Time Warner Inc., et al.; Proposed Consent Agreement With Analysis To Aid Public Comment

Federal RegisterSep 25, 1996

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FEDERAL TRADE COMMISSION

[File No. 961-0004]

Time Warner Inc., et al.; Proposed Consent Agreement With

Analysis To Aid Public Comment

AGENCY: Federal Trade Commission.

ACTION: Proposed consent agreement.

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SUMMARY: In settlement of alleged violations of federal law prohibiting

unfair or deceptive acts or practices and unfair methods of

competition, this consent agreement, accepted subject to final

Commission approval, would require, among other things, a restructuring

of the acquisition by Time Warner Inc. of Turner Broadcasting System,

Inc., which are two of the country's largest cable programmers. Time

Warner, Turner, TCI and its subsidiary Liberty Media Corp. have agreed

to make a number of structural changes and to abide by certain

restrictions designed to break down the entry barriers created by the

proposed transaction.

DATES: Comments must be received on or before November 25, 1996.

ADDRESSES: Comments should be directed to: FTC/Office of the Secretary,

Room 159, 6th St. and Pa. Ave., N.W., Washington, D.C. 20580.

FOR FURTHER INFORMATION CONTACT: William Baer or George Cary, FTC/H-

374, Washington, D.C. 20580. (202) 326-2932 or 326-3741.

SUPPLEMENTARY INFORMATION: Pursuant to Section 6(f) of the Federal

Trade Commission Act, 38 Stat. 721, 15 U.S.C. 46 and Section 2.34 of

the Commission's Rules of Practice (16 CFR 2.34), notice is hereby

given that the following consent agreement containing a consent order

to cease and desist, having been filed with and accepted, subject to

final approval, by the Commission, has been placed on the public record

for a period of sixty (60) days. Public comment is invited. Such

comments or views will be considered by the Commission and will be

available for inspection and copying at its principal office in

accordance with Sec. 4.9(b)(6)(ii) of the Commission's Rules of

Practice (16 CFR 4.9(b)(6)(ii)).

Agreement Containing Consent Order

The Federal Trade Commission (``Commission''), having initiated an

investigation of the proposed acquisition of Turner Broadcasting

System, Inc. (``Turner'') by Time Warner Inc. (``Time Warner''), and

Tele-Communications, Inc.'s (``TCI'') and Liberty Media Corporation's

(``LMC'') proposed acquisitions of interests in Time Warner, and it now

appearing that Time Warner, Turner, TCI, and LMC, hereinafter sometimes

referred to as ``proposed respondents,'' are willing to enter into an

agreement containing an order to divest certain assets, and providing

for other relief:

It is hereby agreed by and between proposed respondents, by their

duly authorized officers and attorneys, and counsel for the Commission

that:

1. Proposed respondent Time Warner is a corporation organized,

existing and doing business under and by virtue of the laws of the

State of Delaware with its office and principal place of business

located at 75 Rockefeller Plaza, New York, New York 10019.

2. Proposed respondent Turner is a corporation organized, existing

and doing business under and by virtue of the laws of the State of

Georgia, with its office and principal place of business located at One

CNN Center, Atlanta, Georgia 30303.

3. Proposed respondent TCI is a corporation organized, existing and

doing business under and by virtue of the law of the State of Delaware,

with its office and principal place of business located at 5619 DTC

Parkway, Englewood, Colorado 80111.

4. Proposed respondent LMC is a corporation organized, existing and

doing business under and by virtue of the law of the State of Delaware,

with its office and principal place of business located at 8101 East

Prentice Avenue, Englewood, Colorado 80111.

5. Proposed respondents admit all the jurisdictional facts set

forth in the draft of complaint for purposes of this agreement and

order only.

6. Proposed respondents waive:

(1) any further procedural steps;

(2) the requirement that the Commission's decision contain a

statement of findings of fact and conclusions of law;

(3) all rights to seek judicial review or otherwise to challenge or

contest the validity of the order entered pursuant to this agreement;

and

(4) any claim under the Equal Access to Justice Act.

7. Proposed respondents shall submit (either jointly or

individually), within sixty (60) days of the date this

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agreement is signed by proposed respondents, an initial report or

reports, pursuant to Sec. 2.33 of the Commission's Rules, signed by the

proposed respondents and setting forth in detail the manner in which

the proposed respondents will comply with Paragraphs VI, VII and VIII

of the order, when and if entered. Such report will not become part of

the public record unless and until this agreement and order are

accepted by the Commission for public comment.

8. This agreement shall not become part of the public record of the

proceeding unless and until it is accepted by the Commission. If this

agreement is accepted by the Commission it, together with a draft of

the complaint contemplated hereby, will be placed on the public record

for a period of sixty (60) days and information in respect thereto

publicly released. The Commission thereafter may either withdraw its

acceptance of this agreement and so notify the proposed respondents, in

which event it will take such action as it may consider appropriate, or

issue and serve its complaint (in such form as the circumstances may

require) and decision, in disposition of the proceeding.

9. This agreement is for settlement purposes only and does not

constitute an admission by proposed respondents that the law has been

violated as alleged in the draft of complaint, or that the facts as

alleged in the draft complaint, other than jurisdictional facts, are

true.

10. This agreement contemplates that, if it is accepted by the

Commission, and if such acceptance is not subsequently withdrawn by the

Commission pursuant to the provisions of Sec. 2.34 of the Commission's

Rules, the Commission may, without further notice to the proposed

respondents, (1) issue its complaint corresponding in form and

substance with the draft of complaint here attached and its decision

containing the following order in disposition of the proceeding, and

(2) make information public with respect thereto. When so entered, the

order shall have the same force and effect and may be altered, modified

or set aside in the same manner and within the same time provided by

statute for other orders. The order shall become final upon service.

Delivery by the U.S. Postal Service of the complaint and decision

containing the agreed-to order to proposed respondents' addresses as

stated in this agreement shall constitute service. Proposed respondents

waive any right they may have to any other manner of service. The

complaint may be used in construing the terms of the order, and no

agreement, understanding, representation, or interpretation not

contained in the order or the agreement may be used to vary or

contradict the terms of the order.

11. Proposed respondents have read the proposed complaint and order

contemplated hereby. Proposed respondents understand that once the

order has been issued, they will be required to file one or more

compliance reports showing that they have fully complied with the

order. Proposed respondents further understand that they may be liable

for civil penalties in the amount provided by law for each violation of

the order after it becomes final.

12. Proposed respondents agree to be bound by all of the terms of

the Interim Agreement attached to this agreement and made a part hereof

as Appendix I, upon acceptance by the Commission of this agreement for

public comment. Proposed respondents agree to notify the Commission's

Bureau of Competition in writing, within 30 days of the date the

Commission accepts this agreement for public comment, of any and all

actions taken by the proposed respondents to comply with the Interim

Agreement and of any ruling or decision by the Internal Revenue Service

(``IRS'') concerning the Distribution of The Separate Company stock to

the holders of the Liberty Tracking Stock within two (2) business days

after service of the IRS Ruling.

13. The order's obligations upon proposed respondents are

contingent upon consummation of the Acquisition.

Order

As used in this Order, the following definitions shall apply:

(A) ``Acquisition'' means Time Warner's acquisition of Turner and

TCI's and LMC's acquisition of interest in Time Warner.

(B) ``Affiliated'' means having an Attributable Interest in a

Person.

in a fiduciary capacity on behalf of a principal with respect to the

specific conduct or action under review or consideration.

(D) ``Attributable Interest'' means an interest as defined in 47

C.F.R. 76.501 (and accompanying notes), as that rule read on July 1,

1996.

(E) ``Basic Service Tier'' means the Tier of video programming as

defined in 47 C.F.R. 76.901(a), as that rule read on July 1, 1996.

(F) ``Buying Group'' or ``Purchasing Agent'' means any Person

representing the interests of more than one Person distributing

multichannel video programming that: (1) Agrees to be financially

liable for any fees due pursuant to a Programming Service Agreement

which it signs as a contracting party as a representative of its

members, or each of whose members, as contracting parties, agrees to be

liable for its portion of the fees due pursuant to the programming

service agreement; (2) agrees to uniform billing and standardized

contract provisions for individual members; and (3) agrees either

collectively or individually on reasonable technical quality standards

for the individual members of the group.

(G) ``Carriage Terms'' means all terms and conditions for sale,

licensing or delivery to an MVPD for a Video Programming Service and

includes, but is not limited to, all discounts (such as for volume,

channel position and Penetration Rate), local advertising

availabilities, marketing, and promotional support, and other terms and

conditions.

(H) ``CATV'' means a cable system, or multiple cable systems

Controlled by the same Person, located in the United States.

(I) ``Closing Date'' means the date of the closing of the

Acquisition.

(J) ``CNN'' means the Video Programming Service Cable News Network.

(K) ``Commission'' means the Federal Trade Commission.

(L) ``Competing MVPD'' means an Unaffiliated MVPD whose proposed or

actual service area overlaps with the actual service area of a Time

Warner CATV.

(M) ``Control,'' ``Controlled'' or ``Controlled by'' has the

meaning set forth in 16 CFR 801.1 as that regulation read on July 1,

1996, except that Time Warner's 50% interest in Comedy Central (as of

the Closing Date) and TCI's 50% interests in Bresnan Communications,

Intermedia Partnerships and Lenfest Communications (all as of the

Closing Date) shall not be deemed sufficient standing alone to confer

Control over that Person.

(N) ``Converted WTBS'' means WTBS once converted to a Video

Programming Service.

(O) ``Fully Diluted Equity of Time Warner'' means all Time Warner

common stock actually issued and outstanding plus the aggregate number

of shares of Time Warner common stock that would be issued and

outstanding assuming the exercise of all outstanding options, warrants

and rights (excluding shares that would be issued in the event a poison

pill is triggered) and the

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conversion of all outstanding securities that are convertible into Time

Warner common stock.

(P) ``HBO'' means the Video Programming Service Home Box Office,

including multiplexed versions.

(Q) ``Independent Advertising-Supported News and Information Video

Programming Service'' means a National Video Programming Service (1)

that is not owned, Controlled by, or Affiliated with Time Warner; (2)

that is a 24-hour per day service consisting of current national,

international, sports, financial and weather news and/or information,

and other similar programming; and (3) that has national significance

so that, as of February 1, 1997, it has contractual commitments to

supply its service to 10 million subscribers on Unaffiliated MVPDs, or,

together with the contractual commitments it will obtain from Time

Warner, it has total contractual commitments to supply its service to

15 million subscribers. If no such Service has such contractual

commitments, then Time Warner may choose from among the two Services

with contractual commitments with Unaffiliated MVPDs for the largest

number of subscribers.

(R) ``Independent Third Party'' means (1) a Person that does not

own, Control, and is not Affiliated with or has a share of voting

power, or an Ownership Interest in, greater than 1% of any of the

following: TCI, LMC, or the Kearns-Tribune Corporation; or (2) a Person

which none of TCI, LMC, or the TCI Control Shareholders owns, Controls,

is Affiliated with, or in which any of them have a share of voting

power, or an Ownership Interest in, greater than 1%. Provided, however,

that an Independent Third Party shall not lose such status if, as a

result of a transaction between an Independent Third Party and The

Separate Company, such Independent Third Party becomes a successor to

The Separate Company and the TCI Control Shareholders collectively hold

an Ownership Interest of 5% or less and collectively hold a share of

voting power of 1% or less in that successor company.

(S) ``LMC'' means Liberty Media Corporation, all of its directors,

officers, employees, Agents, and Representatives, and also includes (1)

all of its predecessors, successors, assigns, subsidiaries, and

divisions, all of their respective directors, officers, employees,

Agents, and Representatives, and the respective successors and assigns

of any of the foregoing; and (2) partnerships, joint ventures, and

affiliates that Liberty Media Corporation Controls, directly or

indirectly.

(T) ``The Liberty Tracking Stock'' means Tele-Communications, Inc.

Series A Liberty Media Group Common Stock and Tele-Communications, Inc.

Series B Liberty Media Group Common Stock.

(U) ``Multichannel Video Programming Distributor'' or ``MVPD''

means a Person providing multiple channels of video programming to

subscribers in the United States for which a fee is charged, by any of

various methods including, but not limited to, cable, satellite master

antenna television, multichannel multipoint distribution, direct-to-

home satellite (C-band, Ku-band, direct broadcast satellite), ultra

high-frequency microwave systems (sometimes called LMDS), open video

systems, or the facilities of common carrier telephone companies or

their affiliates, as well as Buying Groups or Purchasing Agents of all

such Persons.

(V) ``National Video Programming Service'' means a Video

Programming Service that is intended for distribution in all or

substantially all of the United States.

(W) ``Ownership Interest'' means any right(s), present or

contingent, to hold voting or nonvoting interest(s), equity

interest(s), and/or beneficial ownership(s) in the capital stock of a

Person.

(X) ``Penetration Rate'' means the percentage of Total Subscribers

on an MVPD who receives a particular Video Programming Service.

(Y) ``Person'' includes any natural person, corporate entity,

partnership, association, joint venture, government entity or trust.

(Z) ``Programming Service Agreement'' means any agreement between a

Video Programming Vendor and an MVPD by which a Video Programming

Vendor agrees to permit carriage of a Video Programming Service on that

MVPD.

(AA) ``The Separate Company'' means a separately incorporated

Person, either existing or to be created, to take the actions provided

by Paragraph II and includes without limitation all of The Separate

Company's subsidiaries, divisions, and affiliates Controlled, directly

or indirectly, all of their respective directors, officers, employees,

Agents, and Representatives, and the respective successors and assigns

of any of the foregoing, other than any Independent Third Party.

(BB) ``Service Area Overlap'' means the geographic area in which a

Competing MVPD's proposed or actual service area overlaps with the

actual service area of a Time Warner CATV.

(CC) ``Similarly Situated MVPDs'' means MVPDs with the same or

similar number of Total Subscribers as the Competing MVPD has

nationally and the same or similar Penetration Rate(s) as the Competing

MVPD makes available nationally.

(DD) ``TCI'' means Tele-Communications, Inc., all of its directors,

officers, employees, Agents, and Representatives, and also includes (1)

all of its predecessors, successors, assigns, subsidiaries, and

divisions, all of their respective directors, officers, employees,

Agents, and Representatives, and the respective successors and assigns

of any of the foregoing; and (2) partnerships, joint ventures, and

affiliates that Tele-Communications, Inc. Controls, directly or

indirectly. TCI acknowledges that the obligations of subparagraphs

(C)(6), (8)-(9), (D)(1)-(2) of Paragraph II and of Paragraph III of

this order extend to actions by Bob Magness and John C. Malone, taken

in an individual capacity as well as in a capacity as an officer or

director, and agrees to be liable for such actions.

(EE) ``TCI Control Shareholders'' means the following Persons,

individually as well as collectively: Bob Magness, John C. Malone, and

the Kearns-Tribune Corporation, its Agents and Representatives, and the

respective successors and assigns of any of the foregoing.

(FF) ``TCI's and LMC's Interest in Time Warner'' means all the

Ownership Interest in Time Warner to be acquired by TCI and LMC,

including the right of first refusal with respect to Time Warner stock

to be held by R. E. Turner, III, pursuant to the Shareholders Agreement

dated September 22, 1995 with LMC or any successor agreement.

(GG) ``TCI's and LMC's Turner-Related Businesses'' means the

businesses conducted by Southern Satellite Systems, Inc., a subsidiary

of TCI which is principally in the business of distributing WTBS to

MVPDs.

(HH) ``Tier'' means a grouping of Video Programming Services

offered by an MVPD to subscribers for one package price.

