus is the expected utility, in monetary terms, that a representative
consumer obtains from the choice situation. See, e.g., T
RAIN (2009). In the nested logit demand model used here, a
representative consumer’s utility from consuming a product
is given by , where
is a vector of product characteristics,
is the product’s price, is a random variable that represents an
idiosyncratic component of utility that is unobserved by the econometrician, and
and are exogenous parameters
that are estimated from choice data. (Note that
represents the marginal utility that the consumer obtains from
holding money.) The random vector
is distributed according to the cumulative distribution function
given by:
where
, the set of nests, is a partition of the product set , is a tuple of
exogenous nesting parameters (which are estimated from choice data and dictate substitution patterns among
products), and
is Euler’s constant. Under this setup, consumer surplus is
defined as:
A general result due to Daniel McFadden, Modelling the Choice of Residential Location, in S
PATIAL INTERACTION
THEORY AND PLANNING MODELS (A. Karlqvist, L. Lundqvist, F. Snickars & J. Weibull eds., 1978) implies that
expected utility (and, by extension, consumer surplus) in this model has a simple closed-form expression:
(continued….)
Federal Communications Commission FCC 15-94
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Corrected Simulation are computed using the data supplied by the Applicants but based on the correction
of a coding error in the Applicants’ recentering procedure. We report the results from the Corrected
Simulation to provide a baseline with which to compare our results in our Modified Simulation, as they
differ from the results presented by the Applicants in the BH Simulation. The consumer surplus changes
are reported as weighted averages over the DMA-level results for the 85 DMAs that are included in the
merger simulation.
80. The first row of Table 2 shows that, in the Corrected Simulation, relative to the pre-
merger world, and under No PPR, the merger of AT&T and DIRECTV reduces consumer surplus by
$0.12 per household per month. This is equivalent to an increase in industry-wide prices of slightly less
than $0.12.
120
The effect of reductions in programming payments is considered in the second and third
rows of Table 2. If the transaction results in a [BEGIN HIGHLY CONF. INFO.] [END HIGHLY
CONF. INFO.] reduction in programming payments (i.e., Low PPR), the simulated outcome implies a
consumer surplus gain of $0.30 per household per month. Naturally, under a larger [BEGIN HIGHLY
CONF. INFO.] [END HIGHLY CONF. INFO.] reduction in AT&T’s programming payments (i.e.,
High PPR), the simulated outcome entails a larger $0.77 increase in consumer surplus per household.
81. As described earlier, the net consumer surplus effect can be decomposed into three
elements: (1) a reduction in horizontal competition; (2) pass-through from reduced programming
payments; and (3) a dividend from bundling. The last three rows of Table 2 present results from
decomposing these three elements. This analysis uses a model (referred to here as the “Horizontal Effects
Simulation”), which we developed, in which the marginal impact of AT&T’s video service being merged
with DIRECTV is evaluated relative to a hypothetical baseline in which AT&T video is a standalone
business.
121
This hypothetical AT&T-DIRECTV video-only merger is an indicative measure of the purely
(Continued from previous page)
120
There is a tradeoff, which results in the equivalent industry-wide price change being slightly less than the change
in consumer surplus. On one hand, an increase in price will induce some consumers to exit the market entirely.
(This effect pushes the equivalent price change to be slightly greater than the consumer surplus change, because
consumers will leave the market if, by doing so, they can limit their losses to be less than $0.12). On the other hand,
the presence of synthetic bundles works to oppose this effect. This point is best demonstrated via an example. For a
consumer that buys a synthetic bundle pre-merger and continues to buy it post-merger, the effect of a $0.12 across-
the-board price increase on her consumer surplus will be -$0.24; that is, the consumer surplus-equivalent price
increase on any one component is lower in magnitude than the consumer surplus decrease. The latter effect
dominates in the estimated model.
121
The Horizontal Effects Simulation assumes an initial spinoff of AT&T’s U-verse video from the rest of AT&T.
This new entity provides only video service and sets its own price, which is formally independent of the price of
AT&T broadband service set by the original company (in the sense that the new entity does not take into account the
effects of its pricing decision on the profit generated by AT&T’s broadband component). In the first stage of the
simulation, firms and consumers respond to this divestiture until a new equilibrium of prices and market shares is
established. In the second stage, the new entity merges with DIRECTV in a purely horizontal merger of two
competing video components. The welfare effects of this merger are calculated relative to the post-spinoff world,
which differs considerably in market structure from the pre-merger world of the original simulation. A direct
comparison of the consumer surplus effects between the baseline and Horizontal Effects Simulations (using either
the Corrected Simulation or the Modified Simulation) is therefore difficult. The results of the Horizontal Effects
Simulation are nevertheless indicative of the relative magnitude of the harms from a reduction in video competition
compared to the benefits of bundling observed in the relevant baseline simulation.
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horizontal competitive impact of the overall transaction. The Horizontal Effects Simulation is run under
the demand model used in the Corrected Simulation as well as the one used in the Modified Simulation.
Table 2: Consumer Surplus Effects: Corrected Simulation
Assumption Consumer surplus change ($/household/month)
122
No PPR -0.12
0.30
Low PPR
High PPR 0.77
Horizontal Effects: No PPR
Horizontal Effects: Low PPR
Horizontal Effects: High PPR
-0.49
-0.22
0.07
No PPR: no reduction in programming payments for AT&T video
Low PPR: [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] reduction in programming
payments for AT&T video
High PPR: [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] reduction in programming
payments for AT&T video
82. Table 3 is analogous to Table 2, except that it shows the estimated consumer surplus
effects under the Modified Simulation. In this case, the merger has a negligible consumer surplus effect
under No PPR ($0.02 per household per month) but substantial positive effects under Low PPR ($0.51)
and High PPR ($1.11). The Horizontal Effects Simulation returns a reduction in consumer surplus of
$0.29 per household per month under No PPR and gains of $0.16 and $0.64 per household per month
under Low PPR and High PPR, respectively.
123
Table 3: Consumer Surplus Effects: Modified Simulation
Assumption Consumer surplus change ($/household/month)
No PPR
Low PPR
0.02
0.51
High PPR 1.11
Horizontal Effects: No PPR
Horizontal Effects: Low PPR
-0.29
0.16
122
We do not report standard errors or confidence intervals for these estimated welfare effects, because, although we
have computed standard errors for the estimated demand model parameters, the estimated marginal costs and
optimal post-merger prices cannot be written as closed-form functions of the demand model parameters. This
limitation prevents us from obtaining the consumer surplus point estimates and standard errors analytically based on
the demand model parameters; indeed, the firms’ marginal costs and post-merger outcomes are obtained
computationally. Monte Carlo methods provide one way to obtain standard errors or confidence intervals for the
estimated consumer surplus effects based on the demand parameter estimates; in particular, one could determine a
distribution of consumer surplus changes by repeatedly sampling from a multivariate distribution that is based upon
the estimated demand model parameters and running the merger simulation for each draw of parameters from the
distribution. The Applicants attempted such an exercise with the BH Simulation but found that the standard errors
associated with the parameter estimates were too large to generate a representative sample of draws that are
consistent with the nested logit demand model. See Berry-Haile Additional Discussion at 41-44.
123
That is, the marginal effect of a loss of a video competitor is unambiguously detrimental to consumer welfare.
However, a reduction in the cost of providing service (in the form of either Low PPR or High PPR) more than
compensates for the harm created by the reduction in competition.
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Horizontal Effects: High PPR 0.64
No PPR: no reduction in programming payments for AT&T video
Low PPR: [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] reduction in programming
payments for AT&T video
High PPR: [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] reduction in programming
payments for AT&T video
83. We can compare the original Modified Simulation against the Horizontal Effects
Simulation to explore the benefits of bundling. Though the exact size of the bundling effect is difficult to
ascertain, as the baseline off of which consumer surplus is calculated differs between the original
Modified Simulation and the Horizontal Effects Simulation, the difference in magnitude between the two
simulations’ consumer welfare effects is still indicative of the transaction’s potential bundling benefits.
In addition, examining the difference in consumer surplus in Table 3 between original and horizontal
effects (0.02 – [-0.29] = 0.31) under No PPR against the analogous difference under High PPR (1.11 –
0.64 = 0.47) suggests that bundling becomes even more salient in the presence of programming payment
reductions.
84. We also observe, from Table 3, that the marginal welfare effect of High PPR for the
actual merger is $1.09 (1.11 – 0.02), while the marginal effect of High PPR in the hypothetical purely
horizontal merger is $0.93 (0.64 – [-0.29]). This finding suggests that programming payment reductions
increase consumer surplus by passing through the reduction in marginal cost of the standalone AT&T
video product to consumers, as well as by reducing the cost of the integrated bundle that includes AT&T
video as a component.
124
B. Price and Share Effects
85. In Table 4 below, the price changes of selected products – namely, the Applicants’
products and the cable bundle, which is the largest competing product – are reported under the Corrected
Simulation under the assumption of No PPR (i.e., the case considered in the top row of Table 2). These
quoted prices are monthly per-subscriber prices in dollars. Because of price recentering, the prices are
those used in the Corrected Simulation rather than the actual prices charged by the firms. The meaningful
measures are the changes reported in dollar amounts and changes in the percentages of households
purchasing a particular product. Percentage price changes are reported but are informative only to the
extent that the simulation price levels roughly correspond to notional real marketplace prices. They
should be viewed as only somewhat indicative at best.
86. In the No PPR case, the prices of AT&T’s standalone video service, DIRECTV’s
standalone video service, and the AT&T integrated bundle are all predicted to rise. These effects are all
illustrative of the merger’s potential horizontal harm, which was quantified above through the use of the
Horizontal Effects Simulation. The price of the newly integrated AT&T-DIRECTV bundle, however,
falls due to the fact that the combined firm internalizes the externality that the price of each component of
that bundle exerts on the profit earned from sales of the other component.
124
This second cost reduction is not captured in the purely horizontal merger; therefore, the total welfare effect of a
reduction in programming payments is somewhat lower.
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Table 4: Selected Price Changes under No PPR: Corrected Simulation
[BEGIN HIGHLY CONF. INFO.]
[END HIGHLY CONF. INFO.]
87. Table 5 shows the price changes and market effects under Low PPR in the Corrected
Simulation for the same products as shown in the previous table. This case corresponds to the second row
of Table 2. The AT&T video-only price drops by $0.66 relative to the pre-merger price. However, the
price drops by $6.41 (i.e., from $81.73 to $75.32) between the post-merger scenario under No PPR and
the post-merger scenario under Low PPR, implying a pass-through of reduced costs to consumers that
[BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] percent and is higher than the
[BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] percent pass-through in the BH
Simulation.
125
Table 5: Selected Price Changes under Low PPR: Corrected Simulation
[BEGIN HIGHLY CONF. INFO.]
[END HIGHLY CONF. INFO.]
88. Table 6 shows the price changes and market effects under High PPR. This case
corresponds to the third row of Table 2. Again, the AT&T video only price is assumed to drop by $12.47
relative to the post-transaction scenario with no cost reductions, once again implying a pass-through of
[BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] percent.
Table 6: Selected Price Changes under High PPR: Corrected Simulation
[BEGIN HIGHLY CONF. INFO.]
[END HIGHLY CONF. INFO.]
89. Table 7, Table 8, and Table 9 are exactly analogous to Table 4, Table 5, and Table 6
(respectively), except that they show the results from the Modified Simulation, which employs actual
third-party pricing data.
125
See AT&T and DIRECTV, White Paper, Content Cost Savings Will Result in Both Improved Profitability and
Pass Through to Consumers, at 8, transmitted by letter from Maureen R. Jeffreys, Counsel for AT&T, to Marlene H.
Dortch, Secretary, FCC, MB Docket No. 14-90 (filed Nov. 12, 2014). The pass-through is defined as the ratio of
the price change to the change in marginal cost. As shown by Luke Froeb, Steven Tschantz & Gregory J. Werden,
Pass-Through Rates and the Price Effects of Mergers, 23 I
NT’L J. OF INDUSTRIAL ORG. 703, 703-715 (2005), high
estimates of pass-through rates often accompany high estimates of horizontal harm from mergers, because both are
closely related to the concavity of the demand function. [BEGIN HIGHLY CONF. INFO.] [END HIGHLY
CONF. INFO.]
Federal Communications Commission FCC 15-94
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90. The results of the Modified Simulation indicated that the transaction likely would result
in downward pressure on the prices of AT&T-DIRECTV broadband and video bundles and, to a lesser
extent, on the prices of cable bundles. The price of the AT&T-DIRECTV bundle decreases by $2.74 with
no programming payment reductions and decreases by $2.20 and $1.38 for programming payment
reductions of [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] and [BEGIN
HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] , respectively. The price of the AT&T U-
verse bundle increases by $1.31 with no programming payment reductions and decreases by $2.93 and
$6.70 in the Low PPR and High PPR simulations, respectively. For the cable bundle, the price decreases
by $0.08 with no programming payment reductions and decreases by $0.52 and $0.66 in the Low PPR
and High PPR simulations, respectively.
91. The directions of the price changes of the merging-parties’ bundles do not differ between
the Corrected Simulation and the Modified Simulation, but the magnitudes are notably lower in the
Modified Simulation for the AT&T-DIRECTV bundle and larger for the AT&T-AT&T bundle.
However, the size of the price drop for the cable bundle is larger in the Modified Simulation than in the
Corrected Simulation.
92. A comparison of Table 7 with Table 8 also shows that the post-merger price of the
AT&T-DIRECTV integrated bundle is higher in the Low PPR case than in the No PPR case (although it
still falls from its pre-merger level). To understand the reason behind this effect, it is helpful to
temporarily view the No PPR case as a post-transaction baseline and the Low PPR case as the result of an
exogenous reduction in AT&T’s cost of providing video service relative to its post-transaction baseline
level (i.e., relative to the post-transaction cost of AT&T’s video service under No PPR).
126
All else being
equal, this reduction in programming payments leads AT&T to reduce the prices of AT&T video products
– including the AT&T-AT&T bundle – which, in turn, will induce some consumers that reside in DMAs
in which AT&T offers video service to switch from the AT&T-DIRECTV bundle to the AT&T-AT&T
bundle. The consumers that switch away from the AT&T-DIRECTV bundle are likely those that, in the
No PPR case, were nearly indifferent between the AT&T-DIRECTV bundle and some other product
(possibly, but not necessarily, the AT&T-AT&T bundle) but had a slight preference for the AT&T-
DIRECTV bundle. Because, after the price reduction, these nearly indifferent consumers are no longer
purchasing the AT&T-DIRECTV bundle, the demand for the AT&T-DIRECTV bundle has become less
elastic at its baseline price level in DMAs in which AT&T offers video service. Thus, the firm can profit
by slightly raising the AT&T-DIRECTV bundle’s price from its baseline level in these DMAs. The price
increase in these DMAs leads to an increase in the average price across all DMAs, which is reported in
the tables above.
93. As the above discussion illustrates, the transaction allows the combined entity to partially
“recapture” the profit lost from those subscribers that are diverted away from DIRECTV products after
the price increase, as some of them will likely subscribe to the now lower-priced AT&T video products.
