A Quick Primer on the FCC’s “Public Interest” Merger Review Authority…

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As we all know by now, Comcast announced that it would be acquiring Time Warner in a deal worth about $45.2 billion.  Given the high profile of this acquisition, I thought I would use this opportunity to highlight once again the ample case law on the bounds of the Federal Communications Commission’s “public interest” merger review authority.  (For a full exegesis, please see my law review Separating Politics from Policy in FCC Merger Reviews: A Basic Legal Primer of The “Public Interest” Standard, 18 CommLaw Conspectus 329 (2010) which is available on the Phoenix Center’s webpage here.)

First, FCC merger review (aside from being required by law) serves a very important purpose.  That is, while the antitrust authorities are singularly focused on determining whether a merger will “substantially lessen competition”, the Commission is charged not only with evaluating the competitive implications of a transaction, but also with ensuring that Congress’s other articulated policy objectives (e.g., universal service, broadband deployment, foreign ownership restrictions) are maintained and how those policies affects firms’ conduct and industry structure post-merger.  Equally as important, the Commission—as the expert agency—is uniquely qualified over the generalist antitrust agencies to understand the often Byzantine economics of communications industries (a fact that the Department of Justice has repeatedly confirmed for me over the last several years).  As the Supreme Court noted in Brand X, because the FCC must deal with policy questions that “involve a ‘subject matter [that] is technical, complex, and dynamic,’” the “Commission is in a far better position to address these questions” than those with only a general knowledge of the issues.  For this reason, courts have long-held that the FCC must, in the exercise of its responsibilities, “make findings related to the pertinent antitrust policies, draw conclusions from the findings, and weigh these conclusions along with other important public interest considerations.  (Emphasis supplied.)

That said, the agency’s public interest authority is not unfettered.  While Congress provided the agency with the ability to impose conditions to remedy merger-related harms (see, e.g., 47 U.S.C. §303(r)), it is also black letter law that the Commission may not use a merger to “enhance” competition:  to the contrary, courts have long held that the agency cannot “subordinate the public interest to the interest of ‘equalizing competition among competitors.’”  (For those who follow antitrust law, this is essentially the same principle that we should be concerned with “the protection of competition, not competitors.”)

Yet, despite this ample case law, the FCC generally has an unfortunate history of demanding (and getting) multiple “voluntary commitments” from the merged entities to achieve goals the agency would not otherwise be able to achieve legitimately through generic rulemakings.  To wit, in the Comcast/NBC Order, the merged entitles agreed to over 27 pages of “voluntary” merger commitments, including, inter alia, commitments on diversity, commitments to increase both localism and PEG channels, commitments for children’s programming, commitments to expand broadband deployment and adoption, and—my personal favorite—a commitment to adhere to the FCC’s Open Internet Order, even though this order was remanded by the D.C. Circuit in Verizon v. FCC.  While perhaps such commitments may have achieved some desired social goals and gave solace to some of Comcast’s competitors generally, it is unclear how such expansive “voluntary” merger commitments remedied any specific merger-related harm.  Given such a practice, it should come as no surprise that the agency has opened itself up to extensive criticisms that it should be taken out of the merger review process altogether.  (see, e.g., here and here.) 

Although the FCC could easily avoid such criticisms, it keeps going back to the well.  In so doing, the FCC’s long-standing practice of extracting “voluntary” concessions from the merging parties simply is not “good government.”  As I argued in my paper:

Are consumers really well-served by backroom, closed-door negotiations between the regulator and prospective merging parties over important public issues?

Clearly, the answer is “no.”  Heck:  even Cardozo Law School Professor Susan Crawford—Comcast’s most vociferous critic—agrees with me on this point, citing this exact passage of my paper at p. 209 of her book.

So, given the broad parameters of the FCC’s legal mandate, let’s take a quick look at the deal itself, along with the emerging politics surrounding the transaction, to see if we can read some tea leaves.

Based on preliminary reports, the Comcast/Time Warner merger seems to be rather straightforward:  Comcast is going to acquire Time Warner’s systems, but as the two companies currently don’t compete against each other now in the distribution market, the adverse competitive impact of the deal on the number of competitors in each local franchise is zero.  Instead, this transaction will ideally allow Comcast to achieve greater economies of scale and scope, with the savings passed along to consumers.  In this sense, the Comcast/Time Warner deal is no different from a plethora of similar deals in both the cable and telephone industry over the last twenty years (e.g., Bell Atlantic/NYNEX, AT&T/Bell South, Time Warner/Comcast/Adelphia) that have been approved under both Democrat and Republican Administrations. 

While the deal plainly does not affect competition in the downstream distribution market, it is likely that many will ask it may affect the upstream market for programming.  For almost a decade, the FCC had argued that if any one MVPD served more than 30% of the nation’s customers, then that MVPD might adversely affect the diversity of programming Americans enjoy.  In 2009, the D.C. Circuit for the second time rejected this argument, finding that the agency’s “dereliction in this case is particularly egregious.”  Nevertheless, the Commission’s choice of a 30% threshold for concern in the programming market may serve as a useful, even if not legal, guide for merger policy.  Since the FCC chose that target, it would seem silly for the agency now to disregard it.  Apparently, recognizing that simple logic, Comcast has cleverly preempted the “programming market” issue by agreeing, up front, to divest itself of systems serving approximately 3 million managed subscribers, thus bringing Comcast’s managed subscriber post-merger total to approximately 30 million which would be below the 30% threshold. Thus, using FCC guidance, competition is clearly neither an issue in the downstream nor programming markets.

That said, it should come as no surprise that the politics of the merger are already off to a bad start.  For example, according to veteran telecom reporter Amy Schatz over at <Re/code>, “Less than an hour after CNBC’s David Faber broke the news late Wednesday night that Comcast had reached a $45 billion deal to acquire Time Warner Cable, consumer advocates had already drawn up a list of concerns.”  These concerns included, inter alia, peering disputes, interconnection, bandwidth caps, net neutrality and retransmission consent.  While I would agree that these are all difficult and important policy issues, their resolution should not be done on the basis of a backroom “voluntary” commitment in a merger review proceeding.  Instead, these issues should be appropriately be debated and resolved in generic, open rulemaking proceedings (many of which already are) where we can develop rules of general applicability after an opportunity for public notice and comment (not to mention the opportunity for judicial review which “voluntary” commitments prohibit).

In sum, as I noted in an earlier blog, one of Tom Wheeler’s first tasks needs to be to restore the FCC’s credibility as the “expert agency.”  This will require the agency both to demonstrate a rigor in its analysis, as well as to show its independence from the antitrust agencies.  Given the size and magnitude of the proposed transaction, the Comcast/Time Warner deal deserves a thorough review from the FCC.  If the agency finds a specific, merger related harm, then I would fully expect the Commission to impose a narrowly-tailored condition to remedy such harm.  However, should the Commission continue to use its merger review process as a vehicle to load up a transaction like a Christmas Tree with an assortment of “voluntary commitments” wholly unrelated to the transaction at hand, then Mr. Wheeler will unfortunately prove the agency’s critics correct once again.  And with a Communications law update on the horizon, I’m not exactly sure that’s a good long-term strategy for the Commission.