AT&T-Time Warner Antitrust Trial Starts, With Huge Implications for the Industry

ATT Time Warner
Courtesy of AT&T and Time Warner

WASHINGTON — The antitrust trial over AT&T’s proposed merger with Time Warner started on Monday, a case that has huge ramifications for the future of Hollywood and other massive media mergers in an age of consumer disruption.

The first morning was devoted to the question of just what types of evidence should be admitted into the case, but it also offered a glimpse of what will happen in the weeks ahead. AT&T CEO Randall Stephenson and Time Warner CEO Jeff Bewkes are expected to testify, and the government is planning to call executives at rival companies to argue that the transaction will harm their competitive positions.

The Justice Department, which is suing to block the $85 billion merger, wants to enter a large number of emails from executives from both companies, including what one of the government’s attorneys, Eric Welsh, said would be “some very startling statements” from corporate executives.

AT&T’s lead attorney Daniel Petrocelli argued that the DOJ shouldn’t be allowed to admit the emails unless it can call witnesses to establish their relevance. He also said that there is a question as to whether an email came from an employee who had authority at the company, noting that the government was seeking to admit 18 exhibits from one worker who was just out of business school.

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“There isn’t a one shoe fits all answer to this,” Petrocelli said.

Leon has not said how he will handle the email admissions, but cautioned that just because something was written on a corporate account does not mean that it is a business record, and much more explicitly relevant to the case.

Later in the morning, Welsh also argued for the admission of past statements that AT&T and DirecTV have made in the FCC’s merger reviews and other proceedings.

When it sued to block the merger, the Justice Department used some of the quotes that AT&T made in an FCC proceeding in 2012, including that distributors that control programming “have the incentive and ability to use (and indeed have used whenever and wherever they can) that control as a weapon to hinder competition.”

They also cited what DirecTV wrote in its filing to the FCC about the Comcast-NBC Universal merger in 2011, warning that vertically integrated programmers can withhold content from rivals or that they can demand higher prices with more favorable terms.

Petrocelli argued that statements made in the FCC proceedings open up a “Pandora’s box,” as a number of the submissions include expert reports that do not pertain to the AT&T-Time Warner merger. He noted that DirecTV’s prior statements about vertical mergers were made before AT&T acquired the satellite distributor in 2015.

DirecTV is also a defendant in the case even though it is a unit of AT&T, and Petrocelli said that they would be seeking to remove them from the litigation. He said that the government also named DirecTV as a way to bring in the company’s prior statements.

“DirecTV is acquiring nothing and selling nothing,” he said.

Welsh said the DirecTV filing in the Comcast-NBCUniversal case showed that it had concerns that a company could gain “unfair leverage” in a vertical combination. He said that the companies raised issues in their past FCC filings that are central to the government’s case. “Now, today, they are coming into court and saying, ‘Don’t worry because it’s not going to be an issue,” he said.

The judge in the case, Richard Leon, said that he was indicated that he may allow the DirecTV statements to be admitted, but he had not made a final decision. He said that he was “not inclined” to allow expert reports that the companies have filed in past proceedings.

Another thorny problem yet to be worked out is the extent to which the proceedings will be done in private to protect confidential information. The DOJ plans to call a number of witnesses from other companies, including rivals, and they are expected to testify on how the merger will have a negative impact their business.

Most of these third parties want their information to remain confidential, raising the prospect of clearing the courtroom as their executives testify. Leon cautioned that private court proceedings are “inconsistent with the concept of trials in this country.” He acknowledged the concern of executives in going public with their opposition to the merger, and what it would mean for their future relationship with AT&T-Time Warner if the transaction goes through. But he wondered whether those executives could testify without having to be questioned about confidential documents.

Given that it was the first day of the trial, members of the public lined up hours before to get a seat in the courtroom, although it started to thin out as the day went along. Leon said in earlier hearings that he is surprised at the level of interest in the case, and he set aside an overflow courtroom to listen to audio of the proceedings. He has strict rules that bar cameras and the use of any electronic devices.

Monday and Tuesday are being devoted to evidentiary objections, and Wednesday is scheduled to start with opening arguments.

Here’s a quick glance of what to expect:

Central argument: The government is arguing that the merger will ultimately harm consumers because AT&T-Time Warner will be able to demand higher prices for carriage of the Turner networks, which include TBS, TNT and CNN.

AT&T-Time Warner says that the merger is just the type of vertical transaction that has earned the government’s green light. They have pointed to the Comcast-NBCUniversal merger in 2011 as the type of vertical combination that was approved in the past, albeit it came with an extensive set of conditions set by the Justice Department and the FCC.

The DOJ argues that the merger will raise costs to consumers by $436 million per year. That is important because antitrust review is based on the impact that it will have on consumer welfare.

AT&T-Time Warner, however, says that works out to a “theoretical 45-cent increase in the average monthly pay-TV bills for U.S television consumers — an increase of 0.4% in an average monthly bill.” Its legal team, led by Daniel Petrocelli, is expected to try to undermine some of the economic models presented by one of the government’s expert witnesses, Carl Shapiro, a professor at University of California at Berkeley.

What’s expected: The trial is expected to last at least six weeks.

While much of the case could be voted to complicated testimony that hinges on antitrust modeling, the Justice Department has given other hints on who it planned to call to testify. On Monday, it also was disclosed that it planned to call an executive from YouTube TV, one of the new crop of “virtual” multichannel distributor, as a way of demonstrating the importance of having Turner content on its platform. An attorney representing Sony Interactive also tried to weigh in with Leon about his client’s testimony, but the judge said that the issue would have to be decided on Tuesday.

What Trump thinks: President Trump has been vocal about his disdain for the merger and for Time Warner unit CNN. But so far, AT&T-Time Warner has been stymied in its ability to raise the prospect of White House influence on the merger review. Leon rejected the companies’ effort to obtain privilege logs that could shed some light on the extent of conversations between the Justice Department and the White House over the merger.

What are the stakes: Huge. Leon himself has acknowledged this in the courtroom.

Obviously, AT&T-Time Warner’s merger hinges on the decision, but other media companies are looking to the decision to see how it would impact their transactions. The Walt Disney Co. announced in December a plan to purchase a big chunk of the assets of 21st Century Fox. There also has been speculation that CBS and Viacom also would be looking at a recombination.

An argument can be made that the case is about more than individual companies, but the media landscape in the face of quickly changing consumer habits and advertising trends. AT&T and Time Warner say that the merger will enable them to bulk up to better compete with the likes of Google and Facebook.