Justice Department probing pay-TV industry

The Department of Justice has launched a probe into the pay-television business to determine whether cable and satellite operators and programmers are engaging in business practices that, among other things, could derail the emergence of competing broadband distribution services.

The wide-ranging examination is looking at such topics as contracts between programmers and distribution companies and how that affects consumers and competitors, and caps on the amount of data that cable subscribers can use for downloads, according to several people familiar with the situation who declined to speak publicly. A Justice Department spokeswoman also declined to comment.

The Justice Department has sought information from companies including cable behemoths Comcast Corp. and Time Warner Cable; movie and TV service Netflix Inc.; and Hulu, the online programming service owned by Comcast, Walt Disney Co. and News Corp. News of the Justice Department inquiry was first reported by News Corp.-owned Wall Street Journal.

It remains to be seen whether the probe will turn into a full-blown investigation into the pay-TV business. The examination, described by some media insiders as exploratory in nature, started several weeks ago when the Justice Department sent letters requesting information on deal-making and business practices.

The timing of the Justice Department’s investigation has led many industry observers to tie it to a recent feud between Comcast and Netflix over data caps. Specifically, Netflix has accused Comcast of unfairly favoring its own Internet video service Xfinity over those of competitors when used via the Xbox 360 video game console. Video from Netflix and other providers such as Hulu counts against Comcast’s data limits, but Xfinity video does not.

Last month, Sen. Al Franken (D-Minn), an outspoken critic of Comcast, wrote a letter to the Justice Department encouraging it to investigate whether Comcast was engaged in anti-competitive behavior with regards to Netflix.

It is “reasonable to assume that Netflix is a principal mover of the DOJ probe,” Craig Moffett, a prominent media analyst with Sanford C. Bernstein, said in a Wednesday report.

Netflix has not been shy in its criticism of Comcast. Last month the cable operator said it would end its 250-GB-per-month cap on the amount of data that Internet subscribers can access, and would start testing “tiered pricing” for people who use more than 300 GB per month.

Although data caps and they ways cable and broadband providers are treating rival content suppliers such as Netflix may be issues, they are not the only ones, people with direct knowledge of the inquiry said.

Also getting particular scrutiny by Justice Department officials are the programming agreements between networks and distributors. There is concern that the contracts might be anti-competitive because they discourage the use of emerging Internet delivery platforms known in the industry as “over the top” platforms.

Charles Herring, president of Wealth TV, a small cable channel that has struggled to get distribution, said some distributors try to force programmers to contractually agree not to sell their channels to a broadband-delivered service.

“A lot of the programmers are being hindered from offering their services over the top because they don’t want to alienate their cable affiliates,” Herring said. If they do, he said, “they will be in direct conflict with the cable operators that provide them their primary source of revenue.” Herring said he has talked with the Justice Department about this issue. He added that Wealth TV is available to consumers online and via Roku despite those clauses.

“They haven’t called us on it yet,” he said. “Maybe we’re flying under the radar.”

Most cable operators and programmers are not averse to putting content online, provided it is available only to people who already subscribe to a pay-TV provider. The initiative, known as TV Everywhere, was launched primarily with the intent of protecting the current television distribution ecosystem.

But some media watchdogs see TV Everywhere as a way to stave off potential competition and keep the television business closed to outsiders.

“We were very pleased to find out that the Justice Department is investigating whether the cable industry is trying to squelch emerging online competition,” said Harold Feld, legal director of Public Knowledge, a consumer advocacy group focused on emerging platforms. “The future of online competition for cable is being decided right now, and it is crucial that government agencies responsible for protecting the public interest do so.”

Also under scrutiny are most-favored nation (MFN) clauses that are often used in agreements between programmers and distributors. An MFN clause typically enables a large distributor to get programming more cheaply than a smaller distributor, much in the same way a chain such as Wal-Mart often gets products from suppliers at a lower rate than a stand-alone supermarket.

Another hot topic that may get attention from the Justice Department is how programmers package channels that are licensed to distributors, a practice in the industry that is known as bundling. Programmers such as Viacom and Disney often package less popular channels with their more successful ones. For example, if a distributor wanted to carry Disney’s ESPN and not its various spin-off channels, it would have to pay more to do that than to carry all the ESPN outlets.

Although bundling is a sore point for both distributors and smaller programmers such as Herring’s Wealth TV, efforts to get eliminate it through the courts have not succeeded.

“We see little or no chance that the DOJ will take on that issue,” wrote Sanford Bernstein’s Moffett.

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