Majority Statement

• John F. Kerry

  Senator
  Read statement

  Majority Statement

  John F. Kerry

  I would like to welcome our witnesses.  We are conducting this hearing today to discuss sports programming in general -- and baseball in particular – a very popular topic this time of year in Massachusetts and all over the country.

   

  Last year, baseball fans were able to buy what are called “out of market games” through their cable and satellite providers.  The package of games is called “Extra Innings,” and allows fans to follow their home team.  So Red Sox’s fans living in Washington or California could still get access to most Red Sox games for about what it costs a family of four to attend a game. 

   

  Press reports indicated that Major League Baseball was close to announcing an exclusive deal with DirecTV for carriage of these games.  We will evaluate this deal.

   

  Yogi Berra was once heard to say, "You've got to be very careful if you don't know where you are going -- because you might not get there."

   

  That sentiment is as timely now as ever.  We want to examine where the parties are going - and whether this deal will get them there.   Is this type of deal in the best interest of consumers?  Does it serve the sports fans?  These are legitimate questions.   

   

  Baseball is an integral part of American culture.  Commissioner Selig himself has said that baseball is a social institution with enormous social responsibility.  I agree with him. 

   

  Recognizing that, baseball has benefited from an array of favorable Government policies.  The sport enjoys a broad antitrust exemption.  It allows them to negotiate carriage deals, and gives them tremendous market power.

   

  They receive Billions of hard earned tax dollars to support stadium construction.  Right now, only a few blocks away from here, the new Washington Nationals stadium is being built.  One Economist estimates that between 1989- 2001 16 baseball-only stadiums were constructs at a total cost of $4.9 billion.  $3.7 billion of that cost borne by public revenues -- taxpayer money.

   

  We should support baseball, and in return, I believe baseball should serve the public interest.  It is fair to expect baseball to provide broad access to their games. 

   

  Last year, it cost a family of four almost $180 to attend a Major League Baseball game.  For too many families and people living on fixed incomes, the cost of attending a game is getting out of reach.  Still, a record total of 76 million fans attended Major League Baseball games last year. 

   

  We are now less than a week away from the baseball season and over 250,000 people will lose access to their team’s games. 

   

  Let me say at the outset, I am concerned about exclusive carriage deals in the sports industry.  These deals may be good for the short-term financial interests of the sports leagues; they may improve the competitive position of the cable or satellite firms that get the rights -- I have no doubt that there are business advantages --

   

  But we need to discuss the impact of these business changes on baseball fans as well.  I am concerned when fans lose access to their favorite team; or, as we will discover today, they are forced to change their TV service just to see games.  That is wrong.  That is a sign that the system is not working.

   

  The sports leagues have tremendous market power.  We need to ensure that the deals that are cut serve the public interest.

   

  Yogi Berra also was heard saying, "You can observe a lot just by watching." 

   

  Well, the American people are watching, and fans are watching, and they have not been shy to express their feelings about this deal.  Truth be told, baseball fans all over this country are disappointed and some are outraged. 

   

  As we stand here today, approximately 260,000 baseball fans that currently pay a premium to see their team will lose access to those games – unless they switch to DirecTV.   

   

  Baseball is important to America. I believe that baseball fans living outside the state of their favorite team should continue to have access to Major League games without having to cancel their current service.  

   

  Why should fans have to do that?  We have heard from many fans that do not have the ability to switch to satellite if they want to.  That is not fair, and I’m not sure it is in the long term interest of the sport.

    

  With today’s hearing, we will get the facts on the record.  And I urge the parties to work together, in good faith, to ensure we have broad carriage of the Extra Innings package this year.

   

  I welcome our witnesses. 

• Daniel K. Inouye

  Senator
  Read statement

  Majority Statement

  Daniel K. Inouye

  Today, the Committee will be examining the impact of exclusive sports programming contracts on sports fans.  With the baseball season set to open in just a few days, this is a very timely discussion.

   

  The video programming industry is evolving quickly.  The emergence of new distribution platforms has increased competition among cable, satellite and other video programming providers.  

   

  When it comes to sports programming, this evolution, in principle, translates into new ways that fans can watch and follow the progress of our favorite teams.  However, as more choices become available, concerns have arisen about the impact of exclusive sports programming deals.  We must watch this trend closely to ensure that the interests and expectations of consumers are protected. 

   

  This brings us to today’s hearing.  Many sports fans are intensely loyal to their   “home teams” even when living a long distance away.  In the case of my constituents in Hawaii, they have no major league home team to follow.  Instead, Hawaiians are fans of many teams from all over the country.  They want to cheer for their teams like all fans, and they deserve fair access to            out-of-market games.  After all, for them, their only choice is out-of-market games. 

   

  Sports programming deals that either overtly or effectively limit the availability of such programming on competing video programs raise difficult questions about whether all fans are getting fair access to their favorite major league sports events.  It is important that this Committee keep a close watch on this situation, and makes sure that the consumer does not lose out with exclusive sports programming agreements.

   

  I would like to thank Senator Kerry for his leadership in this matter, and I look forward to hearing from the witnesses assembled here today.

Opening Remarks

• Mr. Chase Carey

  Chief Executive Officer

  DIRECTV Group, Inc.
  Read statement

  Opening Remarks

  Mr. Chase Carey

  Chase Carey

  President and Chief Executive Officer, DIRECTV, Inc.

  Before the Senate Committee on Commerce, Science, and Transportation

  March 27, 2007

  Chairman Inouye, Co-Chairman Stevens, and members of the Committee, my name is Chase Carey.  I am the President and CEO of DIRECTV.  Thank you for inviting me to testify today regarding DIRECTV’s recently announced agreement with Major League Baseball (“MLB”) to continue to carry MLB’s Extra Innings package of out-of-town baseball games.  I would like to address four issues today.  First, I’ll describe the fair, open, and arm’s length negotiation for carriage of Extra Innings – a negotiation resulting directly from the pro-competitive, pro-consumer policies Congress has put in place.  DIRECTV has entered into a carriage agreement with MLB, while EchoStar and a consortium of the biggest cable operators remain free to match DIRECTV’s offer until Opening Day.  So when our competitors complain that they don’t have rights to Extra Innings, what they’re really saying is that they’d like to pay less for those rights than DIRECTV – a lament common to many MVPDs in many circumstances.          

  Second, I will address another aspect of competition at work – DIRECTV’s plan to transform Extra Innings from a mere collection of games in low definition to a truly compelling, high definition experience for the most avid baseball fans.  Regardless of whether our competitors step up to the plate, DIRECTV intends to make more baseball available to more fans in a more compelling format than ever before.  This is a big win for baseball fans. 

  Third, I’ll explain how the competitive marketplace Congress created will ensure that fans of our Nation’s pastime will not be left behind.  If EchoStar and the cable consortium step up and match DIRECTV’s offer, their subscribers will continue to have access to this programming from those providers.  If they don’t, subscribers who want to switch to DIRECTV can do so seamlessly.  The small number of subscribers who do not or cannot switch will be able to watch games over broadband – an increasingly viable alternative to traditional television.

   

  Fourth, while DIRECTV’s agreement with MLB is entirely consistent with the policies Congress established to create a competitive marketplace, Congress can always change those policies.  But I would respectfully suggest that, if this Committee is concerned about competition and access issues, these issues should be examined within the broader context of communications and competition policy.  Such an examination might address topics such as the tying of video and broadband access services, the “slow-rolling” of access to Internet video, tying arrangements for programming imposed by competitors with market power, and home-team sports exclusives.  DIRECTV would be happy to participate in such a discussion.

  
  

  Written Testimony of

  Chase Carey

  President and Chief Executive Officer, DIRECTV, Inc.

  Before the Senate Committee on Commerce, Science, and Transportation

  March 27, 2007

   

  Chairman Inouye, Co-Chairman Stevens, and members of the Committee, my name is Chase Carey.  I am the President and CEO of DIRECTV.  Thank you for inviting me to testify today regarding DIRECTV’s recently announced agreement with Major League Baseball (“MLB”) to continue to carry MLB’s Extra Innings package of out-of-town baseball games.

