FOR RELEASE: SEPTEMBER 12, 1996

FTC REQUIRES RESTRUCTURING OF TIME WARNER/TURNER DEAL:
SETTLEMENT RESOLVES CHARGES THAT DEAL WOULD REDUCE CABLE INDUSTRY COMPETITION

FTC Says Restructuring Designed to Keep Prices Lower for Millions of Cable Customers

The Federal Trade Commission today announced that it has approved a restructuring of the acquisition by Time Warner Inc. of Turner Broadcasting System, Inc. originally valued at $7.5 billion. Time Warner agreed to the restructuring to settle FTC charges that the merger would restrict competition in cable television programming and distribution, in violation of federal antitrust laws. The FTC alleged that the acquisition, along with related agreements, would allow Time Warner unilaterally to raise consumer prices for cable television and to limit programming choices.

According to the FTC complaint detailing the charges, the proposed deal would combine Time Warner and Turner, two of the country’s largest cable programmers, thus reducing competition among cable programmers in the United States. The two companies account for about 40 percent of all cable programming in the country today. The overall deal also would tie together (by merger and contract) Turner’s programming business with the cable distribution systems of the nation’s two leading cable operators (Tele-Communications, Inc. [TCI] and Time Warner respectively, whose systems reach nearly half of American cable households), thus making it more difficult for competitors to get into either business successfully.

As a result, the FTC complaint states, Time Warner could unilaterally raise prices for its own programming, as well as for programming offered by Turner. In addition, given TCI’s ownership interest in Time Warner and its complementary long-term contractual obligations to carry Turner programming, the deal would undermine the incentives of TCI, the nation’s number one cable operator, to run better or less expensive programming competitive with that offered by

Time Warner, thereby augmenting Time Warner’s programming market power even further. The FTC also alleged that, because the deal could lead to substantial increases in wholesale programming costs for cable systems and for alternative service providers -- including direct broadcast satellite services and other forms of non-cable distribution -- it could lead to higher cable service prices for consumers, and reduce the programming choices available to them.

To resolve the FTC’s charges and avoid a court battle over the deal, Time Warner, Turner, TCI and its subsidiary Liberty Media Corp. (LMC) have agreed to make a number of structural changes and abide by certain restrictions designed to break down the entry barriers created by the deal. The agreement would (1) require TCI to divest its interest in Time Warner to a separate company (or accept a maximum of 9.2 percent nonvoting interest in Time Warner); (2) require TCI, Turner and Time Warner to cancel their long-term carriage agreements; (3) reduce significantly Time Warner’s enhanced opportunities for bundling Time Warner and Turner programming; (4) bar Time Warner’s programming interests from discriminating in price against rival cable systems; (5) prohibit Time Warner’s cable interests from discriminating in carriage decisions against rival programmers; and (6) require Time Warner’s cable interests to carry a rival to CNN.

In announcing the settlement today, FTC Chairman Robert Pitofsky said: “While the proposed merger of Time Warner and Turner Broadcasting is one of the biggest and most complicated deals that antitrust officials have reviewed, the central issue it raises can be summarized in one word: access. This settlement would preserve competition and protect consumers from higher cable service prices and reduced programming choices by ensuring that competing cable operators, new technologies and future programmers can gain access to Time Warner/Turner’s customers and programming.”

Time Warner, headquartered in New York City, had total revenues of $8 billion in 1995, of which approximately $5 billion was from cable and other pay television services. Its programming business includes ownership of Home Box Office, which is viewed by cable distributors as a “crown jewel” service, necessary to attract and retain a significant percentage of subscribers, according to the FTC’s complaint. Time Warner also has an interest in a number of other cable programs, including Cinemax, and owns Warner Bros. Studio. As the nation’s second largest cable distributor, Time Warner has approximately 11.5 million cable subscribers in 34 states, approximately 17 percent of all U.S. cable television households.

Turner, headquartered in Atlanta, operates both cable networks and film studios. In 1995, Turner posted revenues of $3.4 billion, of which $2 billion was from cable programming. Turner wholly owns a number of cable networks including Cable News Network (CNN), Headline News, Turner Network Television (TNT), WTBS, Cartoon Network and Turner Classic Movies.

