DOJ Approves Charter’s Acquisition of TWC With Behavioral Conditions

On April 25, 2016, the DOJ entered into settlement agreement approving Charter Communications, Inc.’s (“Charter”) acquisition of Time Warner Cable Inc. (“TWC”) and its related acquisition of Bright House Networks, LLC to create New Charter as long as the parties agreed to certain behavioral conditions.

DOJ’s Vertical Concerns Related to the Creation of New Charter

New Charter became the second largest cable company and third largest Multichannel Video Programming Distributor (“MVPD”).  MVPDs include cable companies such as Comcast, TWC and Charter, but also direct broadcast satellite providers (i.e., DirectTV and Dish Network) and telephone companies like AT&T and Verizon.

According to the DOJ, prior to the merger, TWC, the second largest cable company and fourth largest MVPD, already had substantial power over programmers’ content.  The DOJ alleged that TWC used this power to influence programmers’ behavior towards its smaller online video distributors (“OVD”) rivals such as Hulu, Netflix and Amazon.  The DOJ further alleged that TWC was the most aggressive cable company or MVPD in terms of obtaining Alternative Distribution Means (“ADM”) clauses in its contracts with programmers that prohibited or greatly restricted programmers from distributing their content to OVDs or through online distribution.  Indeed, the DOJ specifically alleged in its Complaint that “[n]o [cable company] has sought and obtained these restrictive ADMs as frequently, or as successfully, as TWC.”

In the Complaint, the DOJ expressed the following concern:

In order for an OVD [Netflix] to successfully compete with the traditional [cable companies], it needs both the ability to reach consumers over the Internet and the ability to obtain programming from content providers that consumers will want to watch. Importantly, incumbent cable companies often can exert significant influence over one or both of these essential ingredients to an OVD’s success, because they provide broadband connectivity that OVDs need to reach consumers and are also a critical distribution channel for the same video programmers that supply OVDs with video content.  To the extent a transaction, such as the one at issue here, enhances an MVPD’s ability or incentive to restrain OVDs’ access to either of these critical inputs, and thus to prevent OVDs from becoming a meaningful new competitive option, consumers lose.

Acknowledging that no horizontal overlap existed between the merging parties in any local market, the DOJ noted in its Competitive Impact Statement that “the Clayton Act is concerned with mergers that threaten to reduce the number of quality choices available to consumers by increasing the merging parties’ incentive or ability to engage in conduct that would foreclose competition.”  Accordingly, the DOJ sought comprehensive behavioral relief to ensure that New Charter will not have the ability to foreclose OVD competition and deny customers the benefit of innovation and new services through ADM clauses and other restrictive contracting provisions.

Indeed, the DOJ required conditions to resolve its vertical foreclosure concern that New Charter would have a greater incentive and ability to impose contractual restrictions on video programmers (producers of TV shows and video content), thereby limiting their ability to distribute their content through OVDs.

The New Charter Remedies

The conditions that the DOJ negotiated with New Charter are entirely behavioral in nature.  The remedies restrict New Charter’s post-merger conduct in the following ways:

1. New Charter is prohibited from entering into or enforcing agreements with programmers that limit, or forbid, OVDs’ access to video content.
2. New Charter is prohibited from entering into agreements that create incentives for video programmers to limit access of programming to OVDs.
3. New Charter is prohibited from discriminating against, retaliating against, or punishing any video programmer for providing its content to any video distributor.
4. New Charter is prohibited from entering into or enforcing agreements with programmers that make it financially unattractive for programmers to license their content to OVDs.  In other words, New Charter is not permitted to enter or enforce an agreement whereby the programmer is obligated to provide New Charter with a massive discount if the programmer provides content to an OVD.
5. New Charter is prohibited from entering into or enforcing unconditional most favored nation provisions (“MFNs”) against a programmer for licensing their content to OVDs.

In sum, the conditions contain broad prohibitions on restrictive contracting practices to ensure that New Charter will not replace ADMs with other contracting practices that would increase barriers for OVDs or otherwise make OVDs less competitive.  Indeed, the prohibitions were put in place because the DOJ was concerned that New Charter could enter into certain contracts that are designed to circumvent the Order, create incentives to limit distribution to OVDs, or create economic disadvantages for a programmer to license content to an OVD.

Lessons Learned

While the DOJ normally prefers structural remedies when approving a merger that raises only horizontal concerns, the DOJ’s negotiated consent decree with Charter illustrates the DOJ’s willingness to impose behavioral conditions on mergers that raise vertical foreclosure concerns.  Despite no geographic overlap in any local market, the DOJ required comprehensive behavioral conditions to prevent New Charter from engaging in future anticompetitive conduct against its smaller rivals.  The behavioral remedies used to resolve the vertical foreclosure concerns raised by the creation of New Charter are applicable to any industry with a multi-tier supply chain and dominant firms that already exert power over other tiers of the supply chain.  The DOJ’s goal in New Charter is to prevent the merged firm from raising barriers to entry for smaller horizontal rivals or otherwise make smaller horizontal rivals less competitive.  The DOJ is concerned when a merger enhances the merged firm’s incentive and ability to protect its market power by denying or raising the costs of an input to its rivals.  In other words, the DOJ is concerned about transactions that substantially enhance the merged firm’s ability and incentive to foreclose competition through restrictive contracting provisions or incentive programs that make it economically unattractive to work with the merged firm’s rivals.  The DOJ’s behavioral conditions are aimed at protecting competition and consumer choice.

Andre Barlow
(202) 589-1838
abarlow@dbmlawgroup.com