The opinion of the court was delivered by: LEISURE
AD/SAT alleges that defendant Associated Press ("AP") has violated Section 2 of the Sherman Act, see 15 U.S.C. § 2, by (1) attempting to monopolize the alleged market of electronic transmission of advertisements to newspapers; (2) engaging in monopoly leveraging; and (3) monopolizing the news and wire services markets. In addition, AD/SAT alleges that all defendants in this action have: (1) conspired to boycott plaintiff, in violation of Section 1 of the Sherman Act, see 15 U.S.C. § 1; and (2) conspired to monopolize the alleged market of electronic transmission of advertising to newspapers, in violation of section 2 of the Sherman Act. See 15 U.S.C. § 2. Pursuant to Fed. R. Civ. P. 56, AP moves for summary judgment as to AD/SAT's Sherman Act § 2 claims against it. In addition, all defendants move for summary judgment as to AD/SAT's Sherman Act §§ 1 and 2 conspiracy claims against them. Finally, AD/SAT moves for reconsideration of this Court's April 24, 1995 decision granting defendant the Lexington Herald-Leader's motion for summary judgment. Based on the following reasons, the Court grants all defendants' motions in their entirety, and denies AD/SAT's motion for reconsideration.
This case is about the business of delivering advertisements from advertisers to newspapers. Traditionally, advertisements have been delivered from the advertiser, or advertising agency, to the newspaper by one of several means of physical delivery, including regular mail, messenger service, and overnight delivery service (such as Federal Express). By choosing to spend advertising dollars advertising in newspapers, as opposed to other alternatives such as television and radio, advertisers trigger the demand for delivery service, and they also typically select the means of delivery. In addition, advertisers normally bare the costs of delivery. At the current time, over 80% of all newspaper ads are delivered by overnight services such as Federal Express, with messenger service being the next most popular means of delivery.
An alternative means of delivering newspaper advertisements is electronic transmission. Electronic delivery of advertising involves the transmission of copy from advertisers to newspapers via satellite or terrestrial (i.e. land-based) means. Two of the parties in this litigation, AD/SAT and AP, deliver advertisements to newspapers over satellite networks. AD/SAT has been engaged exclusively in this activity since 1986, and it delivers its ads over a satellite network owned and operated by AP. AP, a cooperative association whose members consist of over 1,500 United States newspapers, is primarily engaged in the collection, assembly and distribution to newspapers of news and photographs. Recently, however, AP also began to deliver ads to newspapers electronically, also using its satellite network. Unlike the physical carriers such as Federal Express, which engage in a wide variety of delivery services, AD/SAT's and AP's services currently focus exclusively on the delivery of ads to newspapers. AD/SAT argues that AP's entrance into the business, which allegedly occurred with unlawful conspiratorial assistance from the remaining defendants in this litigation, violated the antitrust laws.
The remaining defendants are individual newspapers or groups of newspapers, and one individual. Defendant Advance Publications, Inc. is owned by the Newhouse family. Defendant Donald E. Newhouse, the president of Advance, was, during times relevant in this litigation, a member of the Board of Directors of AP, and the volunteer Chairman of NAA. Through wholly owned subsidiaries, Advance owns defendants Newark Morning Ledger Co., which publishes The Star-Ledger, and The Birmingham News Company, which publishes The Birmingham News.1
Cox Newspapers, Inc., a wholly-owned subsidiary of defendant Cox Enterprises, Inc. ("CEI"), publishes fourteen newspapers of general circulation. One of these newspapers is the Dayton Daily News, a Dayton, Ohio newspaper of general circulation, which is owned by defendant Dayton Newspaper, Inc. ("DNI"), a wholly-owned subsidiary of Cox Newspapers. David Easterly, the president of CEI, is a member of the AP Board of Directors, and was a member of an AP Board ad hoc committee which assisted AP's management in investigating and planning AP's entry into the electronic advertisement business.
Defendant Oklahoma Publishing Company publishes an independent daily newspaper called the Daily Oklahoman in Oklahoma City, Oklahoma. Defendant the News & Observer Publishing Company publishes the News & Observer. Finally, defendant Oakland Press Company publishes The Oakland Press, a daily newspaper in Oakland County, Michigan.
