WASHINGTON — The Justice Department’s lead attorney Craig Conrath said that they had proved that the proposed merger between AT&T and Time Warner would lessen competition and harm consumers, and in his closing arguments on Monday, he also referenced statements made by AT&T’s CEO, Randall Stephenson.
Stephenson was present in the courtroom for the proceedings, along with Time Warner CEO Jeffrey Bewkes. Each had testified in the trial.
Conrath tried to show that AT&T recognized the potential harm from a vertical merger transaction around the time it was exploring one with Time Warner.
He cited a conversation that Stephenson had with Time Warner CEO Jeffrey Bewkes in the summer of 2016, over Time Warner’s decision to buy a 10% stake in Hulu.
Conrath said Bewkes wanted to give Stephenson a “heads up” about a “little vertical integration,” as Hulu was launching its own multichannel service and ostensibly would need Time Warner content.
Conrath noted that Stephenson was concerned about the access to Time Warner programming — and the possibility that the Hulu deal would limit it. Conrath told the court that Stephenson said to Bewkes at the time, “It’s hard to imagine how it won’t impact all of our relationships.”
In trial testimony, Stephenson said that he was “just trying to make sure that we had the same access [to Time Warner content rights] as others.”
Conrath argued that this showed that, even with a smaller-scale vertical deal, Stephenson was concerned that Time Warner would “use its content to advance its own distribution.”
Conrath told Judge Richard Leon that the government should block the deal or order a structural remedy. That would include a requirement that AT&T either sell off Turner Networks as a condition of buying Time Warner, or that it sell off its DirecTV unit.
He argued that the merger would give AT&T the “incentive and ability” to raise prices on rivals for Turner network content, with those costs ultimately passed on to consumers.
He noted that a number of witnesses from AT&T’s rivals had testified that the merger would alter their bargaining relationships with Turner networks, as AT&T-Time Warner would have increased leverage in carriage negotiations. That’s because AT&T would stand to gain subscribers for DirecTV if a distribution rival were to lose access to Turner content. In other words, Conrath said, rivals would have to take onerous terms or face damaging their own businesses.
“The threat of this, just the threat, would impact negotiations,” Conrath said.
He also said that the government had to prove that there would be a “reasonable probability of harm,” a threshold that would not require that Leon get a crystal ball to try to predict the future state of the marketplace. In the opening hearings of the trial Leon had quipped that he thought he may need one, as the case put him in the position of trying to gauge what may happen.
Other highlights of the DOJ’s closing argument:
Judge’s interruption: As Conrath was in the initial part of his opening argument, making broad points about the harms from the merger, Leon stopped him and said, “Where is the evidence?” Conrath quickly went to talk about witnesses who has testified. Leon has at points tried to speed things along.
More Stephenson comments: Conrath also referenced notes that Stephenson made about the potential merger after he had initial conversations with Bewkes. One was that an issue in the combination would be “how to advantage your own distribution without harming Time Warner’s position” with other distributors, Conrath said.
In his testimony, Stephenson explained that the “intent of [the note] was to explain to the board, ‘You can’t have this on your mind,'” Conrath said. Stephenson’s point was that the merger would be a way to maximize Time Warner’s content, not AT&T’s distribution.
But Conrath said that Stephenson’s explanation “strains credibility. He argued that Stephenson’s note actually showed that he was still mindful of trying to advance AT&T’s distribution, but doing it in a way that didn’t harm Time Warner’s content relationships with AT&T rivals. Stephenson, Conrath said, “knows the board is focused on profitability.”
Later, in his closing argument, AT&T-Time Warner’s lead attorney Daniel Petrocelli accused the DOJ of making documents “sound sinister,” and said that the companies had made clear they would continue to seek widespread distribution of Time Warner content.
Colorful language: Conrath referred to some of the caustic and colorful language found in AT&T and Time Warner emails and corporate documents. One was a quote that Daniel York, now chief content officer of AT&T Entertainment, made about content providers who had made deals with Dish’s Sling TV service, one of the first multichannel streaming services. York, who was then a top executive at DirecTV (before its merger with AT&T was closed), at the time called those content providers “short sighted whores to whoever was willing to write a check,” Conrath noted.
He also noted that John Stankey, the AT&T executive who will lead the merged company’s entertainment properties, had been upset when Turner Networks made a deal with Apple TV for some sports rights and wrote in an email that it “sets me on a fire” because it will “deteriorate the value of the bundle.”
Conrath’s point was to show how corporate executives were wary of the threat from emerging streaming services. One of the government’s arguments is that the combined company will have the incentive to try to limit the growth of those new distribution rivals.
Economic modeling: Some of the hardest fought moments of the trial have been over the government’s economic analysis, from University of California at Berkeley economist Carl Shapiro, that the transaction will ultimately cost all pay-TV consumers. He did a sophisticated economic model, but AT&T-Time Warner’s legal team challenged his methodology and some of his assumptions.
Conrath, however, defended Shapiro’s figures as conservative — and said that his finding of $286 million of harm was on the “low end.” He also noted that Shapiro gave a range of figures of expected harms, but AT&T-Time Warner’s team, along with its rebuttal witness Dennis Carlton, focused on the lesser numbers.
Conrath also said that the government doesn’t use the models to be precise, but that they can be helpful in “assessing the threat to competition.”
The FANG threat: Conrath tried to dismiss one of AT&T’s rationales for the merger, that they need the transaction to compete against ever growing threats from Facebook, Amazon, Netflix and Google. Stephenson talked of AT&T’s desire to create a targeted ad platform that could rival those of major internet companies, but Conrath said that the fact they want to compete in that space “doesn’t give them a free pass” when it comes to pay TV.
When it comes to offering multichannel options via streaming services, major internet companies are still far behind, and even “tangental” to the subscriber base of satellite and cable companies. The DOJ has said that the relevant market in assessing the merger should be the pay-TV universe.
Conrath cited an email that Stephenson sent to Facebook CEO Mark Zuckerberg, in which there was talk of teaming in the digital ad space. Nothing ever came of it, but Conrath said the conversation was “logical enough because they are not in the same market.”