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June 26, 2000
Robert Pitofsky
Chairman, Federal Trade Commission
600 Pennsylvania Ave, NW
Washington, D.C. 20580
Dear Chairman Pitofsky:
Consumers Union (1) is concerned
that the recently consummated merger of AT&T Corporation
("AT&T") with MediaOne Group Inc. ("MediaOne") gives these
companies significant ownership of Time Warner Inc.'s ("Time Warner")
cable systems, violating a Federal Trade Commission (Commission)
consent agreement that was designed to prevent increased monopoly
power in the cable television distribution and programming business.
In Time Warner Inc., as you are aware, the Commission required
Tele-Communications, Inc. ("TCI"), Mr. Malone, and related entities
to divest or otherwise limit their ownership interests in Time Warner
as a precondition of Time Warner's acquisition of Turner Broadcasting
System, Inc.(2) As a consequence of
its acquisition of TCI last year, AT&T has assumed TCI's
obligations under the Time Warner Inc.
Order.(3)
As the Commission reported in that proceeding, AT&T/TCI was
then, as it is now, the nation's largest cable provider, serving at
that time about 27% of all U.S. cable television households; Time
Warner ranked second, serving approximately 17%. In addition, both
Time Warner and AT&T/TCI owned, and still own, significant cable
programming holdings, with Time Warner alone controlling 40% of that
market as a result of the Turner
acquisition.(4) The Commission
explicitly indicated that "these levels of concentration can be
problematic" and that the merger would "heighten the already
formidable entry barriers into programming by further aligning the
incentives of both Time Warner and TCI to deprive entrants of
sufficient distribution outlets."(5)
Accounting for nearly half of all U.S. cable television households,
Time Warner and AT&T/TCI could have acted in a coordinated
fashion to deprive programmers of the outlets they need to
successfully launch new channels. As set forth by the Commission,
programmers require distribution on cable systems covering 40-60% of
potential subscribers to launch
successfully.(6) Time Warner and
AT&T/TCI also would have had the incentive and ability to
disadvantage competing multichannel video programming distributors
(MVPDs) through price
discrimination.(7) Thus, the
Commission properly concluded that restricting AT&T/TCI's
ownership in Time Warner was necessary to eliminate the parties'
abilities and incentives to harm competition:
Such a substantial ownership interest, especially in a highly concentrated market with substantial vertically interdependent relationships and high entry barriers, poses significant competitive concerns. In particular, the interest would give TCI greater incentives to disadvantage programmer competitors of Time Warner; similarly it would increase Time Warner's incentives to disadvantage MVPDs that compete with TCI.(8)
AT&T's acquisition of MediaOne's 25.5% of Time Warner
Entertainment, L.P. ("TWE"), a subsidiary of Time Warner, directly
implicates these ownership restrictions. The Time Warner Inc. Order
provides that "TCI . . . and John C. Malone, collectively or
individually, shall not acquire or hold, directly or indirectly, an
Ownership Interest that is more than the lesser of 9.2% of the Fully
Diluted Equity of Time Warner, or 12.4% of the actual issued and
outstanding common stock of Time Warner, as determined by generally
accepted accounting principles."(9)
The term "Time Warner" is specifically defined to include any and all
of Time Warner's subsidiaries.(10)
Under the Commission's Order, an ownership interest in the subsidiary
TWE is to be treated the same as an ownership interest in the parent
Time Warner. Consequently, AT&T/TCI and Mr. Malone cannot
"acquire . . . an Ownership Interest that is more than . . . 9.2% of
the Fully Diluted Equity of [TWE]" because Time Warner
"means" TWE. TWE happens to be Time Warner's prime subsidiary, one
that includes virtually all of Time Warner's cable system holdings,
leading pay-TV channels Home Box Office and Cinemax, and other
popular programming networks.
The Commission clearly intended to include subsidiaries such as
TWE in the Order. Where the Commission wished to carve out an
exception to the rule that a parent "means" a subsidiary, it knew how
to do so. For instance, the Order's definition of "Time Warner"
explicitly states that "Time Warner shall . . . include Time Warner
Entertainment Company, L.P.," except for purposes of defining Turner
Video Programming Services and Turner-Affiliated Video Programming
Services.(11) The fact that the
Commission opted to exclude TWE from the definition of "Time Warner"
for certain purposes underscores the Commission's intent to include
TWE in the definition of "Time Warner" for all other purposes.
In short, both the plain language of the Time Warner Inc. Order
and logical inferences drawn from the Commission's judicious use of
exceptions point to one interpretation: TWE is synonymous with Time
Warner. Now that AT&T's acquisition of MediaOne has closed,
AT&T/TCI has acquired a further ownership interest in Time
Warner, in clear violation of the Order. If one reads section I.II
of the Order to prohibit AT&T/TCI from owning more than 9.2% of
TWE - because Time Warner "means" TWE - then AT&T's acquisition
of a 25.5% stake in TWE would, by itself, constitute a violation.