The AD/SAT system requires advertisers or advertising agencies to deliver a hard copy (or Velox) of an advertisement to one of two AD/SAT transmittal stations, which are located in Los Angeles and New York. The ad is then scanned into AD/SAT's system, and transmitted to the designated newspapers via the AP owned and operated satellite network. Next, the ad is received at each newspaper by an AP satellite dish, and forwarded to an AD/SAT installed and owned recorder, which produces a hard copy of the ad. Each recorder, which is essentially a high speed facsimile machine, costs approximately $ 62,000, with additional equipment, necessary to make the recorder operational, costing another $ 30,000.
AD/SAT's revenue is generated from service fees charged to both newspapers and advertisers. Advertisers are charged per ad transmission, and the amount per transmission decreases as the number of sites to which the ad is sent increases.
Because the costs of sending an ad to a single location over the AD/SAT system is much higher than physical delivery of a single ad, the system favors advertisers who send an identical ad to many different locations. Indeed, from its beginnings AD/SAT targeted national advertisers.
Of the 50 largest papers in the United States, 48 are AD/SAT affiliates, and of the next 100 largest, 60 are AD/SAT affiliates. While AD/SAT, at least through the date of the filing of this motion, continues to move more ads electronically than any other supplier, it still only delivers a small percentage of all ads placed in newspapers. In addition, AD/SAT has been unable to expand its network of newspaper affiliates. Because of the high fixed costs associated with the recorders, AD/SAT could not afford to waive the high reception and affiliation fees it demanded from newspapers. Therefore, expansion of the newspaper network to additional newspapers could not occur because the limited number of ads received would not justify the high costs. And, because of the limited size of the network, sending ads over the network remained very expensive to advertisers, who would often be compelled to pay quite a high per ad transmission fee. This lack of volume of ads sent over the network continued the necessity of retaining the high affiliation and reception fees to cover the fixed costs.
As early as 1990, AD/SAT recognized that the high costs associated with its system would preclude growth. At that time, the then-president of the company, Richard Atkins, made a conscious decision to stop acquiring recorders, and pursue converting the AD/SAT system to a digital one where much less expensive computers could be used as receivers. However, as a result of financial difficulties experienced by its former owner, AD/SAT's movement into the newly developing digital market was extremely slow. Indeed, for the next several years AD/SAT's business stagnated.
On March 8, 1994, Skylight, Inc. purchased AD/SAT for roughly $ 4.1 million, including the assumption of certain liabilities. The new management, recognizing the existing problems, had plans to "revitalize and expand" the business, which, they assert, would have occurred but for the actions of AP and the other defendants.
B. The Development of AdSEND
AP began to contemplate entering the business of electronic delivery of advertising in 1991. AP had recently introduced PhotoStream, a high speed, satellite-based digital delivery system for the transmission of news photographs to newspapers, and saw the electronic delivery of advertising as a natural extension.
AP's approach to the business has been quite different from AD/SAT's. The approach is premised on the belief that unless AP's service could compete, both in price and service, with Federal Express and the other overnight delivery services which currently dominate the market, it could not build the network necessary to succeed. Therefore, AP installs reception equipment at the newspapers for free and does not charge the newspapers anything to receive an ad. Like the traditional approach to the business taken by Federal Express and others, all costs associated with the delivery of ads to newspapers are borne by the advertisers.
AP's business plan was approved by its Board in early April 1994, and the project, AP AdSEND, was announced to the public shortly thereafter, on April 25, 1994. The AdSEND system enables advertisers to transmit ads from the computers upon which they were created to the newspaper computers in digital form.
Thus, no hard copy of the ad is created until outputted on the newspaper's imaging equipment, meaning that the ad arrives at the newspaper as a first-generation image, as though it had been printed by the advertiser and physically delivered.