(II) ``Time Warner'' means Time Warner Inc., all of its directors,

officers, employees, Agents, and Representatives, and also includes (1)

all of its predecessors, successors, assigns, subsidiaries, and

divisions, including, but not limited to, Turner after the Closing

Date, all of their respective directors, officers, employees, Agents,

and Representatives, and the respective successors and assigns of any

of the foregoing; and (2) partnerships, joint ventures, and affiliates

that Time Warner Inc. Controls, directly or

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indirectly. Time Warner shall, except for the purposes of definitions

OO and PP, include Time Warner Entertainment Company, L.P., so long as

it falls within this definition.

(JJ) ``Time Warner CATV'' means a CATV which is owned or Controlled

by Time Warner. ``Non-Time Warner CATV'' means a CATV which is not

owned or Controlled by Time Warner. Obligations in this order

applicable to Time Warner CATVs shall not survive the disposition of

Time Warner's Control over them.

(KK) ``Time Warner National Video Programming Vendor'' means a

Video Programming Vendor providing a National Video Programming Service

which is owned or Controlled by Time Warner. Likewise, ``Non-Time

Warner National Video Programming Vendor'' means a Video Programming

Vendor providing a National Video Programming Service which is not

owned or Controlled by Time Warner.

(LL) ``TNT'' means the Video Programming Service Turner Network

Television.

(MM) ``Total Subscribers'' means the total number of subscribers to

an MVPD other than subscribers only to the Basic Service Tier.

(NN) ``Turner'' means Turner Broadcasting System, Inc., all of its

directors, officers, employees, Agents, and Representatives, and also

includes (1) all of its predecessors, successors (except Time Warner),

assigns (except Time Warner), subsidiaries, and divisions; and (2)

partnerships, joint ventures, and affiliates that Turner Broadcasting

System, Inc., Controls, directly or indirectly.

(OO) ``Turner Video Programming Services'' means each Video

Programming Service owned or Controlled by Turner on the Closing Date,

and includes (1) WTBS, (2) any such Video Programming Service and WTBS

that is transferred after the Closing Date to another part of Time

Warner (including TWE), and (3) any Video Programming Service created

after the Closing Date that Time Warner owns or Controls that is not

owned or Controlled by TWE, for so long as the Video Programming

Service remains owned or Controlled by Time Warner.

(PP) ``Turner-Affiliated Video Programming Services'' means each

Video Programming Service, whether or not satellite-delivered, that is

owned, Controlled by, or Affiliated with Turner on the Closing Date,

and includes (1) WTBS, (2) any such Video Programming Service and WTBS

that is transferred after the Closing Date to another part of Time

Warner (including TWE), and (3) any Video Programming Service created

after the Closing Date that Time Warner owns, Controls or is Affiliated

with that is not owned, Controlled by, or Affiliated with TWE, for so

long as the Video Programming Service remains owned, Controlled by, or

affiliated with Time Warner.

(QQ) ``TWE'' means Time Warner Entertainment Company, L.P., all of

its officers, employees, Agents, Representatives, and also includes (1)

all of its predecessors, successors, assigns, subsidiaries, divisions,

including, but not limited to, Time Warner Cable, and the respective

successors and assigns of any of the foregoing, but excluding Turner;

and (2) partnerships, joint ventures, and affiliates that Time Warner

Entertainment Company, L.P., Controls, directly or indirectly.

(RR) ``TWE's Management Committee'' means the Management Committee

established in Section 8 of the Admission Agreement dated May 16, 1993,

between TWE and U S West, Inc., and any successor thereof, and includes

any management committee in any successor agreement that provides for

membership on the management committee for non-Time Warner individuals.

(SS) ``TWE Video Programming Services'' means each Video

Programming Service owned or Controlled by TWE on the Closing Date, and

includes (1) any such Video Programming Service transferred after the

Closing Date to another part of Time Warner and (2) any Video

Programming Service created after the Closing Date that TWE owns or

Controls, for so long as the Video Programming Service remains owned or

Controlled by TWE.

(TT) ``TWE-Affiliated Video Programming Services'' means each Video

Programming Service, whether or not satellite-delivered, that is owned,

Controlled by, or Affiliated with TWE, and includes (1) any such Video

Programming Service transferred after the Closing Date to another part

of Time Warner and (2) any Video Programming Service created after the

Closing Date that TWE owns or Controls, or is Affiliated with, for so

long as the Video Programming Service remains owned, Controlled by, or

Affiliated with TWE.

(VV) ``Unaffiliated MVPD'' means an MVPD which is not owned,

Controlled by, or Affiliated with Time Warner.

(WW) ``United States'' means the fifty states, the District of

Columbia, and all territories, dependencies, or possessions of the

United States of America.

(XX) ``Video Programming Service'' means a satellite-delivered

video programming service that is offered, alone or with other

services, to MVPDs in the United States. It does not include pay-per-

view programming service(s), interactive programming service(s), over-

the-air television broadcasting, or satellite broadcast programming as

defined in 47 C.F.R. 76.1000(f) as that rule read on July 1, 1996.

(YY) ``Video Programming Vendor'' means a Person engaged in the

production, creation, or wholesale distribution to MVPDs of Video

Programming Services for sale in the United States.

(ZZ) ``WTBS'' means the television broadcast station popularly

known as TBS Superstation, and includes any Video Programming Service

that may be a successor to WTBS, including Converted WTBS.

It is ordered that:

(A) TCI and LMC shall divest TCI's and LMC's Interest in Time

Warner and TCI's and LMC's Turner-Related Businesses to The Separate

Company by:

(1) combining TCI's and LMC's Interest in Time Warner Inc. and

TCI's and LMC's Turner-Related Businesses in The Separate Company;

(2) distributing The Separate Company stock to the holders of

Liberty Tracking Stock (``Distribution''); and

(3) using their best efforts to ensure that The Separate Company's

stock is registered or listed for trading on the Nasdaq Stock Market or

the New York Stock Exchange or the American Stock Exchange.

(B) TCI and LMC shall make all regulatory filings, including, but

not limited to, filings with the Federal Communications Commission and

the Securities and Exchange Commission that are necessary to accomplish

the requirements of Paragraph II(A).

(1) The Separate Company's by-laws obligate The Separate Company to

be bound by this order and contain provisions ensuring compliance with

this order;

(2) The Separate Company's board of directors at the time of the

Distribution are subject to the prior approval of the Commission;

(3) The Separate Company shall, within six (6) months of the

Distribution, call a shareholder's meeting for the purpose of electing

directors;

(4) No member of the board of directors of The Separate Company,

both at the time of the Distribution and pursuant to any election now

or at any time in the future, shall, at the time of his or her election

or while serving as

[[Page 50305]]

a director of The Separate Company, be an officer, director, or

employee of TCI or LMC or shall hold, or have under his or her

direction or Control, greater than one-tenth of one percent (0.1%) of

the voting power of TCI and one-tenth of one percent (0.1%) of the

Ownership Interest in TCI or greater than one-tenth of one percent

(0.1%) of the voting power of LMC and one-tenth of one percent (0.1%)

of the Ownership Interest in LMC;

(5) No officer, director or employee of TCI or LMC shall

concurrently serve as an officer or employee of The Separate Company.

Provided further, that TCI or LMC employees who are not TCI Control

Shareholders or directors or officers of either Tele-Communications,

Inc. or Liberty Media Corporation may provide to The Separate Company

services contemplated by the attached Transition Services Agreement;

(6) The TCI Control Shareholders shall promptly exchange the shares

of stock received by them in the Distribution for shares of one or more

classes or series of convertible preferred stock of The Separate

Company that shall be entitled to vote only on the following issues on

which a vote of the shareholders of The Separate Company is required: a

proposed merger; consolidation or stock exchange involving The Separate

Company; the sale, lease, exchange or other disposition of all or

substantially all of The Separate Company's assets; the dissolution or

winding up of The Separate Company; proposed amendments to the

corporate charter or bylaws of The Separate Company; proposed changes

in the terms of such classes or series; or any other matters on which

their vote is required as a matter of law (except that, for such other

matters, The Separate Company and the TCI Control Shareholders shall

ensure that the TCI Control Shareholders' votes are apportioned in the

exact ratio as the votes of the rest of the shareholders);

(7) No vote on any of the proposals listed in subparagraph (6)

shall be successful unless a majority of shareholders other than the

TCI Control Shareholders vote in favor of such proposal;

(8) After the Distribution, the TCI Control Shareholders shall not

seek to influence, or attempt to control by proxy or otherwise, any

other Person's vote of The Separate Company stock;

(9) After the Distribution, no officer, director or employee of TCI

or LMC, or any of the TCI Control Shareholders shall communicate,

directly or indirectly, with any officer, director, or employee of The

Separate Company. Provided, however, that the TCI Control Shareholders

may communicate with an officer, director or employee of The Separate

Company when the subject is one of the issues listed in subparagraph 6

on which TCI Control Shareholders are permitted to vote, except that,

when a TCI Control Shareholder seeks to initiate action on a subject

listed in subparagraph 6 on which the TCI Control Shareholders are

permitted to vote, the initial proposal for such action shall be made

in writing. Provided further, that this provision does not apply to

communications by TCI or LMC employees who are not TCI Control

Shareholders or directors or officers of either Tele-Communications,

Inc. or Liberty Media Corporation in the context of providing to The

Separate Company services contemplated by the attached Transition

Services Agreement or to communications relating to the possible

purchase of services from TCI's and LMC's Turner-Related Businesses;

(10) The Separate Company shall not acquire or hold greater than

14.99% of the Fully Diluted Equity of Time Warner. Provided, however,

that, if the TCI Control Shareholders reduce their collective holdings

in The Separate Company to no more than one-tenth of one percent (0.1%)

of the voting power of The Separate Company and one-tenth of one

percent (0.1%) of the Ownership Interest in The Separate Company or

reduce their collective holdings in TCI and LMC to no more than one-

tenth of one percent (0.1%) of the voting power of TCI and one-tenth of

one percent (0.1%) of the Ownership Interest in TCI and one-tenth of

one percent (0.1%) of the voting power of LMC and one-tenth of one

percent (0.1%) of the Ownership Interest in LMC, then The Separate

Company shall not be prohibited by this order from increasing its

holding of Time Warner stock beyond that figure; and

(11) The Separate Company shall not acquire or hold, directly or

indirectly, any Ownership Interest in Time Warner that is entitled to

exercise voting power except (a) a vote of one-one hundredth (\1/100\)

of a vote per share owned, voting with the outstanding common stock,

with respect to the election of directors and (b) with respect to

proposed changes in the charter of Time Warner Inc. or of the

instrument creating such securities that would (i) adversely change any

of the terms of such securities or (ii) adversely affect the rights,

power, or preferences of such securities. Provided, however, that any

portion of The Separate Company's stock in Time Warner that is sold to

an Independent Third Party may be converted into voting stock of Time

Warner. Provided, further, that, if the TCI Control Shareholders reduce

their collective holdings in The Separate Company to no more than one-

tenth of one percent (0.1%) of the voting power of The Separate Company

and one-tenth of one percent (0.1%) of the Ownership Interest in The

Separate Company or reduce their collective holdings in both TCI and

LMC to no more than one-tenth of one percent (0.1%) of the voting power

of TCI and one-tenth of one percent (0.1%) of the Ownership Interest in

TCI and one-tenth of one percent (0.1%) of the voting power of LMC and

one-tenth of one percent (0.1%) of the Ownership Interest in LMC, The

Separate Company's Time Warner stock may be converted into voting stock

of Time Warner.

(D) TCI and LMC shall use their best efforts to obtain a private

letter ruling from the Internal Revenue Service to the effect that the

Distribution will be generally tax-free to both the Liberty Tracking

Stock holders and to TCI under Section 355 of the Internal Revenue Code

of 1986, as amended (``IRS Ruling''). Upon receipt of the IRS Ruling,

TCI and LMC shall have thirty (30) days (excluding time needed to

comply with the requirements of any federal securities and

communications laws and regulations, provided that TCI and LMC shall

use their best efforts to comply with all such laws and regulations) to

carry out the requirements of Paragraph II (A) and (B). Pending the IRS

Ruling, or in the event that TCI and LMC are unable to obtain the IRS

Ruling,

(1) TCI, LMC, Bob Magness and John C. Malone, collectively or

individually, shall not acquire or hold, directly or indirectly, an

Ownership Interest that is more than the lesser of 9.2% of the Fully

Diluted Equity of Time Warner or 12.4% of the actual issued and

outstanding common stock of Time Warner, as determined by generally

accepted accounting principles. Provided, however, that day-to-day

market price changes that cause any such holding to exceed the latter

threshold shall not be deemed to cause the parties to be in violation

of this subparagraph; and

(2) TCI, LMC and the TCI Control Shareholders shall not acquire or

hold any Ownership Interest in Time Warner that is entitled to exercise

voting power except (a) a vote of one-one hundredth (\1/100\) of a vote

per share owned, voting with the outstanding common stock, with respect

to the election of directors and (b) with respect to proposed changes

in the charter of Time Warner Inc. or of the instrument creating such

securities that would (i) adversely change any of the terms of such

[[Page 50306]]

securities or (ii) adversely affect the rights, power, or preferences

of such securities. Provided, however, that any portion of TCI's and

LMC's Interest in Time Warner that is sold to an Independent Third

Party may be converted into voting stock of Time Warner.

In the event that TCI and LMC are unable to obtain the IRS Ruling,

TCI and LMC shall be relieved of the obligations set forth in

subparagraphs (A), (B) and (C).

III

It is further ordered that

After the Distribution, TCI, LMC, Bob Magness and John C. Malone,

collectively or individually, shall not acquire or hold, directly or

indirectly, any voting power of, or other Ownership Interest in, Time

Warner that is more than the lesser of 1% of the Fully Diluted Equity

of Time Warner or 1.35% of the actual issued and outstanding common

stock of Time Warner, as determined by generally accepted accounting

principles (provided, however, that such interest shall not vote except

as provided in Paragraph II(D)(2)), without the prior approval of the

Commission. Provided, further, that day-to-day market price changes

that cause any such holding to exceed the latter threshold shall not be

deemed to cause the parties to be in violation of this Paragraph.

It is further ordered that

(A) For six months after the Closing Date, TCI and Time Warner

shall not enter into any new Programming Service Agreement that

requires carriage of any Turner Video Programming Service on any analog

Tier of TCI's CATVs.

(B) Any Programming Service Agreement entered into thereafter that

requires carriage of any Turner Video Programming Service on TCI's

CATVs on an analog Tier shall be limited in effective duration to five

(5) years, except that such agreements may give TCI the unilateral

right(s) to renew such agreements for one or more five-year periods.

enter into, prior to the Closing Date, agreements that require carriage

on an analog Tier by TCI for no more than five years for each of WTBS

(with the five year period to commence at the time of WTBS' conversion

to Converted WTBS) and Headline News, and such agreements may give TCI

the unilateral right(s) to renew such agreements for one or more five-

year periods.

It is further ordered that

Time Warner shall not, expressly or impliedly:

(A) refuse to make available or condition the availability of HBO

to any MVPD on whether that MVPD or any other MVPD agrees to carry any

Turner-Affiliated Video Programming Service;

(B) condition any Carriage Terms for HBO to any MVPD on whether

that MVPD or any other MVPD agrees to carry any Turner-Affiliated Video

Programming Service;

of CNN, WTBS, or TNT to any MVPD on whether that MVPD or any other MVPD

agrees to carry any TWE-Affiliated Video Programming Service; or

(D) condition any Carriage Terms for each of CNN, WTBS, or TNT to

any MVPD on whether that MVPD or any other MVPD agrees to carry any

TWE-Affiliated Video Programming Service.