The results of the Modified Simulation indicate that the increased margins on those customers that
continue to purchase the higher-priced DIRECTV video products and the increased margins on those
customers that purchase the lower-cost AT&T video products (due to [BEGIN HIGHLY CONF.
INFO.] [END HIGHLY CONF. INFO.] percent pass-through) together outweigh the loss in profit from
those that leave the DIRECTV video products.
127
126
Note, however, that the cost of providing DIRECTV’s video service does not change.
127
While we have provided an intuitive explanation for the increase in the price of the AT&T-DIRECTV bundle as
a result of PPRs, we note that the pricing incentives in the oligopoly pricing game of this environment are fairly
complex, which is reflected in our use of computational techniques in obtaining solutions. The challenges in
obtaining analytic solutions, even in the simpler monopolistic screening framework, are demonstrated by, for
(continued….)
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94. The prices of standalone AT&T and DIRECTV video products are slightly higher after
the transaction in the Modified Simulation with No PPR. As programming payment reductions are
introduced, the price of standalone DIRECTV video tends to increase slightly, while the price of
standalone AT&T video falls substantially. The Modified Simulation exhibits a pass-through rate of
programming payment reductions of about [BEGIN HIGHLY CONF. INFO.] [END HIGHLY
CONF. INFO.] percent, which is similar to the [BEGIN HIGHLY CONF. INFO.] [END HIGHLY
CONF. INFO.] percent pass-through of the BH Simulation but [BEGIN HIGHLY CONF. INFO.]
[END HIGHLY CONF. INFO.] than the pass-through found in the Corrected Simulation.
Table 7: Selected Price Changes under No PPR: Modified Simulation
[BEGIN HIGHLY CONF. INFO.]
[END HIGHLY CONF. INFO.]
Table 8: Selected Price Changes under Low PPR: Modified Simulation
[BEGIN HIGHLY CONF. INFO.]
[END HIGHLY CONF. INFO.]
Table 9: Selected Price Changes under High PPR: Modified Simulation
[BEGIN HIGHLY CONF. INFO.]
[END HIGHLY CONF. INFO.]
C. DMA Specific Effects
95. In this section, we examine the merger’s effects, as predicted by the Modified Simulation,
on individual DMAs. Specifically, we consider the disaggregated results to analyze whether any DMAs
are disproportionately harmed by the transaction.
96. We first discuss the market-level welfare effects of the merger under the different PPR
assumptions, focusing primarily on the price changes of the merging parties’ products. We then examine
DMAs where AT&T has deployed U-verse video to determine whether the degree of U-verse penetration
is correlated with post-merger outcomes. Finally, we present heat maps as a visual guide to the differing
cross-DMA effects of the merger.
1. Market-Level Welfare Effects
97. Table 10 presents the minimum, maximum, and quartiles of the consumer surplus
changes predicted by the merger simulation across DMAs. Without reductions in programming
payments, 18 DMAs face a reduction in consumer surplus greater than $0.10 per household per month
(Continued from previous page)
example, Jean-Charles Rochet & Philippe Choné, Ironing, Sweeping, and Multidimensional Screening, 66
ECONOMETRICA 783, 783-826 (1998).
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relative to the pre-merger status quo.
128
When we assume Low PPRs or High PPRs, no markets
experience a reduction in consumer surplus greater than $0.05. Markets with the highest amount of
AT&T U-verse coverage benefit the most from the reduction in programming payments, as the higher
availability of U-verse increases the impact of programming payment reduction pass-through. Under
High PPR, the median DMA sees an increase in consumer surplus of $0.79 per household per month,
which is below the household weighted average change across DMAs of $1.11 that is reported in Table 3
(and is also below an unweighted average across DMAs, which yields a consumer surplus of $0.90),
indicating that there are a number of larger DMAs within the U-verse footprint that benefit
disproportionately.
Table 10: Consumer Surplus Effects across DMAs: Modified Simulation
Assumption
Consumer surplus change ($/household/month)
Min Max 25
th
percentile 50
th
percentile 75
th
percentile
No PPR -0.43 0.91 -0.06 0.01 0.12
Low PPR -0.04 1.81 0.11 0.36 0.58
High PPR -0.04 3.89 0.17 0.79 1.25
No PPR: no reduction in programming payments for AT&T video
Low PPR: [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] reduction in
programming payments for AT&T video
High PPR: [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] reduction in
programming payments for AT&T video
98. Table 11 and Table 12 report the price and share changes (respectively) across DMAs
associated with the consumer surplus changes reported in the first row of Table 10, which corresponds to
the case of No PPR. Price changes are reported in dollars per subscriber per month, while share changes
are reported as percentage points.
99. Under No PPR, AT&T’s integrated bundle experiences a significant price increase in
every DMA, with the smallest increase totaling $0.53 per month.
129
Likewise, there are large price
increases for AT&T’s and DIRECTV’s standalone video components in most DMAs. However, the
reduction in consumer surplus from an increase in the price of AT&T’s video component is mitigated by
its small share. All DMAs experience substantial price reductions (of at least $1.07 per month) for the
newly integrated AT&T-DIRECTV bundle relative to the synthetic bundle that is available before the
merger.
128
Though no margin of error is provided for the consumer surplus estimates, changes in consumer surplus below
$0.10 are likely to be small in economic magnitude relative to pre-merger prices.
129
For AT&T’s integrated bundle as well as its standalone video component, Table 11 and Table 12 report statistics
across only those DMAs in which AT&T video is available; they exclude the zero price and share changes reported
by the model outside of the U-verse footprint.
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Table 11: Selected Price Changes across DMAs under No PPR: Modified Simulation
Video Broadband Price Change ($/household/month)
Min Max 25
th
percentile 50
th
percentile 75
th
percentile
DIRECTV AT&T -5.66 -1.07 -3.01 -2.70 -2.40
DIRECTV None -0.08 2.42 0.14 0.58 1.04
Cable Cable -1.12 0.25 -0.17 -0.07 0.01
AT&T AT&T 0.53 2.52 1.03 1.33 1.62
AT&T None 0.58 3.06 1.27 1.53 2.03
None AT&T -1.41 1.08 -0.36 -0.11 0.11
No PPR: no reduction in programming payments for AT&T video
Table 12: Selected Share Changes across DMAs under No PPR: Modified Simulation
[BEGIN HIGHLY CONF. INFO.]
[END HIGHLY CONF. INFO.]
100. Though not reported here, under Low PPR and High PPR, the post-merger price
reduction on the AT&T-DIRECTV integrated bundle is smaller than under No PPR. In fact, eight DMAs
experience an increase in the new integrated bundle price under High PPR (compared to zero DMAs
under No PPR). However, this reduction in the bundling effect for the merging parties is more than offset
by the substantially larger decrease in the price of the cable bundle, as well as the large decrease in price
of the AT&T bundle within the U-verse footprint. This also suggests that, while the introduction of an
integrated AT&T-DIRECTV bundle, by itself, induces a small competitive response from cable
companies, the potential reduction in AT&T’s programming payments magnifies this effect.
130
2. U-verse Household Penetration and Market Outcomes
101. Economic theory suggests that consumer harm from the horizontal aspect of the merger
should be most pronounced in markets with higher U-verse video household penetration, as more product
availability should lead to higher uptake and, therefore, to a larger negative impact of a price increase.
131
However, Figure 1 below, which plots U-verse penetration against post-merger change in consumer
surplus for all 85 DMAs, paints a more nuanced picture. Non-U-verse video markets (the points along
the Y-axis where U-verse penetration is zero) do appear to benefit, but the overall DMA-level impact of
the merger appears largely unrelated to U-verse penetration for DMAs within the U-verse footprint.
Because the net welfare effect of the merger, both across and within DMAs, depends on the potential
reduction in competition as well as on the gains from bundling, Figure 1 suggests either that the welfare
loss from reduced competition is uncorrelated with U-verse penetration, or that the bundling effect also
varies across DMAs.
130
These results are also in line with our previous observation that bundling becomes more salient in the presence of
programming payment reductions.
131
Indeed, the cross-market correlation between U-verse household penetration and market share of standalone U-
verse video is 0.45, while the correlation between U-verse penetration and the U-verse bundle is 0.76.
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Figure 1: Modified Simulation, No PPR: Consumer Surplus vs. U-verse Video Household
Penetration
No PPR: no reduction in programming payments for AT&T video
102. In Figure 2, we repeat the above exercise for the Horizontal Effects Simulation and find
that the harm from reduced video competition is in fact highly correlated with the degree of U-verse
penetration. Taken together with Figure 1, this implies that the gains from bundling do vary
systematically by DMA, and, in particular, that these gains are larger in DMAs with higher U-verse
penetration.
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Figure 2: Modified Simulation – Horizontal Effects Simulation, No PPR: Consumer Surplus vs.
U-verse Video Household Penetration
No PPR: no reduction in programming payments for AT&T video
103. Finally, in Figure 3, we plot consumer surplus versus U-verse penetration for the
Modified Simulation under High PPR. The results are markedly different from the previous graphs: the
largest beneficiaries of the programming payment reduction are now the markets with the highest U-verse
penetration rates. As discussed above, this result is intuitive, because U-verse video needs to be widely
available in a DMA in order for consumers to benefit from any pass-through of PPRs.
132
132
See supra ¶ 101.
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Figure 3: Modified Simulation, High PPR: Consumer Surplus vs. U-verse Video Household
Penetration
High PPR: [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] reduction in
programming payments for AT&T video
3. Maps of Main Simulation Results
104. We present maps of the continental United States showing changes in consumer surplus
within a DMA under various settings for the Modified Simulation. These maps help summarize much of
the discussion in this section. We also present a table of the most negatively affected DMAs under the
same settings to accompany the maps.
105. Under the Modified Simulation with No PPR, the weighted average post-merger change
in consumer surplus is essentially zero. Figure 4 shows that this result is being driven in nearly equal
parts by DMAs that suffer small welfare losses and those that enjoy small welfare gains. Under Low PPR
and High PPR, the consumer surplus change is positive, at $0.51 and $1.11 respectively. Figure 5 and
Figure 6 show that the PPR filters through to all DMAs within the U-verse footprint. Finally, Figure 7
maps the horizontal effects across DMAs. Note that a total of 25 DMAs are outside of the U-verse
footprint and thus unaffected by the reduction in competition analyzed in the Horizontal Effects
Simulation. In Figure 7, these DMAs are shown in light blue and experience no changes in consumer
surplus.
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Figure 4: Modified Simulation, No PPR: Predicted Change in Consumer Surplus by DMA
No PPR: no reduction in programming payments for AT&T video
Figure 5: Modified Simulation, Low PPR: Predicted Change in Consumer Surplus by DMA
Low PPR: [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] reduction in programming
payments for AT&T video
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Figure 6: Modified Simulation, High PPR: Predicted Change in Consumer Surplus by DMA
High PPR: [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] reduction in
programming payments for AT&T video
Figure 7: Modified Horizontal Effects Simulation, No PPR: Predicted Change in Consumer
Surplus by DMA
No PPR: no reduction in programming payments for AT&T video
106. Table 13 lists the most harmed (or least benefited) DMAs under the various
specifications analyzed. As previously indicated, non-U-verse markets do not benefit from a reduction in
programming payments.
133
Conversely, U-verse markets with high video penetration rates are harmed the
most from the horizontal aspect of the merger.
133
Though Table 13 does not present results for the Low PPR case, the markets that benefit the least in that case are
identical to the ones that benefit least under High PPR (which are reported in the table).
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Table 13: Most Harmed Markets by Simulation Specification
Modified Simulation - No PPR:
State Market ID Market Name CS Change U-verse HH Penetration
TX 618 HOUSTON -0.43 0.70
AR 670 FT. SMITH-FAY-SPRNGDL-RGRS -0.35 0.54
TX 635 AUSTIN -0.31 0.71
OH 535 COLUMBUS, OH -0.26 0.57
MO 616 KANSAS CITY -0.24 0.73
IN 527 INDIANAPOLIS -0.22 0.71
TX 623 DALLAS-FT. WORTH -0.21 0.62
MO 609 ST. LOUIS -0.20 0.67
AR 693 LITTLE ROCK-PINE BLUFF -0.20 0.38
TX/NM 765 EL PASO (LAS CRUCES) -0.20 0.51
Modified Simulation - High PPR:
State Market ID Market Name CS Change U-verse HH Penetration
OR 813 MEDFORD-KLAMATH FALLS -0.04 0
IL 632 PADUCAH-CAPE GIRARD-HARSBG -0.01 0
NV 839 LAS VEGAS -0.01 0
MO 604 COLUMBIA-JEFFERSON CITY 0 0
WI 705 WAUSAU-RHINELANDER 0 0
NE 722 LINCOLN & HASTINGS-KRNY 0 0
UT 770 SALT LAKE CITY 0 0
IN 509 FT. WAYNE 0.01 0
WI 676 DULUTH-SUPERIOR 0.01 0
FL 539 TAMPA-ST. PETE (SARASOTA) 0.02 0
Horizontal Effects Simulation - No PPR:
State Market ID Market Name CS Change U-verse HH Penetration
TX 618 HOUSTON -0.70 0.70
AL 630 BIRMINGHAM (ANN AND TUSC) -0.67 0.71
GA 524 ATLANTA -0.60 0.84
NV 811 RENO -0.57 0.56
TX 623 DALLAS-FT. WORTH -0.55 0.62
MO 609 ST. LOUIS -0.54 0.67
CA 862 SACRAMNTO-STKTON-MODESTO -0.52 0.68
FL 686 MOBILE-PENSACOLA (FT WALT) -0.50 0.56
CA 825 SAN DIEGO -0.50 0.94
IN 527 INDIANAPOLIS -0.49 0.71
No PPR: no reduction in programming payments for AT&T video
High PPR: [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] reduction in programming
payments for AT&T video
107. The DMA-specific analysis in this section suggests that the proposed merger would likely
reduce video competition inside of the U-verse video footprint and, in particular, in DMAs where U-verse
reaches a large proportion of TV households. The net welfare loss from these harms is generally balanced
against the welfare gains from a more competitive AT&T-DIRECTV integrated bundle, though a non-
Federal Communications Commission FCC 15-94
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trivial number of DMAs do experience small reductions in consumer surplus. Under High PPR, the
Modified Simulation predicts significant welfare gains for all DMAs within the U-verse video footprint.
These gains outweigh the horizontal harms. The Horizontal Effects Simulation likewise predicts a non-
trivial increase in consumer surplus when incorporating PPRs. Given that the benefits of bundling are
even stronger when PPRs are introduced into the simulation, the predicted effect of the merger across
DMAs depends largely on the magnitude of the realized PPR.
D. Robustness: Outliers and Price Winsorization
108. As noted previously, the AT&T and DIRECTV subscriber price data that is fed into the
simulations shows a very high degree of variability within each plan, including extreme values. To help
determine if the results were being driven by the presence of extreme values, two robustness checks –
both involving winsorization, a form of data censoring in which extreme values below a predetermined
lower bound are replaced with the lower bound and extreme values above a predetermined upper bound
are replaced with the upper bound – were performed.
