Trouble By The Bundle

Stop me if you’ve heard this one before:

“We understand the temptation for the FCC to take credit for resolving this impasse, but their intervention had nothing to do with it. We were very close to a resolution well before Chairman Wheeler got involved. In fact, the FCC process actually delayed the resolution, because it added more issues to negotiate, which lengthened DISH’s service interruption, not shortened it.”

That was Sinclair Broadcasting doing its best impression of Comical Ali, a.k.a. Mohammed Saeed Al-Sahaf, the hapless former Iraqi spokesman, insisting that the FCC’s unusual and urgent intercession in the retransmission consent negotiations between Sinclair and Dish Network had nothing to do with the outcome.

Dish and Sinclair had been negotiating for two and half months without reaching an agreement, Sinclair had triggered the nuclear option by yanking 129 local stations from Dish subscribers in 79 markets, but within hours of FCC chairman Tom Wheeler blasting the blackout and summoning the parties to an “emergency meeting” at the commission, mirabile dictu, all issues were resolved and the blackout was lifted.

Yet one thing had “nothing to do” with the other. Hmm.

The actual substance of the dispute between Dish and Sinclair was no laughing matter for the future of the pay-TV business, however, nor was Wheeler’s intercession, whatever its effect.

According to Dish — and seemingly confirmed by Sinclair in its statement — the parties had pretty much worked out the financial terms of the retransmission consent aspects of the deal by the time Sinclair pulled the plug on the stations. The sticking point, according to a complaint filed by Dish with the FCC on Wednesday, was Sinclair’s insistence as a condition of reaching a final deal that Dish agree to terms and conditions for carriage of a cable network that Sinclair intends to launch, acquire or distribute at some point in the future (it’s not clear which from the complaint) but which Sinclair does not currently own. Dish refused, and asked the commission to declare Sinclair’s position a violation of its obligation to negotiate in good faith.

“In insisting that the parties reach terms on the Non-Sinclair Owned Cable Network before agreeing to retransmission of its local broadcast station, Sinclair is engaging in unilateral bargaining, a per se violation of the Commission’s good faith rules under Section 76.65(b)(viii),” Dish said in its complaint. “In addition, Sinclair stated that it does ‘not intend to extend that further in the absence of final agreement on all points including the issues surrounding the Non-Sinclair Owned Cable Network.’ A refusal to negotiate under any circumstances, is per se bad faith under Section 76.65(b)(i), and a take it or leave it approach is ‘not consistent with an affirmative obligation to negotiate in good faith.’ Good Faith Order ¶ 43.”

Chairman Wheeler has made it pretty evident that he intends to clip broadcasters’ wings in retransmission negotiations, particularly with respect to the use of blackouts as a bargaining tool. But it wasn’t clear — or hadn’t been until this week — how far he might go to address the highly fraught nexus between retransmission consent and channel bundling.

Broadcasters and their parent companies have long used the leverage of retransmission content to gain carriage and carriage fees for affiliated cable networks, although Sinclair may be the first to try to use it on behalf of a network with which it is not actually currently affiliated. While such bundling was never part of Congress’ intent in creating the current retransmission consent system, pay-TV distributors have for the most part acquiesced, either because they lacked confidence that the FCC would support them or because they were generally able to pass along the costs of those deals to their subscribers without losing too many.

With the growth of cord-cutting, however, and new competition from “skinny bundles” delivered over-the-top, that calculus has obviously changed for pay-TV operators, even if FCC enforcement practices have not yet caught up.

In its complaint against Sinclair, Dish tries to raise the stakes by the commission by invoking the Sherman Antitrust Act’s prohibition on “tying” unrelated products together to force a buyer to purchase one product as a condition of obtaining another.

Here, Sinclair’s tying and forced bundling of the Non-Sinclair Owned Cable Network with the carriage of its broadcast stations are unfair practices that likely violate Section 1 of the Sherman Act. .. A per se illegal tie exists where a seller of two separate, unsubstitutable products has sufficient market power with respect to one (the tying product) to force purchasers to buy the other (the tied product), which conduct affects a substantial volume of interstate commerce. All the elements of an antitrust offense are present here.

The Sinclair Stations and the Non-Sinclair Owned Cable Network are distinct and separate products that are not substitutable. The broadcast stations provide local news and national network programming of general interest while the Non-Sinclair Owned Cable Network is a niche network. In the antitrust context, market power has been presumed in two situations: “when the seller offers a unique product that competitors are not able to offer” or “[w]hen the seller’s share of the market is high.” .. The uniqueness of the local programming of and, in many cases, the market share of the Sinclair stations, gives it substantial economic market power to leverage carriage of the Non-Sinclair Owned Cable Network and force unreasonable and uncompetitive terms on DISH.

The long-standing industry practice of tying cable network carriage to broadcast retransmission, in fact, has always carried a echoes of the block booking practices used by the Hollywood studios in the earlier 20th Century. Many of today’s broadcasters, in fact, are corporate descendants of those same studios. Under block booking, independent theater operators were forced to take large slates of a studios’ movies, mostly sight unseen, in order to book the biggest hits. In a striking parallel with Sinclair’s latest effort, in fact, many of the movies theaters were forced to book had not yet been produced at the time and could not even be considered affiliated products.

The Justice Department, backed by the Supreme Court, put an end to the practice in 1948 citing Section 1 of the Sherman Act.

With the dispute between Dish and Sinclair now settled there’s no guarantee the FCC will act on Dish’s complaint, but it’s not required to drop it. Now that it’s on the table, it’s possible the Justice Department or the Federal Trade Commission could even take an interest, if not specifically in the Sinclair case then in the broader industry practices and in the proper scope of the retransmission consent rules.

A renegotiation of the terms of the bundle is inevitable. Who will have the most leverage in that renegotiation,  however, is not. The jockeying for position is likely to be bruising.