It is further ordered that

(A) For subscribers that a Competing MVPD services in the Service

Area Overlap, Time Warner shall provide, upon request, any Turner Video

Programming Service to that Competing MVPD at Carriage Terms no less

favorable, relative to the Carriage Terms then offered by Time Warner

for that Service to the three MVPDs with the greatest number of

subscribers, than the Carriage Terms offered by Turner to Similarly

Situated MVPDs relative to the Carriage Terms offered by Turner to the

three MVPDs with the greatest number of subscribers for that Service on

July 30, 1996. For Turner Video Programming Services not in existence

on July 30, 1996, the pre-Closing Date comparison will be to relative

Carriage Terms offered with respect to any Turner Video Programming

Service existing as of July 30, 1996.

(B) Time Warner shall be in violation of this Paragraph if the

Carriage Terms it offers to the Competing MVPD for those subscribers

outside the Service Area Overlap are set at a higher level compared to

Similarly Situated MVPDs so as to avoid the restrictions set forth in

subparagraph (A).

VII

It is further ordered that

(A) Time Warner shall not require a financial interest in any

National Video Programming Service as a condition for carriage on one

or more Time Warner CATVs.

(B) Time Warner shall not coerce any National Video Programming

Vendor to provide, or retaliate against such a Vendor for failing to

provide exclusive rights against any other MVPD as a condition for

carriage on one or more Time Warner CATVs.

to unreasonably restrain the ability of a Non-Time Warner National

Video Programming Vendor to compete fairly by discriminating in video

programming distribution on the basis of affiliation or nonaffiliation

of Vendors in the selection, terms, or conditions for carriage of video

programming provided by such Vendors.

VIII

It is further ordered that

(A) Time Warner shall collect the following information, on a

quarterly basis:

(1) for any and all offers made to Time Warner's corporate office

by a Non-Time Warner National Video Programming Vendor to enter into or

to modify any Programming Service Agreement for carriage on an Time

Warner CATV, in that quarter:

(a) the identity of the National Video Programming Vendor;

(b) a description of the type of programming;

is no final agreement but the Vendor's initial offer is more than three

months old, the last offer of each side;

(d) any and all commitment(s) to a roll-out schedule, if

applicable, as finally agreed to or, when there is no final agreement

but the Vendor's initial offer is more than three months old, the last

offer of each side;

(e) a copy of any and all Programming Service Agreement(s) as

finally agreed to or, when there is no final agreement but the Vendor's

initial offer is more than three months old, the last offer of each

side; and

(2) on an annual basis for each National Video Programming Service

on Time Warner CATVs, the actual carriage rates on Time Warner CATVs

and

(a) the average carriage rates on all Non-Time Warner CATVs for

each National Video Programming Service that has publicly-available

information from which Penetration Rates can be derived; and

(b) the carriage rates on each of the fifty (50) largest (in total

number of subscribers) Non-Time Warner CATVs for each National Video

Programming Service that has publicly-available information from which

Penetration Rates can be derived.

(B) The information collected pursuant to subparagraph (A) shall be

[[Page 50307]]

provided to each member of TWE's Management Committee on the last day

of March, June, September and December of each year. Provided, however,

that, in the event TWE's Management Committee ceases to exist, the

disclosures required in this Paragraph shall be made to any and all

partners in TWE; or, if there are no partners in TWE, then the

disclosures required in this Paragraph shall be made to the Audit

Committee of Time Warner.

shall annually certify to the Commission that it believes that Time

Warner is in compliance with Paragraph VII of this order.

(D) Time Warner shall retain all of the information collected as

required by subparagraph (A), including information on when and to whom

such information was communicated as required herein in subparagraph

(B), for a period of five (5) years.

It is further ordered that

(A) By February 1, 1997, Time Warner shall execute a Programming

Service Agreement with at least one Independent Advertising-Supported

News and Information National Video Programming Service, unless the

Commission determines, upon a showing by Time Warner, that none of the

offers of Carriage Terms are commercially reasonable.

(B) If all the requirements of either subparagraph (A) or (C) are

met, Time Warner shall carry an Independent Advertising-Supported News

and Information Video Programming Service on Time Warner CATVs at

Penetration Rates no less than the following:

(1) If the Service is carried on Time Warner CATVs as of July 30,

1996, Time Warner must make the Service available:

(a) By July 30, 1997, so that it is available to 30% of the Total

Subscribers of all Time Warner CATVs at that time; and

(b) By July 30, 1999, so that it is available to 50% of the Total

Subscribers of all Time Warner CATVs at that time.

(2) If the Service is not carried on Time Warner CATVs as of July

30, 1996, Time Warner must make the Service available:

(a) By July 30, 1997, so that it is available to 10% of the Total

Subscribers of all Time Warner CATVs at that time;

(b) By July 30, 1999, so that it is available to 30% of the Total

Subscribers of all Time Warner CATVs at that time; and

Subscribers of all Time Warner CATVs at that time.

and Information National Video Programming Service chosen by Time

Warner ceases operating or is in material breach of its Programming

Service Agreement with Time Warner at any time before July 30, 2001,

Time Warner shall, within six months of the date that such Service

ceased operation or the date of termination of the Agreement because of

the material breach, enter into a replacement Programming Service

Agreement with a replacement Independent Advertising-Supported News and

Information National Video Programming Service so that replacement

Service is available pursuant to subparagraph (B) within three months

of the execution of the replacement Programming Service Agreement,

unless the Commission determines, upon a showing by Time Warner, that

none of the Carriage Terms offered are commercially reasonable. Such

replacement Service shall have, six months after the date the first

Service ceased operation or the date of termination of the first

Agreement because of the material breach, contractual commitments to

supply its Service to at least 10 million subscribers on Unaffiliated

MVPDs, or, together with the contractual commitments it will obtain

from Time Warner, total contractual commitments to supply its Service

to 15 million subscribers; if no such Service has such contractual

commitments, then Time Warner may choose from among the two Services

with contractual commitments with Unaffiliated MVPDs for the largest

number of subscribers.

It is further ordered that:

(A) Within sixty (60) days after the date this order becomes final

and every sixty (60) days thereafter until respondents have fully

complied with the provisions of Paragraphs IV(A) and IX(A) of this

order and, with respect to Paragraph II, until the Distribution,

respondents shall submit jointly or individually to the Commission a

verified written report or reports setting forth in detail the manner

and form in which they intend to comply, are complying, and have

complied with Paragraphs II, IV(A) and IX(A) of this order.

(B) One year (1) from the date this order becomes final, annually

for the next nine (9) years on the anniversary of the date this order

becomes final, and at other times as the Commission may require,

respondents shall file jointly or individually a verified written

report or reports with the Commission setting forth in detail the

manner and form in which they have complied and are complying with each

Paragraph of this order.

It is further ordered that respondents shall notify the Commission

at least thirty (30) days prior to any proposed change in respondents

(other than this Acquisition) such as dissolution, assignment, sale

resulting in the emergence of a successor corporation, or the creation

or dissolution of subsidiaries or any other change in the corporation

that may affect compliance obligations arising out of the order.

XII

It is further ordered that, for the purpose of determining or

securing compliance with this order, and subject to any legally

recognized privilege, upon written request, respondents shall permit

any duly authorized representative of the Commission:

1. Access, during regular business hours upon reasonable notice and

in the presence of counsel for respondents, to inspect and copy all

books, ledgers, accounts, correspondence, memoranda and other records

and documents in the possession or under the control of respondents

relating to any matters contained in this order; and

2. Upon five days' notice to respondents and without restraint or

interference from it, to interview officers, directors, or employees of

respondents, who may have counsel present, regarding such matters.

XIII

It is further ordered that this order shall terminate ten (10)

years from the date this order becomes final.

Appendix I

Interim Agreement

This Interim Agreement is by and between Time Warner Inc. (``Time

Warner''), a corporation organized, existing, and doing business under

and by virtue of the law of the State of Delaware, with its office and

principal place of business at New York, New York; Turner Broadcasting

System, Inc. (``Turner''), a corporation organized, existing, and doing

business under and by virtue of the law of the State of Georgia with

its office and principal place of business at Atlanta, Georgia; Tele-

Communications, Inc. (``TCI''), a corporation organized, existing, and

doing business under and by virtue of

[[Page 50308]]

the law of the State of Delaware, with its office and principal place

of business located at Englewood, Colorado; Liberty Media Corp.

(``LMC''), a corporation organized, existing and doing business under

and by virtue of the law of the State of Delaware, with its office and

principal place of business located at Englewood, Colorado; and the

Federal Trade Commission (``Commission''), an independent agency of the

United States Government, established under the Federal Trade

Commission Act of 1914, 15 U.S.C. 41 et seq.

Whereas Time Warner entered into an agreement with Turner for Time

Warner to acquire the outstanding voting securities of Turner, and TCI

and LMC proposed to acquire stock in Time Warner (hereinafter ``the

Acquisition'');

Whereas the Commission is investigating the Acquisition to

determine whether it would violate any statute enforced by the

Commission;

Whereas TCI and LMC are willing to enter into an Agreement

Containing Consent Order (hereafter ``Consent Order'') requiring them,

inter alia, to divest TCI's and LMC's Interest in Time Warner and TCI's

and LMC's Turner-Related Businesses, by contributing those interests to

a separate corporation, The Separate Company, the stock of which will

be distributed to the holders of Liberty Tracking Stock (``the

Distribution''), but, in order to fulfill paragraph II(D) of that

Consent Order, TCI and LMC must apply now to receive an Internal

Revenue Service ruling as to whether the Distribution will be generally

tax-free to both the Liberty Tracking Stock holders and to TCI under

Section 355 of the Internal Revenue Code of 1986, as amended (``IRS

Ruling'');

Whereas ``TCI's and LMC's Interest in Time Warner`` means all of

the economic interest in Time Warner to be acquired by TCI and LMC,

including the right of first refusal with respect to Time Warner stock

to be held by R. E. Turner, III, pursuant to the Shareholders Agreement

dated September 22, 1995 with LMC or any successor agreement;

Whereas ``TCI's and LMC's Turner-Related Businesses'' means the

businesses conducted by Southern Satellite Systems, Inc., a subsidiary

of TCI which is principally in the business of distributing WTBS to

MVPDs;

Whereas ``Liberty Tracking Stock'' means Tele-Communications, Inc.

Series A Liberty Media Group Common Stock and Tele-Communications, Inc.

Series B Liberty Media Group Common Stock;

Whereas Time Warner, Turner, TCI, and LMC are willing to enter into

a Consent Order requiring them, inter alia, to forego entering into

certain new programming service agreements for a period of six months

from the date that the parties close this Acquisition (``Closing

Date''), but, in order to comply more fully with that requirement, they

must cancel now the two agreements that were negotiated as part of this

Acquisition: namely, (1) the September 15, 1995, program service

agreement between TCI's subsidiary, Satellite Services, Inc. (``SSI''),

and Turner and (2) the September 14, 1995, cable carriage agreement

between SSI and Time Warner for WTBS (hereafter ``Two Programming

Service Agreements'');

Whereas if the Commission accepts the attached Consent Order, the

Commission is required to place the Consent Order on the public record

for a period of at least sixty (60) days and may subsequently withdraw

such acceptance pursuant to the provisions of Rule 2.34 of the

Commission's Rules of Practice and Procedure, 16 C.F.R. 2.34;

Whereas the Commission is concerned that if the parties do not,

before this order is made final, apply to the IRS for the IRS Ruling

and cancel the Two Programming Service Agreements, compliance with the

operative provisions of the Consent Order might not be possible or

might produce a less than effective remedy;

Whereas Time Warner, Turner, TCI, and LMC's entering into this

Agreement shall in no way be construed as an admission by them that the

Acquisition is illegal;

Whereas Time Warner, Turner, TCI, and LMC understand that no act or

transaction contemplated by this Agreement shall be deemed immune or

exempt from the provisions of the antitrust laws or the Federal Trade

Commission Act by reason of anything contained in this Agreement;

Now, therefore, upon understanding that the Commission has not yet

determined whether the Acquisition will be challenged, and in

consideration of the Commission's agreement that, unless the Commission

determines to reject the Consent Order, it will not seek further relief

from Time Warner, Turner, TCI, and LMC with respect to the Acquisition,

except that the Commission may exercise any and all rights to enforce

this Agreement and the Consent Order to which this Agreement is annexed

and made a part thereof, the parties agree as follows:

1. Within thirty (30) days of the date the Commission accepts the

attached Consent Order for public comment, TCI and LMC shall apply to

the IRS for the IRS Ruling.

2. On or before the Closing Date, Time Warner, Turner and TCI shall

cancel the Two Programming Service Agreements.

3. This Agreement shall be binding when approved by the Commission.

Analysis of Proposed Consent Order to Aid Public Comment

I. Introduction

The Federal Trade Commission has accepted for public comment from

Time Warner Inc. (``Time Warner''), Turner Broadcasting System, Inc.

(``Turner''), Tele-Communications, Inc. (``TCI''), and Liberty Media

Corporation (``LMC'') (collectively ``the proposed respondents'') an

Agreement Containing Consent Order (``the proposed consent order'').

The Commission has also entered into an Interim Agreement that requires

the proposed respondents to take specific action during the public

comment period.

The proposed consent order is designed to remedy likely antitrust

effects arising from Time Warner's acquisition of Turner as well as

related transactions, including TCI's proposed ownership interest in

Time Warner and long-term cable television programming service

agreements between Time Warner and TCI for post-acquisition carriage by

TCI of Turner programming.

II. Description of the Parties, the Acquisition and Related

Transactions

Time Warner is a leading provider of cable networks and a leading

distributor of cable television. Time Warner Entertainment (``TWE''), a

partnership in which Time Warner holds the majority interest, owns HBO

and Cinemax, two premium cable networks. Time Warner and Time Warner

Cable, a subsidiary of TWE, are collectively the nation's second

largest distributor of cable television and serve approximately 11.5

million cable subscribers or approximately 17 percent of U.S. cable

television households.

Turner is a leading provider of cable networks. Turner owns the

following ``marquee'' or ``crown jewel'' cable networks: Cable News

Network (``CNN''), Turner Network Television (``TNT''), and TBS

SuperStation (referred to as ``WTBS''). Turner also owns Headline News

(``HLN''), Cartoon Network, Turner Classic Movies, CNN International

USA and CNN Financial Network.

TCI is the nation's largest operator of cable television systems,

serving approximately 27 percent of all U.S. cable television

households. LMC, a subsidiary of TCI, is a leading provider of cable

programming. TCI also owns interests in a large number of cable

networks.

[[Page 50309]]

In September 1995, Time Warner and Turner entered into an agreement

for Time Warner to acquire the approximately 80 percent of the

outstanding shares in Turner that it does not already own. TCI and LMC

have an approximately 24 percent existing interest in Turner. By

trading their interest in Turner for an interest in Time Warner, TCI

and LMC would acquire approximately a 7.5 percent interest in the fully

diluted equity of Time Warner as well as the right of first refusal on

the approximately 7.4 percent interest in Time Warner that R. E.

Turner, III, chairman of Turner, would receive as a result of this

acquisition. Although Time Warner has a `poison pill' that would

prevent TCI from acquiring more than a certain amount of stock without

triggering adverse consequences, that poison pill would still allow TCI

to acquire approximately 15 percent of the Fully Diluted Equity, and if

the poison pill were to be altered or waived, TCI could acquire more

than 15 percent of the fully diluted equity of Time Warner. Also in

September 1995, Time Warner entered into two long-term mandatory

carriage agreements referred to as the Programming Service Agreements

(PSAs). Under the terms of these PSAs, TCI would be required, on

virtually all of its cable television systems, to carry CNN, HLN, TNT

and WTBS for a twenty-year period.