  I would like to address four issues today.  First, I’ll describe the fair, open, and arm’s length negotiation for carriage of Extra Innings – a negotiation resulting directly from the pro-competitive, pro-consumer policies Congress has put in place.  DIRECTV has entered into a carriage agreement with MLB, while EchoStar and a consortium of the biggest cable operators remain free to match DIRECTV’s offer until Opening Day.  So when our competitors complain that they don’t have rights to Extra Innings, what they’re really saying is that they’d like to pay less for those rights than DIRECTV – a lament common to many MVPDs in many circumstances.[1]           

  Second, I will address another aspect of competition at work – DIRECTV’s plan to transform Extra Innings from a mere collection of games in low definition to a truly compelling, high definition experience for the most avid baseball fans.  Regardless of whether our competitors step up to the plate, DIRECTV intends to make more baseball available to more fans in a more compelling format than ever before.  This is a big win for baseball fans. 

  Third, I’ll explain how the competitive marketplace Congress created will ensure that fans of our Nation’s pastime will not be left behind.  If EchoStar and the cable consortium step up and match DIRECTV’s offer, their subscribers will continue to have access to this programming from those providers.  If they don’t, subscribers who want to switch to DIRECTV can do so seamlessly.  The small number of subscribers who do not or cannot switch will be able to watch games over broadband – an increasingly viable alternative to traditional television.

  Fourth, while DIRECTV’s agreement with MLB is entirely consistent with the policies Congress established to create a competitive marketplace, Congress can always change those policies.  But I would respectfully suggest that, if this Committee is concerned about competition and access issues, these issues should be examined within the broader context of communications and competition policy.  Such an examination might address topics such as the tying of video and broadband access services, the “slow-rolling” of access to Internet video, tying arrangements for programming imposed by competitors with market power, and home-team sports exclusives.  DIRECTV would be happy to participate in such a discussion.

   

  I.          DIRECTV Negotiated a Fair and Arm’s Length Agreement With MLB; Cable and EchoStar Can Have the Same Deal if they Want It.

  It is sometimes difficult to remember that, little more than a decade ago, Americans had only one choice of multichannel video provider – the cable monopoly.  Today, nearly every American can choose among their cable operator, DIRECTV, and EchoStar.  Verizon and AT&T now also offer service in many parts of the country. 

  These competitors have differentiated themselves in the marketplace.  Cable, and now Verizon and AT&T, compete by offering a “triple play” of voice, video and data – a bundle that DIRECTV cannot yet offer on its own.  EchoStar has carved out a niche as the low-cost provider, and offers a host of foreign language exclusives.  And DIRECTV differentiates itself through an unparalleled selection of sports programming and unmatched technical innovation – including an investment of hundreds of millions of dollars on new satellites to offer consumers their local broadcast stations in HD and over 100 national HD programming services.  These unique offerings helped DIRECTV to differentiate itself and begin to break the stranglehold of the cable monopolies.  The cable industry, in turn, found itself forced to spend billions to innovate and become more responsive to consumers’ desires – today offering a competitive, attractive package that includes its own differentiated video-on-demand and bundled Internet offerings. 

  Cable, to be sure, still possesses an overwhelming market share, which distorts competition to this day.  But the fact remains that today there is competition where before there was none.   This is the success story Congress – and this Committee, in particular – helped write.    

  And this is the context in which DIRECTV negotiated its agreement to carry Extra Innings.  Several months ago, MLB initiated discussions with a number of MVPDs and their affiliates – including DIRECTV, EchoStar, and iN DEMAND (owned by Comcast, Time Warner, and Cox) – regarding carriage of Extra Innings.  These discussions concerned both exclusive and non-exclusive carriage.  Each competitor was given the opportunity to compete for Extra Innings.  And each did. 

  In the end, despite the fact that it has a modest nationwide market share, only DIRECTV showed an interest in carrying Extra Innings on terms acceptable to MLB, including helping to launch the MLB Channel and carrying it widely to our subscribers.  So earlier this month, DIRECTV and MLB announced that they had reached agreement for carriage of Extra Innings and the MLB Channel. 

  That agreement gave DIRECTV’s competitors – all of whom had a seat at the table during the first round of negotiations – yet another turn at bat.  Until Opening Day, MLB will allow incumbent MVPDs willing to agree to terms equivalent to DIRECTV’s carriage arrangement to offer their subscribers this programming.  In other words, Comcast and Cox and Time Warner and EchoStar can provide out-of-town games to their subscribers if they want to.  The agreement says only that they cannot do so on the cheap.  So if they agree to pay the price DIRECTV pays, agree to carry the MLB Channel in the same manner as DIRECTV, and agree to comply with the other terms and conditions that apply to DIRECTV, they can carry Extra Innings.  It’s their choice.  This is why Time Warner’s top programming negotiator recently said she was not sure why people have criticized the deal as if it were “rigged” against competition, when the issue really boils down to the “evaluation of whether acquiring programming is too expensive or not.”[2]

  Now that both iN DEMAND and EchoStar have access to Extra Innings on comparable terms and conditions as DIRECTV, we expected EchoStar and the cable industry to stop complaining and start competing.  But they haven’t.  Now they’re claiming that MLB’s offer to match DIRECTV’s terms isn’t fair. 

  They first contend that the agreement is unfair because DIRECTV will have an ownership interest in the MLB Channel (not in MLB or the Extra Innings package).  But this isn’t unfair at all.  To begin with, because of DIRECTV’s ownership, MLB cannot offer DIRECTV the MLB Channel on an exclusive basis.  If DIRECTV’s competitors think DIRECTV’s ownership interest is inconsistent with this obligation, they already have an avenue for redress at the FCC.[3]  Moreover, granting DIRECTV an ownership interest in exchange for its willingness to be the “first mover” in carrying this channel is a very common industry practice.  The FCC reports that cable operators own dozens of channels, including many of the most important regional sports networks (“RSNs”) such as those in New York, Chicago, Philadelphia, San Diego and Washington D.C.[4]   

  DIRECTV’s rivals also complain that the distribution requirements for the MLB Channel that DIRECTV agreed to are too onerous.  This is nothing but a public relations ploy.  If anything, the distribution requirement actually favors cable operators.  Based on the distribution formula in the agreement, DIRECTV has to distribute the MLB Channel to roughly 80 percent of its total subscribers, while cable operators would have to distribute it to approximately 40 percent of their total subscribers.  The very terms for distribution cable denounces as unfair are equivalent to, or in many instances less stringent than, the requirements cable operators demand for the programming they themselves own.

  DIRECTV’s rivals may not like these terms.  But parties who do not like terms of carriage cannot cry foul on that basis alone.  This is how programming negotiations work.  If an MVPD believes that programming is too expensive, it can choose not to carry the programming.  This happens all the time.  EchoStar, for example, doesn’t carry the YES network for this very reason, so EchoStar subscribers in New York can’t watch most Yankees games.  MLB’s insistence that other MVPDs live by the same deal DIRECTV did isn’t unfair, it is simply the marketplace at work – and surely isn’t a subject worthy of Congressional intervention. 

  II.        DIRECTV’s Carriage of Extra Innings Will Be a Big Win for Fans.

  I do not know whether EchoStar and the cable industry will ultimately match DIRECTV’s offer to carry Extra Innings.  I do know, however, that DIRECTV has big plans for Extra Innings – which is one reason why we have (so far) been willing to pay more than anybody else for it.  DIRECTV will make more baseball available to more fans in a more compelling format than ever before. 

  For starters, DIRECTV will add a mosaic channel and a Strike Zone channel (similar to the NFL Sunday Ticket Red Zone Channel) that will deliver live cut-ins of games throughout the country.  We will also provide great entertainment to fans with real-time scores, player and team stats and other innovations that complement the sport of baseball.  Most importantly, DIRECTV expects to provide most, if not all, games in high definition for the 2008 baseball season – an innovation that most cable operators cannot match. 

  Moreover, as part of the Extra Innings agreement, DIRECTV will also make The MLB Channel widely available when the channel launches in 2009.

  DIRECTV’s transformation of Extra Innings should come as no surprise.  This, after all, is what DIRECTV has done for other programming.  For example, DIRECTV recently completely revamped supplemental coverage of NASCAR races.  The cable industry had the rights to NASCAR content for years, but did little with this programming and attracted only 30,000 customers in 2006.  DIRECTV obtained the rights this year to what is now NASCAR Hotpass, and debuted a service at this year’s Daytona 500 that bears little resemblance to cable’s bare-bones offering.  DIRECTV’s NASCAR Hotpass features five dedicated “Driver Channels,” each focusing on an individual driver and offering multiple camera angles, real-time stats, team audio communications and dedicated announcer teams.  Although the NASCAR season started only recently, DIRECTV already has more than three times the subscribers to this programming than the cable industry had in 2006.

