WASHINGTON (CN) – The Department of Justice made its final push Monday to block the $85 billion AT&T-Time Warner merger, asking a federal judge to either enjoin the merger or allow AT&T to buy only a portion of the content giant.
Arguing on behalf of the Justice Department, Craig Conrath called the merger “a big deal,” and said during closing arguments in the case that it would change all of AT&T’s relationships with its competitors across the pay-TV industry. He also said it would have a “massive effect” on the pay-TV industry itself.
The Justice Department sued on Nov. 20 to block the deal, citing violations of antitrust law.
“We have a Clayton Act precisely for deals like this,” Conrath argued to a packed courtroom late Monday morning, which spilled over into and nearly filled an overflow room with audio of the proceedings.
AT&T and Time Warner executives, including chief executives Randall Stephenson and Jeff Bewkes attended the closing arguments.
Over seven weeks of trial, the government has argued that the deal will give AT&T, which owns DirecTV, increased leverage over rivals during carriage negotiations for popular Time Warner content, such as Turner Broadcasting System networks like CNN, TBS and TNT.
During the trial, executives from DirecTV’s competitors like Dish Network, Charter Communications and Cable One testified that those Turner networks are “must-have” for their subscribers.
That’s because, they said, customers value the live news and marquee sports events these networks carry, such as live election coverage, the NCAA college basketball championship tournament known as March Madness, and NBA games.
Highlighting the importance of the content, Turner chief executive John Martin, who was called by the government as an adversarial witness, revealed during the trial that Turner pays $1 billion each year for the rights to broadcast NBA regular season and playoff games.
But according to Conrath, the merger will give AT&T the incentive and the ability to threaten to black those must-have channels out, and to demand higher prices from distributors. The government has argued this increased leverage will lead to higher content prices, which will ultimately get passed on to consumers to the tune of $571 million by 2021.
On the high end, the government’s key expert witness Carl Shapiro said that pay-TV consumers could see a 45-cent increase on their monthly bills. On the low end, the University of California, Berkeley economics professor estimated an increase of 25 cents.
“If AT&T can push up its prices, consumers will pay the price,” Conrath said.
According to the government, the deal could also hurt competition because subscribers would be incentivized to switch to DirecTV if they lose access to Turner networks at competing pay-TV distributors.
The key fact in the case, Conrath argued, is that prior to the merger Time Warner had the incentive to distribute its content widely. Post merger, however, Conrath said it could also make money by siphoning off subscribers from AT&T’s rivals.
During the trial, AT&T chief executive Stephenson called the antitrust concerns about the merger “absurd.”
But Conrath noted during trial, and reiterated during closing arguments, that Stephenson had expressed similar concerns to Time Warner chief executive Jeff Bewkes after he informed Stephenson the content giant had purchased a 10 percent stake in online video service Hulu.
“So maybe that concern isn’t so absurd after all,” Conrath said.
AT&T defense attorney Daniel Petrocelli meanwhile took direct aim at the economic analysis that served as the cornerstone of the government’s case, saying the government only made “thin, tenuous claims of harm” – not nearly enough to meet its burden to obtain an injunction blocking the merger.
Calling it “the incredible shrinking case,” Petrocelli said the government made no claims that Time Warner would for sure raise its prices, withhold content from any distributor or put competitors out of business.
Dubbing the case “manufactured” and claiming the government had no business bringing it, Petrocelli said the case “vanished before our very eyes” during trial, as government expert witness Shapiro conceded during rebuttal testimony that consumers could see price increases as low as 13 cents on their monthly bills, when factoring in more recent AT&T profit margin data.
Petrocelli called that “statistically indistinguishable from zero,” and scoffed at the notion that AT&T would spend $85 billion on Time Warner to squeeze out 13 cents per month.
But Petrocelli also criticized the government from withholding key data from Shapiro, which he only became aware of during his deposition. That includes changes made to a key study he relied on in his analysis of the merger’s impact that showed the merger would result in a 9 percent subscriber loss rate for an AT&T competitor.
The original version of the study, which Charter Communications commissioned from Altman Vilandrie & Co. for $700,000, showed a subscriber loss rate of only 5 percent.
According to Petrocelli, had Shapiro used that figure in his economic analysis it would eliminate the price increase he predicted.
Petrocelli also accused the government of restricting and compartmentalizing the scope of Shapiro’s work.
At the government’s instruction, Shapiro also did not account for an arbitration offer AT&T made after the Justice Department sued to block the merger, or existing Turner contracts that would prevent the broadcaster from blacking content out. Nor did he account for federal access laws that would prevent anticompetitive behavior, Petrocelli said.
“It leaves no doubt whatsoever that the government could not and did not meet its burden to block this merger,” he said.
According to Petrocelli, the offer from AT&T to enter “baseball style” arbitration if price disputes arise during carriage negotiations is a “unilateral, binding commitment.” The defense has argued throughout the trial that the arbitration offer would remove any leverage the merged company would have over price negotiations, thereby neutralizing the thrust of the government’s case.
“This gives all the leverage to the distributor,” Petrocelli said. “All of it.”
But Justice Department attorney Conrath rejected the arbitration offer as a solution, saying that AT&T competitors are unlikely to invoke the offer because of the uncertainty of the outcome. If arbitration is invoked, the parties would submit their price offers to the arbiter, who would make the ultimate decision about which offer wins.
Competition, Conrath said, is the right solution. In this case, that would require an injunction blocking the deal as an unlawful. But Conrath did float the possibility that U.S. District Judge Richard Leon could require partial divestiture.
Leon, who is presiding over the bench trial, could prohibit AT&T from acquiring Turner networks but still permit it to acquire all other Time Warner content, Conrath said.
But that would amount to a regulatory scheme rather than a pro-competitive solution, Conrath added.
Leon said he would issue a ruling by June 12 at the latest, saying he would issue his decision during a hearing. The AT&T-Time Warner deal will expire June 21.