134
In the first robustness check, prices across all
plan types were winsorized using the first and 99th percentile values as the lower and upper bounds,
respectively. The second robustness check was motivated by the concern that censoring prices may affect
bundled plans (which are, on average, more expensive than video-only and broadband-only plans)
disproportionately; thus, in the second robustness check, prices within each nest (video-only plans,
broadband-only plans, and bundles) were winsorized using the nest’s first and 99th percentile values. In
both robustness checks, all other simulation processes were left unchanged. We refer to the simulations
performed under these two robustness checks as “Winsorized” and “Nest-Winsorized,” respectively.
109. As shown in Table 14, we find that the simulation results are sensitive to alterations in
the underlying pricing data. In the Corrected Simulation, consumer surplus is slightly negative, at -$0.12
under No PPR, and positive, at $0.77, under High PPR. Compared to this baseline, winsorizing over plan
types improves consumer surplus post-merger. Consumer surplus rises to $0.15 under No PPR and to
$0.97 under High PPR. Winsorization within product nests does not qualitatively change the results, as
consumer surplus increases slightly to $0.20 and $1.01, under No PPR and High PPR, respectively.
Table 14: Consumer Surplus Estimates with Price Winsorization
Simulation and Data Consumer surplus change
($/household/month),
Consumer surplus change
($/household/month),
No PPR High PPR
Corrected Simulation - Original -0.12 0.77
Corrected Simulation - Winsorized 0.15 0.97
Corrected Simulation - Nest-Winsorized 0.20 1.01
Modified Simulation - Original 0.02 1.11
Modified Simulation - Winsorized 0.67 1.47
Modified Simulation - Nest-Winsorized 0.56 1.38
No PPR: no reduction in programming payments for AT&T video
High PPR: [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] reduction in programming
payments for AT&T video
110. We also performed the price-winsorization robustness checks in the Modified Simulation.
Running the same analysis using the updated third-party pricing data in the Modified Simulation, we find
134
We also investigated simply dropping (omitting) the extreme observations. This was found to interact with the
data handling structures employed by the simulation code in problematic ways, leading to computational and
convergence challenges.
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that the results continue to be sensitive to the underlying data. Recall that, under the Modified
Simulation, consumers are more price-sensitive than in the Corrected Simulation. When prices are
winsorized across all plan types, consumer surplus rises to $0.67 and $1.47 under No PPR and High PPR,
respectively. Winsorization within product nests slightly dampens the increase in overall consumer
surplus. We find that consumer surplus falls to $0.56 and $1.38 under No PPR and High PPR,
respectively.
E. Robustness: Appropriate Setting of the Pre-Merger Synthetic Bundle Discount
111. The BH Simulation compares post-merger outcomes against the status quo and includes
fixed [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] price discounts that are
offered on synthetic bundles that combine DIRECTV video service with broadband service offered by
AT&T, Telco providers, and one Cable provider. (Each discount is borne equally by both of the firms
whose components compose the associated bundle.) These discounts are exogenous, and, in principle, it
is possible that an alternative discount level exists for the synthetic bundle of DIRECTV video service
and AT&T broadband service that would increase the merging parties’ individual pre-merger profits
while also enhancing consumer surplus. In this case, one might argue that a counterfactual scenario, in
which the parties remain unmerged but coordinate in modifying their synthetic bundle discount to a level
that improves each of their individual profits as well as consumer welfare, might provide a more
appropriate benchmark for welfare comparisons than the status quo does.
112. We explored this possibility by reprogramming the setting of the discount within the
simulation under two scenarios. In the first scenario, the merging parties coordinate in setting a discount
level, but all other prices (including those of other providers) remain fixed at status quo levels. In the
second scenario, the merging parties first coordinate in setting and announcing a discount level, and then
all firms (including the merging parties) play a Nash equilibrium in pricing their components. (In both
scenarios, the only synthetic bundle discount that might change is the one that combines DIRECTV’s
video service with AT&T’s broadband service; all other discounts remain fixed at [BEGIN HIGHLY
CONF. INFO.] [END HIGHLY CONF. INFO.] .) The results from these exercises did not indicate
that an alternative discount level would improve both of the merging parties’ profits while also
substantially enhancing consumer welfare. Thus, we believe that the current [BEGIN HIGHLY CONF.
INFO.] [END HIGHLY CONF. INFO.] discount level is unlikely to hide any realizable efficiency that
significantly skews the results in the Applicants’ favor, and therefore the [BEGIN HIGHLY CONF.
INFO.] [END HIGHLY CONF. INFO.] discount is retained for assessing post-merger welfare gains.
VI. COMPARISON WITH OTHER STUDIES
113. While we are not aware of any empirical analyses of the same product set that has been
analyzed here, there are several comparable studies, which we discuss below, that look at subsets of this
product set. In this section, we demonstrate that the demand model estimated in the Modified Simulation
comports fairly well with the demand models that have been estimated in these studies.
114. Comparing studies that consider distinct (though partly overlapping) product sets and that
use different model specifications is not straightforward; because of such differences, we are limited to
comparisons of quantities that are reported (or that can be inferred from reported quantities) in the
Modified Simulation and other analyses and that carry the same interpretations across models. Given
these considerations, we focus on comparisons of own-price demand elasticities (and, when they can be
computed, own-price demand semielasticities as well).
135
135
Let be a set of products, and, for each , let denote the demand (as a function
of the vector of product prices) for product
. The own-price demand elasticity for product at prices can be
interpreted as the ratio of the percentage change in product
’s demand to the percentage change in its price from
initial prices given by
. It is defined as:
(continued….)
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A. Studies of the U.S. Broadband Internet Service Market
115. Table 15 summarizes the own-price demand elasticities and semielasticities of broadband
Internet access service products from various studies, including the Modified Simulation.
Table 15: Comparison of Own-Price Demand Elasticity and Semielasticity Estimates for
Broadband Internet Service Products from Different Studies
Provider or
Technology
Study Years Elasticity Semielasticity
All
Modified Simulation 2013-14 -0.66 -0.0145
Carare et al. (2015)
136
2011 -0.62 Not available
Dutz et al. (2009)
137
2005 -1.53 -0.0375
2006 -1.17 -0.0299
2007 -0.88 -0.0238
2008 -0.69 -0.0195
Goolsbee (2006)
138
1998 -2.75 -0.0688
(Continued from previous page)
For example, if
, then, starting from a price vector of , a 1 percent increase in would lead the
demand for product
to fall by approximately 0.3 percent. (Note that, because the elasticity captures an
instantaneous change, this figure is a first-order approximation.) As mentioned in Section II.B.2, one consequence
of the method of estimation (and, in particular, of the construction of price indices) is that only the differences in
prices across products are identified. Hence, the price levels themselves (and, by extension, the percentage changes
in prices) are not economically meaningful. While the recentering procedure makes the constructed price indices
more “price-like,” the caveat remains that, due to the invariance of consumer choice behavior to different price
normalizations, the estimated elasticities may not carry their usual interpretations. To address this problem,
wherever possible, we compute the own-price demand semielasticity for product
at prices , which can be
interpreted as the ratio of the instantaneous proportional change in product
’s demand to the instantaneous level
change in its price from initial prices given by
:
For example, if
, then, starting from a price vector of , an increase of $0.01 (or, more generally, of
0.01 units) in
would lead the demand for product to fall by approximately 0.2 percent.
136
Octavian Carare, Chris McGovern, Raquel Noriega & Jay A. Schwarz, The Willingness to Pay for Broadband of
Non-Adopters in the U.S.: Estimates from a Multi-State Survey, 30 I
NFO. ECON. AND POL’Y 19, 19-35 (2015)
(“Carare et al. Study”).
137
Mark Dutz, Jonathan Orszag & Robert Willig, The Substantial Consumer Benefits of Broadband Connectivity for
U.S. Households, Internet Innovation Alliance Report (2009), available at http://internetinnovation.org/files/special-
reports/CONSUMER_BENEFITS_OF_BROADBAND.pdf (visited June 17, 2015) (“Dutz et al. Study”).
Federal Communications Commission FCC 15-94
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Rappoport et al.
(2003)
139
2000 -1.491 Not available
Cable
Modified Simulation 2013-14 -3.67 -0.0814
Dutz et al. (2009)
2005 -5.12 -0.1212
2006 -5.48 -0.1287
2007 -5.59 -0.1322
2008 -5.21 -0.1312
Rappoport et al. (2003) 2000 -0.587 -0.0145
AT&T and
Telcos
Modified Simulation
2013-14 -4.66 -0.1033
DSL Dutz et al. (2009)
2005 -5.71 -0.1490
2006 -4.78 -0.1365
2007 -3.98 -0.1299
2008 -4.04 -0.1356
ADSL Rappoport et al. (2003) 2000 -1.462 Not available
Fiber Dutz et al. (2009)
2007 -8.70 -0.2198
2008 -8.11 -0.2160
116. Because the Modified Simulation uses more recent data than do the other studies that are
cited in Table 15, it is appropriate to compare the figures from the Modified Simulation to extrapolated
versions of the ones from the other studies. We first compare the Modified Simulation to the Dutz et al.
Study and argue that the elasticities from the Modified Simulation are broadly consistent with a few
notable patterns that the Dutz et al. Study illustrates.
140
117. First, the Dutz et al. Study notes that the own-price elasticity of broadband Internet
service is increasing (i.e., decreasing in magnitude), which they argue reflects an increasing tendency
among households to view broadband Internet service as a necessity rather than as a luxury. The
elasticity and semielasticity estimates are consistent with this trend.
118. Second, while the estimates of the Dutz et al. Study do not illustrate a clear trend with
respect to the own-price elasticity and semielasticity of cable broadband, the values derived from the
Modified Simulation are not drastically different from the estimates of the Dutz et al. Study, and the fact
that the estimates from the Modified Simulation are lower in magnitude could plausibly reflect the fact
(Continued from previous page)
138
Austan Goolsbee, The Value of Broadband and the Deadweight Loss of Taxing New Technology, NBER
Working Paper (2006), available at http://www.nber.org/papers/w11994.pdf (visited June 16, 2015) (“Goolsbee
Study”).
139
Paul Rappoport, Donald J. Kridel, Lester D. Taylor & James Alleman, Residential Demand for Access to the
Internet, (2003), available at
http://www.colorado.edu/engineering/alleman/print_files/Forecasting_the_Demand_for_Internet_Services.PDF
(visited June 16, 2015) (“Rappoport et al. Study”).
140
In particular, simple inspection of the estimates in Table 15 do not raise serious concerns about the view that the
Modified Simulation estimates and the Dutz et al. Study estimates are based on draws from a common time-
dependent data generating process, particularly in light of the technological trends that we discuss here.
Federal Communications Commission FCC 15-94
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that, given the increased demand for streaming video content (especially in the years since the Dutz et al.
Study), DSL broadband service is increasingly being viewed as an inferior product relative to cable
broadband service.
141
119. Finally, the estimated own-price elasticity for broadband service provided by AT&T and
other Telcos reflects the underlying demands for both DSL service and fiber service. As in the case of
cable service, the estimates by the Dutz et al. Study for those technologies seem roughly consistent with
their analogues from the Modified Simulation, especially in light of the fact that fiber broadband service
was a relatively new product during the two years in which the Dutz et al. Study includes it in the
analysis. Due to consumers’ unfamiliarity with this product, and also given its fierce competition with
cable broadband service – a much more well-established and familiar product – it is entirely plausible that
fiber broadband service would have initially exhibited relatively elastic demand that has tapered off as
consumers have become more familiar with it.
120. The results of the Goolsbee Study also appear to be roughly consistent with those of the
Dutz et al. Study, especially keeping in mind that Goolsbee’s estimates reflect data from 1998.
Interestingly, though, the estimates of the Rappoport et al. Study suggest that, even in 2000, the demand
for broadband service was significantly less elastic than the estimates from the other studies mentioned
above seem to indicate.
B. Studies of the U.S. MVPD Market
121. Two studies of the U.S. MVPD market that allow for meaningful comparisons with the
Modified Simulation are due to Goolsbee and Petrin in 2004
142
and Crawford and Yurukoglu in 2012.
143
Table 16 provides their estimates of own-price demand elasticities (and implied estimates of own-price
demand semielasticities) of U.S. MVPD products.
141
Of course, the introduction of fiber broadband service is a countervailing factor that, all else equal, should lead to
increasingly elastic demand for cable broadband service. However, given the limited availability of fiber broadband
service, its increasing strength as a disciplining force on cable broadband is likely less important than the dwindling
strength of DSL broadband service – which is much more widely available – as a disciplining force.
142
Austan Goolsbee & Amil Petrin, The Consumer Gains from Direct Broadcast Satellites and the Competition with
Cable TV, 72 E
CONOMETRICA 351, 351-381 (2004) (“Goolsbee-Petrin Study”).
143
Crawford-Yurukoglu Study at 643-685.
Federal Communications Commission FCC 15-94
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Table 16: Comparison of Own-Price Demand Elasticity and Semielasticity Estimates for MVPD
Products from Different Studies
Technology Service Type Study Years Elasticity Semielasticity
Cable
All
Modified
Simulation
2013-14
-8.07 -0.0792
Basic
Goolsbee-Petrin
(2004)
2001
-1.538 -0.0567
Crawford-
Yurukoglu
(2012)
1997-2007
-4.12 -0.1935
Premium
Goolsbee-Petrin
(2004)
2001
-3.175 -0.0823
Expanded Basic Crawford-
Yurukoglu
(2012)
1997-2007
-6.34 -0.2250
Digital Basic
-13.11 -0.2942
Satellite All
Modified
Simulation
2013-14
-7.82 -0.0990
Goolsbee-Petrin
(2004)
2001
-2.448 -0.0612
Crawford-
Yurukoglu
(2012)
1997-2007
-5.35 Not available
122. Again, we may view the estimated elasticities from the Modified Simulation as newer
versions of their analogues from the other studies referenced in Table 16. Leaving aside the usual caveats
regarding estimation errors and differences in methodologies across studies, the figures suggest that
demand for cable MVPD service has become more elastic in recent years. This trend is certainly
plausible given a number of factors, including the entry of fiber-based competitors (especially Telcos
since 2006), the launch of a new satellite by DISH in 2006, which expanded DISH’s channel capacity
significantly, and, probably to a lesser extent, the recent advent of online video distributors (“OVDs”) and
the resulting increase in so-called “cord-cutting” (i.e., dropping traditional video service and relying
solely on access to OVDs through a broadband connection for video service). The first and third factors
listed above also may account for an increase (which the above figures suggest) in the elasticity of
demand for satellite-based MVPD service.
123. The Modified Simulation semielasticities, compared with the ones based on the estimates
of the Goolsbee-Petrin Study, are consistent with the above story as well. Interestingly, though, the
Modified Simulation semielasticity for cable MVPD service seems to be much lower in magnitude than
the ones derived from Crawford and Yurukoglu’s analysis. This discrepancy appears to be driven largely
by price increases in recent years, as the elasticities themselves are not very different.