Assuming instead, however, that the Order is interpreted to prohibit
AT&T/TCI from owning more than 9.2% of the whole of Time Warner,
then AT&T's 25.5% acquisition of TWE would still surpass the 9.2%
threshold of permissible ownership in Time Warner under the
Order.(12) This does not even take
into account AT&T's preexisting holdings in Time Warner through
Liberty Media Corp.
Most significantly, AT&T's acquisition of an additional
ownership interest in Time Warner reinforces the anti-competitive
concerns raised in the Order. First, AT&T, augmented with
MediaOne's cable systems, now has the incentive to disadvantage
programmers who compete with TWE and Time Warner because AT&T
will receive an economic benefit from carrying TWE's program networks
and from not carrying competing programming. That is, to boost the
profitability of TWE programming, AT&T can deny competing
programmers access to its cable outlets, deterring new entry and
reducing competition between TWE programming and other programming.
Second, by virtue of AT&T's 25.5% interest in what is
unquestionably Time Warner's most prized subsidiary, AT&T might
discourage TWE from distributing on comparable terms its valuable
programming to AT&T's MVPD competitors, particularly cable
overbuilders in AT&T's territories. To the extent the Federal
Communications Commission's (FCC) program access rules prohibit an
outright denial of programming, AT&T could influence TWE to make
such programming available only on unfavorable terms, or without fair
access to Time Warner's high speed Internet services. While AT&T
may claim that it lacks any management role in TWE, it retains veto
power over key decisions and may leverage that power to ensure that
TWE's decisions are not contrary to AT&T's interests. These
interests now include preferential arrangements involving new
broadband Internet services. Clearly, the Commission's intent in the
Time Warner Inc. Order was to eliminate these kinds of
anticompetitive incentives by requiring AT&T/TCI to limit its
interest in Time Warner.
AT&T and Mr. Malone may argue that a stake in TWE cannot be
considered the equivalent of a stake in Time Warner because the Order
only prohibits AT&T from acquiring "an Ownership Interest . . .
of the Fully Diluted Equity of Time Warner"(13)
and AT&T/MediaOne's equity partnership shares of TWE
do not constitute "common stock" within the definition of "Fully
Diluted Equity in Time Warner." TWE, they might contend, has issued
only priority capital and residual equity partnership shares, not
"common stock."(14)
In response, one need only point the Commission to the Order's
prohibition against AT&T/TCI acquiring a certain "Ownership
Interest" in Time Warner and, of course, its subsidiaries. The Order
defines "Ownership Interest" to mean "any right(s) . . . to hold
voting or nonvoting interest(s), equity interest(s), and/or
beneficial ownership(s) in the capital stock of a Person," which
"includes any natural person, corporate entity, [or]
partnership."(15) AT&T/MediaOne's
25.51% priority capital and/or residual equity interest in Time
Warner Entertainment, L.P.,(16) surely
would qualify as either a "voting or nonvoting interest," an "equity
interest," or a "beneficial ownership" interest in the "capital
stock" of a "partnership." Furthermore, to interpret the Order any
other way would create a huge loophole precluding the Order from
applying to any Time Warner business the parent company decides to
place in a non-"common-stock"-issuing subsidiary. Such an
interpretation obviously would be inconsistent with the Order's
purpose, largely eviscerating its effectiveness.
Also counseling against AT&T's likely interpretation is the
Commission's language in section III of the Order, which provides
that:
After the Distribution, TCI . . . and John C. Malone, collectively or individually, shall not acquire or hold, directly or indirectly, any voting power of, or other Ownership Interest in, Time Warner that is more than the lesser of 1% of the Fully Diluted Equity of Time Warner or 1.35% of the actual issued and outstanding common stock of Time Warner . . . without prior approval of the Commission.(17)
That the Commission restricted the amount of voting power
AT&T/TCI and Mr. Malone could acquire in Time Warner is worth
noting; that the Commission set the acquisition threshold as low as
1% reveals the Commission's intent to have the Order cover precisely
acquisitions like the AT&T/MediaOne merger.
If, however, the Commission chooses to accept AT&T's
interpretation, then we respectfully ask you to reopen the Time
Warner Inc. proceeding and modify the Order so that its intent cannot
be evaded. Such a course of action is expressly allowed by statute
(see 15 U.S.C. § 45(b) (permitting the Commission to reopen and
modify previously entered orders on its own initiative if it
determines that "conditions of fact or of law have so changed as to
require such action or if the public interest shall so require")),
and by Commission rules. See FTC Rules of Practice § 3.72(b)
(outlining order modification procedures).
The Commission has taken such action before in appropriate cases.