III. The Complaint

The draft complaint accompanying the proposed consent order and the

Interim Agreement alleges that the acquisition, along with related

transactions, would allow Time Warner unilaterally to raise the prices

of cable television programming and would limit the ability of cable

television systems that buy such programming to take responsive action

to avoid such price increases. It would do so, according to the draft

complaint, both through horizontal combination in the market for cable

programming (in which Time Warner, after the acquisition, would control

about 40% of the market) and through higher entry barriers into that

market as a result of the vertical integration (by merger and contract)

between Turner's programming interests and Time Warner's and TCI's

cable distribution interests. The complaint alleges that TCI and Time

Warner, respectively, operate the first and second largest cable

television systems in the United States, reaching nearly half of all

cable households; that Time Warner would gain the power to raise prices

on its own and on Turner's programming unilaterally; that TCI's

ownership interest in Time Warner and concurrent long term contractual

obligations to carry Turner programming would undermine TCI's incentive

to sign up better or less expensive non-Time Warner programming,

preventing rivals to the combined Time Warner and Turner from achieving

sufficient distribution to realize economies of scale and thereby to

erode Time Warner's market power; that barriers to entry into

programming and into downstream retail distribution markets would be

raised; and that substantial increases in wholesale programming costs

for both cable systems and alternative service providers--including

direct broadcast satellite service and other forms of non-cable

distribution--would lead to higher service prices and fewer

entertainment and information sources for consumers.

The Commission has reason to believe that the acquisition and

related transactions, if successful, may have anticompetitive effects

and be in violation of Section 7 of the Clayton Act and Section 5 of

the Federal Trade Commission Act.

IV. Terms of the Proposed Consent Order

The proposed consent order would resolve the alleged antitrust

concerns by breaking down the entry barriers that would otherwise be

erected by the transaction. It would do so by: (1) Requiring TCI to

divest all of its ownership interests in Time Warner or, in the

alternative, capping TCI's ownership of Time Warner stock and denying

TCI and its controlling shareholders the right to vote any such Time

Warner stock; (2) canceling the PSAs; (3) prohibiting Time Warner from

bundling Time Warner's HBO with any Turner networks and prohibiting the

bundling of Turner's CNN, TNT, and WTBS with any Time Warner networks;

(4) prohibiting Time Warner from discriminating against rival

Multichannel Video Programming Distributors (``MVPDs'') in the

provision of Turner programming; (5) prohibiting Time Warner from

foreclosing rival programmers from access to Time Warner's

distribution; and (6) requiring Time Warner to carry a 24-hour all news

channel that would compete with Turner's CNN. The following sections

discuss the primary provisions of the proposed consent order in more

detail.

A. TCI Will Divest Its Interest in Time Warner or Accept a Capped

Nonvoting Interest. The divestiture provision of the proposed consent

order (Paragraph II) requires TCI and LMC to divest their collective

ownership of approximately 7.5 percent of the fully diluted shares in

Time Warner - the amount they will obtain from Time Warner in exchange

for their 24 percent ownership interest in Turner--to a different

company (``The Separate Company'') that will be spun off by TCI and

LMC. The stock of The Separate Company would be distributed to all of

the shareholders of TCI's LMC subsidiary. Because that stock would be

freely tradeable on an exchange, the ownership of The Separate Company

would diverge over time from the ownership of the Liberty Media

Tracking Stock (and would, at the outset, be different from the

ownership of TCI). TCI would therefore breach its fiduciary duty to its

shareholders if it forestalled programming entry that could benefit TCI

as a cable system operator in order to benefit Time Warner's interests

as a programmer.

In addition to the divestiture provisions ensuring that TCI will

have no incentive to forgo its own best interests in order to favor

those of Time Warner, the proposed consent order contains provisions to

ensure that the transaction will not leave TCI or its management in a

position to influence Time Warner to alter its own conduct in order to

benefit TCI's interests. Absent restrictions in the consent order, the

TCI Control Shareholders (John C. Malone, Bob Magness, and Kearns-

Tribune Corporation) would have a controlling share of the voting power

of The Separate Company. To prevent those shareholders from having

significant influence over Time Warner's conduct, the proposed consent

order contains the following provisions that will wall off the TCI

Control Shareholders from influencing the officers, directors, and

employees of The Separate Company and its day-to-day operations:

The Commission must approve the initial board of directors

of The Separate Company;

Within six months of the distribution of The Separate

Company's stock, the stockholders (excluding the TCI Control

Shareholders) of The Separate Company must elect new directors;

Members of the board of directors of The Separate Company

are prohibited from serving as officers, directors, or employees of TCI

or LMC, or holding or controlling greater than one-tenth of one percent

(0.1%) of the ownership in or voting power of TCI or LMC;

Officers, directors or employees of TCI or LMC are

prohibited from concurrently serving as officers, directors, or

employees of The Separate Company, with a narrow exception so that TCI

or LMC employees may provide limited operational services to The

Separate Company;

[[Page 50310]]

The TCI Control Shareholders are prohibited from voting

(other than a de minimis voting share necessary for tax purposes) any

stock of The Separate Company to elect the board of directors or on

other matters. There are limited exceptions for voting on major issues

such as a proposed merger or sale of The Separate Company, the

disposition of all or substantially all of The Separate Company's

assets, the dissolution of The Separate Company, or proposed changes in

the corporate charter or bylaw of The Separate Company. However, no

vote on any of these excepted issues would be successful unless a

majority of shareholders other than the TCI Control Shareholders vote

in favor of such proposal;

The TCI Control Shareholders are prohibited from seeking

to influence, or attempting to control by proxy or otherwise, any other

person's vote of The Separate Company's stock;

Officers, directors, and employees of TCI or LMC, or any

of the TCI Control Shareholders are prohibited from communicating with

any officer, director, or employee of The Separate Company except on

the limited matters on which they are permitted to vote. Further

restrictions require that, in order for a TCI Control Shareholder to

seek to initiate action on an issue on which they are entitled to vote,

they must do so in writing;

The Separate Company is prohibited from acquiring more

than 14.99% of the fully diluted equity shares of Time Warner, with

exceptions in the event that the TCI Control Shareholders sell their

stock in The Separate Company or in TCI and LMC; and

The Separate Company is prohibited from voting its shares

(other than a de minimis voting share necessary for tax purposes) in

Time Warner, except that such shares can become voting if The Separate

Company sells them to an Independent Third Party or in the event that

the TCI Control Shareholders sell their stock in The Separate Company

or in TCI and LMC.

The Commission has reason to believe that the divestiture of TCI's

and LMC's interest in Time Warner to The Separate Company is in the

public interest. The required divestiture of the Time Warner stock by

TCI and LMC and the ancillary restrictions outlined above are

beneficial to consumers because (1) they would restore TCI's otherwise

diminished incentives to carry cable programming that would compete

with Time Warner's cable programming; and (2) they would eliminate

TCI's and LMC's ability to influence the operations of Time Warner.

The proposed consent order also requires TCI and LMC to apply to

the Internal Revenue Service (``IRS'') for a ruling that the

divestiture of TCI's and LMC's interest in Time Warner to The Separate

Company would be generally tax-free. Upon receipt of the IRS Ruling,

TCI and LMC has thirty days to transfer its Time Warner stock to The

Separate Company. After TCI and LMC divest this interest in Time Warner

to The Separate Company, TCI, LMC, Magness and Malone are prohibited

from acquiring any stock in Time Warner, above a collective de minimis

nonvoting amount, without the prior approval of the Commission.

Pending the ruling by the IRS, or in the event that the TCI and LMC

are unable to obtain such an IRS ruling, (1) TCI, LMC, John C. Malone

and Bob Magness, collectively and individually, are capped at level no

more than the lesser of 9.2 percent of the fully diluted equity of Time

Warner or 12.4% of the actual issued and outstanding common stock of

Time Warner, as determined by generally accepted accounting principles;

and (2) TCI, LMC and the TCI Control Shareholders' interest in Time

Warner must be nonvoting (other than a de minimis voting share

necessary for tax purposes), unless the interest is sold to an

Independent Third Party. This nonvoting cap is designed to restore

TCI's otherwise diminished incentives to carry cable programming that

would compete with Time Warner's cable programming as well as to

prevent TCI from seeking to influence Time Warner's competitive

behavior.

B. TCI's Long-Term Carriage Agreement With Turner Is Canceled. As

part of the transaction, Time Warner and TCI entered into PSAs that

required TCI to carry Turner programming for the next twenty years, at

a price set at the lesser of 85% of the industry average price or the

lowest price given to any distributor. According to the complaint, the

PSAs would tend to prevent Time Warner's rivals from achieving

sufficient distribution to threaten Time Warner's market power by

locking up scarce TCI channel space for an extended period of time. By

negotiating this arrangement as part of the Turner acquisition, and not

at arms length, Time Warner was able to compensate TCI for helping to

achieve this result. Under the Interim Agreement, TCI and Time Warner

are obligated to cancel the PSAs. Following cancellation of the PSAs,

there would be a six month ``cooling off'' period during which Time

Warner and TCI could not enter into new mandatory carriage requirements

on an analog tier for Turner programming.1 This cooling off period

will ensure that such agreements are negotiated at arm's length.

Thereafter, the parties cannot enter into any agreement that would

secure Time Warner guaranteed mandatory carriage rights on TCI analog

channel capacity for more than five-year periods. This restriction

would not prevent TCI from having renewal options to extend for

additional five-year periods, but would prohibit Time Warner from

obligating TCI to carry a Time Warner channel for more than five years.

The only exceptions to the cooling off period for Time Warner/TCI

carriage agreements would relate to WTBS and HLN on which there are no

existing contracts. Any such carriage agreements for those services

would also be limited to five years.

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\1\Analog technology is currently used for cable programming

distribution and places significant limitations on the addition of

new channels. Digital technology, which is still in its infancy and

not currently a competitive factor in video distribution, has the

potential to expand capacity sixfold, thereby substantially

alleviating capacity constraints on the digital tier.

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In requiring the cancellation of the PSAs and prescribing shorter

renewal option periods, the Commission has not concluded that any such

long-term programming agreements are anticompetitive in and of

themselves or would violate the antitrust laws standing alone. Rather,

the Commission has concluded that the PSAs are anticompetitive in the

context of the entire transaction arising from the merger and ownership

of Time Warner stock by TCI and in light of those two companies'

significant market shares in both programming and cable service. The

divestiture and rescission requirements would therefore sever

complementary ownership and long-term contractual links between TCI and

Time Warner. This would restore incentives for TCI, a cable operator

serving nearly a third of the nation's cable households, to place non-

Time Warner programming on its cable systems, in effect disciplining

any market power resulting from a combination of Time Warner and Turner

programming.

C. Time Warner is Barred From Bundling HBO with any Turner

Programming and CNN, TNT and WTBS with Time Warner Programming.

Paragraph V bars Time Warner from bundling HBO with Turner channels--

that is, making HBO available, or available on more favorable terms,

only if the purchaser agrees to take the Turner channels. Time Warner

is also barred from bundling CNN, TNT, or

[[Page 50311]]

WTBS with Time Warner channels. This provision applies to new

programming as well as existing programming. This provision is designed

to address concerns that the easiest way the combined firm could exert

substantially greater negotiating leverage over cable operators is by

combining all or some of such ``marquee'' services and offering them as

a package or offering them along with unwanted programming. Because the

focus of the provision is on seeking to prevent the additional market

power arising from this combination of programming, this provision does

not prevent bundling engaged in pre-merger--that is, Turner channels

with Turner channels and pre- merger Time Warner channels with Time

Warner channels. Rather, it is narrowly targeted at Time Warner's use

of its newly-acquired stable of ``marquee'' channels to raise prices by

bundling.

The Commission emphasizes that, in general, bundling often benefits

customers by giving firms an incentive to increase output and serve

buyers who would otherwise not obtain the product or service. The

Commission, however, believes that, in the context of this transaction,

the limited bar on bundling is a prudent measure that will prevent

actions by Time Warner that are likely to harm competition.

D. Time Warner is Barred from Price Discrimination Against Rival

MVPDs. Paragraph VI is designed to prevent Time Warner from using its

larger stable of programming interests to disadvantage new entrants

into the distribution of cable programs such as Direct Broadcast

Services, wireless systems, and systems created by telephone companies.

The complaint alleges that, as a programmer that does not own its own

distribution, Turner pre- merger had no incentive to and did not

generally charge significantly higher prices to new MVPD entrants

compared to the prices offered to established MVPDs. Under the terms of

Paragraph VI, the preacquisition range of pricing offered by Turner is

used as a benchmark to prevent Time Warner from discriminating against

the rival distributors of programming in its service areas, and Time

Warner may not increase the range of pricing on Turner programming

services between established MVPDs and new entrants any more than

Turner had pre-merger. Because Time Warner's incentive to discriminate

against MVPDs stems from an incentive to protect its own cable company

from those in or entering its downstream distribution areas, this

provision only covers competitors in Time Warner's distribution areas.

Because the price charged by Time Warner as a programmer to Time

Warner's cable systems is, to some extent, an internal transfer price,

the proposed consent order uses as a benchmark the price charged to the

three largest cable system operators nationwide rather than the price

charged to Time Warner. This provision, therefore, compares the price

charged to Time Warner's competitors in the overlap areas with the

price charged to the three largest cable system operators, and asks

whether the spread between the two is any greater than the pre-merger

spread between a similarly situated MVPD and the three largest cable

system operators. It thus focuses on the greater possibility for price

discrimination against new MVPD entrants arising directly as a result

of this merger. It both ensures that Time Warner's additional market

power as a result of this merger does not result in higher prices to

new MVPD entrants, while it narrowly protects only those new entrants

that Time Warner may have an incentive to harm.

E. Conduct and Reporting Requirements Designed to Ensure that Time

Warner Cable Does Not Discriminatorily Deny Carriage to Unaffiliated

Programmers. The order has two main provisions designed to address

concerns that this combination increases Time Warner's incentives to

disadvantage unaffiliated programmers in making carriage decisions for

its own cable company. Paragraph VII, drawn from statutory provisions

in the 1992 Cable Act, is designed to prevent Time Warner from

discriminating in its carriage decisions so as to exclude or

substantially impair the ability of an unaffiliated national video

programmer to enter into or to compete in the video programming market.

The Commission views these provisions as working in tandem with the

collection and reporting requirements contained in Paragraph VIII.

Under that paragraph, Time Warner is required to collect and maintain

information about programming offers received and the disposition of

those offers as well as information comparing Time Warner cable

systems' carriage rates to carriage rates on other MVPDs for national

video programming services. Such information would be reported on a

quarterly basis to the management committee of TWE. TWE's management

committee includes representatives of U S West since U S West is a

minority partner in TWE. TWE owns or operates all of Time Warner's

cable systems. Because U S West's incentives would be to maximize

return to TWE's cable systems rather than to Time Warner's wholly owned

programming interests, it would have strong incentives to alert the

Commission to actions by Time Warner that favored Time Warner's wholly

owned programming interests at the expense of Time Warner cable

systems' profitability. Such information would also be available for

inspection independently by the Commission. Furthermore, Time Warner's

General Counsel responsible for cable systems is required to certify

annually to the Commission its compliance with the substantive

prohibitions in Paragraph VII.

F. Time Warner Cable Agrees to Carry CNN Rival. Of the types of

programming in which the post-merger Time Warner will have a leading

position, the one with the fewest existing close substitutes is the

all-news segment, in which CNN is by far the most significant player.

