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Viamedia, Inc. v. Comcast Corp.

United States District Court, N.D. Illinois, Eastern Division

November 4, 2016

VIAMEDIA, INC., Plaintiff,
v.
COMCAST CORPORATION and COMCAST SPOTLIGHT, LP, Defendants.

          MEMORANDUM OPINION AND ORDER

          AMY J. ST. EVE UNITED STATES DISTRICT COURT JUDGE

         Defendants Comcast Corporation (“Comcast”) and Comcast Spotlight, LP (“Comcast Spotlight”)[1] have moved to dismiss Plaintiff Viamedia, Inc.'s (“Viamedia”) complaint under Federal Rule of Civil Procedure 12(b)(6). (R. 22.) For the following reasons, the Court grants in part and denies in part Defendants' motion.

         BACKGROUND[2]

         This case concerns the spot cable advertising business, which generates approximately $5.4 billion annually in television advertising revenues. (R. 1, Compl., at ¶ 3.) Spot cable advertisements account for two-to-three minutes per hour of television programming and are sold by cable service providers-called, according to industry terminology, “multichannel video programming distributors” (“MVPDs”)-like Comcast. (Id. at ¶¶ 23-25, 27, 30.) Viamedia, a spot cable advertising representation company, “represents cable television companies in the sale, placement, and distribution of Spot Cable Advertising.” (Id. at ¶¶ 1-2.) Comcast is “one of the largest” MVPDs in the United States with “more than 22 million cable and high-speed Internet subscribers.” (Id. at ¶¶ 8, 24.) It also owns, among other assets, Comcast Spotlight, a direct competitor to Viamedia and “the country's largest Spot Cable Advertising Representative.” (Id. at ¶¶ 8, 19.)

         Broadly speaking, Viamedia alleges that “[t]hrough its control of technical and business infrastructure that is critical for the sale of Spot Cable Advertising time, ” Comcast has unlawfully “impaired the ability of Viamedia and other Spot Cable Advertising Representatives to compete with Comcast Spotlight.” (Id. at ¶ 2.) To evaluate Viamedia's claim, the Court first describes how the spot cable advertising business functions and what role the parties play in the industry.

         I. The Spot Cable Advertising Market

         A. MVPDs

         MVPDs-for example, Comcast, Wide Open West (“WOW”), and RCN Corporation (“RCN”)-provide households across the United States with what is “colloquially referred to as ‘cable television service.'” (Id. at ¶¶ 23, 25.) In some Designated Market Areas (“DMAs”)-“a regional viewing area used to measure television ratings”-Comcast is the dominant MVPD. (Id. at ¶¶ 4, 24.) In the Chicago DMA (which encompasses Northeast Illinois and Northwest Indiana), for example, “approximately three out of every four cable households are Comcast subscribers.” (Id. at ¶ 24.)

         MVPDs enter into “carriage agreements” with cable networks (e.g., ESPN and CNBC) under which (1) MVPDs pay the networks a fee to carry their programming, and (2) MVPDs gain the right to sell a percentage of advertising time. (Id. at ¶ 27.) “This reserved advertising time is referred to as ‘Spot Cable Advertising, '” and a “15-second, 30-second, or one-minute block of [spot cable advertising] inventory is described as a ‘Spot Cable Advertising Avail' or a ‘Spot Cable Avail.'” (Id. at ¶¶ 27, 29.) Spot cable advertising is one of the two key ways in which MVPDs generate revenue, the other being the collection of subscription fees from households in exchange for providing cable service. (Id. at ¶ 26.) Thus, “[t]he ability to sell Spot Cable Advertising is crucial to the economic survival” of an MVPD. (Id. at ¶ 28.)

         Spot cable advertising differs from traditional national advertising. A cable network sells traditional advertising time directly to advertisers, and traditional advertisements air simultaneously on the network across the United States. (Id. at ¶ 30.) In contrast, MVPDs sell spot cable advertisements. (Id.) Consequently, a spot cable advertisement reaches only households that subscribe to the MVPD that sold the ad, while a traditional advertisement reaches any household watching the television network that sold the ad, irrespective of the MVPD providing cable service. (Id.)

