AT&T Picks Apart Star Witness as U.S. Wraps Up Merger Case

(Bloomberg) -- U.S. antitrust enforcers wrapped up their case for why AT&T Inc.’s takeover of Time Warner Inc. should be blocked, but not before defense lawyers picked apart the findings of the government’s star witness.

Carl Shapiro, an economics professor from the University of California at Berkeley, testified Wednesday in Washington to explain his analysis of how the merger will give AT&T the power to raise costs for Time Warner programming sold to pay-TV companies. Those costs would in turn be passed on to subscribers, he said.

“The merger will likely lead to an increase in fees that Turner is able to charge” that will lead to higher prices for consumers, Shapiro, a former Department of Justice antitrust official, said at the start of his day-long testimony.

That analysis rests on a host of assumptions and ignores some real-world data, according to Daniel Petrocelli, the lead attorney for AT&T and Time Warner who was quick to poke holes in Shapiro’s model. Even a small tweak to the analysis -- about how many subscribers would leave a rival pay-TV company in the event of a programming blackout -- would show that consumer prices wouldn’t rise following the deal, Petrocelli said.

Academic Experiment

Petrocelli did a good job exposing weaknesses in Shapiro’s model, according to Jennifer Rie, a legal analyst with Bloomberg Intelligence in New York. Rie said Shapiro’s analysis was probably the most important part of the Justice Department’s case.

“The testimony on cross examination left the impression that the model used was simply an academic experiment that didn’t align with real-life behavior, which was ignored,” she said. “It also looked a bit like the DOJ cherry-picked the inputs that worked for their theory.”

The judge overseeing the case expressed some confusion about Shapiro’s testimony at the end of the day despite hours of questioning by the Justice Department and AT&T, a potentially bad sign for the government.

“I look forward to re-reading your testimony,” U.S. District Judge Richard Leon said. “I’m not sure I got it.”

AT&T spokeswoman Erin McGrath declined to comment, as did the DOJ’s Kerri Kupec. AT&T and Time Warner lawyers were set to begin their defense of the $85 billion deal Thursday with an expert of their own, Dennis Carlton, an economics professor at the University of Chicago.

‘Significant’ Harm

Shapiro testified Wednesday that by buying Time Warner and gaining leverage in programming negotiations, AT&T would be able raise prices for rival cable and satellite-TV companies. That would lead to $571 million in higher costs for consumers by 2021, he said.

The judge questioned Shapiro’s assumption that AT&T would gain leverage in negotiations.

According to Shapiro, AT&T’s calculations in programming talks would be different than Time Warner’s on its own. While Time Warner would lose revenue if it couldn’t strike a deal for a pay-TV company to carry its programming, AT&T would face less pressure to strike a deal, because if Time Warner content weren’t available, some subscribers would simply switch to AT&T’s DirecTV.

But that assumes AT&T directs the negotiations and uses that leverage to its advantage. Leon pointed to earlier testimony in the trial that Comcast Corp.’s ownership of NBCUniversal doesn’t affect NBC’s programming negotiations.

“If you accept that,” Shapiro said, “this bargaining leverage wouldn’t come into play.”

Under cross-examination by Petrocelli, Shapiro acknowledged that he hadn’t considered the fact that many programming contracts Time Warner’s Turner Broadcasting has with pay-TV companies won’t be up for renegotiation for years, so any price effects from the deal won’t actually be felt immediately. And he said his finding about the price increase in 2021 is uncertain because it’s years away.

Shapiro did little to rebut AT&T’s point that the projected price increase was based in part on a study by competitor Charter Communications Inc. that was tweaked at the last minute to boost the government’s case.

Petrocelli asked Shapiro about earlier testimony from a consultant who created the study for Charter to predict how many subscribers Charter might lose during a hypothetical Turner blackout. The “final” study presented to Charter predicted a minimum loss of subscribers of 5 percent. That was later changed to 9 percent, right around the time Charter was aiding the Justice Department in its case against the AT&T merger, Petrocelli said. 

The 9 percent figure led to Shapiro’s prediction that customers would pay hundreds of millions of dollars more as a result of the merger. The price increase would be zero if 5 percent had been used, according to Petrocelli.

Petrocelli asked what specific work the consulting firm, Altman Vilandrie & Co., had carried out before making a change that ended up being so crucial to his later findings.

“I’m not sure,” Shapiro said.

In fact, Shapiro confirmed his study didn’t take into account subscriber losses from real-world blackouts because he said that typical blackouts are too short to be of use to his analysis of price effects, which are based on long-term blackouts. That prompted another question from Petrocelli: If there isn’t data on Turner blackouts to help build a prediction, isn’t that a sign that Turner isn’t likely to go dark for long after the merger?

Shapiro agreed when Petrocelli said his findings were “based on a threat to do something that has never ever happened.”

Gene Kimmelman, a former U.S. antitrust official and president of the consumer advocacy group Public Knowledge, said the government is doing well “despite all the theatrics” on cross-examination.

“On the fundamentals of the case, the government is checking all the boxes,” Kimmelman said. “It’s not a smoking gun case -- there’s not a lot of massive juicy documents. At the same time, I think it’s a solid case and there’s plenty of evidence.”

©2018 Bloomberg L.P.