While confident with its technical ability to deliver advertisements, AP, as a newcomer, knew very little about its advertising clients or the business of advertising in general. Therefore, along with conducting its own research, AP sought regular advice and assistance from NAA. The primary contact with the NAA was Newhouse, who, as mentioned above, was also an AP Board member, and the president of Advance. Before AdSEND was publicly announced, Newhouse helped arrange meetings between AP and NAA officials. After learning about AdSEND through these meetings, NAA began to encourage and support AP's efforts to enter the advertisement delivery business. After public announcement of the project, AP requested and received approval from NAA to participate in several NAA-sponsored conferences which focused on NAA's "one order/one bill" project. As discussed more fully below, this relationship between AP, Newhouse, and the NAA is at the heart of AD/SAT's conspiracy claim.
AD/SAT and AP are not the only companies which deliver ads electronically. Companies such as DigiFlex, Ad eXpress, AdStar, AdLink and Business Link are already in the market, advertisers are beginning to develop their own systems, and there is evidence that the regional Bell companies may soon enter the market.
Plaintiff appeared before this Court on September 14, 1994 seeking a temporary restraining order preventing AP from initiating its AdSEND program. The Court declined to issue the TRO, but ordered the parties to appear before the Court on September 23, 1994, at which time plaintiff's application for a preliminary injunction barring AP and those in active concert with it from initiating, providing, supplying, engaging in, contributing to or participating in the AdSEND program was denied. On April 24, 1995, this Court issued an Opinion and Order, granting the summary judgment motion of defendant the Lexington Herald-Leader.
I. Summary Judgment in General
Fed. R. Civ. P. 56(c) provides that summary judgment "shall be rendered forthwith if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." See Celotex Corp. v. Catrett, 477 U.S. 317, 322, 91 L. Ed. 2d 265, 106 S. Ct. 2548 (1986). The burden of showing that no genuine factual dispute exists rests on the party seeking summary judgment, see Adickes v. S.H. Kress & Co., 398 U.S. 144, 157, 26 L. Ed. 2d 142, 90 S. Ct. 1598 (1970), and this burden will be satisfied if the movant can point to an absence of evidence to support an essential element of the nonmoving party's claim. See Goenaga v. March of Dimes Birth Defects Found., 51 F.3d 14, 18 (2d Cir. 1995); Celotex, 477 U.S. at 317 (failure of proof concerning essential element of nonmovant's claim renders all other facts immaterial). If the movant satisfies its burden under Rule 56(c), the nonmoving party must then "set forth specific facts showing that there is a genuine issue for trial." Fed. R. Civ. P. 56(e); see Celotex, 477 U.S. at 317 & n.3.
In assessing the record to determine whether there is a genuine issue as to any material fact, the evidence of the non-movant is to be believed, and all reasonable inferences are to be drawn in its favor. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247, 91 L. Ed. 2d 202, 106 S. Ct. 2505 (1986). However, to survive a motion for summary judgment in an antitrust litigation, the non-moving party must set forth facts that tend to preclude an inference of permissible conduct. See Capital Imaging v. Mohawk Valley Medical Ass'n, 996 F.2d 537, 542 (2d Cir.), cert. denied, 126 L. Ed. 2d 337, 114 S. Ct. 388 (1993) (citing Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 588, 89 L. Ed. 2d 538, 106 S. Ct. 1348 (1986)).
Section 2 of the Sherman Act makes it unlawful for any person to attempt to monopolize any part of interstate trade or commerce. See 15 U.S.C. § 2. To succeed on its § 2 attempted monopolization claim, AD/SAT must establish (1) that AP has engaged in predatory or anticompetitive conduct with (2) a specific intent to monopolize and (3) a dangerous probability of achieving monopoly power. See Spectrum Sports, Inc. v. McQuillan, 506 U.S. 447, 456, 122 L. Ed. 2d 247, 113 S. Ct. 884 (1993).
