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AT&T-Time Warner Trial: Key DOJ Expert Witness Says Merger Will Cost Consumers

WASHINGTON — The Justice Department, nearing the end of its witness list in the AT&T-Time Warner antitrust trial, presented an expert whose study about the impact of the merger gave the government’s lawsuit its economic heft.

Carl Shapiro, a professor at University of California at Berkeley who also has held positions at the White House and the Antitrust Division, contends that his modeling of the transaction shows that it will cost consumers an extra $436 million per year, as of 2017, and $571 million by 2021.

“Consumers will be hurt,” Shapiro said. “They will be hurt because competitors to DirecTV will face higher costs.”

His study is key to the Justice Department’s efforts to show that the $85 billion merger will harm consumers, the standard by which the government determines if a transaction raises antitrust issues. He told Justice Department attorney Eric Welsh that he agreed that the merger would “substantially lessen” competition.

In a marathon day of testimony, he faced a rigorous cross-examination by Daniel Petrocelli, representing AT&T-Time Warner, who tried to show that Shapiro’s modeling did not take into account real-world situations and an offer from Time Warner’s Turner networks to go into “baseball-style” arbitration in carriage disputes with AT&T’s rivals.

At several point, Petrocelli’s cross-examination with Shapiro got testy. Shapiro acknowledged that members of his team, but not himself, wrote certain footnotes in his study. They also sparred over the type of data that Shapiro included in his study versus what he left out.

Shapiro defended his methodology as well in line with the standards for merger reviews, and in some cases said that he was being conservative in his approach.

His argument is that the merger will give AT&T-Time Warner increased leverage in carriage negotiations with rival distributors for the Turner networks. As those competitors are forced to shell out more for channels like CNN, TBS and TNT, or face the threat of losing carriage altogether, those added costs ultimately will be passed along to consumers, according to Shapiro.

The negotiating landscape would change, he said, as Turner would have a sister company, DirecTV, that would stand to pick up subscribers if the Turner channels were pulled from rival distributors.

Shapiro did not factor into his study that fact that some of Turner’s program contracts won’t expire for years from now, meaning that any impact would not be immediate. But he said that he did account for the differences in consumer options in some 1,100 geographic markets.

Among Shapiro’s other claims:

Comcast-AT&T ‘coordination.’ Shapiro said that the merger would leave the industry with two vertically integrated giants, Comcast-NBC Universal and AT&T-Time Warner. That would create a “danger” and “risk” that the two companies could “coordinate” to withhold programming from new internet upstarts, which include the likes of Dish’s Sling and Google’s YouTube TV.

Later, under cross-examination, Shapiro acknowledged that he had not quantified how likely this was to happen, nor would he say so.

HBO promotion withheld. AT&T could restrict its rivals from using HBO as a promotional tool, as the premium channel is used across the industry as a way for cable and satellite services to sign up new customers and retain existing ones.

Shapiro, however, said that he hadn’t produced figures to quantify the potential harm.

Blackout battles. Shapiro said that he was not claiming that AT&T will try to withhold Turner content from rivals, but that they will have added bargaining leverage because of the threat of a programming blackout.

He studied the longterm impact of two blackouts — the Viacom channels that went dark on Suddenlink from 2014 to 2017, and from Cable One in 2014. Shapiro said that Suddenlink had a long-term subscriber loss rate of 9.4%, while Cable One’s rate was 16%.

Shapiro argued that Turner’s channels were “more important” and “more valuable” than those of Viacom, and the loss rate would be even greater for distributors without them. In his study, he used a 9% loss rate for the Turner channels.

But Petrocelli ran through a list of blackouts to claim that subscriber loss figures were far lower.

He also tried to press Shapiro on how likely it was that his figures would hold up in a hypothetical situation with a real-life figure, like Charlie Ergen, the hard-nosed co-founder of Dish Network, which has had a number of channel blackouts.

Petrocelli asked Shapiro whether Ergen would really cave in and pay more for the same set of Turner channels, just because they were now owned by a much bigger company, AT&T.

“I’m not going to try to get into the head of Mr. Ergen,” Shapiro said. “Believe me, it’s an uncomfortable place to be.”

AT&T-Time Warner’s expert witness, Dennis Carlton, a University of Chicago economics professor, will take the stand on Thursday. He is expected to provide data on the impact of past vertical mergers, including Comcast’s combination with NBCUniversal in 2011.

By about 6:15 p.m. on Wednesday, after a day of running through data points, it was clear that participants were getting a bit punchy. Even Petrocelli, normally unflappable, expressed some fatigue at the long day. He told the judge that he’d keep his second cross-examination brief.

“I’m hungry, your honor,” Petrocelli said.

(Pictured: AT&T-Time Warner lead counsel Daniel Petrocelli)

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