No. SJC THE COMMONWEALTH OF MASSACHUSETTS DEPARTMENT OF REVENUE,

Transcription

1 COMMONWEALTH OF MASSACHUSETTS SUPREME JUDICIAL COURT No. SJC DIRECTV, LLC and DISH NETWORK, L.L.C., PLAINTIFF/APPELLANTS, v. THE COMMONWEALTH OF MASSACHUSETTS DEPARTMENT OF REVENUE, DEFENDANT/APPELLEE. ON DIRECT APPELLATE REVIEW FROM A FINAL JUDGMENT ENTERED IN THE SUFFOLK COUNTY SUPERIOR COURT BRIEF OF AMICUS CURIAE PUBLIC KNOWLEDGE John Bergmayer Senior Staff Attorney Public Knowledge 1818 N Street NW, Suite 410 Washington, D.C (202) Karen A. Pickett (BBO # ) Pickett Law Offices, P.C. 22 Batterymarch St., 4th Floor Boston, Massachusetts (-617) COUNSEL FOR AMICUS CURIAE PUBLIC.KNOWLEDGE

2 TABLE OF CONTENTS INTEREST OF THE AMICUS...1 SUMMARY OF ARGUMENT...2 ARGUMENT...4 I. MASSACHUSETTS' SATELLITE-ONLY TAX HARMS CRITICAL DBS-BASED COMPETITION IN THE MVPD MARKET A. Congress Intended DBS To Provide Meaningful Competition In The MVPD Market...6 B. A Discriminatory Tax Has A Major Impact On The Effectiveness Of DBS Competition For Massachusetts Consumers...7 C. Rural Consumers Gain Additional Benefit From DBS Availability...9 II. HARM TO DBS-BASED COMPETITION IN THE MVPD MARKET RESULTS IN HARM TO MASSACHUSETTS CONSUMERS...10 A. Harm To MVPD Competition Results In Economic Harm To All Massachusetts MVPD Customers...11 B. Harm To MVPD Competition Reduces The Diversity Of Voices Critical to A Democratic Society...13 C. Harm To MVPD Competition Will Reduce Service Improvements Delivered To Consumers...15 CONCLUSION...16

3 TABLE OF AUTHORITIES Federal Statutes, Cases, and Reports Cable Television Consumer Protection and Competition Act of 1992, Pub. L. No , 106 Stat (1992)...5, 6, 11, 13 Federal Communications Comm' n, In re Annual Assessment of the Status of Competition in the Market for the Delivery of Video Programmin g, 12th Annual Report, F.C.C (Feb. 2006)...6, 14, 15, 16 Federal Communications Comm'n, In re Annual Assessment of the Status of Competition in the Market for the Delivery of Video Programming, 15th Annual Report, F.C.C (July 2013)...7, 11, 13 In re Comcast Corp., 17 F.C.C.R (2002) Turner Broadcasting Sys., Inc, v. FCC, 512 U.S. 622 (1994)...:...13 U.S. Census Bureau, USA Quickfacts...13 U.S. Dept of Labor, Bureau of Labor Statistics, CPI Detailed Report Tables (Mar. 2014)...11 U.S. Government Accountability Office, Direct Broadcast Satellite Subscribership Has Grown Rapidly, but Varies Across Different Types of Markets, GAO (Apr. 2005)...9, 16 Massachusetts Reports Massachusetts Office of Consumer Affairs & Business Regulation, Quick Facts About Cable TV in Massachusetts...10 Massachusetts Department of Telecommunications & Cable, Competition Status Report (Feb. 2010)...5, 10 ii

4 Special Commission on Rural Access and Improving State-Sponsored Services. in Massachusetts Rural Communities, Report to the Great and General Court and Executive Office of the Governor (Aug. 2013) Other Authorities Austan Goolsbee & Amil Petrin, The Consumer Gains from Direct Broadcast Satellites and the Competition With Cable TV, 72 Econometrica 351 (Mar. 2004)...12 Amil Petrin & Kenneth Train, A Control Function Approach to Endogeneity in Consumer Choice Models, 47 Journal of Marketing Research 3 (Feb. 2010)...8 F. M. Scherer & David Ross, Industrial Market Structure and Economic Performance (Houghton Mifflin Co. 1990)...4 Adam Smith, The Wealth of Nations (1776)...4 iii

