En-Touch Systems flags AT&T's use of a most favored nation clause in a deal with its subsidiary as allegedly restraining competition.
AT&T speaks of "the power of vertical integration" in defending its proposed acquisition of Time Warner. Facing an antitrust lawsuit aimed at blocking the merger, AT&T rejects the U.S. government's notion that it has the "incentive and ability to substantially lessen competition by withholding or raising the price" on any of its would-be owned networks including Turner and HBO.
But AT&T must now defend itself in a fresh antitrust case that alleges the media conglomerate has already restrained competition through artificially high license terms. The complaint comes in California federal court on Tuesday from En-Touch Systems, a tiny Texas-based company that is asserting a big and bold theory.
The subject of the dispute is AT&T SportsNet, a regional sports network (RSN) that has exclusive rights to carry Houston Astros and Houston Rockets games. This network was formerly owned by Comcast and was forced into bankruptcy amid contentious circumstances. AT&T and DirecTV eventually acquired the RSN and then rebranded it.
When the RSN was owned by Comcast, according to the complaint, there was one feature that many competitors hated.
"Comcast, itself an MVPD offering a cable subscription service named Xfinity, entered into a contract with its subsidiary CSN Houston ... that contained two provisions relevant to the instant action," states the complaint. "First, the contract set the cost for carrying CSN Houston at an unreasonably high per-subscriber rate. Second, the contract granted Comcast, as an MVPD, most favored nation (“MFN”) status, which required Comcast to be charged no more than any other MVPD to carry CSN Houston. Together, the price term and the MFN clause had the effect of creating an artificially high price for CSN Houston that Comcast, a minority owner (and the only MVPD), could swallow, but that was prohibitive for all other MVPDs."
So, according to the lawsuit, Comcast used this "contract structure" to ensure that Xfinity would be the only cable subscription option for anyone in the Houston area that wanted to watch Astros and Rockets games.
The lawsuit quotes a 2012 interview by then-DirecTV CEO Mike White as saying the $3.40 per-subscriber monthly rate that Comcast was requesting was exorbitant and unfair to other distributors.
But then, AT&T acquired the network in 2014.
It's said in the lawsuit that AT&T and DirecTV "kept in place the very pricing structure that led to CSN Houston's demise."
Needing Astros and Rockets games, En-Touch made a deal. Now with the expiration at hand, the plaintiff says it has been "presented a Hobson’s choice for Plaintiff: negotiate with AT&T SportsNet to continue to carry AT&T SportsNet (née ROOT Sports) at an exorbitantly high price, or lose its subscribers who understandably desire their cable package to have this 'must-see' programming."
And so here's the asserted antitrust theory.
"The continuation by Defendants of the artificially high pricing structure allows Defendants to plead innocence when accused of anti-competitive pricing, proclaiming that AT&T SportsNet is expensive for all MVPDs, including Defendant MVPDs," states the complaint. "This backdoor deal between Defendant MVPDs and AT&T SportsNet harms competition because competitor MVPDs like Plaintiff do not reap the benefit of paying their own subsidiary an exorbitantly high price that will come out in the wash. Thus, the arrangement is a win-win for AT&T because it receives a revenue boost from its subsidiary, AT&T SportsNet, while both harming small MVPDs and keeping an entrance barrier for other MVPDs trying to enter the market."
The full complaint (read here) also addresses other issues, including "zero-rated services," whereby a telecom data provider like AT&T doesn't count the consumption of its owned content against an individual subscriber's data plan.
A spokesperson for AT&T told The Hollywood Reporter, "We believe the complaint lacks merit and we’ll vigorously defend it in court."