  DIRECTV expects that once it adds interactive features, high-definition service, and the MLB Channel, many new subscribers will sign up for Extra Innings with DIRECTV. This will make DIRECTV’s service more attractive than our cable competitors.  Those competitors, in turn, will have to improve their services to keep up.  This, again, is the vibrant competitive marketplace that Congress envisioned at work. 

  III.       The Competitive Marketplace Envisioned by Congress Will Provide Numerous Alternatives for Baseball Fans.

  The same competitive marketplace that permitted DIRECTV to obtain the rights to Extra Innings in a fair and open manner will also ensure that baseball fans will continue to be able to watch their favorite teams.  Right now, both EchoStar and iN DEMAND have the option to continue to provide this programming to their subscribers – if they are willing to pay the fair price negotiated at arm’s length between DIRECTV and MLB.  Even if DIRECTV remains the only MVPD to carry Extra Innings, however, non-DIRECTV subscribers will not be harmed in any meaningful way. 

  First, consumers can switch to DIRECTV with no start-up costs, no equipment to buy, and no installation charges.  When they do so, they will get a better service at a better value than is offered by cable.  DIRECTV, unlike cable, is 100% digital.  DIRECTV offers more programming than cable.  On average, DIRECTV costs significantly less per channel than cable.  And DIRECTV’s customer service is second to none – having surpassed the cable industry average in each of the last six years.[5]  This, again, is how a competitive marketplace is supposed to work.  Unfortunately, cable operators are doing their best to prevent this.  Cable, for example, penalizes customers by dramatically increasing the price of Internet service if the customer drops cable’s video service.  To overcome cable’s barriers, DIRECTV has chosen to offer customers who want to switch no upfront costs and more compelling content.  

  Second, every single game carried on Extra Innings will remain available online through MLB.com.  Internet video is improving dramatically,[6] and MLB announced its intent to offer upgraded picture quality this season. Thus, subscribers who choose not to (or cannot) subscribe to DIRECTV will still be able to watch the games of their choice.  Here again, however, cable operators are attempting to hinder the marketplace.  If cable did not prohibit a direct connection between the Internet and the set top box, MLB.com could easily be viewed on television sets. 

  Third, the arrangement will not disrupt competition among MVPDs.  To begin with, relatively few subscribers are affected at all.  Only 230,000 non-DIRECTV customers subscribed to Extra Innings last year – less than one half of one percent of all television homes.[7]  DIRECTV estimates that there are relatively few viewers – no more than three percent of the cable segment (approximately 180,000 Extra Innings subscribers) – who cannot receive DIRECTV service.  This translates to roughly 5,000 subscribers – each of whom can access the games over the Internet.  Moreover, this agreement does not deny a single fan the right to follow his or her home team.  In all of its programming arrangements, DIRECTV has been respectful of fans’ rights to view their home team sports.  Extra Innings is a premium package of out-of-town games – designed to serve baseball’s most avid fans without adversely affecting viewership of MLB’s national and local telecasts.  By contrast, our cable competitors have withheld core home team sports programming from nearly half a million satellite customers in Philadelphia and San Diego. 

  Fourth, the marketplace will continue to provide subscribers without Extra Innings a wealth of options for watching their favorite sport.  If Extra Innings were to disappear tomorrow, MLB would still offer more televised games by far than any other U.S. sport.  Regardless of the MVPD to which they subscribe, fans throughout the country can watch their home team on broadcast television or RSNs – assuming that cable-affiliated RSNs continue to make their programming available to all MVPDs at non-discriminatory rates.  In addition, fans without Extra Innings can still watch an impressive number of out-of-town games.  On average, more than 400 games are televised in each market – on local broadcast television, RSNs, and MLB’s national partners FOX, TBS, and ESPN.

  IV.       A Broader Review of Competition Policy May Be Appropriate.

  Members of this Committee are naturally concerned about consumer choice and access to content.  So is DIRECTV.  But Congress cannot examine these issues in a vacuum – and certainly should not start with this arm’s length, pro-competitive deal.  If it truly seeks to ensure that every American has a choice among video providers and access to content, this Committee can choose among any number of issues that affect far more consumers. 

  If, for example, this Committee is concerned about the ability of subscribers to switch MVPDs, it might examine why cable operators dramatically increase the price for their broadband service to subscribers that switch from cable to satellite for video service.  In Washington DC, for example, Comcast charges $33.99 for Internet service when bundled with video and voice, but $57.95 for stand-alone Internet – a 70 percent increase in price.  Even though DIRECTV offers a lower price for a better video service, consumers with cable modems lose money by choosing DIRECTV.  If Congress seeks to maximize consumer choice – as it should – cable’s tying of Internet and video services is worthy of review.    

  If this Committee is concerned that viewers might be denied access to content they wish to view, it might examine whether cable operators should be able to degrade the service their broadband subscribers receive when accessing video content from non-affiliated websites (or entities that do not pay to ensure access), or preclude such access altogether.  As more and more video content migrates to the Internet, cable operators will increasingly have the incentive and ability to determine what their broadband subscribers can and cannot see.  A cable operator could even, for example, prohibit a baseball fan from visiting MLB.com (or, more likely, could “slow-roll” communications to that site compared with communications from its own site). 

  If this Committee is concerned about bundling channels in contract negotiations, it might wish to focus more broadly on tying arrangements imposed by parties with market power.  For example, Comcast recently required DIRECTV to distribute its “G4” gaming channel to 80 percent of its subscribers in order to continue to carry Comcast SportsNet Mid Atlantic at market rates.  A broader examination of arrangements like this would consider the pros and cons of today’s programming marketplace and possible ideas for revising it. 

  And finally, if this Committee is concerned about sports programming, it should begin by examining the worst instances of sports withholding.  Congress and the FCC have found repeatedly over the years that cable operators can abuse their formidable market power by arranging to withhold programming they own.  And they do that today in Philadelphia and San Diego, where half a million satellite subscribers cannot watch their home teams.  Surely that – and not an arm’s length, non-exclusive, pro-competitive deal such as that between DIRECTV and MLB for carriage of out-of-town games – is worthy of this Committee’s consideration.

  *                         *                         *

  The video marketplace continues to evolve as competition takes hold under the regime Congress has put in place.  DIRECTV’s arrangement with MLB is part of that process – the result of fair and open competition for programming that even today remains available to DIRECTV’s rivals.  DIRECTV intends to upgrade Extra Innings significantly, giving avid baseball fans more than they have ever had from this package before.  We will also make the transition of any subscriber who wants this programming from DIRECTV as seamless as possible.  In the end, then, DIRECTV’s agreement with MLB is an example of how the competitive marketplace created by this Committee is working – not how it needs to be changed.

  
  

  ---

  [1]       Time Warner’s top programming negotiator recently said as much – stating that she was not sure why people have criticized the deal as if it were “rigged” against competition, when the issue really boils down to the “evaluation of whether acquiring programming is too expensive or not.” SkyReport E-News, Mar. 13, 2007.

  [2]       SkyReport E-News, Mar. 13, 2007.

  [3]       General Motors Corp., Hughes Electronics Corp., and The News Corporation Limited, 19 FCC Rcd. 473 (2004) (“News-Hughes”).

  [4]       Annual Assessment of the Status of Competition in the Market for the Delivery of Video Programming, 21 FCC Rcd. 2503 App. C (2006)

  [5]       See Steve Donohue, “DirecTV Tops J.D. Power Survey,” Multichannel News, Aug. 16, 2006, available at http://www.multichannel.com/article/CA6363083.html.

  [6]       See, e.g., Peter Grant, Plugging the Web Into the TV, Wall St. J., Aug. 4, 2006, at A11 (describing the rapid advances in online video, and stating that, with a TiVo device, one “can’t even tell whether it came from the TV or off the Internet.”).

  [7]      Not to minimize the inconvenience to these customers, but it is worth noting that that tens of millions of  subscribers “churn,” switching video providers every year.