A. Dangerous Probability of Achieving Monopoly Power
AP argues that AD/SAT's § 2 attempted monopolization claim cannot succeed because there is not a dangerous probability that it will achieve monopoly power. "A party has monopoly power if it has 'a power of controlling prices or unreasonably restricting competition.'" Hayden Pub. Co., Inc. v. Cox Broadcasting Corp., 730 F.2d 64, 68 (2d Cir. 1984) (quoting United States v. E.I. duPont de Nemours & Co., 351 U.S. 377, 389, 76 S. Ct. 994, 100 L. Ed. 1264 (1956)). The primary indicator of monopoly power is market share. See Twin Lab., Inc. v. Weider Health & Fitness, 900 F.2d 566, 570 (2d Cir. 1990). Other factors to consider include the strength of competition in the market, barriers to entry into the market, and the probable development of the industry. See International Distrib. Ctrs., Inc. v. Walsh Trucking Co., Inc., 812 F.2d 786, 792 (2d Cir.) (citing Hayden Pub., 730 F.2d at 68-69), cert. denied, 482 U.S. 915, 96 L. Ed. 2d 676, 107 S. Ct. 3188 (1987). Before considering the factors necessary to determining whether a defendant has monopoly power in a relevant market, the Court must define the market.
See Walker Process Equipment, Inc. v. Food Mach. & Chem. Corp., 382 U.S. 172, 177, 15 L. Ed. 2d 247, 86 S. Ct. 347 (1965) (in a § 2 attempted monopolization claim, definition of relevant market necessary to determine defendant's ability to lessen or destroy competition). The relevant market may be either a geographic market, or a product or service market. In this case the parties concede that the geographic market is the United States, but contest the definition of the relevant service market.
In its First Amended Complaint, AD/SAT states that the relevant market in this action is the electronic transmission of newspaper advertising. See Plaintiff's First Amended Complaint P 22.
While some of the language is ambiguous, in its opposition papers to defendants' motions, AD/SAT appears to alter its definition of the relevant market in this action. Relying on the affidavit of its expert witness, Dr. William S. Comanor, AD/SAT limits its definition to a "rush" market for advertisement delivery, where only providers which can deliver ads in less than three hours compete. See Affidavit of William S. Comanor in Opposition to Summary Judgment Motion ("Comanor Aff.") PP 8, 10.
Regardless, neither relevant market offered by AD/SAT is persuasive. Rather, consistent with the conclusion offered by this Court in denying AD/SAT's motion for a preliminary injunction, the Court finds that the relevant market in this action is the delivery of advertisements by any means.
The Supreme Court, in duPont, 351 U.S. at 404, defined the relevant market as consisting of "products that have reasonable interchangeability for the purposes for which they are produced -- price, use and qualities considered." Id.; see also Tampa Elec. Co. v. Nashville Coal Co., 365 U.S. 320, 327-28, 5 L. Ed. 2d 580, 81 S. Ct. 623 (1961) (relevant market defined as the "areas of effective competition" within which defendant operates); Robert Pitofsky, New Definitions of Relevant Market and the Assault on Antitrust, 90 Colum. L. Rev. 1805, 1806 (1990) ("'definition of relevant market' is an attempt to describe the array of firms that currently produces or potentially will produce products that are sufficiently close substitutes to take business away from any firm or group of firms that attempts to exercise market power."). Products or services need not be identical to be considered reasonably interchangeable. See duPont, 351 U.S. at 394 ("where there are market alternatives that buyers may readily use for their purposes, illegal monopoly does not exist merely because the product said to be monopolized differs from others."). Rather, determination of whether a product or service is reasonably interchangeable requires consideration of the cross-elasticity of both demand and supply. If customers would respond to a small price change in a product by changing to another product, then there is a high cross-elasticity of demand between the products. In such a case, the products are reasonably interchangeable, and therefore compete in the same market. See United States v. Grinnell Corp., 384 U.S. 563, 571, 16 L. Ed. 2d 778, 86 S. Ct. 1698 (1966); Brown Shoe, 370 U.S. at 325; DuPont, 351 U.S. at 400. Cross-elasticity of supply refers to "the extent to which producers will be willing to shift their resources from supplying a product or service in one market to supplying a product or service in a different market in response to price changes in the second market." Associated Press' Memorandum of Law in Support of Summary Judgment at 23 (citing Telerate Sys., Inc. v. Caro, 689 F. Supp. 221, 237-38 (S.D.N.Y. 1988). Determining the cross-elasticity of supply also requires consideration of new, start-up entities which may enter a market.