         Spot cable advertising allows advertisers to “geo-target” customers, “meaning that the advertiser does not have to buy advertising on a cable network throughout the entire nation, but can instead select a particular geographic area to display the ad by buying Spot Cable Avails from an MVPD serving that area.” (Id. at ¶ 31.) By purchasing spot advertising during a national broadcast like the World Series, for example, a Chicago-area car dealership can advertise only in the Chicago DMA while a Cleveland restaurant can simultaneously advertise exclusively in the Cleveland DMA. (See Id. at ¶¶ 31-33.)

         B. The three mediums through which MVPDs sell Spot Cable Avails

         “Spot Cable Avails are generally sold to advertisers in three ways, ” (id. at ¶ 34), each of which accounts for approximately one-third of an MVPD's Spot Cable Avail inventory, (id. at ¶¶ 41, 66-68). The Court describes each in turn.

         1. Regional sales through an Interconnect

         In the past, the market for regional spot cable advertising presented a problem for advertisers. Because individual MVPDs sold spot cable advertising rather than television networks, and because multiple MVPDs could operate in a single DMA, an advertiser wishing to run a commercial in all households in a DMA at a particular time during a particular broadcast would have to separately negotiate with each MVPD. (Id. at ¶ 36) “[M]any advertisers found [this] difficult, if not impossible.” (Id.)

         In the 1990s, however, competing MVPDs cooperated with one another to develop Interconnects in each DMA, “which act as a clearinghouse that aggregate Spot Cable Avails from the MVPDs in a DMA and sell packaged Avails to advertisers in such a way that the purchased advertisements will run on all MVPDs across a given DMA simultaneously.” (Id. at ¶¶ 35-37.) Each DMA “has typically contained just one Interconnect, in which all of the MVPDs operating within that DMA have participated” by “making a portion of [their] Spot Cable Advertising inventory available through the Interconnect.” (Id. at ¶¶ 35, 37.) In short, Interconnects “provide[] a business and technical interface that . . . provid[e] regional advertisers with a ‘one-stop shop' where they can buy same-time Avails from all the MVPDs in the DMA.” (Id.) They “[are] the only viable and efficient option for advertisers that wish to purchase Spot Cable Advertising across the entire DMA.” (Id. at ¶ 47.) An Interconnect therefore has no competitors, “[n]or could a competing Interconnect be developed.” (Id. at ¶¶ 47-48.)

         MVPDs “pay a fee to the Interconnect in exchange for its coordination services” and “receive the revenues generated from . . . regional sales on approximately a pro rata basis.” (Id. at ¶ 35.) Because MVPDs compete with one another, “the Interconnects were originally designed to avoid giving preferential treatment to any single MVPD participant, and the dominant MVPD in the region was not able to exercise its influence over the Interconnect to the detriment of other participating MVPDs.” (Id. at ¶ 41.) Thus, at least early on, Interconnect oversight “was performed by boards of directors that were elected by a vote of all the MVPD members of the Interconnect.” (Id. at ¶ 42.) The boards would make decisions by majority vote “with the best interests of all MVPDs in mind.” (Id.) “In form and practice, Interconnects avoided discriminating among or disadvantaging individual MVPD or representative members.” (Id.)

         Over time, industry consolidation has led to the largest MVPD managing and controlling the Interconnect in each DMA. (Id. at ¶ 44.) “Interconnects controlled by dominant MVPDs other than Comcast generally continue to treat all participating MVPDs equally by, for example, charging the same fees to all MVPDs and ensuring all MVPDs or their representatives have open and equal access to the Interconnect.” (Id. at ¶ 45.) Comcast, however, controls the Interconnect in fifteen of the twenty-five largest television markets and twenty-six of the largest fifty markets, including, for example, the Chicago, Detroit, Philadelphia, Boston, Washington D.C., and Denver DMAs. (Id. at ¶¶ 44, 86-94.) Viamedia's allegations of illegality, which are described below, stem in part from Comcast's conduct in DMAs in which it is the dominant MVPD.

         2. Multiregional sales through National Cable Communications

         If an advertiser wishes to air a commercial at a particular time during a particular broadcast across more than one DMA, it can purchase Spot Cable Avails from National Cable Communications LLC (“NCC”), a national clearinghouse that “historically functioned on a multi-DMA level in much the same way that the Interconnects have functioned on a single-DMA level.” (Id. at ¶¶ 34, 49.) Thus, NCC collects fees from MVPDs, aggregates Spot Cable Avails from across multiple DMAs, and sells them to advertisers. (Id. at ¶¶ 51-52.) “Buying through NCC is the only practical option for advertisers that wish to purchase Spot Cable Advertising across multiple DMAs, and such advertisers have no choice but to use it. NCC has no competitors.” (Id. at ¶ 54.)