See, e.g., Flower Industries, Inc., 107 F.T.C. 403 (1986) (reopening
and modifying order on public interest grounds); ITT Continental
Baking Co., 81 F.T.C. 1021 (1972) (reopening and extending order due
to changed circumstances). In Flower Industries, the Commission
found that the public interest would be served by modifying an
existing order to provide for the appointment of a trustee to
expedite the previously-ordered divestiture of a manufacturing plant.
It is hard to imagine the public interest at risk in Flower
Industries being any greater than the public interest at risk now if
the Commission fails to interpret the Time Warner Inc. Order in a
manner consistent with its original intent. Where, as here, a
modification to an order may be necessary to ensure its continued
viability, and to close a loophole that would otherwise vitiate that
order, the public interest clearly justifies such a
reopening.(18)
I look forward to your timely response.
Sincerely,
Gene Kimmelman
Co-Director, Washington
Office
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Commissioner Sheila F. Anthony |
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Notes:
(1) Consumers Union is a nonprofit membership
organization chartered in 1936 under the laws of the State of New
York to provide consumers with information, education and counsel
about goods, services, health, and personal finance; and to initiate
and cooperate with individual and group efforts to maintain and
enhance the quality of life for consumers. Consumers Union's income
is solely derived from the sale of Consumer Reports, its other
publications and from noncommercial contributions, grants and fees.
In addition to reports on Consumers Union's own product testing,
Consumer Reports with approximately 4.5 million paid circulation,
regularly, carries articles on health, product safety, marketplace
economics and legislative, judicial and regulatory actions which
affect consumer welfare. Consumers Union's publications carry no
advertising and receive no commercial support.
(2) Time Warner Inc. No. C-3909, February 3, 1997
at Sections II-III.
(3) Id., at section I.DD ("'TCI' means
Tele-Communications, Inc., . . . and also includes all of its
predecessors, successors, assigns, subsidiaries, and divisions")
(emphasis added).
(4) Time Warner Inc. (statement of Chairman
Pitofsky, and Commissioners Steiger and Varney).
(5) Id.
(6) Statement of Chairman Pitofsky….
Op.cit.
(7) Id.
(8) Id.
(9) Time Warner Inc., op. Cit., at section
II.D.1.
(10) Id., at section I.II ("'Time Warner' means
Time Warner, Inc., . . . and also includes all of its predecessors,
successors, assigns, subsidiaries, and divisions") (emphasis
added).
(11) Time Warner Inc., op.cit., at sections I.II,
I.00, and I.PP
(12) Time Warner has assets totaling $51.2
billion, of which TWE's assets constitute $24.8 billion. Thus,
AT&T's acquisition of 25.5% of TWE's $24.8 billion in assets
would be worth $6.3 billion, which exceeds $4.7 billion, or 9.2% of
Time Warner's $51.2 billion in assets. Time Warner Inc. and Time
Warner Entertainment Co. L.P. Form 10-K for the Fiscal Year Ended
December 31, 1999 (filed March 30, 2000) The fact that TWE
constitutes nearly one half of Time Warner's assets itself
underscores the importance of applying the Time Warner Inc. Order to
this acquisition.
(13) Time Warner Inc., op.cit.., at section
II.D.1 (emphasis added)
(14) See id., at section I.O ("'Fully Diluted
Equity in Time Warner' means all Time Warner common stock . . .
[and] all outstanding securities that are convertible into
Time Warner common stock")
(15) Id., at sections I.W, I.Y
(16) See MediaOne Group, Inc., Form 10-K for the
Fiscal Year Ended December 31, 1999 (filed March 23, 2000)
(17) Time Warner Inc., op.cit., at section III
(emphasis added).
(18) We urge the Commission not to wait for
AT&T to satisfy its divestiture obligations pursuant to the FCC's
recent Order in Matter of Applications for Consent to the Transfer of
Control of Licenses and Section 214 Authorizations from MediaOne
Group, Inc. to AT&T Corp. (CS Docket No. 99-251 (June 5, 2000)),
before deciding whether to take action. The FCC's Order in that
proceeding does not, on its face, require AT&T to cure its
current violation of the Time Warner Inc. Order. One option, for
AT&T to divest ownership interests in cable systems serving 11.8%
of MVPD subscribers nationwide or more than 9.7 million subscribers,
clearly would have no bearing whatsoever on AT&T's compliance
with the Time Warner Inc. Order. The second option, for AT&T to
terminate its involvement in TWE's video programming activities (one
aspect of which would likely be AT&T's disposal of Liberty Media
Group), would still leave AT&T in possession of more than 9.2% of
TWE and/or Time Warner as a result of the MediaOne acquisition. The
last option, for AT&T to divest MediaOne's 25.5% interest in TWE,
would bring AT&T into compliance with the Time Warner Inc. Order,
but, again, it is merely an option, not a requirement.
