AT&T Seen Having Edge Over U.S. in Court Battle for Time Warner
(Bloomberg) -- AT&T Inc. and Time Warner Inc. may have gained an edge in the biggest merger trial in decades as the companies have exposed weaknesses in the Trump administration’s antitrust lawsuit to block their $85 billion merger, according to lawyers and economists following the battle.
As the U.S. rested its case Tuesday in the fifth week of the trial, AT&T and Time Warner have poked holes in the Justice Department’s claim that the deal would give them the power to raise prices on cable and satellite-TV competitors, and disadvantage competitors by coordinating with Comcast Corp., a major rival that went through a similar merger when it bought NBCUniversal.
On Wednesday, the corporate titans themselves will face off against the government’s antitrust enforcers with Time Warner Chief Executive Officer Jeff Bewkes expected to take the stand, followed by AT&T’s CEO Randall Stephenson on Thursday.
At the heart of the case is this: AT&T, which owns DirecTV, is the biggest pay-TV company in the U.S., while Time Warner’s Turner Broadcasting is the owner of numerous popular networks including CNN, TBS and TNT. The U.S. claims the combination is a recipe to raise prices for subscribers of AT&T’s competitors by more than $400 million a year.
And all of this, the U.S. says, risks stunting the entrance of newer companies that threaten the traditional cable model, including streaming services such as Dish Network Corp.’s Sling TV that offer smaller bundles of networks to consumers seeking new ways to watch.
AT&T and Time Warner have assailed the government’s case. Lead defense attorney Daniel Petrocelli and his team, over days of cross-examinations of the Justice Department’s witnesses, attacked the centerpiece of the case: a detailed study by economist Carl Shapiro, a former Justice Department official now at the University of California at Berkeley. Shapiro’s model and the data that went into predicting the price increases are unreliable, the companies say.
The government’s model is highly theoretical and ignores some real-world facts, said Andre Barlow, an antitrust lawyer at Doyle Barlow & Mazard PLLC in Washington.
"It’s really theory versus economic and business realities," said Barlow, who isn’t involved in the case and thinks the government is having a tough time.
Investors have become more confident AT&T will win, based on the difference between the offer price of $104.56 and Time Warner’s share price. The spread is lower than when the lawsuit was filed in November and has declined since the trial started last month.
The government’s antitrust chief, Makan Delrahim, who made the decision to file the lawsuit last year, is sounding confident. When he was asked last week at a conference in Washington about whether losing the AT&T case would make it more difficult to challenge similar deals that don’t combine direct competitors, he said:
"We’re not going to lose."
The challenge for the Justice Department is that the inputs Shapiro used for his model to predict the price increases carry a lot of uncertainty, said Hal Singer, an economist at consulting firm Economists Inc. One of those inputs is how many subscribers would leave a cable or satellite-TV company if Time Warner’s Turner channels are pulled from the distributor and how many would switch to DirecTV. That’s a factor in how much leverage AT&T would have in programming negotiations. AT&T’s economic expert Dennis Carlton testified that tweaking those inputs slightly would push Shapiro’s predicted price increase to zero.
"The problem for the judge is you want to get comfortable that this estimate is basically bulletproof, said Singer, who isn’t involved in the case. "Even if you believe all of his inputs, they are all estimated with error, every one of them."
Even U.S. District Judge Richard Leon, who is overseeing the trial, has expressed some skepticism about the government’s case. At the end of Shapiro’s testimony, Leon said he was "confused" about how Shapiro calculated the price increase to pay-TV subscribers. Shapiro tried to explain, and the judge still didn’t appear satisfied.
"Well, I look forward to rereading your testimony," Leon told him. "I’m not sure I got it, but it’s too late and too hot to belabor the point any further."
"I’m sure if you looked at all the equations and appendix, whatever it is, it would be completely clear," Shapiro said.
"I doubt I’ll do that," the judge said.
Despite the apparent setbacks exposed during cross-examinations, the Justice Department’s case still has its fans. They contend the government is making a strong case, even if the judge has at times signaled he isn’t on-board.
Michael Kades, a former Federal Trade Commission lawyer who’s now a director at the Washington Center for Equitable Growth, a think tank, said the government has done a good job of making its case that the merger will change incentives in a way that has a reasonable probability of harming competition.
“Based on the evidence so far, the DOJ should win the case," Kades said. “AT&T’s lawyers are doing a very good job on cross examination, as a matter of trial strategy, but I don’t think they’ve undermined the substance of the government’s case."
The data used by Shapiro were sufficient for the government to make its case, even if some of the numbers could be challenged or contradicted, said Gene Kimmelman, a former U.S. antitrust official and president of the consumer advocacy group Public Knowledge.
"The government has effectively shown that they have both the opportunity to raise prices and the economic incentive," said Kimmelman. "There just has to be enough evidence to suggest the likelihood that something like this will happen and I think they have enough evidence."
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