         NCC was created in 1981 “as a joint venture among the five largest MVPDs that existed at the time.” (Id. at ¶ 50.) Through a series of acquisitions of other MVPDs, Comcast attained a 60% ownership stake in NCC, thereby gaining “the ability to effectively control NCC.” (Id.)

         “Historically, NCC has had agreements in place with virtually every MVPD or its representative in all 210 DMAs across the United States . . . .” (Id. at ¶ 52.) Indeed, NCC says in its promotion materials that “its participating members cover 98 percent of all multichannel television households in the United States.” (Id.) As described further below, Viamedia contends that Comcast has abused its control of NCC, altering how it has historically functioned in the service of Comcast's anticompetitive goals.

         3. Local spot cable advertising without the involvement of an Interconnect or NCC

         The final manner in which MVPDs sell spot cable advertising is “Local Spot Cable Advertising, ” which “do[es] not involve an Interconnect or NCC acting as an intermediary.” (Id. at ¶ 59.) In this advertising sale method, “an advertiser deals directly with a single MVPD or its representative to purchase those Spot Cable Avails that run in a specific number of the MVPD's ad zones, ” which are subdivisions of a DMA that “allow[] advertisements to be displayed on a neighborhood-by-neighborhood or even a block-by-block basis.” (Id. at ¶¶ 59-60.) Thus, a business can use local spot cable advertising to reach “narrowly targeted geographic audiences” at a cost that is “generally less expensive . . . than regional or national Spot Cable Advertising through an Interconnect or NCC.” (Id. at ¶¶ 61-62.)

         C. Spot cable advertising representatives

         Viamedia fits into the spot cable advertising landscape by “representing MVPD clients for the purpose of selling their Spot Cable Avails.” (Id. at ¶ 74.) More specifically, Viamedia provides MVPDs “sales, marketing, and technology expertise and support to sell their Spot Cable Avails to local, regional, and national advertisers, including by accessing and participating in the Interconnects and NCC.” (Id.) While some large MVPDs like Comcast “devote entire subsidiary organizations to directing and organizing their Spot Cable Advertisement sales operations, ” smaller MVPDs do not have the resources to do this. (Id. at ¶ 71.) Consequently, these smaller MVPDs turn to companies like Viamedia for spot cable advertising representation. (Id. at ¶ 72.)

         Viamedia represents more than sixty MVPDs across more than seventy DMAs, and each day, “Viamedia inserts about one million advertisements . . . for over 7, 000 advertisers nationwide.” (Id. at ¶¶ 76-77.) These numbers make Viamedia “the largest independent Spot Cable Advertising Representative in the United States, meaning that it is the largest representative firm that is not wholly owned and controlled by a cable television service provider such as Comcast.” (Id. at ¶ 17 (emphasis in original).)

         Comcast Spotlight directly competes with Viamedia to represent MVPDs to sell their Spot Cable Avails. (Id. ¶ 79.) It does this despite the fact that Comcast competes with other MVPDs for household cable subscriptions and advertising sales. (Id. at ¶¶ 78, 80.) Through its control of Comcast's Spot Cable Avails, which reach Comcast's twenty-two million subscriber households, as well as its representation of other MVPDs that have more than 13 million subscribers combined, Comcast Spotlight “control[s] Spot Cable Advertising for . . . more than half of the entire cable industry.” (Id. at ¶¶ 8, 85.) Comcast Spotlight's dominance is even greater in DMAs in which it controls the Interconnect. (Id. at ¶¶ 85-94.) In the Chicago, Detroit, Philadelphia, Boston, and Washington, D.C. DMAs, for example, Comcast Spotlight controls approximately 98-100% of all Spot Cable Advertising Avails available for sale. (Id. at ¶¶ 86-90.) Viamedia alleges that Comcast “has used its power to exclude independent MVPDs and their representatives [from accessing Interconnects that it controls] and to coerce them into behaviors that benefit Comcast.” (Id. at ¶ 96.) The Court details the specifics of Viamedia's allegations below.

