Cinémoi founder says AT&T-Time Warner merger will harm independent programmers, innovation

Published 12 April 2017. By Curtis Eichelberger.

Daphna Ziman, founder and president of television network, Cinémoi, told the Department of Justice that AT&T's $85.4 billion acquisition of Time Warner threatens the survival of independent programmers by silencing innovators in their infancy.

Cinémoi, a 24-hour network that is shown on Verizon FiOS and Frontier, features vintage movies, interview series with contemporary actors and actresses, behind-the-scenes productions of film and fashion festivals and environmental documentaries.

"Innovation is about being open to start-ups. That is where innovation occurs," Ziman said. "But shutting off innovation has become a business strategy for large corporations. They eliminate competition before it gets out of the gate and that's an antitrust issue."

Independents such as Cinémoi usually have small margins, said Ziman, and can be driven into bankruptcy when distributors charge fees for the right to be included in their lineup — what's known as pay-for-play.

Cinémoi, whose programs are viewed by an average nine million consumers a month, according to the company, earns revenue from traditional advertising, longer branded programming, sponsored events and sponsored public service announcements.

When media companies combine in what's known as a vertical merger, where a distributor such as AT&T combines with a content producer such as Time Warner, it can make the merged company more efficient.

But it can also allow the merged company to discriminate against competitors such as Cinémoi that air similar content by shutting them out of their programming, hiding them in the channel lineup, or charging exorbitant fees to air their programming.

Cinémoi was offered on DirecTV (later bought by AT&T for $48.5 billion) in 2012 and was dropped a year later over a fee dispute. Soon after, Verizon began offering Cinémoi on FiOS.

Zero-rated programming

Perhaps the biggest threat to independents is what's known as zero-rated programming, which is one of Ziman's biggest concerns and one she has discussed at length with the DOJ.

Consumers often get a limited amount of data each month for their Internet-connected devices, and when they exceed that limit, they are charged overage fees. But zero-rated content doesn't count against the data plan. So when two competitors air similar programming, consumers will often choose the one that is free over the one that eats away at their data plan.

This can constitute discriminatory pricing, with a distributor driving traffic to the content it owns over that of a competitor.

In the AT&T-Time Warner case, the merged company could offer Turner Classic Movies programs that compete with Cinémoi under a zero rating and apply the data cap to Cinémoi's programming. That would likely drive consumers to Time Warner's content and away from Cinémoi's, reducing viewership and advertising for the smaller, independent network.

Catherine Sandoval, a law professor at Santa Clara University and a former commissioner at the California Public Utilities Commission, which regulates the telecommunications industry, among other things, said zero rating is a critical issue to the future of the media industry.

"One of the questions will be: Is AT&T's wireless platform increasing the ability of AT&T to raise rivals' costs in exchange for being zero-rated?" she said. In that case, they would force the independent to pay them fees to be listed as zero-rated. "Or, can it relegate them to the data cap, while affiliated content goes to zero-rated."

Ziman said two-thirds of viewers who watch Turner Classic Movies also watch movies on Cinémoi.

"Shutting us out by making us pay for distribution or putting us on a data plan eliminates competition with their own content. And [TCM has] no incentive to innovate without competitors forcing them to," Ziman said.

Fair play in question

While all companies say they value innovation and competition, that's not always the case. And AT&T has a history of looking to game the system.

In March, AT&T subsidiary DirecTV settled a US antitrust lawsuit accusing it of colluding with its competitors during a 2014 fight with Time Warner Cable over the Los Angeles Dodgers channel.

The DOJ alleged the satellite-television provider was part of a conspiracy involving Los Angeles-area distributors who shared negotiating information to keep Time Warner Cable from gaining a competitive advantage by getting one distributor to sign up before the others.

The agreement between the distributors meant 70 percent of pay-TV subscribers in Los Angeles didn't get to see the Dodgers baseball channel.

"When competitors email, text, or otherwise share confidential and strategically sensitive information with each other to avoid competing, consumers lose," then-acting Assistant Attorney General Brent Snyder said in a statement.

As part of the settlement, DirecTV agreed not to share sensitive negotiating information with rivals and to a compliance program designed to ensure it lives up to its commitment.

FCC chair endorses 'free data'

The Federal Communications Commission introduced the Open Internet Order in 2015, which was intended to protect net neutrality — the notion that an Internet service provider such as AT&T can't favor its own content or discriminate against a competitor's traffic — and declared consumer broadband to be covered by the Communications Act.

Essentially, that law prohibits a distributor from blocking the content of a website or app, slowing the data speed of a website or app, or forcing one company to pay a fee to the distributor to get faster data speeds or more bandwidth.

One fear was that distributors would use zero-rated products to guide consumers to content that is the most profitable to them.

T-Mobile was one of the first with zero-rated data, with programs such as Binge On and Music Freedom. Verizon offers NFL streams on the NFL Mobile app and its Go90 video service. AT&T offers the companion app of its DirecTV service. Sprint offers selected events. And Comcast offers Stream TV.

This raises concerns that only the biggest, wealthiest companies, such as Netflix, Amazon or Alphabet's YouTube, will be able to afford to pay for increased bandwidth in the battle for users, e-commerce sales and advertising dollars.

At the bottom of this business model are independents such as Cinémoi, which Ziman said are likely to get steamrolled if the antitrust agencies don't protect the little companies that are searching for innovative ways to challenge the mega-media companies.

But they aren't likely to get help on that score from the FCC.

On Feb. 3, FCC Chairman Ajit Pai said the Wireless Telecommunications Bureau was closing its investigation into wireless carriers' free-data offerings and that the work former FCC Chairman Tom Wheeler did to protect networks from zero-rating would have no legal standing moving forward.

"These free-data plans have proven to be popular among consumers, particularly low-income Americans, and have enhanced competition in the wireless marketplace," Pai said in a statement. "Going forward, the Federal Communications Commission will not focus on denying Americans free data."

That means the DOJ can't count on the FCC to take a stand against the use of zero-rating to protect small independent television networks.

Observers say the most likely scenario is for the government to negotiate a behavioral remedy that would commit AT&T to not using zero-rating on its own content for a period of time. But as Sandoval notes, behavioral remedies have had mixed results.

Such agreements usually last just three to seven years, and the agencies don't have the money or manpower to keep checking to ensure they are being enforced, Sandoval said. Then a few years later, they expire. And what then?