AT&T, U.S. Clash Over No-Blackout Offer at Time Warner Trial

(Bloomberg) -- AT&T Inc. defended a proposal not to pull programming from rival pay-TV companies if it succeeds in buying Time Warner Inc., even while competitors have rejected the plan as too risky.

Professor Michael Katz of the University of California at Berkeley testified for AT&T Monday in the U.S. trial over the merger. He said the proposal makes it more likely that cable and satellite-TV companies will be able to negotiate programming contracts with Time Warner that reflect market value.

"It will work well, on average," Katz said in federal court in Washington.

Time Warner’s offer to pay-TV distributors is one of the company’s central defenses against the Justice Department’s lawsuit to block its sale to AT&T. The government says the $85 billion tie-up will hand AT&T undo bargaining leverage in programming negotiations that will lead to higher prices for rivals, which in turn will be passed on to subscribers.

AT&T and Time Warner counter that any added leverage is taken away by the promise not to "go dark" on a distributor if both sides can’t reach a deal. In that event, an arbitrator would consider proposals from each side and pick one. The no-blackout offer only applies to Time Warner’s Turner Broadcasting channels such CNN, and not to HBO.

Katz said the government’s prediction that prices will rise by more than $400 million a year suffers from a "fatal error" by not considering the arbitration offer. Once arbitration is factored in, the merger will benefit consumers, he said.

On cross-examination, the Justice Department confronted Katz with testimony from executives of AT&T’s rivals such as Dish Network Corp. and Cable One Inc. They said the arbitration proposal is risky and doesn’t address what they fear will be AT&T’s added leverage.

Katz also acknowledged that the proposal, which calls for the arbitrator to choose an offer that represents "fair market value," doesn’t actually define what fair value would be.

Another AT&T witness, Professor Peter Rossi, testified Monday about two surveys that were crucial to the government’s lawsuit because they predicted major subscriber losses for companies that could lose Turner content after the merger. Rossi, of the UCLA Anderson School of Management, picked apart the methodology of the surveys and said they couldn’t be trusted.

The surveys were conducted by Massachusetts Institute of Technology professor John Hauser and the consulting firm Altman Vilandrie & Co. The results of both surveys were used in the study by Professor Carl Shapiro, the Justice Department’s star witness who testified earlier.

The results of Hauser’s survey "are unreliable" because they’re based on questions that were leading and biased, Rossi said. He also attacked a scale used in Hauser’s survey that asked participants if they’d consider dropping their cable provider if it lost Turner content.

The survey response that was labeled a "very slight possibility" was given a score of 10 percent, which Rossi said was too high. If someone were told there was a "very slight possibility" they’d crash while driving from Washington to Baltimore, that wouldn’t be a "one in ten chance," Rossi said.

"The text description is out of whack with the numbers," he said. "This is at the very least a confusing and biased scale."

Rossie’s view of the survey by Altman Vilandrie were equally scathing. He said the company’s methodology and figures "amount to pure conjecture."

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