• Mr. Robert DuPuy

  President and Chief Operating Officer

  Major League Baseball
  Read statement

  Opening Remarks

  Mr. Robert DuPuy

   

  STATEMENT OF

   ROBERT A. DUPUY

  PRESIDENT AND CHIEF OPERATING OFFICER

  MAJOR LEAGUE BASEBALL

  TO THE

  COMMITTEE ON COMMERCE, SCIENCE AND TRANSPORTATION

  UNITED STATES SENATE

  March 27, 2007

   

              Good morning, Mr. Chairman.  My name is Robert DuPuy, and I am the President and Chief Operating Officer of Major League Baseball.  I appreciate the opportunity to appear before you today to discuss Baseball’s recent agreement with DirecTV for The MLB Channel and the MLB Extra Innings package and to outline what we believe are the deal’s benefits for our fans.  We are particularly pleased that so many baseball fans will have access to our all-baseball, all-the-time channel when it launches in two years, and we are grateful to DirecTV for helping us make this happen.

              It is important to emphasize at the outset that our deal with DirecTV permits iN Demand, the consortium created by the cable industry, and the Dish Network to distribute The MLB Channel and the Extra Innings package also.  We hope that they agree to match DirecTV’s commitment to our fans.  Additionally, we would like to stress that both iN Demand and the Dish Network were given a full opportunity to participate in negotiations for the rights that we were granting.

              I want to make one point abundantly clear.  This is not a matter of fans being unable to view Major League Baseball’s out-of-market games.  It is a matter of not being able to watch those games on a particular system.  Out-of-market games are still available, even if iN Demand and Dish do not choose to participate, and are available on multiple platforms.  Baseball provides more telecasts to its fans than any other sport.  After a lengthy negotiation over the renewal of a single package of games, those games were awarded to DirecTV, but even then, the other bidders have been given a chance to match the negotiated terms.   There is nothing sinister, illegal, wrongful or frankly unusual about that form of business negotiation or result.  In fact, as I will explain later, we believe the result is a benefit to our fans.

              If iN Demand and Dish choose not to step up to the plate as DirecTV has done, fans will still have several options.  They can switch to DirecTV, they can subscribe to MLB.TV and watch the games on the Internet, and they can watch the roughly 400 games that every fan in every Major League market has available without the out-of-market package.  That includes virtually every one of the local market games (Red Sox fans throughout the Red Sox’ home territory are completely unaffected by this deal), all of the games on ESPN, Turner and Fox, and the All-Star Game and complete post-season.  Given that our season and postseason are about 200 days, that is about two games per day.  Of course, fans can also listen to local games on the radio and all of our more than 2,400 regular season games nationwide on XM Satellite Radio.

              As I mentioned, business arrangements such as our agreement with DirecTV are not unusual.  During the negotiation period, every carrier had an ability to bid, and each of them put in a bid to carry the Extra Innings package exclusively.  To watch the Sopranos, you must subscribe to HBO, not Showtime or Cinemax.  To watch the NFL out-of-market games, you must subscribe to DirecTV.  To watch the NCAA and NASCAR specialized packages, you must similarly subscribe to DirecTV.  An even better example involves ironically the behavior of two of the members of the loudest complainant here, the iN Demand consortium.  To watch Phillies games in Philadelphia (not in Utah, in Philadelphia) you must subscribe to cable.  Comcast, the majority owner of iN Demand and the dominant cable provider in the Philadelphia area, does not make the games available to satellite distributors.  Similarly, to watch Padres games in San Diego, you must subscribe to cable because Cox, another member of the iN Demand consortium and the dominant cable provider in the San Diego area, does not make the games available to satellite.  In Philadelphia alone, more than 400,000 satellite subscribers are denied the ability to watch their home town Phillies (or Flyers or 76ers) because of Comcast.  That is more than twice the number of subscribers the entire iN Demand syndicate had nationally for the Extra Innings package last year.  And yet, when after a five month negotiation, iN Demand was the unsuccessful bidder, and even after it was given the ability to match the DirecTV terms and conditions, rather than do so, iN Demand instead complained to Congress for a better business deal than it could negotiate. 

              As we explained in great detail in our report to the FCC, our agreement with DirecTV, which covers the years 2007 through 2013, has two principal components.  First, DirecTV will launch The MLB Channel as part of its “Total Choice” basic

  service -- with over 15 million subscribers throughout the nation -- when the network becomes available in 2009.  The MLB Channel will be the first and only network dedicated to providing baseball programming 24 hours a day, seven days a week on a year-round basis.  The MLB Channel will likely include regular-season MLB games, as well as a mix of Spring Training games, Minor League games, games of other professional or amateur leagues, highlight shows and other programming that will be designed to appeal to MLB’s broad fan base and that would not otherwise be available to them.  DirecTV will have only non-exclusive carriage rights for The MLB Channel, in which it will own a minority stake, and we will aggressively pursue deals with other distributors.

              Second, DirecTV will offer its subscribers the MLB Extra Innings package, as it has done during each of the last eleven years.  This package supplements national and local telecast rights.  Again, our agreement with DirecTV also allows Baseball to license the Extra Innings package to those entities that carried it last year, iN Demand and Dish, provided they agree to rates, rights fees and carriage commitments consistent with those to which DirecTV has agreed.  This includes a commitment to distribute The MLB Channel to at least 80% of their total residential digital subscribers, which in the case of iN Demand translates to approximately 40% of all the subscribers of its owners, a lower threshold than required for DirecTV, which must distribute it to 80% of all of its subscribers.  Retaining the ability to license the Extra Innings package to the Dish Network and the cable universe through iN Demand was something we did because of our desire to provide the greatest amount of baseball to the greatest number of fans.

              It bears repeating that nothing in the DirecTV agreement will affect any of the national telecast rights described above or any club’s local telecasts rights.  Not a single fan needs Extra Innings to watch his or her local team’s games.  This situation stands in direct contrast to the situation in Philadelphia described earlier, where the regional sports network Comcast SportsNet distributes its local games only via cable, in an area in which Comcast Corporation, owner of Comcast SportsNet, is the dominant cable provider, and the similar situation in San Diego with Cox Channel 4 and its owner Cox Communications, again the dominant cable provider and again involving home team games.

              We are excited by the launch of The MLB Channel.  Achieving carriage of new programming networks is a difficult proposition in today’s telecommunications marketplace, and DirecTV’s commitment to distribute The MLB Channel to at least 80% of all its residential subscribers provides an exceptional start for the service.  Contrary to statements that iN Demand has made, it has never offered to match this commitment.  We hope and expect distribution will increase among other programming distributors.  In the meantime, however, at launch 15 million DirecTV subscribers will receive an attractive selection of games and other Baseball programming.  During the course of our negotiations with the other distributors, comments have been made -- some might call them threats -- to the effect that if we do not acquiesce to the demands of the other distributors and make Extra Innings available on their terms, then they will never agree to carry The MLB Channel.  Notwithstanding these comments, we are confident that The MLB Channel will be of significant interest to a wide audience, reflecting the broad appeal of our game, even broader than some channels that are currently widely distributed by the other distributors.

              It is also to our many fans’ great benefit that DirecTV will be carrying the Extra Innings package.  DirecTV has a proven track record of developing features that significantly enhance the viewing of the telecasts they carry.  We were particularly impressed by the types of innovations DirecTV brought to the NFL’s out-of-market package “Sunday Ticket” and NASCAR’s “Hot Pass.”  DirecTV’s plans for the Extra Innings package include a “mosaic channel” (with up to 8 game telecasts shown simultaneously on a single screen); a “Strike Zone Channel” that provides viewers live cut-ins of games in progress at key points; high definition telecasts; and other innovations to be developed.

              We are aware that a limited number of homes in the United States cannot receive satellite delivered programming because of line-of-sight difficulties.  We wish that were not the case, but the number of such households is a small fraction compared to the number of households that will receive The MLB Channel beginning in 2009.  It has always been Baseball’s objective to achieve wide distribution for its telecasts and to serve the greatest number of fans.  We believe the launch of The MLB Channel is consistent with that objective and with Baseball’s longstanding telecast practices that have generated such an overwhelming number of national and local viewers.  Again, we aim to serve the greatest number of our fans, not a small number of distributors.