         II. Viamedia's allegations of anticompetitive conduct

         A. Conduct stemming from Comcast's control of the Interconnects

         The crux of Viamedia's allegations is that Comcast has used its control over certain Interconnects to (1) exclude Viamedia from accessing the critical Interconnect infrastructure, and (2) force MVPDs to engage Comcast Spotlight as their spot cable advertising representatives instead of Viamedia or its competitors.

         Viamedia's complaint focuses on Comcast's conduct in the Chicago and Detroit DMAs, where Comcast exercises unilateral control of regional advertising through the DMAs' respective Interconnects. (Id. at ¶ 102.) Between 2002 and 2012, Viamedia “participated in the Interconnects for Chicago and Detroit” in its representation of its “then most significant MVPD clients, WOW and RCN.” (Id. at ¶ 103.) In 2011, Comcast Spotlight began to express its interest in representing WOW and RCN, but the MVPDs were not interested. (Id. at ¶¶ 104-06.) Indeed, RCN explained, “Comcast would prefer that RCN use Comcast Spotlight and not Viamedia . . . . [But] RCN is not comfortable having its largest and most formidable rival as its representative in the spot cable market and should be free to choose a representative for such services that does not present such an obvious conflict and competitive disadvantage.” (Id. at ¶ 108 (alterations in original).) Then, between 2011 and early 2012, “Comcast repeatedly told advertising agencies that it would have sole control over all of WOW's and RCN's Spot Cable Advertising Avails ‘by years end.'” (Id. at ¶ 109.)

         “On June 1, 2012, Comcast unilaterally ended Viamedia's access to the Chicago and Detroit Interconnects and removed WOW and RCN from participating in regional ad sales through the Interconnects.” (Id. at ¶ 110.) This was, according to Viamedia, the first time a “third-party representation firm or MPVD had ever been excluded from an Interconnect for any reason.” (Id. at ¶ 116 (emphasis in original).) Comcast's sudden closing of the doors to the Interconnect precluded Viamedia, WOW, and RCN “from selling any Spot Cable Advertising Avails through the Interconnects for Chicago and Detroit, two of the largest markets for regional Spot Cable Advertising sales in the country, ” causing “Viamedia and its MVPD clients [to lose] tens of millions of dollars in revenue.” (Id. at ¶¶ 114-15.) Initially, Comcast did not give a reason for the exclusion, but later “acknowledged that the exclusion was motivated by Comcast Spotlight's desire to replace Viamedia as WOW's and RCN's Spot Cable Advertising Representative.” (Id. at ¶¶ 111-12.)

         Although Viamedia requested that Comcast restore it and its clients' access to the Interconnect, Comcast did not oblige. (Id. at ¶¶ 120-21.) In Chicago and Detroit, for example, “Comcast said that it would be willing to consider Viamedia's readmission if, and only if, Viamedia agreed to certain commercially unreasonable terms, which would have prevented Viamedia from meaningfully competing with Comcast Spotlight.” (Id. at ¶ 122.) Specifically, “Comcast demanded that it be given the right to preempt, at its sole discretion and with virtually no advance notice, any of the Spot Cable Avails previously sold or controlled by Viamedia, whether such ads were sold through the Interconnect or not.” (Id. at ¶ 123.) This, Viamedia alleges, “would have given Comcast the unilateral ability to assume control over the entire inventory of Viamedia's MVPD clients and to resell Avails that had already been sold by Viamedia to other advertisers.” (Id. at ¶ 123.) Viamedia did not agree to these terms. (Id.)

         In 2015, Comcast told WOW and RCN that they “could resume [their] participation in the Comcast-controlled Interconnects if they ended their relationship with Viamedia and retained Comcast Spotlight as their sole Spot Cable Advertising Representative.” (Id. at ¶ 124.) In April of that year, WOW accepted a proposal from Defendants to replace Viamedia with Comcast Spotlight in the Detroit and Chicago DMAs in exchange for renewed access to those DMAs' Interconnects. (Id. at ¶ 126-28.) Accordingly, Comcast Spotlight gained control of “WOW's Spot Cable Advertising in Chicago and Detroit for national, regional, and local inventory.” (Id. at ¶ 128.) “Going forward, no advertiser will be able to reach WOW's Chicago and Detroit subscribers without dealing with Comcast Spotlight.” (Id.) Viamedia claims that it ...


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