Time Warner vs. CBS: An Anti Trust Quagmire

Today is the one month anniversary of the financial dispute that has deprived three million Time Warner cable viewers of access to the CBS television network. And now, with the launch of the NFL football season right around the corner, sports fans are beginning to worry about missing the pleasure of viewing their favorite teams.

Why is it proving so difficult for the two corporations to reach an agreement? Although financial disputes are often contentious in nature, they seldom reach a stage of intractability when the underlying business proposition – in this case, television broadcasts of NFL games – is a highly profitable enterprise.

Indeed, the NFL economic colossus – not to mention all of the other programming that airs on CBS — generates more than enough revenues to satisfy both parties. So why can’t Time Warner and CBS reach an agreement?

Perhaps the parties are struggling because of the challenges of maintaining an implicit business model that skirts the edge of anti-trust law. Time Warner and its fellow cable television companies have always forced their viewers to purchase entire collections of network channels in order to access the ones that they actually wish to buy.

Likewise, the television networks have always forced the cable television companies to purchase their entire rosters of shows, from the least watched re-runs in the early morning hours to the most popular professional sporting events in prime time. And the Disney Corporation, like other conglomerates, has always required the cable firms to purchase access to most or all of its networks, from ABC TV to the Disney Channel to the myriad of ESPN channels.

In theory, such forced bundling terms are called tying arrangements. They have been illegal in the United States as a means for maintaining market power for over a century, having been implicitly banned by anti trust law under the Sherman Act of 1890 and then explicitly banned by the Clayton Act of 1914.

So why do they persist? Firms often argue that each bundle of services should be perceived as a single unified product, and not as a collection of tied-together products. Microsoft famously argued that point when it defeated a challenge from Netscape by embedding its Internet Explorer browser directly into its Windows operating system.

Although of questionable legality, the strategy proved to be a wildly successful one for Microsoft. Internet Explorer remained the #1 browser in market share until Google’s Chrome finally surpassed it last year, while Netscape faded and was then discontinued in 2008.

In the continuing case of Time Warner vs. CBS, however, the Tiffany Network’s channels and programs have been missing from the cable television firm’s roster of offerings for one full month. The fact that Time Warner’s remaining channels and programs have been unaffected by the absence of CBS lends credence to the argument that the cable firm’s full set of offerings (including CBS’s content) do not actually function as a single unified product.

And now legislators are threatening to require cable television firms to sell channels on an individual “a la carte” basis. Furthermore, the television networks are themselves making individual series available on DVD products, as well as independent episodes available for viewing on services like Netflix and Amazon Prime.

In other words, the forces of competition are placing incredible strains on the tradition of tying contracts in the cable television industry. That might indeed explain why Time Warner and CBS are struggling so fecklessly to finalize a contract that preserves this status quo business strategy.