Battle For The Box: NSTPL v. Star & Sony

Something is brewing in the television broadcasting industry. Most recently, Tata Sky (the direct-to-home provider) dropped Sony’s channels over a payment dispute, much to the chagrin of sports lovers across the country. But if I can’t watch my favorite teams battle it out on television, I’ll get my fill of competitive action in the corridors of the Competition Commission of India.

Earlier this year, the CCI initiated an investigation under sections 3 and 4 of the Competition Act 2002 (“the Act”) against Star India Pvt. Ltd. & Sony Pictures Network India Pvt. Ltd. (“Star & Sony”) for their conduct in the market for broadcasting television content. Star & Sony hold a portfolio of television channels spanning the sports and entertainment genres that are hugely popular across the country. NSTPL (the informant) alleged that, in licensing this content, Star & Sony discrimination against a certain category of television distributors, called HITS operators, by offering them less favorable terms than other distributors (like MSOs, DTH operators). The CCI arrived at the prima facie conclusion that Star & Sony’s discriminatory conduct violated section 3(4)(d) of the Act, because it amounted to constructive refusal to deal.

In its order, the CCI focused on the agreement between Star & Sony on the one hand, and the informant (NSTPL) on the other, and concluded that this agreement violated section 3(4)(d). This finding has been criticized on the ground that the critical ingredient of “agreement” under section 3(4)(d) is missing when one party unilaterally refuses to deal with another.

It was also argued by NSTPL before the CCI that the broadcasters’ conduct must be examined through the lens of section 4, under which a dominant company would have a special responsibility to deal on fair terms (whereas a non-dominant company could refuse to deal under the pretext of freedom to contract). However, this avenue is precluded in this case because the CCI rejected the argument that Star & Sony abused their dominance under section 4 of the Act (by offering NSTPL discriminatory and unfavorable terms) because the Competition Act does not recognize the concept of ‘collective dominance.’

I make two points in this post, (i) the CCI does not need to infer collective dominance to examine Star & Sony’s conduct under section 4, and (ii) the agreements between Star & Sony on the one hand, and distributors who are offered better terms than the informant on the other, may amount to constructive refusal to deal under section 3(4)(d).

Classic refusal to deal under section 4

The CCI’s summary dismissal of any claim to violation of section 4 is surprising given its own finding that Star and Sony “enjoy significant market power” because they are “leading broadcasters owning premium content and offering some of the most popular television channels with high ratings in terms of viewership across various genres [and] no distributor can operate in the market of distribution of television channels without offering channels of [Star] and [Sony].”

Notably, the CCI held that the broader relevant market is the “market for broadcasting of television channels in India,” but that Star and Sony have market power in the narrower markets comprising specific genres like sports and entertainment. Applying the hypothetical monopolist test to determine whether Star and Sony are dominant, the question is whether distributors would (or could) turn to other broadcasters if Star and Sony effected a small but significant non-transitory increase in price. And the CCI’s own observations in this context suggest that Star and Sony are in fact dominant: “if a distributor does not offer channels of [Star] and [Sony], very few consumers would be willing to procure channels from it, making its business unviable. Overall, the market position of [Star] and [Sony] as leading broadcasters with a portfolio of channels, which few others can match and which consumers of broadcasting services infallibly demand from the distributors, cannot be disputed.”

Therefore, it appears to me that Star and Sony each hold a portfolio of channels that are indispensable from the demand side as a distributor, and it may be argued that failure to procure even one of these channels might render the distributor’s business unviable. If that is true, then Star and Sony are individually dominant with respect to the portfolio of channels they offer, and their imposition of discriminatory terms on distributors may be unfettered by competition from other broadcasters.

Constructive refusal to deal under section 3(4)

While the CCI did order investigation under section 3(4), its reasoning to infer refusal to deal has left the prima facie decision vulnerable to criticism on the ground that their agreements with NSTPL do not constitute an agreement to refuse to deal under section 3(4).

Under the Explanation to section 3(4), “refusal to deal” includes any agreement which restricts, or is likely to restrict, by any method the persons or classes of persons to whom goods are sold or from whom goods are bought. Emphasizing the phrase “by any method,” I argue that the prohibition on refusal to deal is not limited to agreements where both parties expressly agree to refuse to deal with a third party, but also extends to any agreement that has the effect of restricting the persons to whom goods are sold.

Take, for instance, a firm in the upstream market (U) that offers more favorable terms to one player in the downstream market (D1) than the other (D2), making it harder for D2 to compete in the downstream market. If U is supplying an essential input, then D2’s resulting disadvantage may even rise to the level of disability to compete in the downstream market depending on the commercial realities. But the fact of the matter is that D2’s competitive position in the downstream market is weakened by D1’s ability to operate on more favorable terms extended by U. Faced with this competitive disadvantage, D2 may or may not exit the market. Therefore, the agreement between U and D1 may amount to a refusal to deal by likely restricting the persons to whom goods are sold.

In the final analysis, whether the imposition of discriminatory terms violates section 3(4) of the Act will turn on an evaluation of market power of the firms in the upstream and downstream market, the extent of anti-competitive effects, and countervailing pro-competitive justifications that can be established. But arguing that the conduct in question does not qualify for examination under section 3 because there is no agreement to refuse to deal is as misguided as looking for pigs in the sky. The problem in the situation described above is not so much an explicit restriction against dealing with other parties, but rather that leveraging commercial realities by imposing disparate terms could be an effective method to restrict supply in the downstream market. And NSTPL’s argument before the CCI is precisely that Star and Sony’s conduct “make[s] it commercially unviable for any distributor operating on the RIO based agreements to effectively compete in the market.”

Déja vu

This battle over the broadcast channels has parallels with the concerns over AT&T’s acquisition of Time-Warner this year. Time-Warner holds a portfolio of “must-have” content in the sports and news segments, including HBO and CNN, and one of the many ways in which AT&T could distort the television market is by charging competing TV providers (distributors) unreasonably high prices for this portfolio. While that deal went through (perhaps surprisingly, given the current US President’s disposition), it remains to be seen how the CCI makes sense of the dynamics in this highly regulated market. Call it price discrimination or refusal to deal, I sense that the outcome will turn on the competitive impact of HITS as an emerging distribution technology, and an evaluation of the benefits (if any) that flow to Star and Sony through their ‘unregulated’ fixed-fee/cost-per-subscriber arrangements with their preferred distributors.

Stay tuned, folks!