Posted By: Cason Schmit
My Brother and his wife are Northwestern Alums and love their football. Three weeks ago, the Northwestern Wildcats were in the middle of their upset win over the then 13th ranked Iowa Hawkeyes. Unfortunately, the game was not broadcast in their area, so their only hope to see it live was on the Internet. Naturally they went to ESPN.com, “the Worldwide Leader in Sports,” to view the game. Although, ESPN streams games of all kinds from its website for free, not everyone can view them. As it turns out, ESPN does not permit viewers to watch games if they are not using an approved internet service provider (ISP). ESPN’s notice states: “In order to access ESPN3.com, you must receive your Internet Service from one of the providers in the list below or connect through a network on a U.S. college campus or military base. Your current network falls outside of these categories.” http://espn.go.com/espn3/index. To my brother and his wife’s frustration, their ISP is not one of the preferred ISPs, so they were unable to view the game.
Why might ESPN have this strange requirement? It could be that the preferred ISPs have a special agreement with ESPN such that ESPN benefits from the use of these particular ISPs. And this appears to be the case. ESPN provides a special notice to users with Time Warner as an ISP: “Attention Time Warner Cable Customers: In order to watch ESPN3.com, you must receive ESPN as part of your television service.” http://espn.go.com/espn3/index. This requirement shows that ESPN is trying to leverage its market power in online broadcasting to further boost its revenue in cable broadcasting where its market power is much weaker.
This practice could very well have antitrust implications. The Sherman Anti Trust Act forbids certain types of tying arrangements. A tying arrangement occurs when the seller with dominant market power conditions the sale of a product on the purchase of another product that the buyer might not necessarily buy otherwise, thereby impeding competition in the tied product market. Allen-Myland, Inc., V. IBM, 33 F.3d 194 (1994).
Based on ESPN’s terms of service, it could be seen that ESPN is tying the availability of a streaming sporting event (tying product) to the use of particular ISPs (tied product). This kind of “tying arrangement” can be in violation of the Sherman Anti Trust Act but is not necessarily so. The court in Allen-Myland v. IBM held that in order for a tying arrangement to rise to the level of an antitrust violation two things must be shown: 1) the seller has sufficient market power over the tying product, and 2) the arrangement affects a “substantial amount of interstate commerce.” 33 F.3d at 200-201.
Before addressing the first question, it is important to define the market for the tying product. ESPN would likely wish the market to be defined as sport broadcasting, in which case, its market power would be low due to the presence of the television broadcasters and other internet broadcasters. However, a Real Madrid fan doesn’t care about the NFL and a Northwestern Football fan doesn’t care about a Duke Basketball game. In essence, different sporting events are not interchangeable within the market. Furthermore because of team loyalties, a Northwestern Football game might not be interchangeable with a Florida State Football game and vice versa. In other words, fan loyalty prevents one game from being a suitable substitute for another. Because of interchangeability problems between different sporting events and that viewers have specific preferences that define their demand, the relevant market should seemingly be defined as the broadcast of a specific sporting event. Because my brother and his wife are outside the local broadcast area for Northwestern games, the relevant market from them is defined as Internet broadcasts of Northwestern Football games. In this market, ESPN’s power is absolute due to exclusive broadcasting agreements.
The second inquiry in determining the legality of tying arrangements is whether the tying arrangement is affecting a substantial portion of interstate commerce. A few things are clear, 1) ESPN is attempting to leverage its online broadcasting monopoly to favor specific ISPs over others and to encourage purchase of cable television services from firms that purchase its sercvers; 2) by denying access to the broadcast, ESPN is restricting the supply of its broadcast to the demand of individuals using disfavored ISPs; 3) internet users unwilling to change to a preferred ISP are completely barred from access to this market; 4) ESPN’s restrictions limit the reach of advertisers who purchased time during the given broadcast; and 5) there is variability in the cost of using different ISPs for consumers. However, the question remains as to whether these factors, in fact, affect a substantial amount of interstate commerce, which would no doubt require a significant market inquiry.
The weight of that question most certainly will be left to the courts to decide. However, it is apparent that ESPN’s tying practice raises interesting questions under the Sherman Anti Trust Act.