Case 1:17-cv-02511-RJL Document 128 Filed 05/08/18 Page 1 of 178 IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA UNITED STATES OF AMERICA, Plaintiff, Civil Action No. 1:17-cv-02511 (RJL) v. REDACTED AT&T INC., DIRECTV GROUP HOLDINGS, LLC, and TIME WARNER, INC., Defendants. PROPOSED FINDINGS OF FACT OF THE UNITED STATES Case 1:17-cv-02511-RJL Document 128 Filed 05/08/18 Page 2 of 178 TABLE OF CONTENTS I. BACKGROUND ............................................................................................................... 1 A. Parties and venue ............................................................................................................... 1 B. The proposed transaction .................................................................................................. 2 C. The pay-television industry ............................................................................................... 2 1. MVPDs deliver packages of linear channels and on demand content to subscribers via separate, dedicated transmission paths that each one controls ......................................................................................................... 2 2. Virtual MVPDs distribute linear channels and on demand content to subscribers over the internet ........................................................................................ 4 3. SVODs distribute on-demand content over the internet ............................................. 6 D. Defendants recognize their own power within the pay-TV ecosystem ............................. 7 II. RELEVANT MARKETS ................................................................................................ 10 A. Product Market: Multichannel Video Distribution is a relevant product market ............ 10 1. A hypothetical monopolist over Multichannel Video Distribution services (MVPDs and virtual MVPDs) could profitably impose a small but significant non-transitory increase in price above competitive levels ...................... 10 2. Brown Shoe factors establish a distinct Multichannel Video Distribution product market ........................................................................................................... 11 3. Even an all video distribution services market meets the hypothetical monopolist test .......................................................................................................... 12 B. Geographic Market .......................................................................................................... 13 1. Relevant downstream geographic markets are local, but they can be aggregated for analytical convenience ...................................................................... 13 2. The competitive options for any given location vary ................................................ 15 III. AT&T’S DOCUMENTS RECOGNIZE THAT VERTICAL INTEGRATION POSES A THREAT TO COMPETITION ....................................................................... 16 IV. THE PROPOSED MERGER WOULD LIKELY SUBSTANTIALLY LESSEN ii Case 1:17-cv-02511-RJL Document 128 Filed 05/08/18 Page 3 of 178 COMPETITION IN THE ALL VIDEO DISTRIBUTION AND MULTICHANNEL VIDEO DISTRIBUTION PRODUCT MARKETS IN LOCAL MARKETS THROUGHOUT THE COUNTRY .................................................................. 20 A. MVPDs and virtual MVPDs currently compete to attract and retain subscribers .......... 20 1. MVPDs compete with one another based on the programming they offer ............... 20 2. MVPDs compete with one another on price ............................................................. 22 3. MVPDs compete with one another based on innovative offerings ........................... 23 B. The merger would enable AT&T to harm competition because MVPDs and virtual MVPDs need Turner content to compete effectively ...................................................... 23 1. Industry participants highly value Turner ................................................................. 24 a. Turner’s content is valued by viewers ................................................................. 26 b. Turner has exclusive rights to popular sports programming ............................... 28 c. Turner’s core networks are among the most widely-distributed cable networks ..................................................................................................... 30 d. Turner obtains high affiliate fees from MVPDs and virtual MVPDs ................. 31 e. Turner fees have steadily increased for years ..................................................... 33 2. Turner’s valuable content gives it leverage in negotiations with MVPDs and virtual MVPDs ..................................................................................... 35 a. Each of Turner’s agreements with distributors is heavily negotiated ................. 35 b. Each side formulates its negotiating strategy based on what would happen if they did not reach an agreement .......................................................... 40 i. Currently, without an agreement, Turner would lose affiliate fees and advertising revenue due to reduced exposure to viewers .................................... 40 ii. Without an agreement, MVPDs and virtual MVPDs would lose customers ...... 41 iii. MVPDs have estimated their likely subscriber losses to inform their negotiating strategy ............................................................................................. 43 a) Charter commissioned consulting firm Altman Vilandrie to conduct a detailed analysis to inform its negotiation strategy .................. 44 iii Case 1:17-cv-02511-RJL Document 128 Filed 05/08/18 Page 4 of 178 b) Comcast regularly analyzes viewership data to estimate potential subscriber losses........................................................................................ 50 c) Cox estimated potential subscriber losses when considering whether to drop ............................................................................................... 54 d) Other- MVPDs have estimated potential subscriber losses through viewership data ......................................................................................... 55 c. Each side uses its leverage to negotiate the best deal it can ................................ 55 i. Turner uses the threat of going dark as leverage to get favorable agreement terms .................................................................................................. 56 ii. Turner uses its sports rights as leverage to get favorable agreement terms ........ 57 iii. Turner “prevailed nicely” over Cable ONE in the only blackout of all of Turner’s networks, while Viacom remains off air on Cable ONE four years later ..................................................................................................... 60 3. As a result of the merger, Turner’s negotiating leverage would increase ................. 64 a. Post-merger, Turner will pursue a strategy that will maximize AT&T’s overall profits ...................................................................................................... 65 b. AT&T’s rivals expect Turner to exercise its increased bargaining leverage ...... 68 c. Professor Shapiro’s economic model predicts that Turner would be able to use additional leverage to increase fees beyond the regular annual price increases that would occur without the merger .............................. 72 i. Subscriber loss rate .............................................................................................. 75 ii. Diversion rate ...................................................................................................... 78 iii. AT&T profit margins .......................................................................................... 79 iv. The bargaining split ............................................................................................. 81 d. AT&T price reductions to itself resulting from the elimination of double marginalization (EDM) would not offset the price increases from this merger .................................................................................................. 82 4. Rival MVPDs would pass along Turner price increases to their subscribers ........... 84 C. The merger would enable AT&T to use control over HBO to harm competition .......... 86 iv Case 1:17-cv-02511-RJL Document 128 Filed 05/08/18 Page 5 of 178 1. HBO is ............................................................................. 86 2. HBO leverages its value in carriage negotiations with MVPDs and virtual MVPDs .......................................................................................................... 89 3. MVPDs and virtual MVPDs use HBO as important tool to attract and retain subscribers from rival MVPDs .................................................................................. 93 4. MVPDs and virtual MVPDs do not have sufficient alternatives for HBO ............... 96 5. The merged firm will have the incentive and ability to use HBO to harm rival distributors ................................................................................................................. 98 D. Prior vertical integration has raised significant concerns for industry participants ...... 101 V. THE MERGER WOULD GIVE AT&T THE ABILITY TO HARM COMPETITION BY SLOWING THE GROWTH OF EMERGING, INNOVATIVE ONLINE DISTRIBUTORS ................................................................................................ 104 A. The merger