VII. IMPLICATIONS
124. In considering the implications of the BH Simulation, it is important to keep in mind the
limited scope of the exercise. The merger simulation is designed to provide a data-driven, quantitative
answer to the following question: “Assuming that all industry participants’ product offerings remain the
Federal Communications Commission FCC 15-94
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same, what price changes arise from the changed pricing incentives created by the proposed transaction?”
That is, the simulation speaks to the price effects of the transaction, holding constant the industry product
mix. In particular, the simulation ignores any effect that the post-merger integration of the (currently
synthetic) bundle that combines DIRECTV’s video programming service with AT&T’s broadband
Internet access service would have on consumer welfare other than through a potential change in its price.
125. To answer this question, the BH Simulation simplifies many features of the industry.
Notably, it abstracts away from the price discrimination (tiering) that industry participants engage in, as
well as from any dynamic considerations (such as the incentives for investment, incentives to change the
product mix, and frictions due to consumer switching costs).
144
Finally, to make it possible to find results,
any merger simulation imposes specific forms on demand systems and nesting behavior that are unlikely
to match consumer behavior exactly.
126. These simplifications are made to address data limitations and reflect the limits of current
modeling technology. They are common in economic analyses of the industry. The model used in the
simulation was judged to be an appropriate representation of the state-of-the-art in merger simulation
methods. Given the available data and the industry setting, the approach adopted by the parties represents
best practice in building a merger simulation. Where we adopted slightly different models, it was due
either to minor issues found in code submitted by the Applicants or to the ability of the Commission to
access data unavailable to the Applicants. None of these adjustments changed our receptiveness to the
general approach.
127. That said, results of the merger simulation should be viewed as only contributing to an
understanding of the competitive impact of the proposed transaction. With this caveat in mind, the rest of
this section highlights the implications of the Modified Simulation for understanding the likely price
effects of the transaction, holding constant the industry product mix.
128. In discussing the quantitative implications, we begin by considering the Modified
Simulation under Low PPR, which we believe represents a plausible outcome while also providing a
conservative estimate for the consumer welfare gain, as measured by the change in consumer surplus.
The Corrected Simulation predicts this number to be $0.30 per month (Table 1), while the Modified
Simulation predicts this number to be $0.51 per month (Table 2). The robustness checks that we did,
together with information from the Applicants’ submissions,
145
suggest that these estimates have a non-
trivial margin of error around them. While it is difficult to systematically quantify the effect of this
margin of error, the robustness checks reported above suggest that the consumer surplus impact – the net
effect of the horizontal harm, bundling benefit, and PPR – is likely to be positive, though perhaps modest.
In particular, it is unlikely that consumers will be harmed at an aggregate level. Indeed, our best measure
of the net effect of the horizontal harm and the bundling benefit under No PPR is that they essentially
cancel each other out at the aggregate level. To the extent that we believe that the Low PPR scenario is
likely to occur, we also believe that, if anything, the merger is likely to yield modest benefits to
consumers in the form of lower prices.
129. The simulation is also capable of giving predictions of consumer impact by location,
finding difference in the merger’s effect across DMAs. Here, the most harm done to any one DMA is a
loss of $0.04 per household per month in consumer surplus when High PPRs are assumed. For many
DMAs, however, the benefit is of a significantly higher magnitude.
130. It is useful to consider a bound on the harm that this transaction may generate. To do this,
we consider the Horizontal Effects Simulation, in which AT&T’s video service starts as a standalone
144
See Berry-Haile Analysis at 13.
145
See Berry-Haile Additional Discussion at 41-44.
Federal Communications Commission FCC 15-94
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business that is then merged with DIRECTV. To get a worst-case estimate of the horizontal harm that the
transaction may generate, we focus here on the No PPR scenario. In this case, aggregate consumer
surplus falls by $0.29 per household per month. Evaluated DMA by DMA, the greatest potential for
harm is in the Houston area, where the purely horizontal effect is estimated to be -$0.70 per month. The
numbers serve as an indication of the downside risk associated with the merger. Our judgment is that,
while these numbers indicate a potential for harm, the size of this harm, when isolated, is not so large, in
and of itself, as to destroy the credibility of a claim that the improved pricing incentives involved in
AT&T and DIRECTV moving from a synthetic bundle to an integrated bundle (in addition to the
downward pressure this places on cable bundle prices) may provide an offsetting force. Furthermore,
these figures are based on the No PPR scenario. Under the more plausible Low PPR scenario, the
Horizontal Effects Simulation actually predicts a consumer surplus gain, underscoring the importance of
potential downward pricing pressure as a result of PPRs.
131. In a setting in which PPRs are considered, two questions arise for the economic analysis.
The first is what the appropriate level of reduction might be to input into the model, and the second is
how to interpret the results that the model generates.
132. An examination of the programming data, discussed in Section IV.C, suggests that a
[BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] reduction in programming
payments (i.e., Low PPR) is plausible (though arguably conservative). This is in contrast to the [BEGIN
HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] reduction (i.e., High PPR) used in the BH
Simulation.
133. Before inputting any assumption regarding PPRs into the simulation, it is important to
consider the economic structure imposed by the simulation. A reduction in costs will, regardless of the
simulation, be passed through to consumers in some degree in the form of lower prices. All else being
equal, this is a benefit to consumers.
146
134. When applied to the simulation, the assumption of Low PPR is sufficient to make the
aggregate effect on consumer surplus positive and sufficiently large to be economically distinguishable
from zero. Hence, the evidence presented by the merger simulation suggests an overall effect that is
positive for consumers, not only in the aggregate, but also at the DMA level for all but three DMAs.
146
As noted before, the BH Simulation abstracts away from dynamic incentives and ignores programmers (and thus
programming inputs) completely. As a result, the analysis presented here does not directly address a theory of harm
based on the premise that PPRs will tend to reduce programmers’ incentives to invest in high-quality programming,
which will eventually lead to quality reductions and, ultimately, adverse effects on consumer welfare. Using the
programming payment data presented in Section IV.C, we obtained a worst-case estimate for the total fall in affiliate
fees paid by MVPDs to programmers as a result of the merger. This analysis used a run of the Modified Simulation
under the assumption of a reduction of [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] per
subscriber per month in AT&T’s affiliate fees. In this scenario, programmers were estimated to lose about [BEGIN
HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] percent of their affiliate fees. Based on SNL Kagan,
TV Networks: Economics Profile & Peer Comparison, rel. March 10, 2015, we estimate that, all else being equal,
this drop in affiliate fees would constitute a loss of [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF.
INFO.] percent of total programmer revenues and a loss of [BEGIN HIGHLY CONF. INFO.] [END HIGHLY
CONF. INFO.] percent of total programmer profits. The evidence in the record does not support the assertion that
these reductions represent anything beyond a redistribution of surplus between programmers and MVPDs. In the
absence of evidence that indicates a loss of efficiency or a harm to consumers, the Commission remains agnostic on
normative aspects of the division of this surplus.
Federal Communications Commission FCC 15-94
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APPENDIX D
Analysis of AT&T’s FWLL Coverage and Performance Claims and Claimed Rural Benefits
TABLE OF CONTENTS
Heading Paragraph #
I. INTRODUCTION .................................................................................................................................. 1
A. Overview .......................................................................................................................................... 1
B. Terminology ..................................................................................................................................... 2
II. COVERAGE AND PERFORMANCE CLAIMS ................................................................................ 17
A. Background .................................................................................................................................... 17
B. Analysis ......................................................................................................................................... 27
1. Coverage .................................................................................................................................. 28
2. Performance ............................................................................................................................ 37
III. AT&T’S CLAIM THAT FWLL WOULD BENEFIT 13 MILLION RURAL CUSTOMERS ........... 42
A. Background .................................................................................................................................... 42
B. Analysis ......................................................................................................................................... 44
I. INTRODUCTION
A. Overview
1. This Appendix contains the Commission staff’s analysis of certain technical claims made by
the Applicants in connection with their proposed transaction. Section II covers claims the Applicants
have made with respect to the performance and coverage of their proposed Fixed Wireless Local Loop
service (“FWLL”) network. Section III analyzes the claims the Applicants put forth in their Application
that an additional benefit of the transaction is the deployment of the FWLL to 13 million largely rural
households.
1
B. Terminology
2. This section gives a brief introduction to the terms used in this Appendix.
3. ArcGIS is a geographic information system that can be used for the management,
analysis, and display of geographic data.
2
4. Capacity of a cell site is typically measured by the number of simultaneous voice calls
1
AT&T initially described the potential reach of FWLL as 13 million “customer locations,” which AT&T never
defined. See Application, Description of Transaction, Public Interest Showing, and Related Demonstrations,
transmitted by letter from Maureen R. Jeffreys, Counsel for AT&T, to Marlene H. Dortch, Secretary, FCC, MB
Docket No. 14-90, at 5, 39 n.121 (filed June 11, 2014) (“Application”). However, AT&T later determined that the
correct term should be “households.” See, e.g., ATT-FCC-00408122, [BEGIN HIGHLY CONF. INFO.] [END
HIGHLY CONF. INFO.] ; ATT-FCC-02115462, [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF.
INFO.] . AT&T nonetheless continued to use the terms interchangeably. See ATT-FCC-00408122, [BEGIN
HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] ; AT&T Inc. Response to Sept. 9, 2014, Information
and Discovery Requests, transmitted by letter from Maureen R. Jeffreys, Counsel for AT&T, to Vanessa Lemmé,
Media Bureau, FCC, MB Docket No. 14-90, at 204 (Oct. 7, 2014) (“AT&T Response to Sept. 9, 2014, Information
Request”) (using households as the unit of calculation of a percentage). For the purposes of our analysis, we use the
term “households.”
2
See ESRI, ArcGIS 9 – What is ArcGIS,
http://downloads.esri.com/support/documentation/ao_/698What_is_ArcGis.pdf (visited June 18, 2015).
Federal Communications Commission FCC 15-94
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that can be made on the cell or the total volume of data throughput provided by the cell.
3
This capacity is
a function of both the amount of spectrum available in the cell and the radio technology used.
4
The total
capacity of the radio network is determined by the capacity of the individual cells. The network traffic is
often distributed unevenly over the cells, with the result that the busiest cells drive the need to increase
network capacity. Common ways to increase network capacity are adding cells, adding spectrum,
optimizing cells to redistribute traffic more evenly, and increasing spectral efficiency through network
technology or handset upgrades. Network capacity can be added by building more cells, so theoretically
no more spectrum is needed. However, spectrum acquisition is often more economically attractive than
cell splitting, in part because acquiring additional spectrum in a geographic area increases the potential
capacity of all cells in that area.
5. A Cell Site is a transmitter/receiver location through which radio links are established
between a wireless communications system and a wireless unit.
5
Cell sites typically include a support
structure (i.e., a tower, building or other structure that provides a desired height above the ground),
antennas, cables, radios, processors, etc. One site contains one or more sectors,
6
with most sites having
three sectors.
7
A sector corresponds to a geographic cell of radio coverage that uses a portion of the
spectrum to communicate with a number of subscriber devices.
8
6. Cell Splitting refers to building new sites to increase capacity. A new site is placed so
that at least one of its sectors overlaps with a congested sector on a pre-existing site, taking over some of
its coverage area and some of its traffic. This effectively splits a congested cell of coverage into two or
more cells that can share the traffic load.
9
3
SIEGMUND M. REDL, MATTHIAS K. WEBER & MALCOLM W. OLIPHANT, AN INTRODUCTION TO GSM 6 (1995).
4
See generally SAMI TABBANE, HANDBOOK OF MOBILE RADIO NETWORKS 288-300 (2000) (“HANDBOOK OF
MOBILE RADIO NETWORKS”).
5
See HARRY NEWTON, NEWTON’S TELECOM DICTIONARY 770 (20th ed. 2004) (“NEWTON’S TELECOM
DICTIONARY”) (defining cell site as “a transmitter/receiver location, operated by the WSP (Wireless Service
Provider), through which radio links are established between the wireless system and the wireless unit …”); see also
H
ANDBOOK OF MOBILE RADIO NETWORKS at 206-207 (“The cellular architecture was originally designed as a means
of providing a region of substantial geographic size … with a communications network using a limited frequency
allocation and servicing an increasing traffic demand …. The mechanism is based on the path loss property of radio
waves, which means that a frequency used on one site can be reused on another site provided that the two sites are
sufficiently far from each other. Each site covers an area called a cell, the size of which usually depends on user
density.).
6
Sectorization is defined in the Commission’s rules as follows:
The use of an antenna system at any broadband station, booster station and/or response station hub that is
capable of simultaneously transmitting multiple signals over the same frequencies to different portions of
the service area and/or simultaneously receiving multiple signals over the same frequencies from different
portions of the service area.
47 C.F.R. § 27.4. See also H
ANDBOOK OF MOBILE RADIO NETWORKS at 220 (providing graphical examples of sites
having between one to three sectors).
7
See HANDBOOK OF MOBILE RADIO NETWORKS at 295.
8
See id. (Each sector can be considered a new cell as it uses a different set of channels and a directional antenna.).
9
Id. at 293 (“The cell splitting technique consists of reducing cell sizes with an immediate consequence of
increasing network capacity. Each cell is split up into a number of cells of a smaller size.”).
Federal Communications Commission FCC 15-94
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7. Data Speed refers to the speed of the data transmission of a network, typically measured
in million bits per second (“Mbps”).
10
8. GeoLytics, Inc. provides projections of the most recent census data available. The
analysis in this Appendix uses GeoLytics’ 2013 census block-level projections.
11
9. High-Gain Antenna (“HGA”) refers to an antenna with a narrow radio beam that is used
to increase signal strength. High-gain antennas provide a more precise way of targeting radio signals and
are therefore very essential to long-range wireless networks. They even amplify weak signals used in
satellite communication.
12
10. LTE is an acronym for Long Term Evolution, which is the latest mobile network
technology standard set by the 3rd Generation Partnership Project (“3GPP”).
13
LTE is typically used in
so-called “4G” networks.
11. MIMO, or multiple input multiple output, is an advanced antenna technology for wireless
communications in which multiple antennas are used at both the source (transmitter) and the destination
(receiver). The antennas at each end of the communications circuit are combined to minimize errors and
optimize data speed.
14
12. Radio Channel is a frequency, or band of frequencies, assigned to a transmitter/receiver
station in the cell site and used in the cell for transmissions between the station and wireless units.
15
13. Radio Frequency carrier (or “RF carrier”) refers to both the radio equipment for a radio
channel and the signals broadcast over the air on that radio channel.
16
For example, both Universal
Mobile Telecommunications System (“UMTS”) and LTE can operate with 5+5 megahertz RF carriers,
where 5 megahertz is used for uplink transmissions from subscriber devices to the network and another 5
10
See Transmission Speed Definition from PC Magazine Encyclopedia, PC MAGAZINE,
http://www.pcmag.com/encyclopedia/term/53109/transmission-speed (visited June 18, 2015).
11
See Block Level Estimates, GEOLYTICS, http://www.geolytics.com/USCensus,Block-
Estimates,Data,Features,Products.asp (visited June 18, 2015).