There are actual or potential entrants that could in the future erode

CNN's market power, but their ability to do so is partly dependent on

their ability to secure widespread distribution. Without access to Time

Warner's extensive cable holdings, such new entry may not be

successful. Time Warner's acquisition of CNN gives it both the ability

and incentive to make entry of competing news services more difficult,

by denying them access to its extensive distribution system. To remedy

this potential anticompetitive effect, Time Warner would be required to

place a news channel on certain of its cable systems under Paragraph IX

of the proposed agreement. The rate of roll-out and the final

penetration rate is set at levels so as not to interfere with Time

Warner's carriage of other programming. It is set at such a level that

Time Warner may continue carrying any channel that it is now carrying,

may add any channel that it is contractually committed to carry in the

future, and may continue any plans it has to carry unaffiliated

programming in the future. It limits only Time Warner's ability to give

effect to its incentive to deny access even to a news channel that does

not interfere with such commitments or plans. Time Warner has committed

to achieve penetration of 50% of total basic subscribers by July 30,

1999, if it seeks to fulfill this provision by increasing carriage for

an existing channel, or to achieve penetration of 50% of total basic

subscribers by July 30, 2001, if it seeks to fulfill this provision by

carrying a channel not currently carried by Time Warner. This shorter

period is possible in the former case because, to the extent that Time

Warner is already committed to carry the channel on a portion of Time

Warner's systems, less additional

[[Page 50312]]

capacity would need to be found in order to achieve the required

penetration. On the other hand, the longer period if a new news service

is selected assures that an existing news service or other service need

not be displaced to make room for the new service.

This provision was crafted so as to give Time Warner flexibility in

choosing a new news channel, without undermining the Commission's

competitive concern that the chosen service have the opportunity to

become a strong competitor to CNN. To ensure that the competing news

channel is competitively significant, the order obligates Time Warner

to choose a news service that will have contractual commitments with

unaffiliated cable operators to reach 10 million subscribers by

February 1, 1997. Together with Time Warner's commitments required by

the proposed order, such a service would have commitments for a total

of approximately 15 million subscribers. In the alternative, Time

Warner could take a service with a smaller unaffiliated subscriber

base, if it places the service on more of its own systems in order to

assure that the service's total subscribers would reach 15 million. In

order to attract advertisers and become a competitive force, a news

service must have a critical mass of subscribers. The thresholds

contained in this order give Time Warner flexibility while ensuring

that the service selected has enough subscribers to have a credible

opportunity to become an effective competitor. The February 1, 1997,

date was selected so as to give competitive news services an

opportunity to achieve the required number of subscribers.

Accordingly, this provision should not interfere with Time Warner's

plans to carry programming of its choosing or unduly involve the

Commission in Time Warner's choice of a new service. It is analogous to

divestiture of one channel on some cable systems and is thus far less

burdensome to Time Warner than the typical antitrust remedy which would

require that Time Warner divest some or all of cable systems in their

entirety. The Commission, however, recognizes that this provision is

unusual and invites public comment on the appropriateness of such a

requirement.

V. Opportunity for Public Comment

The proposed consent order has been placed on the public record for

60 days for reception of comments from interested persons. Comments

received during this period will become part of the public record.

After 60 days, the Commission will again review the agreement and

comments received, and will decide whether it should withdraw from the

agreement or make final the order contained in the agreement.

By accepting the consent order subject to final approval, the

Commission anticipates that the competitive problems alleged in the

complaint will be resolved. The purpose of this analysis is to invite

and facilitate public comment concerning the consent order. It is not

intended to constitute an official interpretation of the agreement and

proposed order or in any way to modify their terms.

Benjamin I. Berman,

Acting Secretary.

Separate Statement of Chairman Pitofsky, and Commissioners Steiger and

Varney In the Matter of Time Warner Inc., File No. 961-0004

The proposed merger and related transactions among Time Warner,

Turner, and TCI involve three of the largest firms in cable programming

and delivery--firms that are actual or potential competitors in many

aspects of their businesses. The transaction would have merged the

first and third largest cable programmers (Time Warner and Turner). At

the same time it would have further aligned the interests of TCI and

Time Warner, the two largest cable distributors. Finally, the

transaction as proposed would have greatly increased the level of

vertical integration in an industry in which the threat of foreclosure

is both real and substantial.1 While the transaction posed

complicated and close questions of antitrust enforcement, the

conclusion of the dissenters that there was no competitive problem at

all is difficult to understand.

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\1\ Both Congress and the regulators have identified problems

with the effects of vertical foreclosure in this industry. See

generally James W. Olson and Lawrence J. Spiwak, Can Short-term

Limits on Strategic Vertical Restraints Improve Long-term Cable

industry Market Performance?, 13 Cardozo Arts & Entertainment Law

Journal 283 (1995). Enforcement action in this case is wholly

consistent with the goals of Congress in enacting the 1992 Cable

Act: providing greater access to programming and promoting

competition in local cable markets.

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Many of the concerns raised in the dissenting Commissioners

statements are carefully addressed in the analysis to aid public

comment. We write to clarify our views on certain specific issues

raised in the dissents.

Product market. The dissenting Commissioners suggest that the

product market alleged, ``the sale of Cable Television Programming

Services to MVPDs (Multichannel Video Programming Distributors),''

cannot be sustained. The facts suggest otherwise. Substantial evidence,

confirmed in the parties' documents and testimony, as well as documents

and sworn statements from third-parties, indicated the existence of an

all cable television market. Indeed, there was significant evidence of

competitive interaction in terms of carriage, promotions and marketing

support, subscriber fees, and channel position between different

segments of cable programming, including basic and premium channel

programming. Cable operators look to all types of cable programming to

determine the proper mix of diverse content and format to attract a

wide range of subscribers.

Although a market that includes both CNN and HBO may appear

somewhat unusual on its face, the Commission was presented here with

substantial evidence that MVPDs require access to certain ``marquee''

channels, such as HBO and CNN, to retain existing subscribers or expand

their subscriber base. Moreover, we can not concur that evidence in the

record supports Commissioner Azcuenaga's proposed market definition,

which would segregate offerings into basic and premium cable

programming markets.

Entry. Although we agree that entry is an important factor, we

cannot concur with Commissioner Azcuenaga's overly generous view of

entry conditions in this market. While new program channels have

entered in the past few years, these channels have not become

competitively significant. None of the channels that has entered since

1991 has acquired more than a 1% market share.

Moreover, the anticompetitive effects of this acquisition would

have resulted from one firm's control of several marquee channels. In

that aspect of the market, entry has proven slow and costly. The

potential for new entry in basic services cannot guarantee against

competitive harm. To state the matter simply, the launch of a new

``Billiards Channel,'' ``Ballet Channel,'' or the like will barely make

a ripple on the shores of the marquee channels through which Time

Warner can exercise market power.

Technology. Commissioner Azcuenaga also seems to suggest that the

Commission has failed to recognize the impact of significant

technological changes in the market, such as the emergence of new

delivery systems such as direct broadcast satellite networks

(``DBS'').2 We agree that these alternative technologies may

someday become a significant competitive force

[[Page 50313]]

in the market. Indeed, that prospect is one of the reasons the

Commission has acted to prevent Time Warner from being able to

disadvantage these competitors by discriminating in access to

programming.

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\2\ DBS providers are included as participants in the relevant

product market.

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But to suggest that these technologies one day may become more

widespread does not mean they currently are, or in the near future will

be, important enough to defeat anticompetitive conduct. Alternative

technologies such as DBS have only a small foothold in the market,

perhaps a 3% share of total subscribers. Moreover, DBS is more costly

and lacks the carriage of local stations. It seems rather unlikely that

the emerging DBS technology is sufficient to prevent the competitive

harm that would have arisen from this transaction.

Horizontal competitive effects. Although Commissioner Starek

presents a lengthy argument on why we need not worry about the

horizontal effects of the acquisition, the record developed in this

investigation strongly suggests anticompetitive effects would have

resulted without remedial action. This merger would combine the first

and third largest providers of cable programming, resulting in a merged

firm controlling over 40% of the market, and several of the key marquee

channels including HBO and CNN. The horizontal concerns are

strengthened by the fact that Time Warner and TCI are the two largest

MVPDs in the country. The Commission staff received an unprecedented

level of concern from participants in all segments of the market about

the potential anticompetitive effects of this merger.

One of the most frequent concerns expressed was that the merger

heightens the already formidable entry barriers into programming by

further aligning the incentives of both Time Warner and TCI to deprive

entrants of sufficient distribution outlets to achieve the necessary

economies of scale. The proposed order addresses the impact on entry

barriers as follows. First, the prohibition on bundling would deter

Time Warner from using the practice to compel MVPDs to accept unwanted

channels which would further limit available channel capacity to non-

Time Warner programmers. Second, the conduct and reporting requirements

in paragraphs VII and VIII provide a mechanism for the Commission to

become aware of situations where Time Warner discriminates in handling

carriage requests from programming rivals.

Third, the proposed order reduces entry barriers by eliminating the

programming service agreements (PSAs), which would have required TCI to

carry certain Turner networks until 2015, at a price set at the lower

of 85% of the industry average price or the lowest price given to any

other MVPD. The PSAs would have reduced the ability and incentives of

TCI to handle programming from Time Warner's rivals. Channel space on

cable systems is scarce. If the PSAs effectively locked up significant

channel space on TCI, the ability of rival programmers to enter would

have been harmed. This effect would have been exacerbated by the

unusually long duration of the agreement and the fact that TCI would

have received a 15% discount over the most favorable price given to any

other MVPD. Eliminating the twenty-year PSAs and restricting the

duration of future contracts between TCI and Time Warner would restore

TCI's opportunities and incentives to evaluate and carry non-Time

Warner programming.

We believe that this remedy carefully restricts potential

anticompetitive practices, arising from this acquisition, that would

have heightened entry barriers.

Vertical foreclosure. The complaint alleges that post-acquisition

Time Warner and TCI would have the power to: (1) Foreclose unaffiliated

programming from their cable systems to protect their programming

assets; and (2) disadvantage competing MVPDs, by engaging in price

discrimination. Commissioner Azcuenaga contends that Time Warner and

TCI lack the incentives and the ability to engage in either type of

foreclosure. We disagree.

First, it is important to recognize the degree of vertical

integration involved. Post-merger Time Warner alone would control more

than 40% of the programming assets (as measured by subscriber revenue

obtained by MVPDs). Time Warner and TCI, the nation's two largest

MVPDs, control access to about 44% of all cable subscribers. The case

law have found that these levels of concentration can be

problematic.3

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\3\ See Ash Grove Cement Co. v. FTC, 577 F2d 1368 (9th Cir.

1978); Mississippi River Corp. v. FTC, 454 F.2d 1083 (8th Cri.

1972); United States Steel Corp. v. FTC, 426 F.2d 592 (6th Cir.

1970); see generally Herbert Hovenkamp, Federal Antitrust Policy

Sec. 9.4 (1994).

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Second, the Commission received evidence that these foreclosure

threats were real and substantial. There was clearly reason to believe

that this acquisition would increase the incentives to engage in this

foreclosure without remedial action. For example, the launch of a new

channel that could achieve marquee status would be almost impossible

without distribution on either the Time Warner or TCI cable systems.

Because of the economies of scale involved, the successful launch of

any significant new channel usually requires distribution on MVPDs that

cover 40-60% of subscribers.

Commissioner Starek suggests that we need not worry about

foreclosure because there are sufficient number of unaffiliated

programmers and MVPDs so that each can survive by entering into

contracts. With all due respect, this view ignores the competitive

realities of the marketplace. TCI and Time Warner are the two largest

MVPDs in the U.S. with market shares of 27% and 17% respectively.4

Carriage on one or both systems is critical for new programming to

achieve competitive viability. Attempting to replicate the coverage of

these systems by lacing together agreements with the large number of

much smaller MVPDs is costly and time consuming.5 The Commission

was presented with evidence that denial of coverage on the Time Warner

and TCI systems could further delay entry of potential marquee channels

for several years.

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\4\ They are substantially larger than the next largest MVPD,

Continental, which has an approximately 6% market share.

\5\ See U.S. Department of Justice Horizontal Merger Guidelines,

para. 13,103 Trade Cas. (CCH) at 20,565-66, Secs. 4.2 4,21(June 14,

1984), incorporation in U.S. Department of Justice and Federal Trade

Commission Horizontal Merger Guidelines, para. 13,104 Trade Cas.

(CCH) (Apirl 7, 1992).

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TCI ownership of Time Warner. Commissioner Azcuenaga suggests that

TCI's potential acquisition of a 15% interest in Time Warner, with the

prospect of acquiring up to 25% without further antitrust review, does

not pose any competitive problem. We disagree. Such a substantial

ownership interest, especially in a highly concentrated market with

substantial vertically interdependent relationships and high entry

barriers, poses significant competitive concerns.6 In particular,

the interest would give TCI greater incentives to disadvantage

programmer competitors of Time Warner; similarly it would increase Time

Warner's incentives to disadvantage MVPDs that compete with TCI. The

Commission's remedy would eliminate these incentives to act

anticompetitively by making TCI's interest truly passive.

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\6\ See United States v. dupont de Nemours & Co., 353 U.S. 586

(1957); F&M Schaefer Corp v. C. Schmidt & Sons, Inc., 597 F.2d 814,

818-19 (2d Cir. 1979); Gulf & Western Indus. v. Great Atlantic &

Pacific Tea Co., 476 F.2d 687 (2d Cir. 1973).

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Efficiencies. Finally, Commissioner Azcuenaga seems to suggest that

the acquisition may result in certain efficiencies in terms of ``more

and better programming options'' and ``reduced

[[Page 50314]]

transactions costs.'' There was little or no evidence presented to the

Commission to suggest that these efficiencies were likely to occur.

Dissenting Statement of Commissioner Mary L. Azcuenaga in Time Warner

Inc., File No. 961-0004

The Commission today accepts for public comment a proposed consent

agreement to settle allegations that the proposed acquisition by Time

Warner Inc. (Time Warner) of Turner Broadcasting System, Inc. (Turner),

and related agreements with Tele-Communications, Inc. (TCI),1

would be unlawful. 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.

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\1\ Liberty Media Corporation, a wholly-owned subsidiary of TCI,

also is named in the complaint and order. For simplicity, references

in this statement to TCI include Liberty.

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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.

Product Market

We focus in merger analysis on the likelihood that the transaction

will create or enhance the ability to exercise market power, i.e.,

raise prices. The first step usually is to examine whether the merging

firms sell products that are substitutes for one another to see if

there is a horizontal competitive overlap. This is important in a case

based on a theory of unilateral anticompetitive effects, as this one

is, because according to the merger guidelines, the theory depends on

the factual assumption that the products of the merging firms are the

first and second choices for consumers.2

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\2\ 1992 Horizontal Merger Guidelines para. 2.2. The theory is

that when the post-merger firm raises the price on product A or on

products A and B, sales lost due to the price increase on the first-

choice product (A) will be diverted to the second-choice product

(B). The price increase is unlikely to be profitable unless a

significant share of consumers regard the products of the merged

firm as their first and second choices.

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In this case, it could be argued that from the perspective of cable

system operators and other multichannel video program distributors

(MVPDs), who are purchasers of programming services, all network

services are substitutes. This is the horizontal competitive overlap

that is alleged in the complaint.3

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\3\ Complaint para. 24.

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One problem with the alleged all-programming market is that basic

services (such as Turner's CNN) and premium services (such as Time

Warner's HBO) are not substitutes along the usual dimensions of

competition. Most significantly, they do not compete on price. CNN is

sold to MVPDs for a fee per subscriber that is on average less than

one-tenth of the average price for HBO, and it is resold as part of a

package of basic services for an inclusive fee. HBO is sold at

wholesale for more than ten times as much; it is resold to consumers on

an a la carte basis or in a package with other premium services, and a

subscription to basic service usually is a prerequisite. It is highly

unlikely that a cable operator, to avoid a price increase, would drop a

basic channel and replace it with a significantly more expensive

premium channel. Furthermore, cable system operators tell us that when

the price for basic cable services increases, consumers drop pay

services, suggesting that at least at the retail level these goods are

complementary, rather than substitutes for one another.

