U.S. is probing how pay-TV industry affects online competitors

A wide-ranging government probe into the pay-television industry could ultimately lead to dramatic changes in the way consumers receive video content on their television sets as well as on tablets and mobile phones.

The Department of Justice has started looking into business practices of Comcast Corp. and other pay-TV operators to determine whether they are engaging in practices that could derail or hold back emerging competition from such broadband distributors as Netflix Inc.

“The future of online competition for cable is being decided right now, and it is crucial that government agencies responsible for protecting the public interest” investigate, said Harold Feld, legal director of consumer advocacy group Public Knowledge.

“We were very pleased to find out that the Justice Department is investigating whether the cable industry is trying to squelch emerging online competition,” Feld said.

The examination — not yet a full-blown investigation — is looking at how the actions of programmers and distribution companies affect competitors and, ultimately, consumers, according to several people familiar with the situation who declined to be identified because they were not authorized to speak publicly.

Among the topics under review are contracts between programmers and distributors and caps on the amount of data that cable subscribers can use for downloads, the people said.

A Justice Department spokeswoman declined to comment.

Among the companies that federal authorities have queried are cable behemoths Comcast Corp. and Time Warner Cable Inc.; movie and TV rental company Netflix Inc.; and Hulu, the online programming service owned by Comcast, Walt Disney Co. and News Corp.

Described by some media and Washington insiders as exploratory in nature, the fact-finding mission grew out of the Justice Department’s review of Comcast’s merger with NBCUniversal in 2010, a person familiar with the process said. During that review, the Justice Department dug deeply into the media business and discovered several practices that raised concern.

Those concerns may have accelerated recently because of a feud between Comcast and Netflix over limits on data usage by customers.

Netflix accused Comcast of unfairly favoring its own Internet video service, Xfinity, over those of competitors when consumers use the Xbox 360 video game console. Video from Netflix and other providers, such as Hulu, counts against Comcast’s data limits, but Xfinity video does not.

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

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

Netflix has been publicly critical of Comcast, which last month said that it would end its 250-gigabytes-a-month cap on the amount of data its Internet subscribers can access and that it would start testing so-called tiered pricing for customers who use more than 300 gigabytes a month.

Also under federal scrutiny are the programming agreements between cable networks and distributors. There is concern that the contracts may be anti-competitive if they discourage the use of emerging Internet delivery platforms known in the industry as over-the-top platforms.

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

“A lot of the programmers are being hindered from offering their services over the top because they don’t want to alienate their cable affiliates,” Herring said.

If they do offer their services that way, he said, “they will be in direct conflict with the cable operators that provide them their primary source of revenue.” Herring said he has talked with the Justice Department about this issue.

Wealth TV is available online and via Roku despite those clauses, he said. “They haven’t called us on it yet. Maybe we’re flying under the radar.”

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

Some media watchdogs, such as Public Knowledge, see TV Everywhere as a way to stave off potential competition and keep the television business closed to outsiders.

Also being questioned are so-called most-favored nation clauses that often are used in agreements between programmers and distributors.

Such a clause typically enables a large distributor to get programming more cheaply than a smaller distributor, much like the way a chain store such as Wal-Mart often gets products from suppliers at a lower cost than a stand-alone supermarket can.

Another topic that may get attention from the Justice Department is how programmers package channels that are licensed to distributors, a practice known as bundling.

Programmers such as Viacom Inc. and Disney often package less popular channels with their more successful ones. For example, a distributor would have to pay more to carry Disney’s ESPN but not its various spin-off channels than to carry all the ESPN channels.

Bundling is a sore point for distributors as well as for smaller programmers such as Herring’s Wealth TV, but efforts to eliminate it through the courts have not succeeded.

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

News of the Justice Department’s inquiry was first reported by the Wall Street Journal.

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