5 INTEREST OF THE AMICUS Public Knowledge respectfully submits this brief in support of Plaintiffs/Appellants DIRECTV, LLC and DISH Network L.L.C. Public Knowledge is a Washington, D.C. based notfor-profit public interest advocacy and research organization. It is dedicated to protecting consumers' rights and the core democratic principles of openness, public access, and the capacity to innovate and com- Pete in the digital age.. Public Knowledge seeks to guard these cultural values at all layers of our communications systems through legislative, administrative, legal, and grass-roots efforts. The decision below has broad implications for consumer choice and costs as well as for the diversity of voices in the video services which are piped daily into more than two million Massachusetts homes. The Superior Court has provided a recipe for state legislatures to favor in-state interests at the expense of interstate commerce. If these schemes, designed to create an anticompetitive market, are permitted to continue in the face of contrary Constitutional law, the cost of favoring some Multichannel Video Program Distributors ("MVPD") over others will be paid for by 1

6 consumers, speakers, and innovators. Amicus curiae uniquely represents the interests of consumers in a proceeding which is otherwise about the interest of states versus the interest of certain video providers. Public Knowledge is not affiliated with any cable company, Direct Broadcast Satellite ("DBS") provider, other MVPD, or party to this action.l SUNIl~lARY OF ARGUMENT Tax schemes such as the one at issue in this case raise issues of great public and general interest because they harm the competition which is critical to ensuring that MVPD consumers receive the best service and have access to the greatest diversity of voices at the lowest price. Competition in the MVPD market benefits consumers in three broad ways. First, competition in the MVPD market disciplines prices across providers, lowering costs for all subscribers to MVPD services and increasing the availability of services nationwide. Second, competition translates to diversity of voices heard by the vast majority of Massachusetts households who subscribe to multichannel services. Third, competilamicus would also like to acknowledge the assistance of Michael Weinberg, George Washington University Law School, in the preparation of this brief..

7 tion increases quality of service to multichannel custourers. DBS-based competition in particular has_ a demonstrated track record of encouraging innovation in the market, providing consumers with advanced services including better picture quality, music offerings, and Internet and telephone services. Singling out innovative distribution technologies for discriminatory taxation discourages service improvement and encourages providers to freeze existing levels of service. Finally, these benefits are felt even more strongly by rural customers, who may have no locally based MVPD option at all. Congress and the FCC have repeatedly demonstrated their commitment to achieving consumer benefits _ through competition in the MVPD market. By leveling the playing field, Congress has sought to stop runaway cable pricing and to encourage innovation. To some extent, it has succeeded. But to the extent that MVPD prices still outpace inflation, the problem can be partially attributed to the discriminatory treatment of cable's primary competitor in a market where consumers, when faced with higher prices, are very likely to switch providers or leave the market entirely. 3

8 The Superior Court's decision has troubling implications not only for current MVPD competitors, but for future entrants as well. Creating an anticompetitive market by favoring some MVPD distribution technologies over others will harm consumers by restricting competition in existing video services and reducing the incentive to create new services which have not yet been imagined. We respectfully ask this Court to reverse the decision of the Superior Court and hold that the Commonwealth cannot engage in discriminatory taxation against some types of MVPDs. In general, if any branch of trade, or any division of labour, be advantageous to the public, the freer and more general the competition, it will always be the more so. Adam Smith, The Wealth of Nations, Book 11, Chapter 11 (1776). It is now axiomatic that competition is beneficial to consumers, both because it increases choice and because it lowers prices.z When a state acts to unconstitutionally disfavor out-of-state DBS interests in favor of in-state land-based MVPD interests, it z For a more modern, in-depth explanation of the con- Sumer benefits of competition, see F. M. Scherer & David Ross, Industrial Market Structure and Economic Performance (Houghton Mifflin Co. 1990).