Another possible argument is that CNN and HBO should be in the same

product market because, from the cable operator's perspective, each is

``necessary to attract and retain a significant percentage of their

subscribers.'' 4 If CNN and HBO were substitutes in this sense, we

would expect to see cable system operators playing them against one

another to win price concessions in negotiations with programming

sellers, but there is no evidence that they have been used this way,

and cable system operators have told us that basic and premium channels

do not compete on price.5 There are closer substitutes, in terms

of price and content, for CNN (in the basic tier) and for HBO (in the

premium tier).

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\4\ Complaint Paras. II.4 & III.9. To the extent that each

network (CNN and HBO) is viewed as ``necessary'' to attract

subscribers, as alleged in the complaint, each would appear to have

market power quite independent of the proposed transaction and of

each other.

\5\ If the market includes premium cable channels, it probably

ought also to include video cassette rentals, which constrain the

pricing of premium channels. Federal Communications Commission,

Second Annual Report on the Status of Competition in the Market for

the Delivery of Video Programming para. 121 (Dec. 7, 1995)

(hereafter ``FCC Report''). If the theory is that HBO and CNN

compete for channel space, the market probably should include over-

the-air broadcast networks, at least to the extent that they can

obtain cable channel space as the price for retransmission rights.

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I am not persuaded that the product market alleged in the complaint

could be sustained. The products of Time Warner and Turner are not the

first and second choices for consumers (or cable system operators or

other MVPDs), and there are no other horizontal overlaps warranting

enforcement action in any other cable programming market.6 Under

these circumstances, it would seem appropriate to withdraw the proposed

complaint.

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\6\ In the two product markets most likely to be sustained under

the law, basic cable services and premium cable services, the

transaction falls within safe harbors described in the 1992 Merger

Guidelines.

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Entry

The proposed complaint alleges that entry is difficult and

unlikely.7 This is an astonishing allegation, given the amount of

entry in the cable programming market. The number of cable programming

services increased from 106 to 129 in 1995, according to the FCC.8

One source reported thirty national 24-hour channels expected to launch

this year,9 and another recently identified seventy-three networks

``on the launch pad'' for 1996.10 That adds up to between fifty-

three and ninety-six new and announced networks in two years. Another

source listed 141 national 24-hour cable networks launched or announced

between January 1993 and March 1996.11

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\7\ Complaint Paras. 33-35.

\8\ FCC Report para. 10.

\9\ National Cable Television Association, Cable Television

Developments 103-17 (Fall 1995).

\10\ ``On the Launch Pad,'' Cable World, April 29, 1996, at 143;

see also Cablevision, Jan. 22, 1996, at 54 (98 announced services

with expected launches in 1996).

\11\ ``A Who's Who of New Nets,'' Cablevision, April 15, 1996

(Special Supp.) at 27A-44A (as of March 28, 1996, 163 new networks

when regional, pay-per-view and interactive services are included).

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This does not mean that entry is easy or inexpensive. Not all the

channels that have announced will launch a service, and not all those

that launch will succeed.12 But some of them will. Some

[[Page 50315]]

recent entrants include CNNfn (December 1995), Nick at Nite (April

1996), MS/NBC (July 1996) and the History Channel (January

1995).13 The Fox network plans to launch a third 24-hour news

channel, and Westinghouse and CBS Entertainment recently announced that

they will launch a new entertainment and information cable channel, Eye

on People, in March 1997.14 The fact of so much ongoing entry

indicates that entry should be regarded as virtually immediate.

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\12\ ``The stamina and pocket-depth of backers of new players

[networks] still remain key factors for survival. However,

distribution is still the name of the game.'' Cablevision, April 15,

1996 (Special Supp.), at 3A.

\13\ Carter, ``For History on Cable, the Time Has Arrived,''

N.Y. Times, May 20, 1996, at D1. The article reported that the

History Channel began in January 1995 with one million subscribers,

reached 8 million subscribers by the end of the year and by May 1996

was seen in 18 million homes.

\14\ Carmody, ``The TV channel,'' The Washington Post, Aug. 21,

1996, at D12.

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New networks need not be successful or even launched before they

can exert significant competitive pressure. Announced launches can

affect pricing immediately. The launch of MS/NBC and the announcement

of Fox's cable news channel already may have affected the incumbent

all-news channel, CNN, because cable system operators can credibly

threaten to switch to one of the new news networks in negotiations to

renew CNN.15

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\15\ This is the kind of competition we would expect to see

between cable networks that are substitutes for one another and the

kind of competition that is non-existent between CNN and HBO.

---------------------------------------------------------------------------

Any constraint on cable channel capacity does not appear to be

deterring entry of new networks. Indeed, the amount of entry that is

occurring apparently reflects confidence that channel capacity will

expand, for example, by digital technology. In addition, alternative

MVPDs, such as Direct Broadcast Satellite (DBS), may provide a

launching pad for new networks.16 For example, CNNfn was launched

in 1995 with 4 to 5 million households, divided between DBS and cable.

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\16\ The entry of alternative MVPD technologies may put

competitive pressure on cable system operators to expand capacity

more quickly. See ``The Birth of Networks,'' Cablevision (Special

Supp. April 15, 1996), at 8A (cable system operators ``don't want

DBS and the telcos to pick up the services of tomorrow while they

are being overly arrogant about their capacity'').

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Nor should we ignore significant technological changes in video

distribution that are affecting cable programming. One such change is

the development and commercialization of new distribution methods that

can provide alternatives for both cable programmers and subscribers.

DBS is one example. With digital capability, DBS can provide hundreds

of channels to subscribers. By September 1995, DBS was available in all

forty-eight contiguous states and Alaska.17 In April 1996, DBS had

2.4 million customers; in August 1996, DBS had 3.34 million subscribers

18 (compared to 62 million cable customers in the U.S.). AT&T

recently invested $137.5 million in DirecTV, a DBS provider, began to

sell satellite dishes and programming to its long distance customers in

four markets, and reportedly plans to expand to the rest of the country

in September 1996.19 EchoStar and AlphaStar both have launched new

DBS services, and MCI Communication and News Corp. have announced a

partnership to enter DBS.20 Some industry analysts predict that

DBS will serve 15 million subscribers by 2000.21

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\17\ FCC Report para. 49.

\18\ DBS Digest, Aug. 22, 1996 (http://www.dbsdish.com/

dbsdata,html (Sept. 5, 1996)).

\19\ See Breznick, ``Crowded Skies,'' Cable World (April 29,

1996) (http://www.mediacentral.com/magazines/Cable Worls/News96/

1996042913.htm/539128 (Setp. 3, 1996); see also N.Y. Times, JUly 14,

1996, at 23 (AT&T full page ad for digital satellite system DirecTV

and USSB); USA Today, Aug. 20, 1996, at 5D (DISH Network full page

ad for digital satellite system and channels).

\20\ Breznick, ``Crowded Skies,'' Cable World, April 29, 1996

(http://www.mediacentral.com/magazines/Cable World/news96/

1996042913.htm/539128 (Sept. 3, 1996)).

\21\ See id.

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Digital technology, which would expand cable capacity to as many as

500 channels, is another important development. DBS already uses

digital technology, and some cable operators plan to begin providing

digital service later this year. Discovery Communications (The

Discovery Channel) has announced that it will launch four new

programming services designed for digital boxes in time for TCI's

``digital box rollout'' this fall.22 (Even without digital

service, cable systems have continued to upgrade their capacity; in

1994, about 64% of cable systems offered thirty to fifty-three

channels, and more than 14% offered fifty-four or more

channels.23) Local telephone companies have entered as

distributors via video dialtone, MMDS 24 and cable systems, and

the telcos are exploring additional ways to enter video distribution

markets. Digital compression and advanced television technologies could

make it possible for multiple programs to be broadcast over a single

over-the-air broadcast channel.25 When these developments will be

fully realized is open to debate, but it is clear that they are on the

way and affecting competition. According to one trade association

official, cable operators are responding to competition by ``upgrading

their infrastructures with fiber optics and digital compression

technologies to boost channel capacity. * * * What's more, cable

operators are busily trying to polish their images with a public that

has long registered gripes over pricing, customer service and

programming choice.'' 26

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\22\ Katz, ``Discovery Goes Digital,'' Multichannel News Digest,

Sept. 3, 1996 (``The new networks * * * will launch Oct. 22 in order

to be included in Tele-Communications Inc.'s digital box rollout in

Hartford, Conn.'') (http://www.multichannel.com/digest.htm (Sept. 5,

1996)).

\23\ FCC Report at B-2 (Table 3).

\24\ MMDS stands for multichannel multipoint distribution

service, a type of wireless cable See FCC Report at Paras. 68.85.

Industry observers project that MMDS will serve more than 2 million

subscribers in 1997 and grow more than 280% between 1995 and 1998.

FCC Report para. 71.

\25\ FCC Report para. 116.

\26\ Pendleton, ``Keeping Up With Cable Competition,'' Cable

World, April 29, 1996, at 158.

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Ongoing entry in programming suggests that no program seller could

maintain an anticompetitive price increase and, therefore, there is no

basis for liability under Section 7 of the Clayton Act. Changes in the

video distribution market will put additional pressure on both cable

systems and programming providers to be competitive by providing

quality programming at reasonable prices. The quality and quantity of

entry in the industry warrants dismissal of the complaint.

Horizontal Theory of Liability

The proposed complaint alleges that Time Warner will be able to

exploit its ownership of HBO and the Turner basic channels by

``bundling'' Turner networks with HBO, that is, by selling them as a

package.27 As a basis for liability in a merger case, this appears

to be without precedent.28 Bundling is not always anticompetitive,

and one problem with the theory is that we cannot predict when it will

be anticompetitive.29 Bundling can be used to transfer market

power from the ``tying'' product to the ``tied'' product, but it also

is used in many industries as a means of discounting. Popular cable

networks, for example, have been sold in a package at a discount from

the single product price. This can be a way for a programmer to

encourage cable system operators to carry multiple

[[Page 50316]]

networks and achieve cross-promotion among the networks in the package.

Even if it seemed more likely than not that Time Warner would bundle

HBO with Turner networks after the merger, we could not a priori

identify this as an anticompetitive effect.

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\27\ Complaint para. 38a.

\28\ Cf. Heublein, Inc., 96 F.T.C. 385, 596-99 (1980) (rejecting

a claim of violation based on leveraging).

\29\ See Whinston, ``Tying, Foreclosure, and Exclusion,'' 80 Am.

Econ. Rev. 837, 855-56 (1990) (tying can be exclusionary, but ``even

in the simple models considered [in the article], which ignore a

number of other possible motivations for the practice, the impact of

this exclusion on welfare is uncertain. This fact, combined with the

difficulty of sorting out the leverage-based instances of tying from

other cases, makes the specification of a practical legal standard

extremely difficult.'').

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The alleged violation rests on a theory that the acquisition raises

the potential for unlawful tying. To the best of my knowledge, Section

7 of the Clayton Act has never been extended to such a situation. There

are two reasons not to adopt the theory here. First, challenging the

mere potential to engage in such conduct appears to fall short of the

``reasonable probability'' standard under Section 7 of the Clayton Act.

We do not seek to enjoin mergers on the mere possibility that firms in

the industry may later choose to engage in unlawful conduct. It is

difficult to imagine a merger that could not be enjoined if ``mere

possibility'' of unlawful conduct were the standard. Here, the

likelihood of anticompetitive effects is even more removed, because

tying, the conduct that might possibly occur, in turn might or might

not prove to be unlawful. Second, anticompetitive tying is unlawful,

and Time Warner would face private law suits and agency enforcement

action for such conduct.

The proposed remedy for the alleged bundling is to prohibit

it,30 with no attempt to distinguish efficient bundling from

anticompetitive bundling.31 Assuming liability on the basis of an

anticompetitive horizontal overlap, the obvious remedy would be to

enjoin the transaction or require the divestiture of HBO. Divestiture

is a simple, easily reviewable and complete remedy for an

anticompetitive horizontal overlap. The weakness of the Commission's

case seems to be the only impediment to imposing that remedy here.

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\30\ Order para. V.

\31\ Although the proposed order would permit any bundling that

Time Warner or Turner could have implemented independently before

the merger, the reason for this distinction appears unrelated to

distinguishing between pro- and anti-competitive bundling.

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Vertical Theories

The complaint also alleges two vertical theories of competitive

harm. The first is foreclosure of unaffiliated programming from Time

Warner and TCI cable systems.32 The second is anticompetitive

price discrimination against competing MVPDs in the sale of cable

programming.33 Neither of these alleged outcomes appears

particularly likely.

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\32\ Complaint para. 38b.

\33\ Complaint para. 38c.

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Foreclosure

Time Warner cannot foreclose the programming market by refusing

carriage on its cable system, because Time Warner has less than 20% of

cable subscribers in the United States. Even if TCI were willing to

join in an attempt to barricade programming produced by others from

distribution, TCI and Time Warner together control less than 50% of the

cable subscribers in the country. In that case, entry of programming

via cable might be more expensive (because of the costs of obtaining

carriage on a number of smaller systems), but it need not be

foreclosed. And even if Time Warner and TCI together controlled a

greater share of cable systems, the availability of alternative

distributors of video programming and the technological advances that

are expanding cable channel capacity make foreclosure as a result of

this transaction improbable.

The foreclosure theory also is inconsistent with the incentives of

the market. Cable system operators want more and better programming, to

woo and win subscribers. To support their cable systems, Time Warner

and TCI must satisfy their subscribers by providing programming that

subscribers want at reasonable prices. Given competing distributors and

expanding channel capacity, neither of them likely would find it

profitable to attempt to exclude new programming.

TCI as a shareholder of Time Warner, as the transaction has been

proposed to us (with a minority share of less than 10%), would have no

greater incentive than it had as a 23% shareholder of Turner to protect

Turner programming from competitive entry. Indeed, TCI's incentive to

protect Turner programming would appear to be diminished.34 If

TCI's interest in Time Warner increased, it stands to reason that TCI's

interest in the well-being of the Turner networks also would increase.

But it is important to remember that TCI's principal source of income

is its cable operations, and its share of Time Warner profits from

Turner programming would be insufficient incentive for TCI to

jeopardize its cable business.35 It may be that TCI could acquire

an interest in Time Warner that could have anticompetitive

consequences, but the Commission should analyze that transaction when

and if TCI increases its holdings. The divestiture requirement imposed

by the order 36 is not warranted at this time.

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\34\ Turner programming would account for only part of TCI's

interest in Time Warner.

\35\ Even if its share of Time Warner were increased to 18%,

TCI's interest in the combined Time Warner/Turner cash flow would be

only slightly greater than TCI's pre-transaction interest in Turner

cash flow, and it would still amount to only an insignificant

fraction of the cash flow generated by TCI's cable operations.

\36\ Order Paras. II & III.