12
See High-Gain Antenna (HGA), TECHOPEDIA, http://www.techopedia.com/definition/26056/high-gain-antenna-
hga (visited June 25, 2015).
13
See LTE Encyclopedia, https://sites.google.com/site/lteencyclopedia/home (visited June 18, 2015). See also
Magdalena Nohrborg, 3GPP, LTE, http://www.3gpp.org/technologies/keywords-acronyms/98-lte (visited June 18,
2015).
14
See Margaret Rouse, What is MIMO (multiple input, multiple output), TECHTARGET,
http://searchmobilecomputing.techtarget.com/definition/MIMO (visited June 18, 2015).
15
See Radio Channel Definition and Meaning, DICTIONARY OF ENGINEERING,
http://www.dictionaryofengineering.com/definition/radio-channel.html (visited June 18, 2015).
16
CARL J. WEISMAN, THE ESSENTIAL GUIDE TO RF AND WIRELESS 9 (1st ed. 2000) (“ESSENTIAL GUIDE TO RF AND
WIRELESS”) (“Frequency is what separates one [Radio Frequency or RF] signal from another and it is what
distinguishes one wireless application from another.”); id. at 11-12 (“Only analog signals (sine waves) are used to
carry information ‘on their backs’ as they travel through the air. These analog ‘carrier’ signals can carry either
analog or digital ‘information’ signals. The process of combining information signals on top of carrier signals is
called modulation …. When an information signal is combined with a carrier signal the result is known as wireless
communications, and the analog signal doing the carrying is called RF or the carrier ….”); G
EORGE CALHOUN,
DIGITAL CELLULAR RADIO 202-203 (1988) (“DIGITAL CELLULAR RADIO”) (“Most radio transmission utilizes a
continuous wave of a fixed frequency, called the carrier …. The modulated carrier – i.e., the carrier with the
information … actually occupies a narrow region of the spectrum …. [T]he width of this region – the occupied
bandwidth – is also measured in KHz or MHz. This is what is commonly referred to as a radio channel.”).
Federal Communications Commission FCC 15-94
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megahertz is used for downlink transmissions from the network to subscriber devices. One RF carrier can
support many devices at once.
14. Spectrum is the set of radio wave frequencies used by an operator to provide
communications services to its subscribers.
17
It is measured in Hertz (“Hz”) which represents the number
of wave cycles that will pass a point in one second.
18
Because radio waves travel at the speed of light, the
wave length is easily calculated from the wave’s frequency. When referring to radio spectrum used for
mobile broadband services, frequency is typically measured in kilohertz (1000 Hz), megahertz (“MHz”)
(1 million Hz), or gigahertz (“GHz”) (1 billion Hz). These units can refer to either the frequency of a
radio wave, or the bandwidth between two frequencies. For example, there is five megahertz of
bandwidth between the radio frequency 1930 MHz (1.93 GHz) and 1935 MHz (1.935 GHz). Spectrum
used by mobile providers is typically licensed; however, technologies that use unlicensed spectrum, such
as Wi-Fi, can also be used to relieve congestion on networks that also use licensed frequencies.
15. Spectral Efficiency refers to the amount of traffic a given amount of spectrum in a cell
can support.
19
Newer technologies often increase spectral efficiency compared to older technologies, for
example, LTE has a greater spectral efficiency than UMTS and therefore provides more capacity per RF
carrier of equal size.
16. Stata is a statistical analysis package created and maintained by StataCorp LP. Its
capabilities include statistical analysis, plus data management, graphics, simulations, and programming.
20
II. COVERAGE AND PERFORMANCE CLAIMS
A. Background
17. The Applicants propose to deploy a FWLL network that would offer specific coverage
and speeds in areas outside AT&T’s wireline footprint and areas within that footprint that currently do not
receive the U-verse broadband and video bundle.
21
18. The Applicants would deploy the FWLL on [BEGIN HIGHLY CONF. INFO.] [END
HIGHLY CONF. INFO.] .
22
19. The FWLL would employ LTE technology in [BEGIN HIGHLY CONF. INFO.]
[END HIGHLY CONF. INFO.] of dedicated spectrum in the [BEGIN HIGHLY CONF. INFO.]
[END HIGHLY CONF. INFO.] currently licensed to AT&T.
23
Each cell site would use “the same basic
equipment, spectrum and technological configuration.”
24
In particular, the deployment would require
17
See NEWTON’S TELECOM DICTIONARY at 770 (defining spectrum as “[a] continuous range of frequencies, usually
wide in extent within which waves have some specific common characteristics.”)
18
See ESSENTIAL GUIDE TO RF AND WIRELESS at 8 (“The number of times a signal goes through a complete up and
down cycle (from point A to point E) in one second is the signal’s frequency (measured in Hertz and abbreviated
Hz).”)
19
Spectral efficiency is a measure of modulation efficiency and can be defined as the number of “bits per Hertz” or
the number of bits that are transmitted in a given period of time, usually one second, over a radio channel with a
defined bandwidth. See D
IGITAL CELLULAR RADIO at 304-305, 394.
20
See StataCorp LP, Why Use Stata?, http://www.stata.com/why-use-stata/ (visited June 18, 2015).
21
Application at 5.
22
See AT&T Response to Sept. 9, 2014, Information Request at 203; see also infra Section XI.G.3.
23
See AT&T Response to Sept. 9, 2014, Information Request at 193-194, 200. [BEGIN HIGHLY CONF. INFO.]
[END HIGHLY CONF. INFO.]
24
AT&T Response to Sept. 9, 2014, Information Request at 194.
Federal Communications Commission FCC 15-94
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AT&T to “install additional antennas and other equipment at each cell site in areas it seeks to serve.”
25
The Applicants do not specify what “other” equipment would be required, but it would be typical for a
deployment like FWLL to include radio sets and potentially additional power and backhaul resources as
well as professionally installed HGAs at the customer premise.
26
20. The Applicants state that the HGAs would be [BEGIN HIGHLY CONF. INFO.] [END
HIGHLY CONF. INFO.] .
27
The Applicants also state that FWLL “will incorporate advanced
technologies, including professionally installed customer premises equipment that will significantly
enhance spectral efficiency and signal quality.”
28
21. The Applicants expect that by using HGAs to compensate for differences in spectrum
propagation characteristics, FWLL coverage at the deployment frequencies would be similar to their
[BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] coverage.
29
AT&T notes in
particular that the HGAs would have a much higher gain than the antennas of [BEGIN HIGHLY CONF.
INFO.] [END HIGHLY CONF. INFO.] .
30
22. Depending on the number of subscribers and the distance from the cell site, the FWLL
service would have maximum download speeds of up to [BEGIN HIGHLY CONF. INFO.] [END
HIGHLY CONF. INFO.] .
31
The Applicants expect that [BEGIN HIGHLY CONF. INFO.] [END
HIGHLY CONF. INFO.] .
32
25
Id. at 235.
26
See id. at 207 (“Deploying fixed WLL requires incremental equipment at existing LTE cell sites, including new
antennas, radios, and base band units.”); Implementation of Section 6002(B) of the Omnibus Budget Reconciliation
Act of 1993, Annual Report and Analysis of Competitive Market Conditions With Respect to Mobile Wireless
Including Commercial Mobile Services, WT Docket No. 13-135, Seventeenth Report, 29 FCC Rcd 15311, 15371, ¶
116 (WTB 2014) (observing that a lack of fiber backhaul can delay a provider’s LTE rollout); Neal Gompa, T-
Mobile Announces LTE, Prepares to take US Wireless Market by Storm, E
XTREMETECH, Feb. 24, 2012, available at
http://www.extremetech.com/electronics/119703-t-mobile-announces-lte-prepares-to-take-the-us-wireless-market-
by-storm (discussing how LTE deployment would require new backhaul) (visited June 18, 2015).
27
See ATT-FCC-02122591, [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] . See also
ATT-FCC-02122591, [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] ; Application,
Declaration of John T. Stankey, Group President and Chief Strategy Officer, AT&T, transmitted by letter from
Maureen R. Jeffreys, Counsel for AT&T, to Marlene H. Dortch, Secretary, FCC, MB Docket No. 14-90, ¶ 48 (filed
June 11, 2014) (“Stankey Decl.”) (stating that FWLL “will incorporate advanced technologies, including
professionally installed customer premises equipment, that significantly enhance spectral efficiency and signal
quality.”). See also Joint Opposition of AT&T and DIRECTV to Petitions to Deny and Condition and Reply to
Comments, Reply Declaration of Michael L. Katz, transmitted by letter from Maureen R. Jeffreys, Counsel for
AT&T, to Marlene H. Dortch, Secretary, FCC, MB Docket No. 14-90, ¶ 42 (filed Oct. 16, 2014) (“Katz Reply
Decl.”) (stating that FWLL “will utilize an outdoor antenna which will be much more powerful than the indoor
device that is currently offered” and will “achieve faster speeds than current wireless broadband products”).
28
Stankey Decl. ¶ 48.
29
[BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.]
30
See AT&T Response to Sept. 9, 2014, Information Request at 197, 202; AT&T Inc. Response to Sept. 9, 2014,
and Dec. 15, 2014, Information and Discovery Requests, transmitted by letter from Maureen R. Jeffreys, Counsel
for AT&T, to Marlene H. Dortch, Secretary, FCC, MB Docket No. 14-90, Exhibit 4.1 at 26 (Dec. 19, 2014)
(“AT&T Response to Dec. 15, 2014, Information Request”).
31
AT&T Response to Sept. 9, 2014, Information Request at 200.
32
Id. at 201.
Federal Communications Commission FCC 15-94
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23. With these downlink data speeds, the Applicants believe the FWLL service would
perform “as well as wireline broadband services advertised today at 15-20 Mbps,” which, the Applicants
note, would be faster than typical indoor wireless home Internet products like AT&T’s Wireless Home
Phone and Internet.
33
The Applicants assert that “even customers at the cell edge will experience speeds
greater than 10 Mbps more than 90 percent of the time.”
34
In addition, the Applicants claim that the data
speeds would be significantly better in off-peak periods, and that customers located closer to the cell
tower would experience even better speeds.
35
24. AT&T would limit the FWLL capacity to no more than “ [BEGIN HIGHLY CONF.
INFO.] [END HIGHLY CONF. INFO.] .”
36
However, AT&T expects generally to deploy [BEGIN
HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] .
37
25. AT&T notes that “ [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF.
INFO.] .”
38
26. The Applicants have chosen not to submit the results of a traditional network planning
analysis to support their claims. Instead of providing detailed information including proposed site
locations, comprehensive link budgets, and other facts about the proposed network, the Applicants rely on
assumptions that deployment parameters and operating conditions applicable to a different technology in
a different spectrum band would apply to FWLL. To support their assumptions, the Applicants have
provided high-level information on slide decks, summaries and test results describing various aspects of
the proposed FWLL deployment, including cell site locations, coverage simulation results, link budgets,
network configuration plans, and summaries of field trials. Some of the Applicants’ network engineering
materials did not support their network performance claims. Similarly, certain of the Applicants’ claims
in their “business case” materials related to marketing FWLL services are inconsistent with certain of
their engineering materials.
39
B. Analysis
27. It is axiomatic that the performance of any wireless broadband network depends on a
number of factors, such as technology and equipment, spectrum, the usage patterns of the subscribers, the
traffic load, and the deployment environment, including possible sources of interference that could limit
the coverage or data speeds of the network. Commission staff has reviewed the materials that the
Applicants have submitted. This review included carefully analyzing the materials for accuracy,
33
Stankey Decl. ¶ 49; AT&T Response to Sept. 9, 2014, Information Request at 194. See generally ATT-FCC-
02122591, [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] . See also Katz Reply Decl. ¶ 42
(“[F]ixed WLL will be able to achieve faster speeds than current wireless broadband products.”).
34
Stankey Decl. ¶ 49; AT&T Response to Sept. 9, 2014, Information Request at 194.
35
Stankey Decl. ¶ 49; AT&T Response to Sept. 9, 2014, Information Request at 194. AT&T states that it “has not
projected minimum download speeds for each geographic area.” AT&T Response to Sept. 9, 2014, Information
Request at 194.
36
AT&T Response to Sept. 9, 2014, Information Request at 200.
37
Id.
38
Id.
39
The business plan assumes the offered cell-edge data speeds from [BEGIN HIGHLY CONF. INFO.] [END
HIGHLY CONF. INFO.] Mbps during the peak 15 minutes, depending on the MIMO configuration, but the
[BEGIN HIGHLY CONF. INFO.]
[END HIGHLY CONF. INFO.] study suggests only [BEGIN HIGHLY
CONF. INFO.] [END HIGHLY CONF. INFO.] Mbps peak 15-minutes cell-edge data rates. Compare AT&T
Response to Sept. 9, 2014, Information Request, Exhibit 58.g.1 at 2, 11 with AT&T Response to Dec. 15, 2014,
Information Request, Exhibit 6.1 at 11.
Federal Communications Commission FCC 15-94
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consistency, and feasibility. The technical information provided on the proposed FWLL deployment is
presented at a higher level than is customary for a typical network engineering design and analysis. The
technical data initially provided by the Applicants included the results of a network performance
simulation program that differ materially from the map showing predicted coverage that was also
provided. However, as set forth in greater detail below, the Applicants ultimately submitted sufficient
data to enable Commission staff to understand the discrepancy and conclude that the Applicants’
coverage and performance claims are feasible.
1. Coverage
28. Coverage characteristics can differ between technologies and spectrum. Therefore, a
network deployment would normally be closely engineered to the propagation characteristics of the
spectrum being used and related data would be available for analysis. The Applicants have provided a
FWLL coverage map based on their [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF.
INFO.] .
40
The Applicants, however, plan to deploy the FWLL network on [BEGIN HIGHLY CONF.
INFO.] [END HIGHLY CONF. INFO.] .
29. The spectrum used in the Applicants’ coverage maps has coverage characteristics that are
different, and typically better, than the spectrum where the FWLL would be deployed. The principal
compensation for potential propagation differences the Applicants describe in the record is the use of the
professionally installed outdoor HGAs.
30. These coverage maps were generated using the “best server” analysis data from Forsk’s
Atoll, an RF planning tool AT&T normally uses in the ordinary course of business to predict signals for
use in network planning.
41
The Atoll tool uses a variety of site-specific parameters including actual cell
site location, cell tower height, and local topography to predict signal availability in requested areas. The
“best server” approach shows only the areas where [BEGIN HIGHLY CONF. INFO.] [END HIGHLY
CONF. INFO.] .
42
31. Separately, the Applicants submitted the results of a network performance simulation that
purport to show the predicted network download data speeds at the cell edge. Unlike the Atoll tool, the
performance simulation assumes the same parameters for each cell site which are not site-specific. The
results were inconsistent with the site-specific Atoll coverage predictions.
32. The performance simulation data and assumptions that the Applicants initially submitted,
in fact, suggest that the coverage area of the FWLL depicted on the maps generated with the Atoll “best
server” data would not support the target cell-edge downlink data speeds. In particular, as depicted in
Figure 1 below, Applicants’ performance-simulation data show that target data speeds were achieved
where the average FWLL cell radius was assumed to be [BEGIN HIGHLY CONF. INFO.] [END
HIGHLY CONF. INFO.] .