9 hampers this critical competition and hurts all Massachusetts MVPD customers.a group that comprises some of the Commonwealth's households.3 I. MASSACHUSETTS' SATELLITE-ONLY TAX HARMS CRITICAL DBS-BASED COMPETITION IN THE MVPD MARKET. As Congress has long recognized, the pro-speech and pro-consumer effects of DBS-based competition are critical to the MVPD market: "There is a substantial governmental and First Amendment interest in promoting a diversity of views provided through multiple technology media," and "[w]ithout the presence of another multichannel video programming distributor, a cable system faces no local competition. The result is undue market power for the cable operator as compared to 'that of consumers and video programmers." Cable Television Consumer Protection and Competition Act of 1992, Pub. L. No , ~~ 2 (a)(2), 2 (a)(6), 106 Stat. 1460, 1460 (1992) (codified at 47 U.S.C. ~ 521 note) [hereinafter "1992 Cable Act"]. 3 Massachusetts Department of Telecommunications & Cable, Competition Status Report at xii (Feb. 2010) [hereinafter "Massachusetts Competition Status Report"], available at dtc/compreport/competitionreport-combined.pdf.

10 A. Congress Intended DBS To Provide Meaningful Competition In The MVPD Market. Congress has long been concerned with cable companies abusing their MVPD monopolies. See, e.g., 1992 Cable Act. With the large initial investment required to construct a cable network, cable has often been described as a natural monopoly. Although there have been attempts to diversify MVPD offerings by encouraging cable "overbuilders" (companies that construct a second cable network in communities with existing cable networks)., these services have historically experienced problems reaching financial stability and economies of scale. See Federal Communications Comm'n, In re Annual Assessment of the Status of Competition in the Market for the Delivery of Video Programming, 12th Annual Report at 47-48, F.C.C (Feb. 2006) [hereinafter "2006 FCC Annual Report"]. Unlike overbuilders, who must construct large networks~in every market before they can begin to compete, DBS services can quickly and easily distribute equipment to begin competing in a given market. This ease of entry into new markets provides a much-needed check on cable's monopoly power. See id. at 4, 7. C.~

11 In recent years, online video distribution ("OVD") providers like Netflix have gained prevalence in the marketplace. But they also face significant competitive barriers, including the costs of "content acquisition and [their] ability to access sufficient Internet capacity to provide customers with a highquality OVD viewing experience." Federal Communicabons Comm'n, In re Annual Assessment of the Status of Competition in the Market for the Delivery of Video, 15th Annual Report at 124, F.C.C (July 2013) [hereinafter "2013 FCC Annual Report"] OVD providers, too, must invest heavily in hardware and software to compete against MVPD providers. Id. at 152. Although an important part of the marketplace, it is clear that OVD is not yet an adequate substitute for cable - and that DBS providers are still the most important guard against a cable monopoly. B. A Discriminatory Tax Has A Major Impact On The Effectiveness Of DBS Competition For Massachusetts Consumers. Consumers in the MVPD market are price-sensitive, meaning that small increases in the price of one providers' service will produce comparatively large shifts of consumers away from that provider, often to competitors. As a result, differential taxation di- 7

12 rectly impacts competition and harms all of the goals discussed below. There is no question that cable operators and DBS providers are direct competitors, and the relative cost of service is a key factor in consumers' buying decisions. When the cost of DBS rises just lo, con- Sumer demand for that service falls precipitously - by more than Amil Petrin & Kenneth Train, A Control Function Approach to Endogeneity in Consumer Choice Models, 47 Journal of Marketing Research 3, 12 tbl. 4 (Feb. 2010), available at htt.p:// ~petrin/papers/petrin_train_jmr.pdf. Significantly, the MVPD market has high cross-elasticity, meaning that an increase in the cost of DBS not only reduces demand that service, it also drives customers to competing cable operators. One study reports that a to increase in the cost of DBS service increases demand for cable service by nearly Id. Thus, a multiple-percentage point tax imposed only on DBS discourages tens of thousands of Massachusetts residents from choosing DBS, and persuades them to choose cable instead. The type of cost.changes imposed on DBS by the Massachusetts tax is likely to produce a drastic effect '3

