Award Winning Blog

Tuesday, October 10, 2017

What’s a Fair Burden of Proof in Forecasting Future Benefits, or Harms?

           On many occasions, the FCC and reviewing courts have to decide who bears the burden of proving something, what they have to prove and how convincing they have to be. Far too often, this process lacks science, or any semblance of discipline.  The various stakeholders march their researchers who offer economic “rules,” specific to the last dime cost or benefit estimates and vicious attacks on the credibility of other experts with opposing views.

            This high stakes game has profound impacts on consumers and the degree of competitiveness in various sectors of the economy.  In many instances the burden lies with the party opposing a merger and other types of official blessings required before a commercial transaction can take place.

            Consider this real world scenario.  Comcast has an ownership interest in the Golf Channel.  It stands to reason that Comcast would want to maximize viewership of this network.  It can benefit the Golf Channel, itself and its cable television subscribers by including this network in the basic service tier, rather than a more expensive one having fewer subscribers and a higher monthly subscription price. Arguably, we have a win/win/win situation.  So far, so good.

            Along comes another specialized sport network in which Comcast does not have an ownership interest.  In this scenario, Comcast has to undertake a more granular financial analysis: does adding this channel generate more revenues for the company in the basic tier than in a more expensive sport tier?  Comcast presumably uses math and “real economics” to calculate the financial benefits in any advertising revenue sharing with the network, plus revenues from advertising it sells, plus any possible increase in the basic tier monthly subscription rate, plus savings in its costs of carrying the network in the sports tier.  If Comcast can generate such a composite figure, it then must subtract the per subscriber per month cost of adding carriage of this network in the basic tier.  Bear in mind, the cost of carriage can vary as a function of tier placement.

            In reality, there are additional factors, not easily quantified even if Comsat wanted to undertake the calculation (which it most certainly would not want to do so if obligated to share it with the FCC).  Comcast benefits on both sides of its cable television platform when it places the Golf Channel in the basic tier.  Comcast Cable pays Comcast the programmer of the Golf Channel.  Comcast Cable also receives payments from its cable subscribers.  For sport networks, which Comcast does not have an ownership interest, only one revenue flow exists: subscription payments from cable subscribers.

             It does not take an economist, antitrust expert, or rocket scientist to infer that Comcast has a vested financial interest to favor its golf programming over other sports programming generated by unaffiliated ventures. Some might call it a conflict of interest.  At the very least, a simple “smell test” detects a disincentive to carry competing content which does impose some minor additional programming cost for the basic tier.

             However, the appellate court considering the merits of tennis versus golf programming established a near impossible set of burdens on the unaffiliated network relegated to the more expensive sports tier. § 616 of the Communications Act unambiguously prohibits multichannel video programming networks (like Comcast) from “unreasonably restrain[ing] the ability of an unaffiliated video programming vendor to compete fairly.” Notwithstanding this mandate, the D.C. Circuit Court of Appeals imposed a remarkably high burden of proof on the Tennis Channel (which previously had convinced an FCC Administrative Law Judge that discrimination had occurred only to have that finding overturned by a majority of Commissioners.)  See$file/12-1337-1438011.pdf; and$file/15-1067-1622957.pdf.

             The court-imposed burden required the Tennis Channel to prove that Comcast would accrue a financial benefit by changing the tier location of the network.  How can one meet that burden of proof?  The experts retained by the Tennis Channel would have to come up with a plausible mathematical equation proving that Comcast would earn more money if it re-tiered the Tennis Channel, i.e., that Comcast could raise the basic tier rate, or accrue more advertising revenues that would offset the cost of placing the network in a cheaper, but more heavily subscribed tier.

             I do not see how counsel for the Tennis Channel could create a formula and an accompanying narrative showing how increased viewership of the Tennis Channel and a commensurate increase in advertising rates would satisfy the financial benefit to Comcast burden of proof.

             The bottom line: Comcast can handicap a competing sport network through a seemingly innocent and business-driven program tiering decision.  Of course corporate non-affiliation had nothing to do with such decision making.

Would You Pay a 400% Surcharge for Connected Networks?

          With the well past due retirement of America Online’s Instant Messenger, I thought about  interconnectivity concerns in light of AOL’s market dominance.  Years ago, advocates worried that AOL could bolster its market share simply by refusing to interconnect its networks and large subscriber base with market entrants.  The AOL-Time Warner merger provided a basis for the federal government to impose some connectivity requirements that in retrospect appear unnecessary.

          Currently, I am experiencing the consequences when health networks do not interconnect and no government agency has legal authority, or the inclination to require connectivity.  My Primary Care Physician and all specialty doctors I see have an affiliation with Medical Practice Group One.  This Group is affiliated with the only hospital in town.  My employer has its own Medical Practice Group Two which predictably cannot share medical information, including blood tests, with other Groups.  Additionally, my employer has negotiated quite attractive blood test prices with an unaffiliated Large Diagnostic Facility which predictably has no direct document links with either Medical Practice Groups.

          In this “balkanized” environment, test results do not get delivered to physicians and the Medical Practice Groups cannot share results.  With repeated prodding, the Large Diagnostic Facility will use 1960s facsimile technology to send results to the Medical Practice Groups.

          I can reduce, if not eliminate the prospects for non-delivery of results if I opt to use the Local Diagnostic Facility affiliated with both the local hospital and Medical Practice Group One.  This option typically costs 300-400 percent more.

          Would you pay the premium to reduce or eliminate hassles, uncertainty and anxiety?  For many months I resisted and have paid the consequences.  However, I cannot help thinking that intentional “unconnectivity” serves business interests at the expense of consumers.  Economists can explain the situation in terms of network effects and externalities, but they do not seem to factor in higher consumer costs for joining the dominant network.