The US Department of Justice filed a major lawsuit against AT&T's DirecTV unit on Wednesday, alleging that the satellite giant "colluded" with rivals during carriage talks over the LA Dodgers TV channel, leading to a broadcasting blackout for millions of consumers.
The blockbuster civil lawsuit alleges that DirecTV acted as the "ringleader" of an unlawful scheme to coordinate with its pay-TV rivals, including Cox and Charter, in order to gain bargaining leverage in negotiations with Time Warner Cable, the co-owner of the Dodgers channel, SportsNet LA.
DirecTV's conduct, according to the Justice Dept., was a blatant violation of the Sherman Antitrust Act, one of the nation's most important antitrust laws. As a direct result of the satellite giant's behavior, millions of Dodgers fans in Los Angeles have been unable to watch their favorite baseball team, according to the feds.
In a scathing complaint filed in the US District Court for the Central District of California, the Justice Dept. accused DirecTV of orchestrating a scheme that "corrupted the Dodgers Channel carriage negotiations and the competitive process that the Sherman Act protects." As evidence, the feds cited phone and text conversations in which senior executives at DirecTV and its rivals plotted how to coordinate their strategy in order to pressure Time Warner Cable during the negotiations.
To this day, SportsNet LA is only carried by Time Warner Cable and its affiliates, depriving approximately half of the Southern California market of access to Dodgers programming. (Time Warner Cable was recently acquired by Charter, in a merger fiercely opposed by public interest advocates.)
"Competition, not collusion, best serves consumers and that is especially true when, as with pay-television providers, consumers have only a handful of choices in the marketplace."
"As the complaint explains, Dodgers fans were denied a fair competitive process when DirecTV orchestrated a series of information exchanges with direct competitors that ultimately made consumers less likely to be able to watch their hometown team," Deputy Assistant Attorney General Jonathan Sallet of the Justice Dept.'s Antitrust Division, said in a statement.
"Competition, not collusion, best serves consumers and that is especially true when, as with pay-television providers, consumers have only a handful of choices in the marketplace," Sallet added.
In one exchange cited by the feds, DirecTV CEO Mike White told Daniel York, the company's chief content officer, that the rivals involved in the carriage talks "may have more leverage if we all stick together." York "[a]greed" that "others holding firm is key." Furthermore, York "disclosed nonpublic information" about the status of DirectTV's negotiations with Time Warner Cable and, in return, "learned similar non-public information" from the company's competitors, according to the feds.
It's worth noting that Sallet was until recently General Counsel at the Federal Communications Commission, before moving over to the Justice Dept.'s Antitrust Division, so he knows a thing or two about competition in the pay-TV market.
As such, the lawsuit can be read, at least in part, as a not-so-subtle "shot across the bow" at DirecTV parent AT&T, which last month proposed buying entertainment giant Time Warner in a $85 billion deal that has sparked concerns over anti-competitive harm and media consolidation. Federal regulators, led by the Justice Dept., are expected to scrutinize the proposed deal closely over the next year.
DirecTV's alleged illegal conduct occurred before AT&T gobbled up the satellite company for $50 billion in 2015, as the telecom giant was quick to point out in a statement emailed to Motherboard. (In fact, AT&T is named as one of the competitors with which DirecTV is alleged to have colluded.)
"We respect the DOJ's important role in protecting consumers, but in this case, which occurred before AT&T's acquisition of DIRECTV, we see the facts differently," said David McAtee, AT&T General Counsel. "The reason why no other major TV provider chose to carry this content was that no one wanted to force all of their customers to pay the inflated prices that Time Warner Cable was demanding for a channel devoted solely to LA Dodgers baseball."
"We make our carriage decisions independently, legally and only after thorough negotiations with the content owner," McAtee added. "We look forward to presenting these facts in court."
McAtee's reference to "inflated prices" refers to Time Warner Cable's initial demand that it be paid as much as $5 per month per subscriber, according to the complaint, in exchange for granting its rivals the right to carry the Dodgers channel. That's extremely high by cable industry standards. (To put that number in context, ESPN, the most expensive channel in the cable bundle, receives more than $7 per month per subscriber, according to SNL Kagan—and that's for access to hundreds of sports teams.)
This demand was a consequence, at least in part, of the fact that Time Warner Cable's 25-year deal with the Dodgers to create the channel was valued at a whopping $8.35 billion, a staggering amount for a cable channel devoted to one sports team, albeit in one of the nation's largest media markets.
Public interest groups seized on the Justice Dept.'s lawsuit as evidence that AT&T's proposed Time Warner buyout should be viewed with extreme suspicion by federal regulators.
"The timing of today's announcement likely had nothing to do with the timing for announcing the monstrous AT&T/Time Warner merger proposal last month," said Matt Wood, policy director at DC-based public interest group Free Press. "But the impact of runaway consolidation—and the identity of the ringleaders in the alleged scheme—shouldn't be lost on lawmakers and antitrust law enforcers."
"AT&T and DirecTV had too much power over the pay-TV, internet, and content markets even before their multibillion merger closed last year," Wood added. "Now that they've joined forces, the absolute last thing we need is approval of a deal to put these bad actors in control of Time Warner's video content empire."
Public interest groups have warned of potential harm to consumers if AT&T prioritizes Time Warner content over rival programming for AT&T and DirecTV subscribers, or extracts higher prices for HBO, CNN, or Warner Bros. content from competitors like Comcast. The former conduct could be a violation of the FCC's net neutrality policy; the latter could lead to higher prices for consumers.
"This case raises obvious concerns about whether AT&T would have the incentive and ability to harm consumers if it were permitted to acquire Time Warner," said John Bergmayer, senior counsel at DC-based public interest group Public Knowledge. "Although thorough enforcement uncovered evidence of wrongdoing in this instance, we should not allow further consolidation that invites this type of behavior across the entire market."