Charter can charge Netflix and other online video streaming services for network interconnection despite a merger condition prohibiting the practice, a federal appeals court ruled today.

The ruling by the US Court of Appeals for the District of Columbia Circuit overturns two merger conditions that the Obama administration imposed on Charter when it bought Time Warner Cable and Bright House Networks in 2016. The FCC under Chairman Ajit Pai did not defend the merits of the merger conditions in court, paving the way for today’s ruling. The case was decided in a 2-1 vote by a panel of three DC Circuit judges.

The lawsuit against the FCC seeking to overturn Charter merger conditions was filed by the Competitive Enterprise Institute (CEI), a free-market think tank, and four Charter users who claim they were harmed by the conditions. The FCC unsuccessfully challenged the suing parties’ standing to sue, and it did not mount a legal defense of the conditions themselves.

Though Charter did not file this lawsuit, the ISP separately asked the FCC to let the network-interconnection condition and a condition prohibiting data caps expire on May 18, 2021, two years earlier than scheduled. Today’s court’s ruling seems to render Charter’s petition moot as far as the network-interconnection condition goes, but the court ruling did not overturn the data-cap prohibition.

Charter is the second biggest cable company in the US after Comcast and offers service in 41 states under the Spectrum brand name.

ISPs extract payments from online video

The Obama-era FCC required Charter to provide free interconnection to large online providers until 2023. The condition was intended to prevent business disputes that have a history of harming consumer-broadband performance when companies refuse to pay fees demanded by ISPs.

“Many interconnection agreements are made between broadband Internet providers and ‘edge providers’ such as Netflix—i.e., those who provide content to consumers through the Internet,” today’s ruling noted. “Since broadband providers allow edge providers to reach their subscribers, the broadband providers often can extract payments from edge providers. The disputed condition prohibits New Charter [the post-merger entity] from doing so.”

The CEI lawsuit argued that requiring Charter to forgo revenue from interconnection agreements caused Charter to increase broadband prices after the merger. Of course, Charter could have simply pocketed extra interconnection revenue and still raised Internet prices, as it faces little competition from other high-speed broadband providers in its cable territory. But DC Circuit judges agreed with the plaintiffs’ argument:

To begin, the condition plainly caused New Charter to forgo revenue from edge providers. Before the merger, Time Warner, the largest broadband provider among the merging companies, raised substantial revenue from paid interconnection agreements. So did Bright House. But the merger condition prohibits New Charter from using those same revenue sources.

It is also clear that the consumers’ bills increased shortly after the merger. Before the merger, France and Haywood [two of the lawsuit filers] subscribed to Bright House’s broadband service, and Frank subscribed to Time Warner’s. Shortly after, New Charter raised their monthly bills: France’s bill increased about 20 percent, from $84 to $101, Haywood’s about 40 percent, from $51 to $71; and Frank’s about 5 percent, from $75.99 to $79.99.

“Small financial injury” enough to prove standing

The case turned largely on the question of whether the consumers who sued had standing to challenge the conditions. Even if other factors besides interconnection contributed to the price increases, “the subscribers need not show that prohibiting paid interconnection agreements caused the entirety of the price increases, or even that it caused price increases of some specific amount,” judges wrote. “For standing purposes, even a small financial injury is enough, and the consumers have shown a substantial likelihood that their bills are higher because of the prohibition on paid interconnection agreements.”

The lawsuit targeted four merger conditions, and judges ruled that the plaintiffs had standing to challenge two of them: the interconnection-payment ban and a condition requiring Charter to offer a discount Internet service to people with low incomes. The litigants have standing to challenge the discount-service condition based on the argument that a low-income service causes higher prices for other consumers, the judges found.

With the consumers’ having standing to challenge those two conditions, the FCC’s refusal to defend the conditions on their merits made the judges’ decision easier. Judges wrote that they “need not resolve” all the thorny questions of the case because “there is a simpler ground of decision. The lawfulness of the interconnection and discounted-services conditions are properly before us, yet the FCC declined to defend them on the merits. The agency’s only explanation for doing so was its view that we cannot reach the merits. Having lost on that question, the FCC has no further line of defense.” The two conditions are “vacate[d] given the FCC’s refusal to defend on the merits,” the judges wrote.

The low-income condition required Charter to offer 30Mbps broadband service for no more than $14.99 in service fees and no more than $5 in router rental fees each month, and to enroll at least 525,000 qualifying low-income households by May 2020. Charter complied with the condition with its Spectrum Internet Assist program, which is similar to a low-income program offered by Time Warner Cable before the merger. Under the merger condition, Charter was allowed to raise the base price to $17.99 a month last year. Charter hasn’t announced any plans to stop offering the low-income service.

The judges rejected the lawsuit’s challenge to the data-cap condition, writing that “there is scant evidence that New Charter would offer usage-based pricing if allowed to do so.” The judges also rejected the challenge to a requirement that Charter extend its network to 2 million additional homes and businesses, saying that “New Charter already has built much of the required infrastructure, and its sunk costs in doing so cannot be recovered.” The litigants “offer no reason to think that New Charter will abandon the project if now allowed to,” and “no reason to think that if New Charter were to abandon the project at this late date, thus ensuring a wasted investment, the decision to do so would somehow lower the prices for its broadband customers,” the judges wrote.

“Prices go up because of mergers”

Charter told the FCC in a filing that it doesn’t “currently” plan to impose data caps or charge video providers for interconnection, but the company wants the prohibitions lifted because they “put Charter at a competitive disadvantage” and “forc[e] Charter to run its network based on arbitrary merger conditions instead of market conditions.” Charter’s filing also claimed that broadband plans with data caps are “often popular” with consumers.

We contacted Charter about the court decision today and will update this article if we get a response.

Matt Wood, VP of policy at consumer-advocacy group Free Press, said in response to the court decision that “prices go up because of mergers, not the tame conditions imposed on them. That’s the whole point of taking out competitors and concentrating power.”

Wood pointed to a Free Press filing to the FCC that he said shows “Charter was delivering better value and getting better financial results for itself than any other big wired ISP. So the notion that either Charter or its customers have suffered from the conditions is a joke, as is any claim by the litigants that unconditioned mergers and monopolies are somehow better for people.”

Disclosure: The Advance/Newhouse Partnership, which owns 13 percent of Charter, is part of Advance Publications. Advance Publications owns Condé Nast, which owns Ars Technica.

https://arstechnica.com/?p=1699205