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Another aspect of the foreclosure theory alleged in the complaint

is a carriage agreement (programming service agreement or PSA) between

TCI and Turner. Under the PSA, TCI would carry certain Turner networks

for twenty years, at a discount from the average price at which Time

Warner sells the Turner networks to other cable operators. The

complaint alleges that TCI's obligations under the PSA would diminish

its incentives and ability to carry programming that competes with

Turner programming,37 which in turn would raise barriers to entry

for unaffiliated programming. The increased difficulty of entry, so the

theory goes, would in turn enable Time Warner to raise the price of

Turner programming sold to cable operators and other MVPDs. It is hard

to see that the PSA would have anticompetitive effects. TCI already has

contracts with Turner that provide for mandatory carriage of CNN and

TNT, and TCI is likely to continue to carry these programming networks

for the foreseeable future.38 The current agreements do not raise

antitrust issues, and the PSA raises no new ones. Any theoretical

bottleneck on existing systems would be even further removed by the

time the carriage requirements under the PSA would have become

effective (when existing carriage commitments expire), because

technological changes will have expanded cable channel capacity and

alternative MVPDs will have expanded their subscribership. The PSA

could even give TCI incentives to encourage the entry of new

programming to compete with Time Warner's programming and keep TCI's

costs down.39 The PSA would have afforded Time Warner long term

carriage for the Turner networks, given TCI long term programming

commitments with some price protection, and eliminated the costs of

renegotiating a number of existing Turner/TCI carriage agreements as

they expire. These are efficiencies. No compelling reason has been

[[Page 50317]]

advanced for requiring that the carriage agreement be cancelled.40

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\37\ Complaint para. 38b(2).

\38\ Cable system operators like to keep their subscribers

happy, and subscribers do not like to have popular programming

cancelled.

\39\ Under the ``industry average price'' provision of the PSA,

Time Warner could raise price to TCI by increasing the price it

charges other MVPDs. TCI could encourage entry to defeat any attempt

by Time Warner to increase price.

\40\ See Order para. IV. There would appear to be even less

justification for cancelling the PSA after ECI has been required

either to divest or to cap its shareholdings in Time Warner.

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In addition to divestiture by TCI of its Time Warner shares and

cancellation of the TCI/Turner carriage agreement, the proposed

remedies for the alleged foreclosure include: (1) Antidiscrimination

provisions by which Time Warner must abide in dealing with program

providers; 41 (2) recordkeeping requirements to police compliance

with the antidiscrimination provision; 42 and (3) a requirement

that Time Warner carry ``at least one Independent Advertising-Supported

News and Information National Video Programming Service.'' 43

These remedial provisions are unnecessary, and they may be harmful.

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\41\ Order para. VII.

\42\ Order para. VIII.

\43\ Order para. IX.

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Paragraph VII of the proposed order, the antidiscrimination

provision, seeks to protect unaffiliated programming vendors from

exploitation and discrimination by Time Warner. The order provision is

taken almost verbatim from a regulation of the Federal Communications

Commission.44 It is highly unusual, to say the least, for an order

of the FTC to require compliance with a law enforced by another federal

agency, and it is unclear what expertise we might bring to the process

of assuring such compliance. Although a requirement to obey existing

law and FCC regulations may not appear to burden Time Warner unduly,

the additional burden of complying with the FTC order may be costly for

both Time Warner and the FTC. In addition to imposing extensive

recordkeeping requirements,45 the order apparently would create

another forum for unhappy programmers, who could seek to instigate an

FTC investigation of Time Warner's compliance with the order, instead

of or in addition to citing the same conduct in a complaint filed with

and adjudicated by the FCC.46 The burden of attempting to enforce

compliance with FCC regulations is one that this agency need not and

should not assume.

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\44\ See 47 CFR 76.1301(a)-(c).

\45\ The recordkeeping requirement may simply replicate an FCC

requirement and perhaps impose no additional costs on Time Warner.

\46\ See 47 CFR 76.1302. The FCC may mandate carriage and impose

prices, terms and other conditions of carriage.

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Paragraph IX of the proposed order requires Time Warner to carry an

independent all-news channel (presumably MS/NBC or the anticipated Fox

all-news channel). This requirement is entirely unwarranted. A duty to

deal might be appropriate on a sufficient showing if Time Warner were a

monopolist. But with less than 20% of cable subscribers in the United

States, Time Warner is neither a monopolist nor an ``essential

facility'' in cable distribution.47 CNN, the apparent target of

the FTC-sponsored entry, also is not a monopolist but is one of many

cable programming services in the all-programming market alleged in the

complaint. Clearly, CNN also is one of many sources of news and

information readily available to the public, although this is not a

market alleged in the complaint. Antitrust law, properly applied,

provides no justification whatsoever for the government to help

establish a competitor for CNN. Nor is there any apparent reason, other

than the circular reason that it would be helpful to them, why

Microsoft, NBC, or Rupert Murdoch's Fox needs a helping hand from the

FTC in their new programming endeavors. CNN and other program networks

did not obtain carriage mandated by the FTC when they launched; why

should the Commission now tilt the playing field in favor of other

entrants?

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\47\ Even in New York City, undoubtedly an important media

market, available data indicate that Time Warner apparently serves

only about one-quarter of cable households. See Cablevision, May 13,

1996, at 57; April 29, 1996, at 131 (Time Warner has about 1.1

million subscribers in New York, which has about 4.5 million cable

households). We do not have data about alternative MVPD subscribers

in the New York area.

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Price Discrimination

The complaint alleges that Time Warner could discriminatory raise

the prices of programming services to its MVPD rivals,48

presumably to protect its cable operations from competition. This

theory assumes that Time Warner has market power in the all-cable

programming market. As discussed above, however, there are reasons to

think that the alleged all-cable programming market would not be

sustained, and entry into cable programming is widespread and, because

of the volume of entry, immediate. Under those circumstances, it

appears not only not likely but virtually inconceivable that Time

Warner could sustain any attempt to exercise market power in the all-

cable programming market.

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\48\ Complaint para. 38c.

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Whatever the merits of the theory in this case, however,

discrimination against competing MVPDs in price or other terms of sale

of programming is prohibited by federal statute 49 and by FCC

regulations,50 and the FCC provides a forum to adjudicate

complaints of this nature. Unfortunately, the majority is not content

to leave policing of telecommunications to the FCC.

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\49\ 47 U.S.C.A. 548.

\50\ CFR 76.1000-76.1002.

---------------------------------------------------------------------------

Paragraph VI of the proposed order addresses the alleged violation

in the following way: (1) It requires Time Warner to provide Turner

programming to competing MVPDs on request; and (2) it establishes a

formula for determining the prices that Time Warner can charge MVPDs

for Turner programming in areas in which Time Warner cable systems and

the MVPDs compete. The provision is inconsistent with two antitrust

principles: Antitrust traditionally does not impose a duty to deal

absent monopoly, which does not exist here, and antitrust traditionally

has not viewed price regulation as an appropriate remedy for market

power. Indeed, price regulation usually is seen as antithetical to

antitrust.

Although Paragraph VI ostensibly has the same nondiscrimination

goal as federal telecommunications law and FCC regulations, the bright

line standard in the proposed order for determining a nondiscriminatory

price fails to take account of the circumstances Congress has

identified in which price differences could be justified, such as, for

example, cost differences, economies of scale or ``other direct and

legitimate economic benefits reasonably attributable to the number of

subscribers serviced by the distributor.'' 51 These are

significant omissions, particularly for an agency that has taken pride

in its mission to prevent unfair methods of competition. There is no

apparent reason or authority for creating this exception to a

congressional mandate. To the extent that the proposed order creates a

regulatory scheme different from that afforded by the FCC, disgruntled

MVPDs may find it to their advantage to seek sanctions against Time

Warner at the FTC.52 This is likely to be costly for the FTC and

for Time Warner, and the differential scheme of regulation also could

impose other, unforeseen costs on the industry.

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\51\ U.S.C.A. 548(c)(B)(i)-(iii)

\52\ Most people outside the FTC and the FCC already confuse the

two agencies. Surely we do not want to contribute to this confusion.

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Efficiencies

As far as I can tell, the proposed consent order entirely ignores

the likely efficiencies of the proposed transaction. The potential

vertical efficiencies include more and better programming options for

consumers and reduced transaction costs for the merging firms.

[[Page 50318]]

The potential horizontal efficiencies include savings from the

integration of overlapping operations and of film and animation

libraries. For many years, the Commission has devoted considerable time

and effort to identifying and evaluating efficiencies that may result

from proposed mergers and acquisitions. Although cognizable

efficiencies occur less frequently than one might expect, the

Commission has not stinted in its efforts to give every possible

consideration to efficiencies. That makes the apparent disinterest in

the potential efficiencies of this transaction decidedly odd.

Industry Complaints

We have heard many expressions of concern about the proposed

transaction. Cable system operators and alternative MVPDs have been

concerned about the price and availability of programming from Time

Warner after the acquisition. Program providers have been concerned

about access to Time Warner's cable system. These are understandable

concerns, and I am sympathetic to them. To the extent that these

industry members want assured supply or access and protected prices,

however, this is the wrong agency to help them. Because Time Warner

cannot foreclose either level of service and is neither a monopolist

nor an ``essential facility'' in the programming market or in cable

services, there would appear to be no basis in antitrust for the access

requirements imposed in the order.

The Federal Communications Commission is the agency charged by

Congress with regulating the telecommunications industry, and the FCC

already has rules in place prohibiting discriminatory prices and

practices. While there may be little harm in requiring Time Warner to

comply with communications law, there also is little justification for

this agency to undertake the task. To the extent that the proposed

consent order offers a standard different from that promulgated by

Congress and the FCC, it arguably is inconsistent with the will of

Congress. To the extent that the proposed consent order would offer a

more attractive remedy for complaints from disfavored competitors and

customers of Time Warner, they are more likely to turn to us than to

the FCC. There is much to be said for having the FTC confine itself to

FTC matters, leaving FCC matters to the FCC.

The proposed order should be rejected.

Dissenting Statement of Commissioner Roscoe B. Starek, III, in the

Matter of Time Warner Inc., et al. File No. 961-0004

I respectfully dissent from the Commission's decision to accept a

consent agreement with Time Warner Inc. (``TW''), Turner Broadcasting

System, Inc. (``TBS''), Tele-Communications, Inc. (``TCI''), and

Liberty Media Corporation. The proposed complaint against these

producers and distributors of cable television programming alleges

anticompetitive effects arising from (1) The horizontal integration of

the programming interests of TW and TBS and (2) the vertical

integration of the TBS's programming interests with TW's and TCI's

distribution interests. I am not persuaded that either the horizontal

or the vertical aspects of this transaction are likely ``substantially

to lessen competition'' in violation of Section 7 of the Clayton Act,

15 U.S.C. 18, or otherwise to constitute ``unfair methods of

competition'' in violation of Section 5 of the Federal Trade Commission

Act, 15 U.S.C. 45. 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.

Horizontal Theories of Competitive Harm

This transaction involves, inter alia, the combination of TW and

TBS, two major suppliers of programming to multichannel video program

distributors (``MVPDs''). Accordingly, there is a straightforward

theory of competitive harm that merits serious consideration by the

Commission. In its most general terms, the theory is that cable

operators regard TW programs as close substitutes for TBS programs.

Therefore, the theory says, TW and TBS act as premerger constraints on

each other's ability to raise program prices. Under this hypothesis,

the merger eliminates this constraint, allowing TW--either unilaterally

or in coordination with other program vendors--to raise prices on some

or all of its programs.

Of course, this story is essentially an illustration of the

standard theory of competitive harm set forth in Section 2 of the 1992

Horizontal Merger Guidelines.1 Were an investigation pursuant to

this theory to yield convincing evidence that it applies to the current

transaction, under most circumstances the Commission would seek

injunctive relief to prevent the consolidation of the assets in

question. The Commission has eschewed that course of action, however,

choosing instead a very different sort of ``remedy'' that allows the

parties to proceed with the transaction but restricts them from

engaging in some (but not all) ``bundled'' sales of programming to

unaffiliated cable operators.2 Clearly, this choice of relief

implies an unusual theory of competitive harm from what ostensibly is a

straightforward horizontal transaction. The Commission's remedy does

nothing to prevent the most obvious manifestation of postmerger market

power--an across-the-board price increase for TW and TBS programs. Why

has the Commission forgone its customary relief directed against its

conventional theory of harm?

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\1\ U.S. Department of Justice and Federal Trade Commission,

Horizontal Merger Guidelines, Sec. 2 (1992), 4 Trade Reg. Rep. (CCH)

para. 13,104 at 20,573-6 et seq.

\2\ In the Analysis of Proposed consent Order to Aid Public

Comment (Sec. IV.C), the Commission asserts that ``the easiest way

the combined firm could exert substantially greater negotiating

leverage over cable operators is by combining all or some of such

`marquee' services and offering them as a package or offering them

along with unwanted programming.'' As I note below, it is far from

obvious why this bundling strategy represents the ``easiest'' way to

exercise market power against cable operators. The easiest way to

exercise any newly-created market power would be simply to announce

higher programming prices.

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The plain answer is that there is little persuasive evidence that

TW's programs constrain those of TBS (or vice-versa) in the fashion

described above. In a typical FTC horizontal merger enforcement action,

the Commission relies heavily on documentary evidence establishing the

substitutability of the parties' products or services.3 For

example, it is

[[Page 50319]]

standard to study the parties' internal documents to determine which

producers they regard as their closest competitors. This assessment

also depends frequently on internal documents supplied by customers

that show them playing off one supplier against another--via credible

threats of supplier termination--in an effort to obtain lower prices.

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\3\ The Merger Guidelines emphasize the importance of such

evidence. Section 1.11 specifically identifies the following two

types of evidence as particularly informative: ``(1) Evidence that

buyers have shifted or have considered shifting purchases between

products in response to relative changes in price or other

competitive variables [and] (2) evidence that sellers base business

decisions on the prospect of buyer substitution between products in

response to relative changes in price or other competitive

variables.''

To illustrate, in Coca-Cola Bottling Co. of the Southwest,

Docket No. 9215, complaint counsel argued in favor of a narrow

product market consisting of ``all branded carbonated soft drinks''

(``CSDs''), while respondent argued for a much broader market. In

determining that all branded CSDs constituted the relevant market,

the Commission place great weight on internal documents from local

bottlers of branded CSDs showing that those bottlers ``[took] into

account only the prices of other branded CSD products [and not the

prices of private label or warehouse-delivered soft drinks] in

deciding on pricing for their own branded CSD products.'' 5 Trade

Reg. Rep. (CCH) para.23,681 at 23,413 (Aug. 31, 1994), vacated and

remanded on other grounds, Coca-Cola Bottling Co. of the Southwest

v. FTC, No. 94-41224 (5th Cir., June 10, 1996). (The Commission

dismissed its complaint on September 6, 1996.)

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In this matter, however, documents of this sort are conspicuous by

their absence. Notwithstanding a voluminous submission of materials

from the respondents and third parties (and the considerable incentives

of the latter--especially other cable operators--to supply the

Commission with such documents), there are no documents that reveal

cable operators threatening to drop a TBS ``marquee'' network (e.g.,

CNN) in favor of a TW ``marquee'' network (e.g., HBO). There also are

no documents from, for instance, TW suggesting that it sets the prices

of its ``marquee'' networks in reference to those of TBS, taking into

account the latter's likely competitive response to unilateral price

increases or decreases. Rather, the evidence supporting any prediction

of a postmerger price increase consists entirely of customers'

contentions that program prices would rise following the acquisition.

Although customers' opinions on the potential effects of a transaction

often are important, they seldom are dispositive. Typically the

Commission requires substantial corroboration of these opinions from

independent information sources.4

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\4\ For example, in R.R. Donnelley Sons & Co., et al., Docket

No. 9243, the Administrative Law Judge's decision favoring complaint

counsel rested in part on his finding that ``[a]s soon as the

Meredith/Burda acquisition was announced, customers expressed

concern to the FTC and the parties about the decrease in competition

that might result.'' (Initial Decision Finding 404.) In overturning

the ALJ's decision, the Commission cautioned: ``There is some danger

in relying on these customer complaints to draw any general

conclusions about the likely effects of the acquisition or about the

analytical premises for those conclusions. The complaints are

consistent with a variety of effects, and many--including those the

ALJ relied upon--directly contradict [c]omplaint [c]ounsel's

prediction of unilateral price elevation.'' 5 Trade Reg. Rep. (CCH)

para.23,876 at 23,660 n. 189 (July 21, 1995).