The evidence supports the conclusion that the relevant market in this case is the delivery of advertisements by any means. First, it is undisputed by both AD/SAT and AP that currently the predominant method of advertisement delivery is provided by overnight services such as Federal Express. AD/SAT's President David Hilton so stated in his deposition. See Deposition of David A. Hilton at 822. Indeed, a business plan prepared by AD/SAT's own consultants, Bain & Company, found that over 80% of all ad delivery services is provided by overnight carriers. See DX
2 at 750; Deposition of Sam Rovit at 315.
Considering the extensive financial resources and existing capital, both human and physical, possessed by overnight carriers as Federal Express and the United States Postal Service, it is not surprising that they deliver such a large percentage of the ads sent to newspapers. Whatever their limitations, these services have developed and earned reputations for dependability and timeliness.
AD/SAT, however, has been unable to compete in that market because its high capital costs have precluded it from pricing its service at rates comparable to Federal Express and other physical delivery sources. While overnight carriers such as Federal Express charge advertisers $ 7 to $ 15 per ad, see Affidavit of Patrick T. O'Brien in Support of Summary Judgment ("O'Brien Aff.") Ex. D at 7,8, AD/SAT charges advertisers between $ 20 and $ 30 for each non-express ad delivered. Once the affiliation and reception fees charged to newspapers are added to the total cost, it is obvious that AD/SAT's prices are not competitive with overnight carriers. The fact that, nearly a decade after AD/SAT began delivering ads electronically, over 80% of ads are still delivered by physical means, with messenger service being the next most popular means of delivery, indicates that AD/SAT's inability to price competitively with physical carriers precluded it from succeeding in its goal to expand the size of its network, and the volume of ads it delivered. While it is true that electronic delivery of ads provides benefits which physical delivery cannot provide -- such as greater speed and reliability in all weather conditions -- the continued dependance upon physical means of delivery is evidence that, unless priced competitively, electronic services will not be accepted by the market.
In contrast to AD/SAT, AP entered the market knowing that a pricing scheme which was competitive with the overnight carriers is essential to success. See Affidavit of Terry M. Walcott, Esq., in Opposition to Summary Judgment ("Walcott Aff.") Ex. 123 at 3, 6; O'Brien Aff. P 8. As noted above, newspapers pay nothing to receive ads over the AdSEND system. In addition, advertisers, depending upon the number of ads sent in a given year, pay between $ 4 and $ 8 for ads delivered within a 12-hour period, and $ 6 and $ 12 for ads delivered within a 4-hour period. See AP's Reply Memorandum in Support of Summary Judgment at 11 n.11. AP realized the key to success would be quickly to establish a large network of advertisers and papers using AdSEND. The only way to achieve this goal was to provide a more effective service at competitive prices.
AD/SAT's primary objection to AP's argument that AdSEND's pricing structure reveals a high cross-elasticity of demand in the delivery of advertisements by any means market centers around the fees charged by AP for ads delivered within one hour. AD/SAT concludes that because AP charges $ 40 per ad for ads delivered within one hour, regardless of the volume of ads sent, "AP effectively acknowledges that there is a distinct class of buyers who cannot use overnight delivery methods and is willing to pay substantially more for rush delivery." AD/SAT supplements this conclusion by noting that, according to its rate cards, it charges a premium price of $ 58 for ads delivered within three hours. In essence, as stated above, AD/SAT appears to be arguing that these "rush" services, for which all parties admit there is no non-electronic substitute deliverer, constitutes a separate market.
For several reasons, the Court is not persuaded by this argument. First, despite the statements made by Dr. Comanor, see Comanor Aff. P 33, the Court finds that AD/SAT has not identified a class of advertisers for which this service is a regular necessity. Indeed, AD/SAT has supplied no evidence that even one advertiser requires rush delivery on a regular basis. Certainly it is true that there will be a certain class of situations where express service is needed -- namely, when advertisers, by some happenstance, fail to get an ad prepared in a timely fashion. But this is insufficient to create a market for the service. Considering that for years AD/SAT was the exclusive provider of this rush service, if it were anything but an emergency remedy used occasionally by a wide range of advertisers, one would think that AD/SAT would have prospered. However, the opposite happened. AD/SAT's own acknowledgment of the need to increase the volume of its deliveries by reducing its fees in order to survive indicates that there is not a steady class of advertisers who need regular express service.