CNN, TNT and WTBS are viewed by cable distributors as "marquee" or crown jewel services, according to the FTC’s complaint.

TCI, based in Englewood, Colorado, is the nation’s largest operator of cable television systems, serving approximately 27 percent of all U.S. cable television households. By itself or through its LMC subsidiary, TCI owns interests in a large number of cable networks such as Starz!, Discovery Channel, The Learning Channel and Court TV.

The proposed consent agreement to settle the FTC charges, announced today for a public comment period before the Commission determines whether to make it final and binding, contains the following provisions:

1) In response to allegations that TCI’s interest in Time Warner would lessen TCI’s incentives to carry non-Time Warner programming, TCI and Liberty Media would divest their ownership of 7.5 percent of Time Warner’s shares -- the amount they would obtain from Time Warner in exchange for their ownership interest in Turner -- to a separate company that would be spun off by TCI and Liberty Media. The proposed consent also contains provisions to ensure that the transaction will not leave TCI or its management in a position to influence Time Warner to benefit TCI.

 

2) The unprecedented agreements between TCI, Turner and Time Warner (entered into as an inducement to the merger), which would have committed TCI to carry Turner’s CNN, TNT and Headline News for 20 years at prices equal to a 15 percent discount, would be canceled. According to the complaint, by locking up scarce TCI channel space for an extended period of time, these agreements would tend to prevent Time Warner’s programming rivals from achieving sufficient distribution to threaten Time Warner’s market power. The consent agreement also includes a six month "cooling off" period during which Time Warner and TCI could not enter into new, similar agreements. After that time, the parties could not enter into the same type of contract unless TCI has an option every five years to terminate, a provision designed to ensure that non-Time Warner programmers will have an opportunity to bid for carriage on TCI’s systems and replace Time Warner programming.

 

3) In order to prohibit the merged company from exerting substantially greater negotia ting leverage over cable operators to take unwanted programming by bundling all or some of the marquee or crown jewel networks and offering them only as a package, the consent order would bar Time Warner from bundling HBO with Turner channels. Time Warner also would be barred from bundling CNN, TNT or WTBS with Time Warner channels.

 

4) Time Warner would be prohibited from discriminating in prices on Turner programming against companies, such as direct broadcast services, wireless systems and systems created by telephone companies, trying to enter and compete against Time Warner in the cable distribution market. Under the consent agreement, Time Warner could not set the difference in the prices it charges to established cable companies as compared to new companies any greater than the difference in price that Turner charged before the merger.

 

5) Time Warner generally would be barred from foreclosing rival programmers from access to its distribution systems. Time Warner also would be required to report information on carriage decisions by its cable systems to the management committee of Time Warner Entertainment (TWE), which is generally responsible for Time Warner’s cable operations. That management committee includes representatives of U S West, Time Warner’s minority partner in TWE. Because U S West’s incentives would be to maximize returns to TWE cable company interests rather than to Time Warner’s wholly-owned programming interests, it would have strong incentives to alert the Commission to any incidents of discrimination.

 

6) A final provision addresses Time Warner’s lack of incentive to allow CNN rivals access to its extensive distribution systems, which would help such a rival secure the widespread distribution it would need to be competitive. The consent order would require the post-merger Time Warner to roll out a rival all-news channel. The consent would allow Time Warner the choice of adding a news channel currently not carried on its distribution system or expanding the distribution of an existing independent news channel.

The proposed consent agreement also contains various reporting and record keeping provisions designed to assist the FTC in monitoring compliance. The Commission vote to accept the proposed consent agreement for public comments was 3-2, with Commissioner Mary L. Azcuenaga and Commissioner Roscoe B. Starek, III, dissenting, having found no reason to believe that there was a violation of law and on the ground that the order was unnecessary and may be harmful. The Commissioners issued separate dissenting statements.

In dissenting, Commissioner Azcuenaga said, "Alleging that this transaction violates the law is possible only by abandoning the rigor of the Commission’s usual analysis under Section 7 of the Clayton Act. To reach this result, the majority adopts a highly questionable market definition, ignores any consideration of efficiencies and blindly assumes difficulty of entry in the antitrust sense in the face of overwhelming evidence to the contrary. The decision of the majority also departs from more general principles of antitrust law by favoring competitors over competition and contrived theory over facts.

