AT&T Witness Attacks `Theoretically Unsound' Merger Case

(Bloomberg) -- AT&T Inc. went on the offensive to defeat the U.S. lawsuit against its proposed takeover of Time Warner Inc., putting an economist on the stand to explain pay-TV prices will actually fall after the merger, not rise as the government claims.

University of Chicago Professor Dennis Carlton testified Thursday that the Justice Department’s economic analysis, which predicts the deal will cost pay-TV subscribers hundreds of millions of dollars, is riddled with errors. The author of the study, Professor Carl Shapiro of the University of California at Berkeley, testified Wednesday as the U.S. largely wrapped up its case.

In what amounted to an academic duel, Carlton politely criticized Shapiro, questioning various key figures used in his work and calling his merger model “basic.” The paid experts, both of whom are former antitrust officials, managed to reach opposite conclusions using largely the same data.

“How much confidence should this court have in Professor Shapiro’s model?” Randy Oppenheimer, a lawyer for AT&T, asked Carlton during the trial in Washington.

“None,” said Carlton.

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Carlton was the first witness called by the companies to make their case to U.S. District Judge Richard Leon that their $85 billion combination should be approved. The Justice Department sued to stop the deal because it says the tie-up of AT&T’s DirecTV unit and Time Warner’s programming will raise prices for pay-TV subscribers.

When Carlton took the stand, he outlined a series of flaws he said undermined Shapiro’s findings, which he called “theoretically unsound.”

He said Shapiro was wrong to ignore price effects in the pay-TV market at times when companies combined both distribution and programming, such as Time Warner and Time Warner Cable, which were once part of the same company, or when Comcast Corp. bought NBCUniversal. Carlton said he looked at those effects and found no support for the claim that combining pay-TV distribution and programming leads to higher prices.

Carlton also criticized key inputs that Shapiro fed into his model, such as how many subscribers would leave a DirecTV competitor if it lost access to Time Warner programming. That estimate is important because the government claims some would go to DirecTV, allowing AT&T to make up lost revenue. That possibility gives AT&T additional leverage in negotiations with programmers that will allow it to raise prices, according to the government.

Shapiro overestimated how many would leave the rival company and underestimated how many would become so-called cord-cutters by ditching cable and satellite-TV altogether, Carlton said. He also said Shapiro used outdated data to estimate the profit AT&T would earn from subscribers who switch to DirecTV.

During his cross-examination by Justice Department attorney Craig Conrath, Carlton conceded that some of the information in his study had changed by the time the trial got under way. For example, Conrath noted, Carlton’s list of online-TV entrants excluded a programming deal that had been reached between Turner and YouTube TV.

Carlton also agreed with Conrath that a graph presented as evidence in the trial showed that after Comcast acquired NBCUniversal, a deal that united a distributor and a programmer, NBC secured higher prices for its programming. Carlton said the graph oversimplified the matter.

“As a matter of economic logic it’s irrelevant,” Carlton said.

Conrath questioned Carlton’s comparison of the AT&T deal to Comcast’s takeover of NBCUniversal, saying the lack of competition problems from the latter merger wasn’t a reasonable comparison because Comcast is regional in reach and restricted by a consent decree that was put in place to win government approval.

“Looking at the NBCU merger was not a way for you to look at an un-remedied merger,” Conrath said.

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