43
However, as Figure 1 also shows, the radii of some of the cells predicted
using the Atoll tool are much larger, sometimes [BEGIN HIGHLY CONF. INFO.] [END HIGHLY
CONF. INFO.] .
44
40
AT&T Response to Sept. 9, 2014, Information Request at 197.
41
Id. Forsk’s Atoll propagation tool is used by AT&T to create coverage maps.
42
Id.
43
See id. at Exhibit 58.i.1 at 5, Exhibit 58.g.2 at 3 (reporting an inter-site distance of [BEGIN HIGHLY CONF.
INFO.] [END HIGHLY CONF. INFO.] ).
44
See id. at Exhibit 58.b, Exhibit 81.j.
Federal Communications Commission FCC 15-94
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Figure 1: Houston, TX
[BEGIN HIGHLY CONF. INFO.]
[END HIGHLY CONF. INFO.]
33. In response to Commission staff inquiries about this discrepancy, the Applicants
submitted additional results from four geographically diverse FWLL field trials using a frequency band
near the band where they plan to deploy FWLL. In addition to the field-test data, the Applicants
responded to the Commission staff inquiries with new, separate calculations of cell coverage radii based
on their FWLL link budgets and a simple slope-intercept propagation model, ranging from [BEGIN
HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] (“supplemental cell radii calculations”).
45
34. Although the FWLL field trials were conducted at [BEGIN HIGHLY CONF. INFO.]
[END HIGHLY CONF. INFO.] frequencies, the performance results show that with HGAs, the
measured cell-edge downlink data speeds could be greater than 10 Mbps at similar distances compared to
the same cell Atoll coverage predictions in three of the four geographic areas – [BEGIN HIGHLY
CONF. INFO.] [END HIGHLY CONF. INFO.] . However, for the fourth geographic area, [BEGIN
HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] , the field trial measured average cell-edge
radius seems somewhat less than the same cell Atoll coverage predictions.
46
35. Applying the measurements obtained by the field trials, Commission staff was able to
determine that the discrepancy between the coverage maps generated with the Atoll tool and the
throughput simulation data likely results from the difference in the way the Atoll tool and the simulation
tool predict coverage, as well as differences in the cell site configurations. The Atoll prediction of the
FWLL cell coverage uses varying base station antenna heights and actual terrain data, in contrast to the
lab simulation coverage model, which uses simplified propagation without terrain variability and uniform
antenna heights that appear to be generally lower than the Atoll antenna heights. Similarly, Commission
staff determined that, unlike the Atoll predictions, the set of supplemental cell radii calculations submitted
alongside the field test data, as described in paragraph 34 above, relied on average estimates which also
do not account for varying terrain and base station antenna heights.
36. Commission staff determined that if the original, inconsistent performance and coverage
simulation information were interpreted taking into consideration the actual field performance
measurements, it is reasonable to conclude that the Applicants’ claim that when compensated by other
factors, such as higher HGAs and likely better propagations than predicted,
47
the actual FWLL network
45
See AT&T Response to Dec. 15, 2014, Information Request, Exhibit 5.1 at [BEGIN HIGHLY CONF. INFO.]
[END HIGHLY CONF. INFO.] Tab. These are simple propagation model calculations without regard to the
underlying physical terrain or clutter.
46
See id., Exhibit 4.2 at 4, 9; Exhibit 4.4 at 23-24, 47-48; and Supplemental Exhibit 58.b.1 FWLL coverage maps.
See also AT&T Response to Sept. 9, 2014, Information Request at 197 (describing lab modeling); AT&T Response
to Sept. 9, 2014, Information Request, Exhibit 58.g.2 at 3-4; AT&T Response to Dec. 15, 2014, Information Request
at 5 (stating that AT&T has conducted “further lab modeling” since its first predictions).
47
See AT&T Response to Sept. 9, 2014, Information Request, Exhibit 58.i.1 at 4; AT&T Response to Dec. 15,
2014, Information Request at 6. The fixed outdoor antenna at customer premises equipment (“CPE”) has two main
advantages compared to antennas [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] : (1) roof-
(continued….)
Federal Communications Commission FCC 15-94
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coverage at the target data speed would be comparable to the Atoll coverage predictions for the field trial
locations.
2. Performance
37. The Applicants have proposed a FWLL network design based on several assumptions
that may not be realized in the actual deployed network. In particular, the Applicants have assumed that:
(1) subscriber usage patterns would be consistent with a lower speed tier than the Applicants propose to
market for the FWLL deployment; (2) six-sector sites would provide [BEGIN HIGHLY CONF. INFO.]
[END HIGHLY CONF. INFO.] .
48
38. More specifically, the Applicants assume a conservative traffic speed tier of [BEGIN
HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] in the lab-based simulations they have
submitted to support their FWLL performance and capacity claims.
49
By contrast, the Applicants
elsewhere claim they would offer consumers much faster data speeds (15-20 Mbps) and a higher data cap
(up to [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] per month).
50
39. The record shows that when subscribers are offered higher speeds, their usage
increases.
51
This, in turn, would affect the network’s capacity and performance. Traffic typically
associated with the higher speed and data tiers associated with the target market segment (i.e., 15-20
Mbps and up to [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] per month) places
greater demands on a network than the lower speed tiers that the Applicants relied upon for their FWLL
input traffic model [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] .
52
If
improperly engineered, greater traffic loads could have an adverse effect on either maintaining the
FWLL’s target data speeds or the target number of subscribers that could use the network per sector, or
both. Finally, Applicants use simulations of [BEGIN HIGHLY CONF. INFO.] [END HIGHLY
CONF. INFO.] .
53
However, the Applicants’ own analysis indicates that [BEGIN HIGHLY CONF.
INFO.] [END HIGHLY CONF. INFO.] .
54
Furthermore, the simulated sector capacity may not be
realized for all sites, because [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] .
55
40. The Applicants have provided no evidence to explain how they would address the
practical issues affecting FWLL performance that could arise if any of these assumptions is not accurate.
Poor network performance could, in turn, affect long-term competitiveness of FWLL, particularly in areas
where there is an existing terrestrial broadband competitor.
(Continued from previous page)
top heights and (2) antenna gain of [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] . There
are also differences in foliage or clutter signal losses at higher frequencies, but those differences are counterbalanced
to some degree by the higher FWLL antenna gains and heights. Foliage signal reduction is generally higher at
higher frequencies.
48
See AT&T Response to Sept. 9, 2014, Information Request at 200, Exhibit 58.g.2 at 8.
49
See id. at Exhibit 58.i.1 at 3; AT&T Response to Dec. 15, 2014, Information Request, Exhibit 6.1 at 4.
50
See AT&T Response to Sept. 9, 2014, Information Request at 199.
51
See id. at Exhibit 58.f.6 at 4.
52
See supra ¶ 38.
53
See AT&T Response to Sept. 9, 2014, Information Request at 200, Exhibit 58.g.2 at 8.
54
See id. at Exhibit 58.i.1 at 13.
55
See ATT-FCC-02208834, [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] .
Federal Communications Commission FCC 15-94
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41. To be sure, network performance challenges could be mitigated by adding spectrum or
cell sites to maintain the target quality of service. Any required expansion, either of cell count, or use of
additional spectrum, would increase both capital and operating expenses.
56
However, there is no evidence
in the record that explains how AT&T might expand the FWLL network capacity or whether its business
model would support the required additional cost. In the absence of quantifiable financial data that
support a different conclusion, we believe these expenses could have a negative impact on the financial
viability of the FWLL business model.
57
III. AT&T’S CLAIM THAT FWLL WOULD BENEFIT 13 MILLION RURAL CUSTOMERS
A. Background
42. The Applicants claim that post-transaction, FWLL would reach 13 million mostly rural
households.
58
Further, AT&T maintains that almost 20 percent of the 13 million households (i.e., 2.6
million households) have no access to terrestrial broadband, and 27 percent of the 13 million households
(i.e., 3.5 million households) have only one terrestrial option.
59
Conversely, in certain documents,
AT&T claims that its FWLL network would provide broadband to [BEGIN HIGHLY CONF. INFO.]
[END HIGHLY CONF. INFO.] FWLL-eligible rural households that do not have terrestrial broadband
service available.
60
The record does not reconcile the claims. In any case, Applicants claim that in most
households with only one terrestrial option, that option is either DSL or a relatively slow cable modem
service.
61
43. According to the Applicants, FWLL coverage – and, therefore, the number of people it
would serve in rural areas – is determined by a complex four-part formula. First, the sites must be in a
“rural” geographic area. AT&T defines geographic areas “by superimposing a grid of one mile squares
on a map of the continental United States.”
62
AT&T “considers a cell site ‘rural’ if it is located in a
square mile with a population of less than 250 persons.”
63
However, [BEGIN HIGHLY CONF. INFO.]
[END HIGHLY CONF. INFO.] .
64
In addition, the cell site must be one where [BEGIN HIGHLY
CONF. INFO.] [END HIGHLY CONF. INFO.] . Finally, the cell site must be one where [BEGIN
HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] .
65
56
There is no evidence in the record that explains how AT&T might expand the FWLL network capacity. See
generally AT&T Response to Sept. 9, 2014, Information Request, Exhibit 59.a.1 (showing net present values for
various numerical ranges of subscribers) and Exhibit 59.l.1 (showing LTV calculations for FWLL).
57
See supra ¶ 26 & n.39.
58
See Stankey Decl. ¶ 36. See also supra n.1 (discussion and definition of “household”).
59
Application at 44. AT&T describes its methodology as follows: “ [BEGIN HIGHLY CONF. INFO.] [END
HIGHLY CONF. INFO.] .” AT&T Response to Sept. 9, 2014, Information Request at 205.
60
See ATT-FCC-02210352, [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] . Specifically,
AT&T estimates that there are [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] households in
no-broadband or “IP red” territories, of which [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF.
INFO.] are rural and [BEGIN HIGHLY CONF. INFO.] [END HIGHLY CONF. INFO.] are rural and included
in its FWLL deployment plans. Id.
61
Application at 44; Stankey Decl. ¶ 55.
62
AT&T Response to Sept. 9, 2014, Information Request at 195.
63
Id.
64
See id. at 203.
65
See id.
Federal Communications Commission FCC 15-94
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B. Analysis
44. AT&T has submitted a map that depicts its projected FWLL deployment area. There is
insufficient information in the record to replicate this coverage map. Therefore, we assume this map was
derived using the four criteria discussed above, and use this map to represent the projected FWLL
deployment area in our analysis. We evaluate the Applicants’ claims regarding population and existing
broadband coverage within the projected FWLL coverage area using two separate methods.
45. The first method uses GeoLytics census data and State Broadband Initiative (“SBI”) data
(“Census Block Methodology”). SBI data contain a comprehensive list of terrestrial providers at the
census-block level, including provider name, maximum advertised speed, and technology, among other
variables.
66
GeoLytics data contain 2013 projections of 2010 census data at the census-block level,
including variables such as population, housing units, and block area. Using ArcGIS, Commission staff
selected every census block for which the centroid of the block overlapped the projected FWLL
deployment area. The resulting list of census blocks was combined with the SBI and GeoLytics data.
67
The resulting dataset was used to create census-block-level estimates of broadband availability and
population density.
68
46. In addition, we also evaluated the Applicants’ claims using only the data that they
submitted in the record (“Grid Methodology”). This second method enables an examination of
population and population density; however there was not sufficient Applicant-submitted data to evaluate
existing broadband coverage in the projected FWLL deployment area. Using ArcGIS, Commission staff
overlaid the Applicant-submitted one mile grid with the map of the projected FWLL deployment area.
The grid squares that overlapped the projected deployment area were selected, and the selected
66
In 2009, in the Recovery Act, Congress directed NTIA through the SBI program to collect more robust data about
broadband deployment and to create a National Broadband Map, “a comprehensive, interactive, and searchable
nationwide inventory map of existing broadband service capability and availability.” Inquiry Concerning the
Deployment of Advanced Telecommunications Capability to All Americans in a Reasonable and Timely Fashion,
GN Docket No. 10-159, Seventh Broadband Progress Report and Order on Reconsideration, 26 FCC Rcd 8008,
8079, Appendix F, ¶ 4 (2011) (quoting Department of Commerce, NTIA, State Broadband Data and Development
Grant Program, Docket No. 0660-ZA29, Notice of Funds Availability, 74 Fed. Reg. 32545, 32546 (July 8, 2009),
available at http://www.ntia.doc.gov/frnotices/2009/FR_BroadbandMappingNOFA_090708.pdf); see also Inquiry
Concerning the Deployment of Advanced Telecommunications Capability to All Americans in a Reasonable and
Timely Fashion, GN Docket No. 11-121, Eighth Broadband Progress Report, 27 FCC Rcd 10342, 10344, ¶ 1 (2012).
These data, while useful for measuring developments in terrestrial broadband deployment, have certain limitations
that likely overstate the extent of terrestrial broadband deployment.
67
Our analysis does not include broadband connections in which the customer is classified as “Business” or
“Government,” nor those in which the provider is classified as a “Reseller.” Every observation in the SBI dataset
provides information on an individual provider in an individual census block. Therefore, there are no SBI data for
any census block without existing terrestrial broadband providers. However, census blocks that are within the
projected FWLL deployment area, but do not have existing terrestrial broadband providers are included in our
analysis in order to reflect the number of households with no broadband providers.
68
The SBI data is divided into two categories – large census blocks and small census blocks. Large blocks are
defined as any census block with an area greater than two square miles. Small blocks are defined as any census
block with an area up to two square miles. The total number of broadband providers in a census block represents
deployment, or homes passed, which does not necessarily reflect the number of choices available to a particular
individual or household. If there are no households in a census block, it is assumed that there is no terrestrial
broadband coverage in that block. Because our analysis reflects the overall number of households with broadband
coverage, this does not affect our result.
Federal Communications Commission FCC 15-94
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observations were exported and combined with demographic data to calculate population and population
density for these one square mile areas.
69
47. Since its 2004 Report and Order concerning deployment of wireless services in rural
areas, the Commission has used a guideline definition of “rural” as an area with a population density of
100 persons or fewer per square mile.
70
In our analysis, the relevant area is either a census block or a mile
grid square, depending on the methodology used. We see no reason to revisit this guideline here. The
Commission’s definition of a rural area as one with 100 persons or fewer per square mile conflicts with
the Applicant’s definition of a rural area as one with less than 250 persons per square mile.
48. Using the Commission’s definition of “rural”
at the census block level, and the Census
Block Methodology described above, we estimate that approximately 4.5 million rural households would
be within the projected FWLL deployment area. Using the same methodology, and the Applicants’
definition of rural, we estimate that approximately 6.9 million rural households would be within the
projected FWLL deployment area. As a control, we replicated this calculation using the Applicants’ data
using the Grid Methodology and the Commission’s definition of “rural.”