"The usual analysis of competitive effects under the law, unlike the apparent analysis of the majority, would take full account of the swirling forces of innovation and technological advances in this dynamic industry. Unfortunately, the complaint and the underlying theories on which the proposed order is based do not begin to satisfy the rigorous standard for merger analysis that this agency has applied for years. Instead, the majority employs a looser standard for liability and a regulatory order that threatens the likely efficiencies from the transaction. Having found no reason to relax our standards of analysis for this case, I cannot agree that the order is warranted."

In his dissenting statement, Commissioner Starek said, "I am not persuaded that either the horizontal or the vertical aspects of this transaction are likely ?substantially to lessen competition’.... Moreover, even if one were to assume the validity of one or more theories of violation underlying this action, the proposed order does not appear to prevent the alleged effects and may instead create inefficiency."

In discussing the horizontal theories of competitive harm, Commissioner Starek stated that "there is little persuasive evidence that TW’s programs constrain those of TBS (or vice- versa).... [T]here is no strong theoretical or empirical basis for believing that an increase in bundling of TW and TBS programming would occur postmerger...[and] even if such bundling did occur, there is no particular reason to think that it would be competitively harmful.... Thus, I am neither convinced that increased program bundling is a likely consequence of this transaction nor persuaded that any such bundling would be anticompetitive. Were I convinced that anticompetitive bundling is a likely consequence of this transaction, I would find the proposed remedy inadequate."

Commissioner Starek’s statement also discussed the vertical theories of competitive harm. "The proposed consent order also contains a number of provisions designed to alleviate competitive harm purportedly arising from the increased degree of vertical integration between program suppliers and program distributors brought about by this transaction. I have previously expressed my skepticism about enforcement actions predicated on theories of harm from vertical relationships." Among other weaknesses of the Commission’s vertical case, Starek noted, "if the reasoning of the complaint is carried to its logical conclusion, it constitutes a basis for challenging any vertical integration by large cable operators or large programmers...." Moreover, said Starek, "it is far from clear that TCI’s incentives to preclude entry into programming are the same as [Time Warner’s]." These considerations and others illustrate "why foreclosure theories fell into intellectual disrepute: because of their inability to articulate how vertical integration harms competition and not merely competitors.... All of the majority’s vertical theories in this case ultimately can be shown to be theories of harm to competitors, not to competition.... Even were I to conclude otherwise, however, I could not support the extraordinarily regulatory remedy contained in the proposed order...."

An announcement of the agreement will appear in the Federal Register shortly. The agreement will be subject to public comment for 60 days, after which the Commission will decide whether to make it final. Comments should be addressed to the FTC, Office of the Secretary, 6th Street and Pennsylvania Avenue, N.W., Washington, D.C. 20580.

NOTE: A consent agreement is for settlement purposes only and does not constitute an admission of a law violation. When the Commission issues a consent order on a final basis, it carries the force of law with respect to future actions. Each violation of such an order may result in a civil penalty of $10,000.

Copies of the complaint, proposed consent agreement, an analysis of the agreement to assist the public in commenting, Commissioners Azcuenaga’s and Starek’s dissenting statements, as well as a separate statement of Chairman Pitofsky and Commissioners Janet D. Steiger and Christine A. Varney are available from the FTC’s Public Reference Branch, Room 130, 6th Street and Pennsylvania Avenue, N.W., Washington, D.C. 20580; 202-325- 2222; TTY for the hearing impaired 1-866-653-4261. To find out the latest news as it is announced, call the FTC NewsPhone recording at 202-326-2710. FTC news releases, documents and other materials also are available on the Internet at the FTC’s World Wide Web site at: http//www.ftc.gov

MEDIA CONTACT:

Victoria Streitfeld
Office of Public Affairs
202-326-2718 or 202-326-2180

STAFF CONTACT:

Bureau of Competition
William J. Baer, 202-326-2932
George Cary, 202-326-3741

(FTC File No. 961-0004)

(timewarn)