              It is also worth emphasizing that all of the Major League Baseball game telecasts on Extra Innings will be available online through MLB.TV, which, beginning this season, will offer an upgraded picture quality.  With future technological developments, we expect the quality of the online viewing experience of our fans to continue to improve.  And with the significant growth of broadband penetration (which is now greater than that of digital cable), the total number of subscribers to our out-of-market packages (MLB.TV and Extra Innings combined) is likely to reach new highs in the coming years.

              In summary, Mr. Chairman, Baseball believes strongly that the agreement we have reached with DirecTV will provide the most benefits to the greatest number of Baseball fans.  Under this deal, we have been guided by this fan-friendly approach because we view that as one of our primary responsibilities and because we believe doing so simply makes good business sense.  Under this deal, DirecTV, a long-standing MLB partner that prides itself on customer service, has made a very significant and, in our view, appropriate commitment to its customers and to our fans.  As part of this deal, we negotiated to secure for iN Demand and Dish this window of opportunity to continue as distributors of the Extra Innings package.  We continue to hope that they will similarly adopt a customer- and fan-friendly approach and capitalize on their right to “opt-in” to this deal on the fair, reasonable and market-based terms offered.  Thank you, again, for the opportunity to appear today.  I have attached to my written testimony the report on this subject that we submitted to the FCC on March 21.

   

• Mr. Stephen F. Ross

  Professor of Law

  The Dickinson School of Law, The Pennsylvania State University
  Read statement

  Opening Remarks

  Mr. Stephen F. Ross

  RESTORING THE MARKET FOR OUT-OF-MARKET BASEBALL

  Testimony of Professor Stephen F. Ross

  Director, Penn State Institute for Sports Law, Policy and Research

  The Pennsylvania State University

  Before the

  Senate Committee on Commerce, Science and Transportation

  March 27, 2007

   

  Mr. Chairman and Members of the Committee:

            It is an honor and privilege to be invited to join a panel of industry leaders to offer an independent view, based on over two decades of scholarship and teaching concerning sports and competition policy, in discussing the impediments to the free flow of interstate commerce as millions of Americans seek ways to take advantage of technological advances to watch non-local Major League Baseball games in their homes.

  General Thoughts on Exclusive Dealing

            The issue before the Committee today is whether the exclusive dealing arrangement between Major League Baseball (MLB) and DirecTV, whereby DirecTV becomes the only source for out-of-market games not shown on national networks, is in the public interest.  As the Supreme Court has recognized,¹ exclusive dealing arrangements are both legitimate and indeed can have pro-competitive effects.  In traditional markets where consumers have free access to retail markets, the Court has declared that, as a matter of antitrust law (in my view, this reasoning also applies to sound regulatory policy), these arrangements should only be questioned when there is a serious risk that they will foreclose access to supply or outlet by other firms.²  Thus, an agreement by Sears to exclusively sell Levi’s blue jeans is unlikely to harm consumers; there are ample other retail outlets for Levi’s rivals, and ample other jean manufacturers for Sears’ competitors.  If there are efficiencies in exclusivity, the likely market response is for Lee to reach an exclusive deal with Macy’s, etc.   Consumers unhappy with Sears’ selection are only harmed to the extent they have to walk across the shopping mall.

  Harm to baseball fans

            In contrast, baseball fans face significant harm because of various pre-existing agreements as well as the recently announced exclusive MLB/DirecTV deal.   Those who have other reasons to prefer DishNetwork or cable must either forego quality telecasts of out-of-market baseball games,³ or suffer exploitation by subscribing to multiple multi-channel video distribution platforms that require the purchase of duplicate programming and unnecessary equipment.  The exclusive deal reinforces the harm that already befalls the millions of Americans who do not live within the local media market of their favorite team, because of a horizontal market division agreement entered into by MLB owners that, in the context of football, has been illegal for over 50 years.⁴  There is no public interest justification in forcing consumers to purchase a distribution platform that is inferior for their needs, or duplicate platforms, just to watch their favorite teams.  These consumers include:

  ? Residents in areas with heavy thunderstorm activity (such as Florida) who prefer cable because of concerns about weather-related interference with important sports broadcasts

  ? Residents of local markets (like metropolitan Philadelphia and southern New Jersey) who are fans of local basketball and hockey teams but out-of-market baseball teams, and would under planned agreements be required to subscribe to cable for some teams and satellite for others

  ? Virtually all residents of states without a local team (like Alaska, Hawaii, or Nevada) or states with many retirees from other states (like Florida, California, or Arizona): there is no reason that the only way they can watch games of their favorite teams is to acquire a single product, MLB ExtraInnings^TM,  from a single retailer, DirecTV

  ? Consumers in multi-residence dwellings who are not allowed to select their preferred retailer, and where the landlord, homeowners’ association, or other decision-maker is insufficiently interested in baseball to switch to DirecTV

  Restraints on Interstate Commerce: Horizontal Market Division

            To be clear, the agreement that sparked this hearing did not arise from the free market.  First, there is the horizontal market division by MLB owners.  Under the common law, the home team owns a property right in the radio and television rights to baseball games.⁵  However, the MLB owners have agreed to significant limitations on these common law rights.  Each club will only broadcast games in its assigned geographic territory, licensing the visiting club for the purpose of broadcasting games in its own home territory, and assigning to MLB the exclusive right to sell games not only to free-to-air networks (a right protected by the Sports Broadcasting Act) but most significantly the exclusive right to sell non-network games to satellite or cable only through MLB ExtraInnings^TM (which is not exempt from antitrust scrutiny). 

            Were it not for this web of agreements, the MLB/DirecTV deal would raise few problems for consumers.  Those interested in the convenience of a single package of all out-of-market games could purchase ExtraInnings^TM from DirecTV.  A Los Angeles Dodgers fan outside southern California, or someone who simply enjoyed the final years of play-by-play from hall-of-famer Vin Scully, would likely find it possible to purchase Dodger telecasts, acquired from the Dodgers by DirecTV, DishNetwork, or the local cable company.  Other intermediaries might offer a syndicate of games in competition with ExtraInnings^TM.

            Antitrust precedents suggest that the MLB agreements are anti-competitive and ought to be illegal.  In United States v. National Football League,⁶ a very sophisticated district court decision that presaged by 30 years the antitrust analysis of broadcast restraints later adopted by the Supreme Court,⁷ the court noted that sports leagues had a unique interest in promoting competitive balance among member teams so that, to the extent that a rival team’s out-of-market telecast would significantly harm live attendance, the league could agree to prevent this.  However, the court rejected the NFL’s effort to bar out-of-market telecasts that simply competed with the home team’s telecast of road games: the only effect there was to limit output and raise rights fees for the home team, a result that was not legitimate or pro-competitive.  As later courts have recognized,⁸ leagues can adequately protect competitive balance with regard to television rights sales by revenue sharing, rather than output limits. 

            The courts have also recognized, in antitrust litigation, that broad licenses awarded by competing copyright holders through intermediaries can be pro-competitive, when these are non-exclusive licenses.  Thus, the Supreme Court rejected a lower court holding that Broadcast Music and ASCAP violated the Sherman Act by offering a blanket license for the vast majority of copyrighted songs.⁹  On remand, the court of appeals upheld the legality of the arrangement, but only after finding that potential licensees had real alternative ways of acquiring rights.¹⁰  This was because the Justice Department had challenged, many years ago, the agreement among almost all the nation’s songwriters to grant exclusive licenses to BMI or ASCAP – grants akin to the out-of-market assignments that individual team owners have made to DirecTV -- and the parties by consent decree had agreed to limit the license to a non-exclusive grant.¹¹

            It is bad enough that these agreements meet the “hallmark” definition of unreasonable restraints of trade, by increasing price, reducing output, and rendering output unresponsive to consumer demand.¹²  In fact, these agreements are even more inefficient and anti-competitive than would be the case if all rights to all games were assigned to a single entity.  Because the additional costs of showing games to out-of-market fans is virtually zero, such an entity would likely sell, in addition to local rights and ExtraInnings^TM, other packages to other consumers.  For example, there are surely many fans who would pay, on a per game or per team basis, for out-of-market games.  These are not authorized now, not because the sale would not be profitable, but because the MLB owners can not agree on how to divide the profits.¹³

   

  Insufficient competition in multi-channel video distribution

            An analysis of the economics of rights sales for out-of-market games demonstrates that the current scheme would be implausible except for two additional deviations from the free market: (1) insufficient competition between DirecTV, DishNetwork, and cable permits excess profits from consumers of “basic premium” programming; (2) by tying the sale of ExtraInnings^TM to its “Choice” package, DirecTV is able to increase its excess profits and the agreement in question reflects a sharing of those increased excess profits between DirecTV and Major League Baseball.