Also, in several instances involving hospital mergers in

concentrated markets, legions of third parties came forth to attest

to the transaction's efficiency. The Commission has discounted this

testimony, however, when these third parties could not articulate or

document the source of the claimed efficiency, or when the testimony

lacked corroboration from independent information sources. I believe

that the Commission should apply the same evidentiary standards to

the third-party testimony in the current matter.

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Independent validation of the anticompetitive hypothesis becomes

particularly important when key elements of the story lack credibility.

For a standard horizontal theory of harm to apply here, one key element

is that, prior to the acquisition, a MVPD could credibly threaten to

drop a marquee network (e.g., CNN), provided it had access to another

programmer's marquee network (e.g., HBO) that it could offer to

potential subscribers. This threat would place the MVPD in a position

to negotiate a better price for the marquee networks than if those

networks were jointly owned.

Here, the empirical evidence gathered during the investigation

reveals that such threats would completely lack credibility. Indeed,

there appears to be little, if any, evidence that such threats ever

have been made, let alone carried out. CNN and HBO are not substitutes,

and both are carried on virtually all cable systems nationwide. If, as

a conventional horizontal theory of harm requires, these program

services are truly substitutes--if MVPDs regularly play one off against

the other, credibly threatening to drop one in favor of another--then

why are there virtually no instances in which an MVPD has carried out

this threat by dropping one of the marquee services? The absence of

this behavior by MVPDs undermines the empirical basis for the asserted

degree of substitutability between the two program services.5

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\5\ In virtually any case involving less pressure to come up

with something to show for the agency's strenuous investigative

efforts, the absence of such evidence would lead the Commission to

reject a hypothesized product market that included both marquee

services. Suppose that two producers of product A proposed to merge

and sought to persuade the Commission that the relevant market also

included product B, but they could not provide any examples of

actual substitution of B for A, or any evidence that threats of

substitution of B for A actually elicited price reductions from

sellers of A. In the usual run of cases, this lack of

substitutability would almost surely lead the Commission to reject

the expanded market definition. But not so here.

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Faced with this pronounced lack of evidence to support a

conventional market power story and a conventional remedy, the

Commission has sought refuge in what appears to be a very different

theory of postmerger competitive behavior. This theory posits an

increased likelihood of program ``bundling'' as a consequence of the

transaction.6 But there are two major problems with this theory as

a basis for an enforcement action. First, there is no strong

theoretical or empirical basis for believing that an increase in

bundling of TW and TBS programming would occur postmerger. Second, even

if such bundling did occur, there is no particular reason to think that

it would be competitively harmful.

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\6\ As I noted earlier, a remedy that does nothing more than

prevent ``bundling'' of different programs would fail completely to

prevent the manifestations of market power--such as across-the-board

price increases--most consistent with conventional horizontal

theories of competitive harm.

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Given the lack of documentary evidence to show that TW intends to

bundle its programming with that of TBS, I do not understand why the

majority considers an increase in program bundling to be a likely

feature of the postmerger equilibrium, nor does economic theory supply

a compelling basis for this prediction. Indeed, the rationale for this

element of the case (as set forth in the Analysis to Aid Public

Comment) can be described charitably as ``incomplete.'' According to

the Analysis, unless the FTC prevents it, TW would undertake a bundling

strategy in part to foist ``unwanted programming'' upon cable

operators.7 Missing from the Analysis, however, is any sensible

explanation of why TW should wish to pursue this strategy, because the

incentives to do so are not obvious.8

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\7\ As I have noted, supra n. 2, the Analysis also claims that

TW could obtain ``substantially greater negotiating leverage over

cable operator * * * by combining all or some of [the merged firm's]

`marquee' services and offering them as a package * * *'' If the

Analysis uses the term ``negotiating leverage'' to mean ``market

power'' as the latter is conventionally defined, then it confronts

three difficulties: (1) The record fails to support the proposition

that the TW and TBS ``marquee'' channels are close substitutes for

each other; (2) even assuming that those channels are close

substitutes, there are more straightforward ways for TW to exercise

postmerger market power; and (3) the remedy does nothing to prevent

these more straightforward exercises of market power. See discussion

supra.

\8\ In ``A Note on Block Booking'' in The Organization of

Industry (1968), George Stigler analyzed the practice of ``block

booking''--or, in current parlance, ``bundling''--``marquee'' motion

pictures with considerably less popular films. Some years earlier,

the United States Supreme Court had struck this practice down as an

anticompetitive ``leveraging'' of market power from desirable to

undesirable films. United States v. Loew's Inc., 371 U.S. 38 (1962).

As Stigler explained (at 165), it is not obvious why distributors

should wish to force exhibitors to take the inferior film:

Consider the following simple example. One film, Justice

Goldberg cited Gone with the Wind, is worth $10,000 to the buyer,

while a second film, the Justice cited Getting Gertie's Garter, is

worthless to him. The seller could sell the one for $10,000, and

throw away the second, for no matter what its cost, bygones are

forever bygones. Instead the seller compels the buyer to take both.

But surely he can obtain no more than $10,000, since by hypothesis

this is the value of both films to the buyer. Why not, in short, use

his monopoly power directly on the desirable film? It seems no more

sensible, on this logic, to block book the two films than it would

be to compel the exhibitor to buy Gone with the Wind and seven Ouija

boards, again for $10,000.

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A possible anticompetitive rationale for ``bundling'' might run as

follows: by requiring cable operators to purchase a bundle of TW and

TBS programs that contains substantial amounts of ``unwanted''

programming, TW can tie

[[Page 50320]]

up scarce channel capacity and make entry by new programmers more

difficult. But even if that strategy were assumed arguendo to be

profitable,9 the order would have only a trivial impact on TW's

ability to pursue it. The order prohibits only the bundling of TW

programming with TBS programming; TW remains free under the order to

create new ``bundles'' comprising exclusively TW, or exclusively TBS,

programs. Given that many TW and TBS programs are now sold on an

unbundled basis--a fact that calls into question the likelihood of

increased postmerger bundling 10--and given that, under the

majority's bundling theory, any TW or TBS programming can tie up a

cable channel and thereby displace a potential entrant's programming,

the order hardly would constrain TW's opportunities to carry out this

``foreclosure'' strategy.

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\9\ The argument here basically is a variant of the argument

often used to condemn exclusive dealing as a tool for monopolizing a

market. Under this argument, an upstream monopolist uses its market

power to obtain exclusive distribution rights from its distributors,

thereby foreclosing potential manufacturing entrants and obtaining

additional market power. But there is problem with this argument, as

Bork explains in The Antitrust Paradox (1978):

[The monopolist can extract in the prices it charges retailers

all that the uniqueness of its line is worth. It cannot charge the

retailers that full worth in money and then charge it again in

exclusively the retailer does not wish to grant. To suppose that it

can is to commit the error of double counting. If [the firm] must

forgo the higher prices it could have demanded in order to get

exclusivity, then exclusivity is not an imposition, it is a

purchase. Id. at 306; see also id. at 140-43.

Although modern economic theory has established the theoretical

possibility that a monopolist might, under very specific

circumstances, outbid an entrant for the resources that would allow

entry to occur (thus preserving the monopoly), modern theory also

has shown that this is not a generally applicable result. It breaks

down, for example, when (as is likely in MVPD markets) many units of

new capacity are likely to become available sequentially. See, e.g.,

Krishna, ``Auctions with Endogenous Valuations: The Persistence of

Monopoly Revisited,'' 83 Am. Econ. Rev. 147 (1993); Malueg and

Schwartz, ``Preemptive investment, toehold entry, and the mimicking

principle,'' 22 RAND J. Econ. 1 (1991).

\10\ If bundling is profitable for anticompetitive reasons, why

do we not observe TW and TBS now exploiting all available

opportunities to reap these profits?

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Finally, all of the above analysis implicitly assumes that the

bundling of TW and TBS programming, if undertaken, would more likely

than not be anticompetitive. The Analysis to Aid Public Comment,

however, emphasizes that bundling programming in many other instances

can be procompetitive. There seems to be no explanation of why the

particular bundles at issue here would be anticompetitive, and no

articulation of the principles that might be used to differentiate

welfare-enhancing from welfare-reducing bundling.11

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\11\ Perhaps this reflects the fact that the economics

literature does not provide clear guidance on this issue. See, e.g.,

Adams and Yellen, ``Commodity Bundling and the Burden of Monopoly,''

90 Q.J. Econ. 475 (1976). Adams and Yellen explain how a monopolist

might use bundling as a method of price discrimination. (This also

was Stigler's explanation, supra n. 8.) As Adams and Yellen note,

``public policy must take account of the fact that prohibition of

commodity bundling without more may increase the burden of monopoly

* * * [M]onopoly itself must be eliminated to achieve high levels of

social welfare.'' 90 Q.J. Econ. at 498. Adams and Yellen's

conclusion is apposite here: if the combination of TW and TBS

creates (or enhances) market power, then the solution is to enjoin

the transaction rather than to proscribe certain types of bundling,

since the latter ``remedy'' may actually make things worse. And if

the acquisition does not create or enhance market power, the basis

for the bundling proscription is even harder to discern.

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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.

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.12 I have

previously expressed my skepticism about enforcement actions predicated

on theories of harm from vertical relationships.13 The current

complaint and proposed order only serve to reinforce my doubts about

such enforcement actions and about remedies ostensibly designed to

address the alleged competitive harms.

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\12\ Among other things, the order (1) constrains the ability of

TW and TCI to enter into long-term carriage agreements (para. IV);

(2) compels TW to sell Turner programming to downstream MVPD

entrants at regulated prices (para. VI); (3) prohibits TW from

unreasonably discriminating against non-TW programmers seeking

carriage on TW cable systems (para. VII(C)); and (4) compels TW to

carry a second 24-hour news service (i.e., in addition to CNN)

(para. IX).

\13\ Dissenting Statement of Commissioner Roscoe B. Starek, III,

in Waterous Company, Inc./Hale Products, Inc., File No. 901 0061, 5

Trade Reg. Rep. (CCH) para. 24,076 at 23,888-90; Dissenting

Statement of Commissioner Roscoe B. Starek, III, in Silicon

Graphics, Inc. (Alias Research, Inc., and Wavefront Technologies,

Inc.), Docket No. C-3626 (Nov. 14, 1995), 61 Fed. Reg. 16797 (Apr.

17, 1996); Remarks of Commissioner Roscoe B. Starek, III.

``Reinventing Antitrust Enforcement? Antitrust at the FTC in 1995

and Beyond,'' remarks before a conference on ``A New Age of

Antitrust Enforcement: Antitrust in 1995'' (Marina Del Rey,

California, Feb. 24, 1995) [available on the Commission's World Wide

Web site at http://www.ftc.gov].

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The vertical theories of competitive harm posited in this matter,

and the associated remedies, are strikingly similar to those to which I

objected in Silicon Graphics, Inc. (``SGI''), and the same essential

criticisms apply. In SGI, the Commission's complaint alleged

anticompetitive effects arising from the vertical integration of SGI--

the leading manufacturer of entertainment graphics workstations--with

Alias Research, Inc., and Wavefront Technologies, Inc.--two leading

suppliers of entertainment graphics software. Although the acquisition

seemingly raised straightforward horizontal competitive problems

arising from the combination of Alias and Wavefront, the Commission

inexplicably found that the horizontal consolidation was not

anticompetitive on net.14 Instead, the order addressed only the

alleged vertical problems arising from the transaction. The Commission

alleged, inter alia, that the acquisitions in SGI would reduce

competition through two types of foreclosure: (1) Nonintegrated

software vendors would be excluded from the SGI platform, thereby

inducing their exit (or deterring their entry); and (2) rival hardware

manufacturers would be denied access to Alias and Wavefront software,

without which they could not effectively compete against SGI.

Similarly, in this case the Commission alleges (1) that nonintegrated

program vendors will be excluded from TW and TCI cable systems and (2)

that potential MVPD entrants into TW's cable markets will be denied

access to (or face supracompetitive prices for) TW and TBS

programming--thus lessening their ability to effectively compete

against TW's cable operations. The complaint further charges that the

exclusion of nonintegrated program vendors from TW's and TCI's cable

systems will deprive those vendors of scale economies, render them

ineffective competitors vis-a-vis the TW/Turner programming services,

and thus confer market power on TW as a seller of programs to MVPDs in

non-TW/non-TCI markets.

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\14\ I say ``inexplicably'' not because I necessarily believed

this horizontal combination should have been enjoined, but because

the horizontal aspect of the transaction would have exacerbated the

upstream market power that would have had to exist for the vertical

theories to have had any possible relevance.

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My dissenting statement in SGI identified the problems with this

kind of analysis. For one thing, these two types of foreclosure--

foreclosure of independent program vendors from the TW and TCI cable

systems, and foreclosure of independent MVPD firms from TW and TBS

programming--tend

[[Page 50321]]

to be mutually exclusive. The very possibility of excluding independent

program vendors from TW and TCI cable systems suggests the means by

which MVPDs other than TW and TCI can avoid foreclosure. The

nonintegrated program vendors surely have incentives to supply the

``foreclosed'' MVPDs, and each MVPD has incentives to induce

nonintegrated program suppliers to produce programming for it.15

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\15\ Moreover, as was also true in SGI, the proposed complaint

in the present case characterizes premerger entry conditions in a

way that appears to rule out significant anticompetitive foreclosure

of nonintegrated upstream producers as a consequence of the

transaction. Paragraphs 33, 34, and 36 of the complaint allege in

essence that there are few producters of ``marquee'' programming

before the merger (other than TW and TBS), in large part because

entry into ``marquee'' programming is so very difficult (stemming

form, e.g., the substantial irreversible investments that are

required). If that is true--i.e., if the posited programming market

already was effectively foreclosed before the merger--then, as in

SGI, TW's acquistion of TBS could not cause substantial postmerger

foreclosure of competitively significant alternatives to TW/TBS

programming.

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In response to this criticism, one might argue--and the complaint

alleges 16--that pervasive scale economies in programming,

combined with a failure to obtain carriage on the TW and TCI systems,

would doom potential programming entrants (and ``foreclosed'' incumbent

programmers) because, without TW and/or TCI carriage, they would be

deprived of the scale economies essential to their survival. In other

words, the argument goes, the competitive responses of ``foreclosed''

programmers and ``foreclosed'' distributors identified in the preceding

paragraph never will materialize. There are, however, substantial

conceptual and empirical problems with this argument, and its

implications for competition policy have not been fully explored.

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\16\ See Paragraph 38.b of the proposed complaint.

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First, if one believes that programming is characterized by such

substantial scale economies that the loss of one large customer results

in the affected programmer's severely diminished competitive

effectiveness (in the limit, that programmer's exit), then this

essentially is an argument that the number of program producers that

can survive in equilibrium (or, perhaps more accurately, the number of

program producers in a particular program ``niche'') will be small--

with perhaps only one survivor. Under the theory of the current case,

this will result in a supracompetitive price for that program. Further,

this will occur irrespective of the degree of vertical integration

between programmers and distributors. Indeed, under these

circumstances, there is a straightforward reason why vertical

integration between a program distributor and a program producer would

be both profitable and procompetitive (i.e., likely to result in lower

prices to consumers): Instead of monopoly markups by both the program

producer and the MVPD, there would be only one markup by the vertically

integrated firm.17

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\17\ See, e.g., Tirole, The Theory of Industrial Organization

174-76 (1988). The program price reductions would be observed only

in those geographic markets where TW owned cable systems. Thus, the

greater the number of cable subscribers served by TW, the more

widespread would be the efficiencies. According to the propos

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