13 on competition. This directly impacts Massachusetts consumers, increasing overall prices paid and reducing quality of service and the diversity of voices on the airwaves. C. Rural Consumers Gain Additional Benefit From DBS Availability. More than 100 of Massachusetts families live in rural areas. See Special.Commission on Rural Access and Improving State-Sponsored Services in Massachusetts Rural Communities, Report to the Great and General Court and Executive Office of the Governor at 5 (Aug. 2013), available at docs/eohhs/rural-services-commission-report.pdf. In addition to broadly competing with cable, DBS has a much higher adoption rate in rural areas. U.S. Government Accountability Office, Direct Broadcast Satellite Subscribership Has Grown Rapidly, but Varies Across Different Types of Markets at 3, 7, GAO (Apr. 2005) [hereinafter "GAO Report"], available at http: // In areas where no cable service is available at all (which are often rural), DBS adoption rates are 53o higher. Id. at 9. Notably, the Massachusetts Office of Consumer Affairs and Regulation reports that 120 (43 of 351) of the ~:]

14 Commonwealth's cities and towns are not wired for cable, meaning that 58,000 Massachusetts households cannot subscribe to cable.4 For these households - for which obtaining service from a DBS provider is the only practical or actual choice discriminatory tax schemes will directly translate to an increase in con- Sumer costs, driving a significant fraction of consumers out of the market altogether and producing higher prices for the rest. Further, any harm to DBS in markets that have cable as well will be visited more powerfully on rural customers, who do not have the benefit of a state-preferred option available. II. HARM TO DBS-BASED COMPETITION IN THE MVPD MARKET RESULTS IN HARM TO MASSACHUSETTS CON- SUMERS. The benefits of competition in the MVPD market are realized by consumers in three ways: First, competition between MVPDs reins in prices for all MVPDs. Second, it encourages MVPDs to diversify their offerings, resulting in a broader diversity of speech being available to consumers. Finally, competition drives 4 Massachusetts Office of Consumer Affairs & Business Regulation, Quick Facts About Cable TV in Massachusetts, Massachusetts Competition Status Report at xi. ~[i7

15 both the creation of new, innovative MVPD offerings and an increase in quality of existing services. When a state's tax scheme harms competition from DBS, it also hurts consumers in all three areas. A. Harm to MVPD Competition Results In Economic Harm To All Massachusetts MVPD Customers. Congress intended for DBS entry to provide meaningful price constraints in an otherwise monopolistic MVPD market. See 1992 Cable Act, ~ 19. It has been partially successful, although current levels of competition have not been enough to completely discipline pricing. In a recent report on competition in the video programming market, the FCC reported that despite technological improvements in video delivery, prices in the MVPD market continue to outpace the general level of inflation FCC Annual Report at 58.5 Competition from DBS, however, has had the effect of constraining the price increases from incumbent providers, preventing them from rising even higher SInflation, as measured by the Consumer Price Index, during the reported.period ( ) increased between 2. 1 o and See U. S. Dept of Labor, Bureau of Labor Statistics, CPI Detailed Report Tables, at tbl. 24 (Mar. 2014), available at cpi/cpid1403.pdf. The cost of basic MVPD service, by contrast, increased by 6.20 on average FCC Annual Report at

16 than they have to date. One study concluded that without DBS's entry into the market, cable prices would be 15o higher. Austan Goolsbee & Amil Petrin, The Consumer Gains from Direct Broadcast Satellites and the Competition With Cable TV, 72 Econometrica 351, 373 (Mar. 2004). Especially given the price sensitivity of MVPD customers, differential treatment of DBS and cable services in Massachusetts and other states could account for DBS's failure to fully control cable price increases despite its positive effect on other areas, including network availability, picture quality, and overall innovation. In the same way that competition lowers prices for consumers, reduced competition raises them. If allowed to proceed unchecked, discriminatory taxing will raise prices not just for DBS users, but for all MVPD subscribers. This results not just in DBS customers paying higher prices (as is the case with all taxes), but in increased prices for MVPD services used and paid for by the vast majority of Massachusetts residents. 12