            Although there are important differences in the economics of English football and North American sports, on both sides of the Atlantic we see leagues that offer entertainment products with no reasonable substitutes selling broadcast rights to a major programmer in return for a large, fixed sum of money.  Policy questions about exclusive agreements for prime sports programming have also arisen in the United Kingdom, and have been insightfully analyzed in a working paper widely distributed among sports economists.¹⁴  Economists David Harbord and Marco Ottaviani detail the profit-maximizing strategy for the various market participants.  First, they note that leagues are likely to sell rights for a fixed rather than per-subscriber fee.  A fixed fee avoids the problem of the rights-purchaser tacking on its own excess profits charge to that imposed by the league.¹⁵  Because MLB doesn’t know precisely how many fans will subscribe to ExtraInnings^TM, or how effectively DirecTV will market the product, it has an even greater incentive to sell for fixed fees, as the rights-purchaser is better able to accept the risk of marketing the product effectively during the course of the contract.  If the rights purchaser is effective in maximizing revenues from resale and advertising, results of which are usually reported in the trade press, the league can profit from the rights purchaser’s success to secure even higher rights fees for the next contract.  (For example, the NFL’s first network contract with CBS gave each owner $300,000/yr.  Three years later, the second contract gave each owner $1 million/yr.)

            Next, Harbord & Ottaviani explain why a rights-purchaser, having paid a lump-sum to obtain rights for which there was no substitute, would want to re-sell rights on a per-subscriber basis to its cable and satellite rivals.  Ordinarily, they observe, by re-selling to rivals, the rights purchaser increases the marginal operating costs for its rivals at the same time it fetches additional revenue.  This “makes reselling more profitable for the firm which acquires the rights, and hence more likely to occur.”¹⁶  Re-selling on a per-subscriber basis results in higher rights fees (because the league can capture a portion of the additional profit to be obtained from reselling on a per-subscriber basis) and maximizes output (more people subscribe).

            Applied to American baseball, Harbord & Ottaviani’s analysis suggests that DirecTV would find it profitable to resell ExtraInnings to cable networks and Dish Network, and that MLB would share in this profit through a higher lump-sum fee for the exclusive rights to out-of-market baseball games.  So why have DirecTV and MLB done the opposite?  We can infer from the parties’ preference for an exclusive deal that DirecTV is willing to forego this opportunity, and indeed pay MLB more than the total amount that MLB might reasonably expect to receive from sales of ExtraInnings through various retail outlets.  This is because DirecTV would prefer to force some out-of-market baseball fans to switch their patronage to DirecTV, rather than obtain all the revenue from out-of-market fans, regardless of which “retailer” these fans patronize.  DirecTV’s ability to obtain more revenue from those fans that remain with or switch to DirecTV than it could by charging the full monopoly price for ExtraInnings^TM to all out-of-market fans is most likely due to their ability to obtain even greater super-competitive profits from those that switch. 

      Suppose one million fans would be willing to subscribe to ExtraInnings^TM at $160 per season, but that 200,000 of these will not patronize DirecTV (perhaps they fear thunderstorms, prefer programming available only on cable, can’t afford two systems in areas where local cable is unavailable, don’t have a clear south-facing view on their property, must use the system subscribed by the landlord, etc.).  That’s $32 million in lost revenue.  The exclusive deal means that DirecTV plans on making this up by obtaining new customers from cable or DishNetwork.  If 300,000 ExtraInnings customers switch to DirecTV’s Choice package (at $480/yr) + ExtraInnings^TM, that’s an additional $144 million in revenue (from Choice, not MLB games, which these fans were already purchasing via cable or DishNetwork).  If DirecTV’s operational and programming costs in servicing the new customers was not well below $144 million, this scheme wouldn’t be profitable.  Only the excess profits on the Choice package – which baseball fans are required to purchase as a condition of subscribing to ExtraInnings^TM, – is what allows DirecTV to profitably enter into an exclusive deal.

      One other explanation is theoretically possible – that there are huge cost-saving efficiencies from an exclusive dealing arrangement.  However, no one has, to date, seriously made this claim on behalf of MLB or DirecTV.

   

  Summary of economic analysis

  
  

      The foregoing analysis suggests that the MLB/DirecTV exclusive deal reflects the ability of these sellers to exploit baseball fans because of the lack of any substitute products, and thus impose a monopoly price and significantly reduce output.  Out-of-market games will henceforth only be available on DirecTV, presumably at the monopoly price.  The absence of alternative means of obtaining out-of-market games means millions of consumers will pay more.  But it also means that output is substantially reduced, because of foregone purchases (all of which would be considerably above the marginal cost of production) from (i) expatriate fans of one particular team willing to pay a lower price to watch their favorite team but unwilling to pay for the ExtraInnings package; (ii) avid fans who have other preferential reasons to prefer to continue to subscribe to cable or Dish Network; (iii) marginal customers of satellite programming, who otherwise prefer DirecTV’s programming but decline to pay the “basic premium” price charged by DirecTV because it reflects in part the need to share profits with MLB.  This is bad public policy.

   

  Ways that legislation can protect consumers

      There are a number of ways that existing or potential legislation could protect baseball fans against exploitation by inefficient and anti-competitive broadcast agreements:

  ?  Existing antitrust laws could be used to invalidate these unreasonable restraints of trade. 

  ? Specific antitrust legislation could be enacted to facilitate this result. 

  ? Regulatory legislation could minimize the excess profits that satellite and cable providers enjoy from their “basic premium” packages, or could directly prohibit the bundling essential to the exclusivity scheme by requiring “a la carte” pricing.

  ? Strategic legislation could also be introduced by leading members of this committee as a means of facilitating voluntary pro-consumer compliance by industry.

  
  

  Existing antitrust enforcement

   

      As detailed below, even vigorous enforcement of the antitrust laws by the Justice Department would face significant obstacles to quick resolution in time to protect sports fans.  Unfortunately, the record of the current Antitrust Division leadership does not lead to a confident prediction of such enforcement.  The obstacles to private litigation to effectively protect consumers are even greater.  For these reasons, reliance on existing law is unlikely to constitute an adequate public policy response by this Congress. 

      A government enforcement action should be able to rely on the precedents discussed above to establish that the horizontal restraint among MLB clubs is an unreasonable restraint of trade.  The exclusive broadcast territories are neither necessary to promote competitive balance among member teams nor to prevent any efficiency-deterring free riding. The only way in which a club’s sale of their games into another geographic market could harm competitive balance would be if the additional revenue generated from these out-of-market rights fees would enable the teams to acquire enough talent to enable them to dominate the league. This scenario is implausible for a number of reasons. There is no evidence that these fees would be significant enough to affect competitive balance. More important, there is no reason why the leagues could not share these revenues, as Major League Baseball has with teams whose games are carried nationwide via locally-based superstations.

      Nor can the leagues, in this context, sensibly claim that the restraint is an intra-firm restraint among the “single entity” of the league, rather than the horizontal agreement among independent clubs.  Because of the economics of rights sales, a single firm would sell all rights in all games that are going to be televised to the highest bidder, who could then re-sell the games to consumers in a price discriminating manner designed to yield the greatest revenue (noting again that the marginal costs of selling a game once it is being televised is virtually zero).  The ExtraInnings package is the only way that out-of-market fans can get games, not because this is DirecTV’s preference, but because it is the choice of the majority of MLB clubs.  DirecTV would clearly be better off if it could price discriminate by selling the ExtraInnings package to those with a demand for over 1,000 baseball games, and selling a smaller package of games (or even individual games on a pay-per-view basis) to its subscribers unwilling to pay for ExtraInnings.  Rather, individual games are unavailable to out-of-market fans, despite the potential for profitable sales, because transactions costs prevent owners from agreeing on how to divide the spoils.  As a result, the interest of the league-as-a-whole in maximizing revenues from television sales is subordinated to the interests of individual teams in protecting their own local broadcast rights and preventing rivals from attaining a competitive advantage from more successful out-of-market rights sales.  This is not the “unity of interest” that the Supreme Court has required to exclude agreements among formally separate entities from review under section 1 of the oftlineSherman Act.¹⁷

      Existing precedents with regard to tying arrangements might also support a claim that DirecTV’s practice of bundling ExtraInnings^TM with its $40/mo. Choice package is also unreasonable.  However, there are several serious obstacles to successful government prosecution of such a lawsuit.  First, MLB could claim that the judicially-created baseball exemption applies to broadcast restraints.  Although good arguments can be made that the exemption does not apply,¹⁸ the result is ultimately an uncertain question likely to require ultimate resolution, after years of litigation, by the Supreme Court.  Second, although DirecTV’s bundling practices would appear to be unreasonable under existing precedents,¹⁹

  
  

   these precedents have come under criticism by commentators²⁰ and justices.²¹  Moreover, current regulation of cable and satellite practices by the FCC might be held to preclude antitrust scrutiny of this behavior. 