71
Using this method, we find
there are 6.0 million FWLL eligible rural households. These estimates are substantially fewer than half of
AT&T’s claim of 13 million “largely rural” households.
49. We also note that, based on the Census Block Methodology described above, there are
many fewer rural households with zero or one terrestrial broadband provider than AT&T claims. Table 1
compares the Applicants’ customer-coverage claims to Commission staff estimates.
69
AT&T submitted three separate population numbers for each grid square: daytime population, nighttime
population, and maximum population, which is the larger of daytime and nighttime population. See AT&T
Response to Sept. 9, 2014, Information Request at 195, 198 (describing AT&T’s process for identifying “rural”
areas in a grid of square miles) and Exhibit 58.c.2 (setting forth daytime, nighttime, and maximum population values
via “National Morphology Grids”). The analysis in the body of this Appendix uses the maximum population. This
is the value that we assume AT&T used in their analysis.
70
Facilitating the Provision of Spectrum-Based Services to Rural Areas and Promoting Opportunities for Rural
Telephone Companies To Provide Spectrum-Based Services, WT Docket No. 02-381, Report and Order, 19 FCC
Rcd 19078, 19087-88, ¶ 12 (2004) (“We recognize, however, that the application of a single, comprehensive
definition for ‘rural area’ may not be appropriate for all purposes …. Rather than establish the 100 persons per
square mile or less designation as a uniform definition to be applied in all cases, we instead believe that it is more
appropriate to treat this definition as a presumption that will apply for current or future Commission wireless radio
service rules, policies and analyses for which the term ‘rural area’ has not been expressly defined. By doing so, we
maintain continuity with respect to existing definitions of ‘rural’ that have been tailored to apply to specific policies,
while also providing a practical guideline.”).
71
The Applicant data included the population per grid square; however it did not include the number of households
per grid square. We converted the resulting population numbers into households by dividing the population
numbers by the census definition of average household size of 2.54 persons per household.
Federal Communications Commission FCC 15-94
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Table 1.
Applicants’
Claim
(number of
households)
Commission
Staff Estimate
(number of rural
and non-rural
housing units)
72
Commission Staff
Estimate (number
of rural housing
units with less than
250 pops per
square mile)
Commission Staff
Estimate (number of
rural housing units
with less than 100
pops per square
mile)
Customers located in
projected FWLL
deployment area
13 million
“largely rural”
households
73
15.2 million 6.9 million 4.5 million
Customers located in
projected FWLL
deployment areas with
no existing terrestrial
broadband provider
2.6 million
74
1.5 million 1.2 million 1.0 million
Customers located in
projected FWLL
deployment areas with
one existing terrestrial
broadband provider
3.5 million
75
4.5 million 2.8 million 2.0 million
50. Table 1 shows that, according to AT&T, 2.6 million households within the projected
FWLL deployment have no existing terrestrial broadband service. In contrast, Commission staff
estimates that within the entire projected FWLL deployment area (i.e., rural and non-rural areas),
approximately 1.5 million households would have no terrestrial broadband option. In addition, based on
the Applicant’s definition of “rural,” Commission staff estimates that approximately 1.2 million rural
households would have no terrestrial broadband option. Further, based on the Commission’s guideline
definition of “rural,” Commission staff estimates that approximately 1.0 million rural households would
have no terrestrial broadband option. With regard to AT&T’s claim that 3.5 million households have only
one terrestrial broadband provider,
76
we observe that, even assuming Applicants’ definition of “rural,”
approximately 2.8 million rural households would have one terrestrial broadband option. And based on
the Commission’s guideline definition of “rural,” Commission staff estimates that approximately 2.0
million rural households would have only one terrestrial broadband option. Thus, Commission staff’s
estimates are significantly lower than AT&T’s estimates, even when using AT&T’s definition of “rural,”
but even more so when using the Commission’s established guideline for determining which communities
are “rural.”
72
Commission staff estimates were derived using AT&T Response to Dec. 15, 2014, Information Request, Exhibit
58.b.1; SBI data; and GeoLytics census data. For more details regarding data and calculation techniques, see supra
¶¶ 44-49.
73
See Stankey Decl. ¶ 36.
74
AT&T maintains that almost 20 percent of the 13 million households (i.e., 2.6 million households) have no access
to terrestrial broadband. See supra ¶ 42.
75
See supra ¶ 42.
76
AT&T claimed that 27 percent of 13 million households have only one terrestrial broadband provider, which
equates to 3.5 million households. See supra ¶ 42.
Federal Communications Commission FCC 15-94
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STATEMENT OF
CHAIRMAN TOM WHEELER
Re: Applications of AT&T Inc. and DIRECTV for Consent to Assign or Transfer Control of
Licenses and Authorizations, MB Docket No. 14-90.
Today I vote in favor of an order with conditions that approves the acquisition of DIRECTV by
AT&T. This transaction offers the opportunity for more competition, directly benefitting consumers, thus
advancing the public interest.
My vote comes after the Commission staff engaged in a state-of-the-art economic analysis and a
rigorous examination of the facts. Their work supports my conclusion that this merger is pro-competitive,
which is consistent with the views publicly expressed by the Department of Justice. Until now, neither
company has been fully equipped to compete with cable’s bundled services, including both high speed
broadband and pay TV. AT&T has had a disproportionately slow broadband network and higher
programming costs. DIRECTV has no means of supplying competitive broadband access. There also is
too little competition today in the availability of fixed broadband, especially at higher speeds. As I noted
last fall, roughly 74% of American homes have a choice of zero or only one fixed broadband providers at
25/3 mbps. A combined AT&T-DIRECTV offers consumers a viable competitor to cable by providing a
bundle of broadband and video. That new competition will challenge some of the nation’s biggest cable
companies, including Comcast, Time Warner Cable, Charter, and Cox, as well as Google Fiber.
Competition means lower prices for both customers of the new company and customers of cable.
At the same time, the transaction carries with it two notable competitive risks. First, roughly one
quarter of American households will lose a pay TV competitor – a traditional horizontal harm. Second,
after the merger, AT&T, with the ability to provide Pay TV programming nationally, will have a greater
incentive to harm emerging services that use broadband connections to offer consumers new choices in
the selection of Pay TV. It is to directly address those risks that the Order includes targeted and merger-
specific conditions. The conditions will lock in the benefits of the acquisition and address the risks of
competitive harm. This is our statutory obligation.
The detail set forth in the Order need not be repeated here, but the core purposes of the conditions
should be emphasized. As the Order explains, with DIRECTV in hand, AT&T will now have a lesser
incentive to deploy fiber to consumers. Given the lack of competition that already exists, that
disincentive would be a bad outcome, but it is remedied by the requirement that AT&T make good on its
promises and bring competitive high-speed broadband to 12.5 million customer locations. This additional
build-out is about ten times the size of AT&T’s current fiber-to-the-premise (FTTP) deployment,
increases the entire nation’s residential fiber build by more than 40 percent, and more than triples the
number of metropolitan areas AT&T had previously announced plans to serve.
A natural consequence of the FTTP deployment is expansion of the AT&T network to institutions
and enterprises—and that offers an additional opportunity for competition which is why the Commission
is requiring AT&T-DIRECTV to offer gigabit service to any E-rate eligible school or library within the
areas where AT&T-DIRECTV deploys FTTP service.
Most importantly, this requirement will result in the permanent expansion of fiber—a legacy that
will endure long after the conditions of the decision have expired. AT&T has four years to complete the
required FTTP build-out, but if it is not completed in that time period, all of the conditions we impose
today will remain in effect. At various times, AT&T has announced an expansion of their fiber footprint.
Then, after the Open Internet decision, AT&T announced they would not be undertaking the expansion
and then quickly told the merger review team that it would, in fact, complete its prior expansion plans.
Federal Communications Commission FCC 15-94
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What is plain is this: investment in new high speed broadband is profitable now because it offers
companies the opportunity to reach new customers with new products, and nothing in the implementation
of the Open Internet Order has changed that.
In addition, while our analysis confirmed that a potential benefit of the merger is the availability
of better and lower priced bundles of video and broadband service, the Commission also concludes that
the public interest requires us to ensure that a bundle of video and broadband services is not the only
competitive choice for low-income subscribers who may not be able to afford bundled services. The
Commission accordingly requires as a condition of the merger that AT&T-DIRECTV make available an
affordable, low-price standalone broadband service to low-income consumers in its broadband service
area.
We also impose conditions that build on the Open Internet Order already in effect, addressing
two merger-specific issues. First, in order to prevent discrimination against online video competition,
AT&T will not be permitted to exclude affiliated video programming services and content from data caps
or impose other discriminatory retail terms and conditions on its fixed broadband connections. Second, in
order to bring greater transparency to interconnection practices, the company will be required to submit
all completed interconnection agreements to the Commission, along with regular reports on network
performance.
These commitments are important to confirm the benefits of the transaction, and there has been
concern expressed as to whether previous merger terms have actually been fulfilled. We have heard those
concerns and require the company to retain an outside independent compliance officer who will monitor
compliance and report to the Commission throughout the life of the conditions.
In sum, this Order will serve the public interest. Transaction conditions should directly address
the threat of competitive harm, and these do. Binding legal requirements must be enforceable, which is
why the creation of an independent compliance officer is very important.
There is too little competition in high speed broadband and in the market for bundled services and
this transaction, with its targeted conditions, is a big step in the right direction. Broadband deployment
should be inclusive, and this transaction will serve both low-income Americans and schools and libraries,
addressing the Digital Divide.
I am proud of our work here and so should be the American people.
Federal Communications Commission FCC 15-94
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STATEMENT OF
COMMISSIONER MIGNON L. CLYBURN
Re: Applications of AT&T Inc. and DIRECTV for Consent to Assign or Transfer Control of
Licenses and Authorizations, MB Docket No. 14-90.
I firmly believe that broadband is the greatest equalizer of our time. The ability to participate in
e-commerce, seek employment online, benefit from telemedicine or become an entrepreneur is key to
addressing many of the challenges in our Nation’s persistent poverty areas. But for our goal of universal
broadband access to be realized, we need both deployment of networks and access to affordable services.
This merger makes strides in achieving these two goals.
First, approval of this transaction is conditioned on the deployment of fiber-to-the-home to twelve
million additional households. This is a laudable result and I look forward to its implementation.
Second, as the Order notes, cost remains a barrier for too many low-income consumers who wish
to adopt broadband at home. I am particularly pleased that the commitments in this merger provide an
affordable standalone broadband offering based on Supplemental Nutrition Assistance Program (SNAP)
eligibility, which means that parents with school-aged children as well as adults, veterans, persons with
disabilities and seniors without children, could benefit. This broadband option has the potential to
empower consumers by making the Internet available at home for $10 per month for 10 Mbps, without
any hidden or additional costs, fees for installation or equipment, or needless limits on consumers who
have been challenged in obtaining or maintaining services before applying. Consumers will have the
ability to participate for four years and AT&T will provide the Commission with reports on the success of
their efforts every six months.
While I believe that public interest benefits are significant, I do have concerns with the potential
impact on smaller MVPDs and independent programming. This merged entity will have over 25 million
video subscribers. A larger subscriber base and corresponding ability to leverage efficiencies in order to
save programming costs are cited as benefits of this transaction, but a number of parties have expressed
concerns regarding potential harms to smaller cable operators (or MVPDs) in accessing certain
programming, or gaining access to content at affordable costs. On the other side, we have heard from a
number of parties about the impact on independent programmers, particularly those that supply
programming for diverse and niche audiences via MVPD or online. While the analysis underlying this
transaction does not find that these challenges are made demonstrably worse by this merger, I believe it is
now time to reevaluate our program access rules, and to examine barriers to program carriage and
distribution, in order to address significant concerns about the impact on small businesses and diverse or
independent programmers. Indeed, the transaction itself highlights the need for a reexamination of our
rules when a provider as large as AT&T merges with a DIRECTV in part to reduce programming costs.
I therefore call on the Chairman to initiate a proceeding, such as a Notice of Inquiry, in order to
take a fresh look at our carriage rules and examine the challenges and barriers to independent and diverse
programming. This could include the ability of small and independent programmers to achieve program
carriage, as well as the ability of distributors to offer niche content in innovative ways. I also call on the
Chairman to initiate (or complete, to the extent necessary) a proceeding regarding our program access
rules, to evaluate their effectiveness and identify whether there are ways to reform our rules to provide a
level playing field for smaller operators to remain competitive.
In addition, the other conditions included in this Order to address identified harms, including non-
discrimination in the application of data caps, the appointment of a Compliance Officer to track and
report AT&T’s progress in carrying out the commitments enumerated in this Order, and enabling the
Federal Communications Commission FCC 15-94
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Commission to evaluate interconnection practices and performance are necessary to ensure that the
transaction is in public interest.
I therefore vote to approve this item, and look forward to working with the Chairman to take a
hard look at program carriage, program distribution and the program access rules to ensure we address
any industry-wide concerns that our rules may not be working as intended.
Federal Communications Commission FCC 15-94
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STATEMENT OF
COMMISSIONER JESSICA ROSENWORCEL
Re: Applications of AT&T Inc. and DIRECTV for Consent to Assign or Transfer Control of
Licenses and Authorizations, MB Docket No. 14-90.
In this Order we approve the merger of AT&T and DIRECTV. This decision is based on
extended review and careful consideration of the consequences of combining a mix of interests in
broadband, wireless, and video services. On balance, we find that this transaction, as conditioned, serves
the public interest, as required under law.
Communications markets are changing fast—and the future of watching is bound to look
different from the past. Channel packages with limited choices are giving way to a new world where
consumers watch what they want, when they want it, on any screen handy. As a result, broadband is
becoming an essential tool for the distribution of video content. Consequently, this transaction is
conditioned on the deployment of fiber to the premises to 12.5 million new customer locations. This
deployment will result in more modern infrastructure that supports a range of activities—including online
video. This development is not just good for consumers, it also addresses disincentives for deployment
that could arise from this transaction. Even better, these facilities will be made available to schools and
libraries in the deployment footprint. In addition, this transaction is conditioned on non-discriminatory
usage-based practices that will help ensure that the online marketplace for video has fair opportunity to
grow. Finally, though not the subject of any conditions in this transaction, the issue of independent
programming and the complexities of securing access on traditional video distribution platforms has come
up repeatedly in the record in this proceeding. I think this issue is ripe for examination, and hope that the
Commission can find another forum for discussion of this important topic.
Federal Communications Commission FCC 15-94
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STATEMENT OF
COMMISSIONER AJIT PAI
APPROVING IN PART AND DISSENTING IN PART
Re: Applications of AT&T Inc. and DIRECTV for Consent to Assign or Transfer Control of
Licenses and Authorizations, MB Docket No. 14-90.
The Commission’s comprehensive record conclusively demonstrates that AT&T’s acquisition of
DirecTV is in the public interest. The combined entity will compete more effectively in our nation’s
video and broadband markets. In particular, the transaction will allow the combined entity to offer
integrated bundles of video and broadband to far more Americans than AT&T could alone. The end
result will be lower-priced bundles for consumers and greater high-speed broadband deployment. I
therefore support the Commission’s decision to approve this transaction.
