WASHINGTON — The federal judge in the AT&T-Time Warner antitrust trial indicated that he would like to hear about the competition that the companies face from much bigger internet giants like Google and Facebook.
U.S. District Judge Richard Leon did not say whether he would ultimately use the information to define the competitive landscape, but his broaching of the topic spurred attorneys for the Justice Department and AT&T-Time Warner to address the issue of how traditional media players adapt in the fast-changing consumer landscape.
Daniel Petrocelli, the lead attorney for AT&T-Time Warner, said that the “question of these giants goes directly to the nature of the market, directly to the definition of the market.”
He used the term FANG to describe Facebook, Amazon, Netflix, and Google, and noted that their combined market cap was $3 trillion, compared to $300 billion for an AT&T-Time Warner combination. Facebook and Google command 90% of the digital ad market, he said, and “now they are entering into television.” Netflix has said it would spend $8 billion on content this year, “vastly more than HBO,” a unit of Time Warner.
He said that a combined AT&T-Time Warner would be able to do what internet giants do: Use consumer data to offer much more targeted advertising. With the merger, AT&T will be able to rely on DirecTV consumer data in selling “way more valuable” advertising on Turner networks. That, he said, would put less pressure on passing along Turner costs to consumers.
As it is, Petrocelli said, Turner and other cable networks are “suffering” as advertising revenue migrates to digital platforms, while DirecTV has been losing subscribers along with other pay-TV platforms. He said that 4 million dropped their subscriptions to cable and satellite last year. “They are leaving in droves,” he told the court.
AT&T and Time Warner leaders have said that a key rationale for the merger is the competitive threat posed by internet giants, particularly in advertising.
Randall Stephenson, the CEO of AT&T, will testify about the bulked-up competition, Petrocelli said, having already noted, “We’re chasing their taillights.” He also said that Stephenson will tell the court that traditional pay-TV subscribers have reached a “gag point,” as customers will no longer accept price increases.
The Justice Department plans to argue that while the industry is changing, the competitive marketplace is still in the delivery of pay TV service. Its lead attorney, Craig Conrath, said that Netflix has peeled away some subscribers, but “mostly they are a complement” to a consumers’ multichannel pay-TV service. He said that 85% of Netflix subscribers also have traditional cable and satellite service. He added that the projections of AT&T will show continued durability of the traditional model.
He also noted that the AT&T-Time Warner merger would have an impact on the ability of “virtual” multichannel distributors, like Dish and Sling, to grow and offer their own set of competitive channel bundles. He noted that they need Turner channels like TBS and CNN at a “reasonable price and on reasonable terms.”
He also said that AT&T-Time Warner’s arguments about the competitive threat from Google and Facebook should be treated as one of their defenses in the trial, weighed against the potential for consumer harm. Petrocelli disagreed, saying that it is actually a central rationale for the merger.
The discussion of Google, Facebook and other tech giants was a diversion from the other focus of Tuesday’s proceedings, having to do with issues of confidentiality and whether to clear the court in order to hear testimony from AT&T rivals.
The Justice Department indicated that it planned to call an executive from Cox Communications to testify about how the merger will put them at a bargaining disadvantage because the merger will give AT&T-Time Warner increased leverage.
The DOJ wants at least part of the testimony to be in a closed courtroom, warning that a public forum could reveal the bargaining strategies of a rival to AT&T. But Petrocelli argued that the testimony should remain open, as much of the information he expects to be offered by rivals will be speculative on what they think will happen in the marketplace.
Opening arguments are scheduled for Wednesday.