      Private enforcement is even more problematic.  The obstacles stated above pose major litigation risks that would deter private antitrust attorneys from commencing expensive litigation.  Because the proposed exclusive deal is prospective, treble damage relief (and accompanying attorneys fees funded by the damage award) would not be available for that aspect of the challenge.  My own experience as a public interest advocate has been that private firms are unlikely to view the grant of statutory attorneys fees provided for in the Clayton Act as a sufficient economic incentive to undertake the costs of uncertain litigation.  In addition, private litigation on behalf of consumers who currently patronize DirecTV would have to confront complex issues that would arise in light of the contract-by-adhesion DirecTV requires all customers that provides for disputes to be arbitrated.

   

  
  

  New antitrust legislation

   

      This Committee could defer to your Judiciary Committee colleagues, who could consider specific legislation that amended the Sports Broadcasting Act to prohibit the sort of bundling or exclusive dealing practices identified in this testimony.  There is a long history of specific legislation enacted by Congress to outlaw specific anti-competitive practices: indeed, the Clayton Act was passed to specifically outlaw tying arrangements arguably illegal under the Sherman Act, over the objections of former President William Howard Taft, who left the White House to accepted a chaired professorship at Yale Law School and wrote a book arguing for the adequacy of the Sherman Act on this and other points.²²

  Regulatory legislation

      As Judge Richard Posner famously observed, a “firm that has no market power is unlikely to adopt policies that disserve its consumers; it cannot afford to. And if it blunders and does adopt such a policy, market retribution will be swift.”²³  The corollary, of course, is that firms with market power can afford to disserve consumers and market retribution will not be swift. 

      Either expressly, or by delegation to the FCC, this Committee could craft legislation that recognizes that market retribution is not swift in either the market for out-of-market baseball games or the market for delivery of multi-channel video distribution.  A variety of regulatory approaches might be considered.  I would be pleased to continue to work with you and your staff if any of these are of particular interest:

      ? Listed Events Legislation: A variety of other countries have enacted legislation that specifically requires a variety of important sporting events to remain on free-to-air television, for the benefit of millions of consumers.

      ? “A La Carte” Pricing: Satellite and cable companies could be prohibited from requiring lengthy subscriptions to their “basic premium” packages as a condition of subscription to high-demand sport programming.  The analysis above suggests that DirecTV would quickly lose its incentive to pay MLB for exclusive rights if cable subscribers could, in a secondary market, acquire DirecTV equipment and then simply subscribe to ExtraInnings^TM without having to pay $40/mo. for Choice.

      ? Specifically Ban Sports Exclusivity: Unlike general delegations contained in the Sherman Act or the Federal Communications Act, Congress is free to write specific legislation to deal with specific industry problems.  Based on the economic analysis summarized above, the Committee could conclude that copyright holders and their licensees can fully exploit their intellectual property rights by sale and re-sale and there is no legitimate justification (sharing in excess profits from limited retail competition is not legitimate) for exclusive agreements in this area.²⁴

   

  Strategic behavior – by Major League Baseball and by the Senate Commerce Committee

      Both business and political actors often behave strategically – they act in a way that may or may not further immediate short-run goals in order to achieve long-run objectives.  Although MLB owners are rightly accused of being short-sighted and greedy in some instances, there are many other occasions where MLB owners have decided that the long-term health of the National Pastime is more important.  It is possible that this is one of those occasions: that MLB owners see a strong future in the development of The Baseball Channel, and the exclusive agreement with DirecTV is simply a negotiating strategy to persuade DishNetwork and cable companies to re-sell The Baseball Channel on favorable terms.

      If market retribution were swift among cable and satellite programmers, this would not be a problem.  If MLB’s demands were not unreasonable, then so many consumers would shift to DirecTV that rival MVPDs would have to go along.  If MLB’s demands were unreasonable, then DirecTV would lose so much money that it would eventually back out.  However, anyone inside the Beltway is familiar with the lack of swift retribution reflected in the lengthy negotiations that were required before millions of Capital-area baseball fans could obtain Washington Nationals local broadcasts on their stations.  The FCC has already recognized that market retribution is not swift in a number of non-sports contexts involving cable mergers, requiring programmers and distributors to either reach agreement on terms or submit their unresolved disputes to binding commercial arbitration.   

      There are a variety of situations where public policy may require government intervention, but where the best solution would be a voluntary agreement among private parties rather than direct legislation.  An excellent example of that technique was recently employed by this Committee, when under Senator McCain’s chairmanship there were explicit overtures to MLB owners and players to agree on new procedures for steroid testing or face federal legislative intervention.  The result was a voluntary deal that is probably superior to anything Congress could have done.²⁵

      Likewise, if it appears that the best resolution of this controversy is voluntary agreement among MLB and the various programming distributors, perhaps this Committee could proceed strategically by threatening onerous legislation (barring collective sales of sports broadcasting rights to satellite and cable, mandating a la carte programming, authorizing FCC rate regulation of premium programming, etc.) unless the parties reach a voluntary agreement or agree to submit the matter to binding commercial arbitration.

   

  Conclusion

      The MLB/DirecTV exclusive deal is not like a facially-similar contract between Sears and Levi’s.  Rather, the deal reflects (1) cartel behavior by MLB clubs in refusing to sell out-of-market rights to their games except via ExtraInnings^TM on DirecTV and (2) a willingness of DirecTV to share the excess profits it enjoys from its Choice package with MLB.  Millions of baseball fans who no longer live near their favorite teams are harmed by their inability to watch their teams’ local broadcasts except via ExtraInnings^TM, and harmed particularly by being forced to do so via DirecTV.  This Committee has a variety of arrows in its legislative quiver to protect consumers from this sort of exploitation.

   

  
  

  
  

  RESTORING THE MARKET FOR OUT-OF-MARKET BASEBALL

  Testimony of Professor Stephen F. Ross

  Professor of Law, The Dickinson School of Law

  Director, Penn State Institute for Sports Law, Policy and Research

  The Pennsylvania State University

  Before the

  Senate Committee on Commerce, Science and Transportation

  March 27, 2007

   

  EXECUTIVE SUMMARY

   

  1) Although exclusive dealing agreements with retailers whom consumers can access for free can often be pro-competitive, the MLB/DirecTV deal threatens to harm a wide variety of consumers

  ? Fans who, for other reasons, are unable or unwilling to switch to DirecTV

  ? Fans who would prefer to get out-of-market games other than the entire ExtraInnings^TM package

   

  2) The agreement exploits significant departures from the free market

  ? MLB clubs agree to only telecast games in assigned territories, contrary to a 50-year old antitrust precedent

  ? MVPDs face insufficient competition, allowing them excess profits for their basic premium service

   

  3) Economic analysis shows that ordinarily, DirecTV would want to re-sell ExtraInnings to its cable and satellite rivals at a high per-subscriber charge; the exclusive deal reflects a sharing of additional excess profits DirecTV will obtain by forcing consumers to switch to its Choice or higher premium packages

   

  4) Although the conduct is arguably illegal under the antitrust laws, a number of obstacles render litigation inadequate to protect consumers

   

  5) Congress could, alternatively, consider:

  ? Regulatory legislation to outlaw specific sports programming practices that harm consumers

  ? Amendments to the Sports Broadcasting Act to specifically outlaw anti-consumer practices

  ? “Strategic” legislation onerous to the industry that would facilitate voluntary compliance

  
  

  ---

  ¹ Tampa Electric Co. v. Nashville Coal Co., 365 U.S. 320 (1961).

  ² Id. at 334.

