Antitrust Trial: DOJ Says AT&T Will Use Time Warner as a ‘Weapon’ to Harm Rivals

WASHINGTON — The lead attorney for the Justice Department said that AT&T would use Time Warner content as a “weapon” to harm rivals as the antitrust trial entered its third day on Thursday with opening arguments.

Craig Conrath, a veteran in the Antitrust Division, also said that they would present an array of evidence showing that AT&T would have the “ability and incentive” to engage in anticompetitive conduct, as the bulked-up company would have increased leverage to charge more for Time Warner content.

“Time Warner would be a weapon for AT&T, because AT&T’s competitors need Time Warner content,” he said.

He added that AT&T could curb the growth of emerging “virtual” multichannel providers that enable consumers to cut the cord of their traditional video providers. Executives from Dish are expected to testify for the government about their Sling service.

Conrath indicated that during the trial, which is expected to last six to eight weeks, the Justice Department would present not only witnesses but some of the documents and emails of AT&T and Time Warner executives. He pointed to a 2012 filing that AT&T made to the FCC, which he said showed that the company understood the threat a vertically integrated company would pose when it comes to gaining leverage over the prices for content.

Meanwhile, AT&T-Time Warner’s lead attorney, Daniel Petrocelli, said that the government was “fundamentally stuck in the past” in assessing the competitive landscape, and has failed to take into account the threat that Google and Facebook pose to traditional media advertising models.

He spent much of his opening arguments trying to puncture holes in the government’s contention that the merger would lead to a price increase on the order of $400 million or more per year. He indicated that they would challenge some of the economic projections being offered by one of the government’s witnesses, Carl Shapiro of University of California at Berkeley.

Petrocelli also said that the government would fall short of meeting its burden of showing that it was “more probable than not” that the merger would “substantially lessen competition.”

He noted that the government “cannot prove that the merger is likely to lessen competition, much less to lessen it substantially,” he said.

Judge Richard J. Leon has already said that the case was “unsettling” for him because he will have to decide on two different prognostications of the future. He even quipped earlier this week that he may have to buy a crystal ball.

Conrath, however, made a point of citing language in the Clayton Antitrust Act that mergers are deemed in violation of the law when the effect “may be to substantially lessen competition,” with an emphasis on the word may.

The evidence, he said, will show that.

Among those attending the oral arguments were AT&T CEO Randall Stephenson and Time Warner CEO Jeff Bewkes. Both are expected to testify later in the trial. Also attending was Makan Delrahim, the chief of the Justice Department’s Antitrust Division.

Other highlights:

Time Warner content. Conrath said that they will show that Time Warner’s content is so valuable that the combination with AT&T “changes the bargaining dynamic” that they have with rival distributors.

He said that witnesses, experts and company documents would show that Turner channels are “generally viewed” as “must have” content, and he cited Turner’s current coverage of the NBA playoffs.

“There is no substitute to watching it live.”

He continued that the DOJ would show that in the event of a protracted carriage dispute, if AT&T blacks out Turner channels, tens of thousands and even hundreds of thousands of consumers would drop their cable and satellite service, and that AT&T-owned DirecTV will gain some of those customers.

Petrocelli, however, challenged that point, and said that the DOJ was relying on faulty economic forecasts and a specious consumer survey. He said that Shapiro relied on “some kind of computer program” to come up with the numbers, and that the AT&T-Time Warner legal team would challenge his calculations when he took the stand.

He also said that the survey was done in an “absurd” way.

“Do you know how hard it is to cancel your pay TV?” he said. “…It’s a pain.”

Petrocelli said that in carriage disputes, Time Warner is offering to go into “baseball style” arbitration with rivals should the merger go through.

“We want to distribute the Turner networks are widely as possible,” he said, adding that it would be “financially ruinous” to withhold their content.

Prices. Conrath said that the DOJ would show that the merger would lead to a price increase for consumers. He cited Shapiro’s conclusion that there would be a “net price increase of over $400 million” per year, and noted that it was based on a model created by Nobel Prize winner John Nash, whose story was featured in “A Beautiful Mind.”

AT&T-Time Warner has noted that the price increase works out to about 45 cents per month per subscriber, or about $6 per year. Conrath, though, challenged the companies’ notion that this is mere “pocket change.” “Really, their answer is that consumers can afford it,” he said, calling such a dismissal “an attack on antitrust law enforcement.” His point was that their duty was to identify anticompetitive conduct that harms consumers.

Petrocelli said that he plans to challenge many of Shapiro’s assumptions and that the model he used “has no business in this case.” “We think it’s dead wrong,” he said. He said that they would identify a number of faults with his methodology, including that Time Warner is still bound by existing contracts with distributors that have yet to expire. He said that their own expert will show that the merger actually could result in a 50 cent per month price decrease.

‘Virtual’ MVPDs. Conrath said that AT&T-Time Warner has the “incentive” to slow the growth of “virtual” multichannel distributors, like Dish’s Sling TV, as they pose a threat to the traditional pay TV business model. He indicated that they would present evidence to show that AT&T believes that the traditional pay TV platform is “still profitable” and that the “expect it to be profitable for years to come.”

AT&T has argued that the merger is needed in the face of competition from much larger tech companies like Google and Facebook, but Conrath noted that those internet giants are “small in the market for live TV” and their size has more to do with a host of other business ventures. He cited Staples’ attempt to buy Office Depot, in which the argument was made that it faced competition from the much larger Amazon. But a federal judge blocked that merger in 2016.

He also criticized some of AT&T-Time Warner’s claims that the merger would produce substantial efficiencies. Those include the ability to use “content intelligence,” or data on consumer likes and dislikes, in a way that helps Warner Bros. make better programming. Conrath said that they would present an email showing that Warner Bros.’ executive team found such a method “speculative, unproven and untested.”

Petrocelli said that AT&T has an interest in seeing new pay-TV services flourish, noting that it launched DirecTV Now in the first year after its 2016 purchase of DirecTV.

He also said that the merger would enable AT&T and Time Warner to share data that will allow Turner networks to offer more valuable, targeted advertising, akin to that offered by Google and Facebook. He said that the greater advertising revenue will lessen the pressure to recover programming costs from distribution fees, ultimately leading to a decline in cable bills.

He said that they would examine what happened to programming prices in the wake of the 2011 Comcast-NBCUniversal merger but that the government has “turned a blind eye” to examining such data in its own files. Petrocelli said that they would show that the increases were “not beyond the normal industry levels.”

(Pictured: Randall Stephenson and Jeff Bewkes at a hearing on the merger in 2016.)

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