Feds Dissect Rosy Take on Time Warner-AT&T Merger

WASHINGTON (CN) - Government attorneys turned up the heat Monday on an economist who testified in support of AT&T’s proposed $85 billion buyout of Time Warner.

Rivals of AT&T have balked that the merger will cause price spikes or content blackouts, but Michael Katz, a professor at the University of California, Berkeley, told the court this morning that he believes that the “baseball-style" arbitration will allow competitors to negotiate contracts close to market value.

Time Warner made its arbitration offer shortly after the Department of Justice sued to block the merger. Set to expire after seven years, the offer would allow pay-TV companies to invoke arbitration in the event of a stalemate during programming negotiations, and it would prevent Turner from blacking out popular channels during arbitration.

But the blackout safeguard in the arbitration offer has failed to sway executives from AT&T's cable and satellite-TV rivals.

On cross-examination Monday, Justice Department attorneys forced Katz to concede that he hasn’t studied whether the arbitration offer is legally enforceable.

Katz also admitted that the offer doesn’t define what fair-market value would be.

Turner Broadcasting System Inc., a division of Time Warner, manages popular channels like TBS, TNT and CNN, which executives for rival pay-TV providers have testified are "must-have" for their subscribers.

Those executives have testified they are concerned that the merger will enable the new company to force distributors to choose between accepting onerous terms, or contend with content blackouts. Moreover, they say the arbitration agreement doesn’t account for the increased leverage the merged company will have over negotiations.

Katz testified meanwhile that no evidence exists to suggest the arbitration agreement would favor the merged company. He noted that arbitration worked well after Comcast Corp. bought NBCUniversal in 2011.

U.S. District Judge Richard Leon had cleared the Comcast-NBCUniversal merger back then, but only after a settlement agreement incorporated a provision similar to Time Warner's arbitration offer. Leon is also presiding over the AT&T-Time Warner antitrust trial.

Throughout the first five weeks of trial, rival executives have expressed hesitation about the arbitration agreement. Randy Sejen, the former chief contract negotiator for Cable One Inc., told attorneys during a deposition that he would avoid invoking arbitration because he wouldn't want the company saddled with a contract he didn't know the terms of.

During arbitration, an arbiter would be tasked with determining which final offer from the negotiating parties is closer to fair-market value. The arbiter would hear from witnesses and examine evidence, but would bear ultimate responsibility for deciding the outcome.

That makes rival executives, who have called into question the ability of arbitrators to adequately decipher complex contract offers, nervous.

Tom Montemagno, executive vice president of programming Acquisition at Charter Communications, told Leon on April 3 that arbitration is "a risky tool to exercise," even though he acknowledged that Charter reached a deal with NBCUniversal after invoking arbitration.  

Time Warner’s arbitration offer would only apply to Turner networks, and not to HBO.

Warren Schlichting, president of Dish Network’s online TV service Sling TV, had testified that the arbitration agreement is akin to a “hammer” without the inclusion of HBO.

AT&T and Time Warner CEO’s Randall Stephenson and Jeff Bewkes are expected to take the witness stand this week.

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