However, I cannot support the Commission’s decision to place 17 pages of conditions on that
approval.
1
The transaction’s benefits clearly outweigh any harms. As a result, there is no need to impose
conditions upon it. Indeed, earlier this week, the U.S. Department of Justice “concluded that the
combination of AT&T’s land-based internet and video business with DirecTV’s satellite-based video
business does not pose a significant risk to competition.”
2
It therefore concluded its “extensive
investigation” into the transaction without asking for any conditions.
3
The Commission should have done
the same.
But the FCC goes much further, demanding that AT&T satisfy a regulatory wish-list that has
nothing to do with the transaction at hand. These conditions are the forced tribute that the company must
offer to mollify the Capitol.
4
In this regard, I dissent.
Some conditions are nothing more than policymaking through the merger review process.
Consider, for example, the decision (however nobly intended) to require AT&T to offer discounted
broadband service. The Commission concedes that its economic model “predicts very little change in the
price of AT&T’s standalone broadband post-transaction.”
5
Depending upon the assumptions used, the
price adjustment will range from a 0.73% decline to a 0.46% increase. Moreover, the Commission
concedes that the transaction will lead to “little change (positive or negative)” in the stand-alone
broadband prices offered by AT&T’s competitors.
6
Notwithstanding these findings, the Commission effectively decides to get into the discount
broadband business, using AT&T as its agent. For example, where technically available, the company is
1
Order at Appendix B.
2
Justice Department Will Not Challenge AT&T’s Acquisition of DirecTV, Press Release (July 21, 2015),
http://go.usa.gov/37rkh.
3
See id.
4
Cf. President Snow, The Hunger Games (Lionsgate 2012) (“And so it was decreed that, each year, the various
districts of Panem would offer up, in tribute, one young man and woman to fight to the death in a pageant of honor,
courage and sacrifice.”).
5
Order at para. 142.
6
Order at para. 143.
Federal Communications Commission FCC 15-94
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required to offer “qualifying households”
7
wireline broadband service with download speeds of at least 10
Mbps (which, according to the majority on a different day, isn’t broadband
8
) for no more than $10 a
month.
9
When the Commission instructs a regulated entity that it must offer a particular service for no
more than a particular price, there is a name for that. It is called rate regulation. So notwithstanding the
repeated claims by some over the past few months that the FCC has no interest in regulating retail
broadband rates, the reality is far different. When given the opportunity, the Commission did not hesitate
to impose rate regulation upon a broadband provider. This is merely a preview of coming attractions.
Moreover, the rate regulation imposed by the Commission is not even designed to prevent price
increases from occurring in the wake of the transaction. It is merely intended to cut pre-transaction
prices. To give just one example, the price of AT&T’s stand-alone 6 Mbps broadband service in Austin,
Texas is currently $34.95 a month.
10
And the 6 Mbps broadband service portion of an Internet/phone
bundle is $14.95 a month.
11
Given these figures, how could requiring AT&T to offer a 10 Mbps stand-
alone broadband service for no more than $10 a month possibly be necessary to remedy a harm caused by
the transaction? The Commission doesn’t even make a cursory attempt to explain how it arrived at this
$10 price point.
Shifting gears, the Commission imposes conditions designed to remedy what it contends would
be the combined entity’s increased incentive to discriminate against unaffiliated over-the-top video
providers. Specifically, the Commission claims that, after the merger, AT&T would seek to hinder those
over-the-top providers in order to protect DirecTV’s video product or AT&T’s own online video
products.
But the only detailed economic analysis and econometric modeling in the record (not to mention
the Justice Department’s approval, which implies rejection of the FCC’s argument) point to the opposite
conclusion. They demonstrate that any attempt by AT&T to hamper its broadband customers’ access to
over-the-top video providers would only end up hurting the company.
12
It would encourage customers to
switch broadband providers, and many customers purchasing bundles from AT&T would likely end up
taking their video business elsewhere as well. Indeed, AT&T benefits when its customers use over-the-
top video providers, such as Netflix and Amazon, since “[o]nline video is a major driver of broadband
demand, and desire to consumer online video leads consumers to purchase more broadband service,
7
Qualifying households are those where at least one individual participates in the Supplemental Nutrition Assistance
Program and that do not have certain outstanding debts to AT&T. See Order at Appendix B § VI(2)(c).
8
See Inquiry Concerning the Deployment of Advanced Telecommunications Capability to All Americans in a
Reasonable and Timely Fashion, and Possible Steps to Accelerate Such Deployment Pursuant to Section 706 of the
Telecommunications Act of 1996, as Amended by the Broadband Data Improvement Act, GN Docket No. 14-126,
2015 Broadband Progress Report and Notice of Inquiry on Immediate Action to Accelerate Deployment, 30 FCC
Rcd 1375, 1485 (Dissenting Statement of Commissioner Ajit Pai) (2015), http://go.usa.gov/372yw.
9
Order at Appendix B § VI(2)(a).
10
See AT&T, Check for U-Verse Availability, https://www.att.com/shop/u-verse/offers.html (entering address for
Austin, Texas and selecting Internet-phone bundle).
11
See id. (entering Austin, Texas address and selecting stand-alone broadband service).
12
Joint Opposition, “An Economic Assessment of AT&T’s Proposed Acquisition of DIRECTV,” Reply Declaration
of Michael L. Katz, transmitted by letter from Maureen R. Jeffreys, Counsel for AT&T, to Marlene H. Dortch,
Secretary, FCC, MB Docket No. 14-90 (Oct. 16, 2014).
Federal Communications Commission FCC 15-94
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including higher speed tiers.”
13
Thus, it should come as no surprise that AT&T offers a promotional
package in conjunction with Amazon Prime in four cities.
The Commission’s theory is also internally contradictory. For example, the Commission
contends on one hand that AT&T would seek to harm unaffiliated over-the-top video providers in order to
encourage customers to subscribe to DirecTV’s video package. Yet it concludes in another section that
over-the-top video providers are in a different product market than multichannel video programming
distributors such as DIRECTV because “for most consumers today, OVD [online video distribution]
services are not substitutes for MVPD services.”
14
Well, which is it? Do over-the-top video providers
compete with DirecTV or not? The FCC’s creative heads-we-win-tails-AT&T-loses view of the video
marketplace embraces Wilde’s dictum that “consistency is the hallmark of the unimaginative.”
15
On top of this, the conditions pertaining to over-the-top video providers are highly intrusive. For
example, AT&T must fork over to the FCC each and every interconnection agreement for the next four
years. It also must retain an Independent Measurement Expert, approved by the FCC’s Office of General
Counsel, to develop a methodology for measuring specified performance metrics for traffic exchanged at
its interconnection points. And it must report regularly to the Commission on those metrics. This
government-mandated surveillance is entirely unnecessary and is just another step towards putting the
FCC at the core of the Internet. It has been said that the Commission’s Title II order makes the FCC the
referee on the field, ready to throw the flag whenever a broadband service provider does something that it
doesn’t like. This condition goes beyond that and injects the FCC into the huddle, monitoring a team’s
play calling.
Speaking of surveillance, the conditions imposed by the Commission in this item also place a
FCC-designated monitor inside of AT&T. Specifically, the company and the Commission’s Office of
General Counsel must appoint an Independent Compliance Officer to monitor AT&T’s compliance with
the Commission’s demands and provide regular reports to the Commission. And if the company and
Commission’s Office of General Counsel are unable to agree on an Independent Compliance Officer, the
Office of General Counsel will pick one.
16
This Independent Compliance Officer will have wide-ranging powers. Among other things, he or
she will have the authority to interview any company personnel, to inspect and copy any document, email,
or contract, and to require the company to provide any data or submit any reports for any purpose that he
or she believes to be reasonably related to his or her duties.
17
And he or she may hire a staff to help do all
of these things.
18
There is no justification for the Commission to adopt this extraordinary condition. The
Commission does not point to any credible evidence that the company has failed to comply with the
13
Id.
14
Order at para. 68.
15
Moreover, to the extent that the Commission believes that the company will attempt to hurt unaffiliated, over-the-
top video providers in order to assist AT&T’s over-the-top video products—a theory that is not supported by the
record—it is difficult to see how such a harm would be specific to this transaction because such an incentive would
already exist.
16
Order at Appendix B § VII(3)(a).
17
Order at Appendix B § VII(3)(i).
18
Order at Appendix B § VII(3)(k).
Federal Communications Commission FCC 15-94
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conditions imposed upon it by the FCC in prior transactions. And there is no reason to presume that
AT&T will fail to abide by the conditions contained here.
This also establishes a dangerous precedent. I have little doubt that when we consider future
transactions, there will be calls for future applicants to accept Independent Compliance Officers as a
condition of approval. Virtually any transaction involving companies we regulate could result in the
injection of a Commission-selected solon with vast powers. Government-approved monitors placed
throughout the communications industry would represent a pernicious intrusion into the affairs of private
businesses and a dramatic expansion of the Commission’s authority.
* * *
Substance aside, I also have concerns about process. The Commission has established a 180-day
shot-clock for transactional review. But it has been 408 days since AT&T and DirecTV filed their
application with the Commission! In that amount of time, Jules Verne’s Phileas Fogg from Around the
World in 80 Days could have circumnavigated the globe five times in the 1870s.
To state the obvious, this matter has taken far too long to resolve and has made a joke of the
Commission’s 180-day shot-clock.
What took so long? Part of the time was wasted, over my objection, on a pointless and misguided
quest to permit third-parties to review programming contracts. This dispute ended with the Commission
suffering a resounding defeat in the U.S. Court of Appeals for the D.C. Circuit, which held unanimously
that the Commission “offer[ed] an exceedingly thin rationale” for a “substantive and important departure
from prior Commission policy.”
19
And even though the D.C. Circuit gave the FCC the option on remand
of trying again to give third-parties access to programming contracts, the agency approves this transaction
without taking that step, belying any assertion that third-party inspection of these materials was necessary
to the Commission’s consideration of this transaction.
20
But this litigation was not responsible for most of the delay here. Instead, it appears that the
Commission adopted a “four corners” strategy for handling this transaction that would have made the late,
great University of North Carolina basketball coach Dean Smith proud. This is unacceptable. I
understand that some savor the leverage gained by keeping a regulated entity under the Commission’s
thumb for as long as possible. But the speed of today’s digital economy makes it critical for the FCC to
move quickly. When companies remain stuck in purgatory for over a year waiting for an answer from the
Commission, their business plans are placed on hold while their rivals move full speed ahead. That isn’t
good for competition, it isn’t good for consumers, and it isn’t good government.
For these reasons, I hope that in the future, the Commission abides by its self-imposed deadline
and completes its consideration of proposed transactions much more quickly than it did here.
19
CBS Corp. v. FCC, 785 F.3d 699, 708–09 (D.C. Cir. 2015).
20
Cf. id. at 707 (“Nowhere does either the [Media] Bureau or the Commission make the jump from useful or
relevant or central to necessary.”).
Federal Communications Commission FCC 15-94
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STATEMENT OF
COMMISSIONER MICHAEL O’RIELLY
APPROVING IN PART AND CONCURRING IN PART
Re: Applications of AT&T Inc. and DIRECTV for Consent to Assign or Transfer Control of
Licenses and Authorizations, MB Docket No. 14-90.
More than a year after the applicants filed the transfer applications, with our 180-day “shot clock”
left in pieces on the floor like a particularly raucous alarm clock on a weekend morning, the Commission
now concludes its review. Although I do not subscribe to a number of premises presented in the item (is
it really the Commission’s job to make a “bet” on competition as part of its overall public interest
analysis? Are bundles really the future of communications offerings in the age of the cord cutter?), on
balance the combination of the two companies will produce certain benefits, and the case for a lack of
competitive harm is sufficiently made. At the same time, I find the conditions being imposed, albeit less
onerous than some of those extracted in past merger approvals, are unrelated to the transaction at hand,
outside the scope of our proper role, and harmful to consumers. Therefore I approve in part and concur in
part.
Some of the conditions imposed will sound strangely familiar to those who have followed the
Commission closely over the last many years. Our duty to determine whether a proposed transaction will
serve the public interest, however, should not be read as an opportunity to divert private resources toward
favorite causes and theories. The economic analysis finds that the net effect of the transaction is
beneficial to consumers,
1
that the transaction has a positive effect on the price of bundled products,
2
and
that the loss of a video provider within AT&T’s current video footprint creates such a limited potential for
competitive harm that, when balanced against the benefits of the transaction, no conditions are required.
3
But the Commission just can’t pass up an opportunity to push its own objectives, even if it is unrelated to
the matter at hand.
For instance, the analysis suggests there will be “very little change in the price of AT&T’s
standalone broadband post-transaction” and thus the applicants’ standalone broadband offering and
pricing commitment was rejected as unnecessary.
4
But in the very next paragraph, the importance of a
standalone option to the public interest is reiterated and then used as a flawed justification to impose a
mandate to offer a discounted standalone broadband program to low-income consumers.
5
The imposition
of this condition – which is clearly not merger-specific – is likely to result in price increases as the
majority of AT&T customers will have to subsidize those AT&T customers that receive this offering.
As recognized in the Order, the transaction will allow the applicants to achieve certain
efficiencies, freeing up resources that the applicants proposed to invest in a mix of fiber and fixed
wireless broadband deployment. The Order goes to great pains to discount any potential benefits of a
fixed wireless buildout to 13 million homes in largely rural areas, including many that currently have no
access to any type of terrestrial broadband, while on the other hand forcing additional fiber buildout to
metropolitan areas that already have a competitive broadband market, in the hope of further increasing
1
Supra para. 105
2
Supra para. 111
3
Supra para. 127
4
Supra paras. 142, 143
5
Supra paras. 144, 145
Federal Communications Commission FCC 15-94
241
competition there. I am skeptical that this reprioritization of metropolitan over rural areas really is in the
public interest when so many people continue to go completely unserved. Generally, we should be
supportive of innovative, voluntary private sector solutions to connect unserved areas, but in this item we
have rejected the opportunity. Consequently, millions of Americans will still be waiting indefinitely for a
viable broadband offering while the applicants sink billions of dollars into large, competitive markets at
the demand of the government, not market forces.
Additionally, the interconnection disclosure condition inches us that much closer to rate
regulation, which I have said repeatedly will be the inevitable result of the Commission’s recent net
neutrality order, despite all protests to the contrary. Why collect all of this sensitive information, and
threaten to release it publicly, if not to eventually intervene in these agreements? While the item states
that the record does not contain “any evidence that would support blanket restrictions on all
interconnection agreements”
6
between the applicants and online video providers, it is clear that the table
is being set for exactly that. And then there are the inane limitations on usage based billing practices and
the mandate of an independent compliance officer with questionable duties despite the lack of a
Commission finding of past digressions with other mergers.
While I do not support the specific conditions being imposed, I am willing to concur because the
applicants have indicated that they are willing to accede to them and they don’t appear to cause direct
harm to other market participants. I look forward to seeing the merged company’s efforts to meet
consumer demands for services in the communications landscape.
6
Supra para. 219
