WASHINGTON (CN) – The U.S. government's antitrust lawsuit to block the $85 billion AT&T-Time Warner merger reached its apex Wednesday as its key expert witness testified the merger would cost consumers hundreds of millions annually.
Carl Shapiro, an economics professor at the University of California, Berkeley, projects pay-TV consumers could pay an additional $571 million a year in fees by 2021.
"I've concluded that the merger will harm consumers, and the harm is significant," Shapiro said to a jam-packed courtroom. "That's my conclusion."
According to Shapiro – whose testimony serves as the cornerstone of the government's case – the merger would enable AT&T-Time Warner to charge cable companies more to carry networks like CNN, TNT and TBS. Those channels are managed by Turner Broadcasting System, a division of Time Warner.
In 2015, AT&T bought satellite TV provider DirecTV, which made AT&T the biggest provider of pay-TV subscriptions.
Executives from companies opposed to AT&T's merger with Time Warner, including Charter Communications and Dish Network, have testified they believe Turner would gain greater leverage to impose more onerous terms on AT&T's rivals, including charging them more for Turner channels which they consider "must-haves" for their subscribers.
They also said they worry AT&T would have so much leverage after the merger that Turner could simply choose to black out its content.
Shapiro's testimony Wednesday bolstered those concerns. As the new owner of Turner content, AT&T will have greater leverage in negotiations with distributors than it did before, he said.
Using Charter Communications as an example, Shapiro said AT&T's business could benefit from Turner blackouts. If, for example, Charter no longer had Turner content, AT&T’s DirecTV would benefit as subscribers leave Charter.
"Some of those subscribers are going to turn out to be DirecTV subscribers instead," Shapiro said.
AT&T could then use its control over Turner content to boost profits by retaining subscribers who would be deterred from switching to providers that don't carry Turner channels.
Over the long haul, that could cause AT&T's competitors to lose between 9 and 14 percent of their subscribers, Shapiro said.
The merger could also enable AT&T and Time Warner to coordinate to withhold Turner content from a band of emerging online programming distributors that offer an alternative to traditional cable and lack the hassle of cable boxes. Such coordination might not be illegal, Shapiro said.
Finally, Shapiro said the merger would also create incentive for AT&T to restrict HBO promotions – which to some degree currently pull subscribers from DirecTV – for rival distributors. While Shapiro stopped short of saying AT&T would totally halt the promotions, he said the company would be less inclined to do it.
All of these factors combined will reduce competition in the market for video distributors, Shapiro said.
During the government's direct examination of Shapiro by Department of Justice attorney Eric Welsh, Shapiro emphasized that his predictions have limitations.
"Do economists have a crystal ball they can use," Welsh asked him.
"No, our field is not advanced enough to have a crystal ball," Shapiro replied.
Instead, Shapiro said he has "good binoculars" that allow him to make predictions to the best of his ability.
With a meaty resume packed with academic accolades, published peer-reviewed research and experience at the Department of Justice's antitrust division, Shapiro has served as a witness in prior antitrust cases.
Two years ago he provided court testimony concerning the Staples-Office Depot merger, and specializes in how firms compete and how markets are structured.
In his predictive analysis – commissioned by the Justice Department – Shapiro relied heavily on a $700,000 study paid for by Charter ahead of negotiations with Time Warner in 2016.
The study found Charter would lose 9 percent of its subscribers if it lost the Turner channels. Defense attorney Daniel Petrocelli placed a spotlight on that study when he cross-examined its lead author, Stefan Bewley with Altman Vilandrie & Co., last week.
Petrocelli called into question changes made to the study's methodology after Bewley presented the findings to Charter. Although Bewley denied being asked to make changes, the study originally showed that on the low end Charter would only lose 5 percent of its subscribers in a Turner blackout.
Bewley said the changes were made because the data for Turner was an outlier from the other programmers analyzed. Five percent was too low of an estimate, he said.
Although Shapiro noted the limitations of his analysis Wednesday, Petrocelli grilled him on his conclusions during cross-examination in the afternoon.
"I was a little bit amused by your reference to binoculars," Petrocelli said, adding that Shapiro might actually need a telescope to peer into the future impacts of the merger.
Shapiro conceded during Petrocelli’s questioning that he doesn't know for sure whether any coordination to hurt competitors would occur after the merger.
But Shapiro called it "dangerous," or at the very least "worrisome," to assume that merging companies won't align to support a shared interest. He said he assumes DirecTV and Turner would work together in the joint interest of the overall company.
Petrocelli pointed out that Shapiro's assumptions directly contradict testimony offered up Tuesday by NBCUniversal executive Madison Bond.
Bond testified he never considers the impact of content negotiations on NBCUniversal's sister company Comcast. The two companies merged in 2011.
Petrocelli also zeroed in on the fact that Shapiro did not consider the impact of certain AT&T contracts – which will prevent AT&T from blacking out Turner content – or its offer to enter "baseball-style" arbitration in any disputes with distributors over Turner content after the merger.
Shapiro said a different model would be needed to analyze the impact of the merger while taking into account the arbitration offer.
Petrocelli noted the outcome of content negotiations will be different if distributors invoke arbitration.
"I have not analyzed that outcome," Shapiro said.
Nonetheless, Shapiro said his predictions would not come to fruition immediately. They would happen gradually over time, as some of AT&T's contracts expire. Meanwhile, AT&T's offer of baseball-style arbitration expires in seven years.
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