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AT&T-Time Warner Trial: Expert Witness Blasts DOJ Claims of Merger Harms

UPDATED WASHINGTON — An expert witness for AT&T-Time Warner spent much of Thursday blasting the methodology behind the government’s claims of the merger’s harm to consumers, even concluding that “on average prices will go down.”

Dennis Carlton, a professor at the University of Chicago, refuted claims made just a day earlier by Carl Shapiro, the government’s economic expert and a professor at University of California at Berkeley, and gave his own analysis of the effects of the merger.

“The evidence does not support the government’s claim, Shapiro’s claim, that this will harm consumers,” Carlton testified.

The Justice Department is suing to block the $85 billion merger, claiming that it would give AT&T-Time Warner increased leverage that will allow it to extract higher carriage rates for networks like CNN, TBS, and TNT from rivals to AT&T. That would ultimately lead to higher prices for consumers.

Shapiro on Wednesday produced the results of his study, based on economic modeling of the merger’s impact, that showed that the transaction would raise prices on pay-TV consumers by $571 million by 2021.

But Carlton said that Shapiro failed to take into account a number of factors, including what happened after past recent vertical mergers, such as the Comcast-NBCUniversal union in 2011. “Ignoring that evidence is a big mistake,” Carlton said. One of the graphs in his study showed NBCUniversal’s program carriage fees from distributors rising less quickly than the industry overall.

Carlton at one point called Shapiro’s method, based in part on a bargaining model created by John Nash, “theoretically unsound.” At one point, when he talked about the complicated nature of Shapiro’s study, U.S. District Judge Richard Leon said that it was like a “Rube Goldberg contraption.”

He said that Shapiro’s conclusion that AT&T-Time Warner would gain increased leverage in carriage negotiations depended too heavily on the threat of a blackout of Time Warner’s Turner networks. Turner has offered AT&T’s rivals to go into arbitration in carriage disputes should the merger be approved, but Carlton said that Shapiro’s figures did not take that into account.

He also challenged some figures that Shapiro used in his study, like a a 9% rate of long-term subscriber loss should a distributor lose Turner’s content. Carlton said that number was too high. He said that Shapiro’s predictions underestimate the number of those pay-TV subscribers who choose to “cut the cord,” or give up traditional cable or satellite service.

He acknowledged that studies on merger effects cannot be precise, but said that should be something to be considered when looking at Shapiro’s data. He said it would be a “real mistake” to stop a merger “because I am predicting a tiny price increase.”

The Justice Department’s lead attorney, Craig Conrath, tried to show how Carlton failed to account for certain factors in his own study. Conrath pointed to an array of conditions placed on the Comcast-NBCUniversal deal, including those requiring arbitration and another prohibiting retaliation, that could have limited the company’s ability to extract price increases from rivals.

He also noted that Carlton’s study was in some cases out of date — the new internet streaming service YouTube TV, for instance, now carries Turner’s networks, a fact that the Justice Department shows that those channels are “must have” content for all types of multichannel distributors.

Conrath and Carlton had a few tense exchanges, as the Justice Department attorney questioned some of the data that Carlton used. One of their longest exchanges was over a “lifetime value” figure that Carlton used in one of his calculations. In his questioning, Conrath suggested that Carlton had selectively picked a a number that would ultimately show that the merger posed less of an economic harm. Carlton insisted that it was selected because it was  the most recent data available.

Like the day before, Thursday was a long day of proceedings spent on examining figures — some simple, others rather arcane.

At certain points, attorneys on both sides addressed Carlton as “Mr. Shapiro,” drawing laughs in the courtroom and a certain recognition of the complicated nature of the testimony. After he finished and walked out of the courtroom, Carlton shook hands with attorneys on both sides, an acknowledgement of the marathon session. Makan Delrahim, the DOJ’s antitrust chief, who sat during the day with the government’s legal team, also shook hands with the defense witness and gave him a friendly tap on the back.

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