It is true that AP projects that 30% of its ads will be delivered on a rush schedule, and a premium price of $ 40 per ad will be charged for such service. Again, however, there is no evidence that any advertisers will use the rush service on a regular basis. Indeed, AP's strategy is to price its four-hour and overnight service at levels comparable to the dominant overnight carriers. The availability of a rush service, without evidence that there is a class of advertisers who will regularly use it, is simply a supplemental feature of AP's service which is intended to convince advertisers to use AP's service, as opposed to Federal Express or another deliverer.
This does not create a separate market for antitrust purposes because products or services need not be fungible to compete in the same market. See United States v. Continental Can Co., 378 U.S. 441, 449, 12 L. Ed. 2d 953, 84 S. Ct. 1738 (1964) (relevant market defined not by product fungibility, but by meaningful competition).
AD/SAT's current contracts with some of its larger advertiser clients reveals that its rush service is simply an additional aspect of a larger package to attract advertiser customers. In many of these contracts the advertiser does not pay any additional fee for rush delivery, up to a certain number of advertisements. See Hilton Aff. Ex. E. (reproducing six AD/SAT contracts which support stated proposition). For example, AD/SAT's current contract with Lord & Taylor, one of its major clients, provides that Lord & Taylor will pay an annual fee of $ 184,000, which entitles Lord & Taylor to send up to 8,250 ads. Of those 8,250 ads, 800 may be sent priority service at no extra charge, with a $ 20 premium per ad beginning thereafter. From this it seems evident that AD/SAT's rush service is simply one aspect of a larger package of services which AD/SAT offers in an attempt to succeed in the competition for advertiser dollars.
In sum, both AD/SAT and AP admit that they are in competition with non-electronic ad delivery providers. Furthermore, AP, after studying the ad delivery business before entering the market, has priced its service to compete with Federal Express and other physical deliverers. Therefore, the Court finds high cross-elasticity of demand in the market of the delivery of advertisements by any means. Because AD/SAT cannot identify any class of advertisers which consistently depend upon the availability of rush services which only electronic deliverers can provide, the premium charged for such services does not create a separate market. Rather, the ability to provide rush delivery is simply an additional feature of the overall service for an advertiser to consider in choosing which ad deliverer to use.
The Court also finds high cross-elasticity of supply in this market. As mentioned above, the current dominant deliverers of newspaper ads, the overnight carriers, are large companies with great financial strength and businesses which extend well beyond this market. It is simply implausible to think that the development and implementation of AP AdSEND could drive these competitors out of the ad delivery business. It certainly could not drive them completely out of business. Therefore, even if driven out of the ad delivery business, if AP attempted to exercise market power by raising prices to supracompetitive levels, the overnight carriers could easily and quickly reenter the market.
In addition, the barriers to entry into this market, as AD/SAT conceded in its First Amended Complaint, are low.
As noted supra p. 9, not only are electronic deliverers such as DigiFlex, Ad eXpress, AdStar, AdLink and Business Link already in the market, but advertisers are beginning to develop their own systems, and there is evidence that the regional Bell companies may soon enter the market. In short, there is high cross-elasticity of supply in the market defined by the Court.
Having determined that the relevant market in this case is the delivery of advertisements by any means, it is evident that AP lacks sufficient monopoly power to allow AD/SAT's § 2 attempted monopolization claim to survive the instant motion.
Reviewing the factors to consider in determining market power which were set forth supra p. 12, the Court first notes that AP, a new entrant into a market where over 80% of all ads are delivered by overnight carriers, obviously possesses an insignificant market share. While the Court of Appeals for the Second Circuit is unwilling to base market power determinations solely on market share data, see Broadway Delivery Corp. v. United Parcel Service of America, Inc., 651 F.2d 122, 128 (2d Cir.), cert. denied, 454 U.S. 968, 70 L. Ed. 2d 384, 102 S. Ct. 512 (1981), such data is treated as strong evidence of the absence or presence of market power. See id. Many courts in the Second Circuit have found market shares of less than 50% or even 60% insufficient to support an attempted monopolization claim. See id. ...