  ³ Standard antitrust analysis properly focuses on whether a product or service faces competition from “reasonable substitutes” that will draw consumers if there is a small but significant increase in price or decrease in quality of the good or service in question.  Courts have generally found that major sports are sufficiently unique in consumers’ hearts – baseball is, after all, the National Pastime – that a small increase in the price of watching a favorite baseball team will not send enough fans to the library or to cricket websites to render the move unprofitable.  See, e.g., National Collegiate Athletic Ass'n v. Board of Regents, 468 U.S. 85 (1984) (college football is a market distinct from professional football or other forms of entertainment); International Boxing Club v. United States, 358 U.S. 242 (1959) (championship boxing is a market distinct from non-championship boxing).

   

              Likewise, the issue here concerns quality telecasts to be displayed on television sets of increasing size and clarity.  Although some fans may prefer the convenience of watching webcasts of out-of-market games on their computers, or others are willing to endure the significant reduction in picture quality when subscribing to mlb.com, these webcasts are not the sort of reasonable substitutes for ExtraInnings^TM that either antitrust doctrine or public policy ought require.

  ⁴ United States v. National Football League, 116 F.Supp. 319 (E.D. Pa. 1953).

  ⁵ See, e.g., Pittsburgh Athletic Co. v. KQV Broad. Co., 24 F. Supp. 490 (W.D. Pa. 1938).

  ⁶ 116 F.Supp. 319 (E.D. Pa. 1953).

  ⁷ National Collegiate Athletic Ass’n v. Board of Regents, 468 U.S. 85 (1984).

  ⁸ Chicago Professional Sports Ltd. v. National Basketball Ass’n, 961 F.2d 667 (7th Cir. 1992).

  ⁹ Broadcast Music, Inc. v. Columbia Broadcasting System, Inc., 441 U.S. 1  (1979).

  ¹⁰ Columbia Broadcasting System, Inc. v. American Soc’y of Composers, Authors & Publishers, 620 F.2d 930 (2d Cir. 1980).

  ¹¹ CBS v. Broadcast Music, 441 U.S. at 10-11, citing United States v. American Soc’y of Composers, Artists & Publishers, 1940-1943 Trade Cas. (CCH) ¶ 56,104 (S.D.N.Y. 1941).

  ¹² NCAA, 468 U.S. at 107.

  ¹³ There are at least two recent examples of this phenomenon.  In 1992, the English Premier League, having agreed to show 60 of its 380 matches exclusively on the BSkyB satellite, rejected BSkyB’s offer to show 90 matches for a 50% increase in fees.  At about the same time, the National Basketball Association succeeded in strictly limiting the very popular broadcasts of the Chicago Bulls featuring Michael Jordan, despite evidence that Bulls’ broadcasts had minimal effects in other markets, refusing to copy MLB’s practice of taxing superstation revenue.

  ¹⁴ David Harbord & Marco Ottaviani, “Contracts and Competition in the Pay-TV Market,” London Bus. School Dep’t of Economics Working Paper No. DP 2001/5, available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=289334. 

  ¹⁵ This phenomenon is known to economists as “double marginalization.”  Suppose the profit-maximizing price for ExtraInnings^TM is $160/year.  (Any increase in price reduces demand, unless a product is essential to life.  Thus, raising the price from $150 to $160 will cause some marginal consumers to discontinue patronage, but if the number is small enough, the increase is profitable.  If 100 consumers refuse to go along with the increase, this would cost MLB/DirecTV $15,000.  But if a 10,000 consumers are willing to pay $160, this is an additional $100,000.  At some point, the number of consumers discontinuing purchases outweighs the additional income, just short of that point is the profit-maximizing price.)  If MLB sold rights on a per-subscriber basis, they would want to fix the price at $160 minus DirecTV’s costs.   If these costs were $5/subscriber, MLB would set the rights sale at $155.  However, this would leave DirecTV with no excess profits.  DirecTV would rather get some excess profits, even at the expense of losing some customers.  So DirecTV would be likely to charge $170 or more, costing MLB some customers and some profit.  These problems are avoided by a lump-sum sale.

  ¹⁶ Harbord & Ottaviani, supra, at 8.    To the extent that there are strategic gains from raising rivals’ cost, the incentive to re-sell is even stronger. 

  ¹⁷ Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752, 771 (1984).

  ¹⁸

   When the Supreme Court last revisited the issue in Flood v. Kuhn, 407 U.S. 258 (1972), the Court explicitly rejected its original holding that baseball was not interstate commerce, instead re-affirming the exemption because of baseball’s “unique characteristics and needs” and Congress’ “positive inaction” in sustaining the judicial precedents.  It is clear that baseball has no unique characteristics and needs with regard to broadcasting, a fact Congress recognized by including baseball as a sport covered by the limited exemption for package sales to free-to-air networks contained in the Sports Broadcasting Act.  Congress’ positive inaction with regard to the baseball exemption, upon which Justice Blackmun relied in Flood, related almost entirely to labor restraints.  When Congress overturned that specific aspect of Flood in enacting the Curt Flood Act of 1995, it is clear that continuing legislative concern almost entirely related to protecting the unique characteristics and needs of minor league baseball, not broadcasting practices that MLB shares in common with the NBA and the NHL. 

   

              In addition, lower courts have suggested that the exemption applies only to the “business of baseball” and not to the “business of broadcasting.”  Henderson Broad. Corp. v. Houston Sports Ass'n, 541 F. Supp. 263 (S.D. Tex. 1982).  Especially in light of courts’ explicit recognition that MLB can lawfully require clubs to share revenues from rights sales, Chicago Professional Sports Ltd. Partnership, supra, 961 F.2d at 675, there is no reason why subjecting television agreements to standard antitrust analysis would compromise “the business of baseball.”

  ¹⁹ The current Supreme Court doctrine is expressed in Jefferson Parish Hospital Dist. No. 2 v. Hyde, 466 U.S. 2 (1984).  Firms engaged in a substantial amount of interstate commerce may not force consumers to purchase a product, service, or copyright license as a condition of purchasing a more desired license, where the seller has “market power,” the arrangement requires the purchase of two “separate products,” and the tying is not necessary to introduce a new product or to ensure the reliable use of either.  Applying this precedent, it is clear that DirecTV has market power in the sale of ExtraInnings^TM, as there are no reasonable substitutes for out-of-market MLB games.  Forcing purchasers of ExtraInnings^TM to purchase the Choice package constitutes a tied sale, because there is distinct and separate consumer demand for both products.  Finally, a there is no need to tie well-established programs in the Choice package with uniquely desirable MLB games in order to penetrate a market, and there are no reliability issues in subscribing to one or the other. 

  ²⁰ See, e.g., Robert Bork, The Antitrust Paradox 365-381 (1978).

  ²¹ See, e.g., Eastman Kodak Co. v. Image Tech. Servs., 504 U.S. 451, 487 (Scalia, J., dissenting); Hyde, 466 U.S. at 32 (O’Connor, J., concurring).

  ²²

   William Howard Taft, The Anti-Trust Act and the Supreme Court (1914).

  ²³ Valley Liquors, Inc. v. Renfield Importers, Ltd., 678 F.2d 742, 745 (7^th Cir. 1982).

  ²⁴ This legislation would also prevent cable companies from aggressively competing in a consumer-harming way by acquiring their own exclusive sports programming rights and refusing to re-sell to satellite outlets.

   

              Another example, of perhaps little interest to most Americans but of keen interest to millions, especially recent immigrants from south Asia or the United Kingdom, concerns the rights to satellite broadcasting of international cricket matches.  Thus, DishNetwork obtained exclusive rights for the International Cricket Council’s World Cup contests currently being played in the West Indies, while DirecTV obtained exclusive rights to a large number of international contests throughout the year.  Devoted cricket fans need to either subscribe to both or forego the ability to watch these matches in their homes.

  ²⁵ The substance of the agreement, and whether the agreement or proposed legislation accurately reflects the public interest in an appropriate balance between protecting (i) players’ health, (ii) the integrity of the game from health-harming, performance-enhancing behavior, and (iii) privacy rights, is of course beyond the scope of this testimony as well as my scholarly expertise.

• Mr. Rob Jacobson

  President and Chief Executive Officer

  iN DEMAND Networks
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• Mr. Carl Vogel

  President & Vice Chairman

  EchoStar Satellite L.L.C.
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