17 B. Harm To MVPD Competition Reduces The Diversity of Voices Critical To A Democratic Society. As Congress has recognized, "[t]here is a. substantial... First Amendment interest in promoting a diversity of views provided through multiple technology media." 1992 Cable Act, ~ 2(a)(6). The Supreme Court of the United States has also recognized this Constitutional interest: "[A]ssuring that the public has access to a multiplicity of information sources is a governmental. purpose of the highest order, for it promotes values central to the First Amendment." Turner Broadcasting Sys., Inc. v. FCC, 512 U.S. 622, 663 (1994). The FCC, too, has echoed the Supreme Court's observation that "[i]t has long been a basic tenet of national communications policy that `the widest possible dissemination of information from diverse and antagonistic sources is essential to the welfare of the public."' In re Comcast Corp., 17 F.C.C.R , 9I 27 (2002) (quoting Turner Broadcasting Sys., 512 U.S. at 663). As of June 2012, there were 101 million households in the United States that subscribed to an MVPD service FCC Annual Report at 4. According to the Census Bureau, there are roughly 115 million house- 13

18 holds in the United States. See U.S. Census Bureau, USA Quickfacts, states/ooooo.html. Because so many households subscribe to an MVPD service, it is unsurprising that Americans watch more than 35 hours of television every week, on average. See 2013 FCC Annual Report at 62. In Massachusetts today, the delivery of video services to homes is much more than an entertainment business. It is a primary speech outlet one through which Massachusetts households collectively view billions of hours of television-based speech per year. The current diversity of voices on this communications channel is the product, in part, of DBS's key role in promoting consumer choice. As the FCC has found, "Competition in the delivery of video programming services has provided consumers with increased choice... In particular, the effect of DBS competi- Lion has resulted in the addition of networks to cable operators' channel line ups..." 2006 FCC Annual Report at 4. DBS's nationwide structure also allows it to provide a wider variety of options than 1oca1 cable franchises can. For instance, while foreignlanguage programming may not be economically viable in a given cable market, DBS can aggregate the demand 14

19 for it nationwide and offer it to consumers in every market across the United States. When a state grants some MVPDs preferential tax treatment, it not only raises prices for consumers, it also reduces the diversity of voices and speech venues available to all Massachusetts residents. C. Harm To MVPD Competition Will Reduce Service Improvements Delivered To Consumers. In addition to delivering more diverse voices and lowering prices, the FCC has noted that MVPD competition provided consumers with "better picture quality[] and greater technological innovation." 2006 FCC Annual Report at 4. Specifically, the competition of DBS providers encouraged cable operators to make investments that enable "more channels of basic and digital cable services, premium movie services, pay-per-view service, high-definition service, high-speed Internet access services, CD-quality music, cable telephony, and more personalized programming options." Id. at 22. The FCC attributed these new services in large part to competition from DBS; and in response to cable's new services, DBS providers have expanded their own offerings: "Cable operators have responded to the growth of DBS and its competitive service offerings 15

20 by, among other things, expanding their channel line ups and bundling video service with other service offerings, such as cable modem service or telephone service... These competitive efforts are matched by DBS operators' offering of local broadcast channels, additional sports and international programming, and advanced set-top boxes with digital video recorder (DVR) capabilities." 2006 FCC Annual- Report at 4. This continual upgrading of services is emblematic of the benefits of competition. The Government Accountability Office also reports that DBS penetration is 20o higher in places where cable is not offering these advanced services, suggesting that DBS's presence forces cable to offer customers improved services in order to compete. GAO Report at 9. Taxes that disproportionately burden DBS to the benefit of cable will allow incumbents to slow or cease these innovations, as they will be unnecessary for cable to compete in the marketplace. CONCLUSION For these reasons, amicus therefore requests that the Court reverse the judgment of the Superior Court and hold that the satellite-only tax violates the Commerce Clause. 16

21 Respectfully Submitted, John ~e~'gmayer Senior Staff Attorney Public Knowledge 1818 N Street NW, Suite 410 Washington, D.C (202) Karen A. Pickett (BBO #633801) Pickett Law Offices, P.C. 22 Batterymarch St., 4th Floor Boston, Massachusetts (617) COUNSEL FOR AMICUS CURIAE Public Knowledge Dated: April 28,

22 CERTIFICATE OF COMPLIANCE This brief complies with the rules of court that pertain to the filing of amicus briefs, including but not limited to: Mass.R.App.P. 17 (amicus briefs) and Mass.R.App.P. 20 (form of briefs, appendices and other papers). ~ f _. 7 ~/~ J ~7 ~ ~ ~~`: IN W'~ '~c~ F :11~1/~L~~ Karen'~~1. Pickett