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AT&T-Time Warner Trial: Judge Says He’ll Have Decision in June

AT&T-Time Warner Attorney Calls DOJ's Case a 'House of Cards'

WASHINGTON — U.S. District Judge Richard Leon said that he would have a decision in the AT&T-Time Warner antitrust trial by June 12, if not earlier, and planned to announce his ruling in a hearing that afternoon.

After both sides wrapped up their closing arguments, Leon sounded emotional as he praised the parties for getting the case to trial so quickly. He called it an “amazing achievement,” and said that he “will do and pledge to do my level best” to issue a decision by that date. The trial started on March 19.

The AT&T-Time Warner deal expires on June 21, under an extension that the companies worked out after the Justice Department sued to block the merger in November.

AT&T CEO Randall Stephenson and Time Warner CEO Jeff Bewkes were at the closing arguments.

Daniel Petrocelli, the lead attorney for the companies, called the government’s case a “house of cards” that hinged on the testimony and economic modeling of a key witness, Carl Shapiro, an economist at University of California at Berkeley. Petrocelli spent much of his closing argument trying to discredit Shapiro’s conclusions that the merger would end up costing pay TV consumers.

“The only lessening of competition that would occur is if this merger were blocked,” Petrocelli said.

The DOJ’s lead attorney, Craig Conrath, presented his closing argument earlier in the day, but had 15 minutes of rebuttal after Petrocelli’s final statement.

Petrocelli said that the government was left with a case that vanished before our very eyes” and “did not come close” to proving that the merger was anticompetitive.

“This is a case of theory in search of fact,” he said.

The Justice Department claims that AT&T-Time Warner will gain increased leverage from the merger, allowing it to raise prices for CNN, TBS and TNT and other Turner network content that eventually will be passed on to the consumer.

Petrocelli tried to show how the DOJ’s argument of increased leverage doesn’t make sense. He said that the government’s case is rooted in the idea that AT&T-Time Warner will gain an advantage over rivals because of the threat that it would black out Turner content in carriage battles. That, in turn, will cause subscribers to abandon their own cable or satellite service and instead sign up with AT&T-owned DirecTV.

But Petrocelli said that AT&T-Time Warner would still lose out in any blackout, in the form of lost carriage fees and advertising revenue, creating a “catastrophic loss.”

He said that the government’s model is the idea that AT&T-Time Warner will threaten a blackout because of the prospect that they will “suffer a tiny bit less of a catastrophic loss.”

He also noted that Bewkes testified that when Time Warner owned Time Warner Cable, union of content and distribution, the company did not engage in such anticompetitive conduct, and that other executives in vertically integrated companies said the same.

“No one has ever done these things they say is going to happen in a vertical merger,” he said.

Petrocelli faulted Shapiro for not taking into account a series of other factors in his economic modeling, including Turner’s offer to go into “baseball-style” arbitration with AT&T’s distribution rivals. That offer, he said, actually gives “all the leverage” to competitors, as Turner could not blackout its channels during carriage negotiations.

Other highlights:

Comcast coordination, HBO: The government’s other arguments were that the merger would leave the industry with two vertically integrated giants — AT&T-Time Warner and Comcast-NBC Universal — and that they would coordinate in a way to limit the growth of rival multichannel streaming services.

The DOJ also said that the merged company could limit the ability of distributors to use HBO as a promotional tool, now quite common in the industry.

Petrocelli said that Shapiro produced “no economic analysis whatsoever” to try to back up those arguments.

Number crunch: Shapiro did not take into account a host of issues, including Turner’s arbitration offer, existing programming contracts, cord cutting trends, and the FCC’s program access rules, all of which would have an impact on the result, Petrocelli said.

Petrocelli went through a number of calculations to show that when the modeling accounts for these other factors, the result is a negligible impact to consumers or a transaction that will have them money. Shapiro’s calculations showed an impact of a 27 cents per month increase for pay-TV subscribers, although Shapiro argued that was at the low end of his range.

Petrocelli also accused Shapiro of not doing enough to question the methodology of an Altman Vilandrie & Co. study, which showed that a pay-TV provider could lose 9% of subscribers if it lost Turner content. Shapiro used a figure from that study in his modeling, but Petrocelli attacked the methodology of those numbers. He noted that Altman Vilandrie had revised its figures from a lower number that showed a less impactful subscriber loss. With that lower figure inserted into Shapiro’s model, the merger cost to consumers would be zero, he said.

He also noted that Conrath downplayed Shapiro’s model in the DOJ’s closing argument. Conrath defended the Altman Vilandrie figures, and said that the revisions were not specific to the Turner networks and applied across the industry.

‘Hollow threat’: Petrocelli called the threat of a blackout the “most hollow threat you can make in this business, except Charlie Ergen of Dish. He blacks everyone out.” Ergen, the hard-charging, co-founder of Dish, was referenced at points throughout the trial. He didn’t testify, but AT&T-Time Warner’s legal team tried to show how his intractability was responsible for the blackout of a number of Turner channels in the fall of 2014. Petrocelli also cited Ergen to make the point that AT&T’s rivals were unlikely to pay more for Turner’s channels just because it was part of a bigger merged company.

“Nobody is going to pay a nickel more for identical content just because AT&T owns Time Warner,” he said.

Kabuki dance. Conrath, in his 15-minute rebuttal, pointed out that distributors treat the threat of a blackout as something that is a real possibility. He cited the testimony of negotiators from Cox Cable and Dish Network, among others, and noted that they assess the potential harm from the loss of content like the Turner networks.

Leon then interrupted him. “Isn’t it a bit of a kabuki dance where everyone threatens to go dark, but then it never ends up happening?” he asked.

Conrath, though, said blackouts do occur.

Annie Hall. In interrupting Conrath over the issue of whether blackout threats are hollow, Leon paraphrased a quote from the movie “Annie Hall” that perhaps gives some insight of how he views carriage negotiations.

In the movie, Alvy Singer tells of an old joke, about a guy who goes to a psychiatrist and says, “My brother’s crazy. He thinks he’s a chicken.” The doctor asks why he doesn’t turn him in. The guy says, “I would, but I need the eggs.”

Singer’s point was that relationships can be “irrational, crazy and absurd,” but men and women keep going through them because “most of us…need the eggs.”

Conrath didn’t know the “Annie Hall” reference but, without skipping a beat, he said, “Turner Classic Movies, I’m sure it has it available.” Leon has made several mentions of Time Warner-owned TCM. He’s likely a fan.

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