WASHINGTON (CN) - The first expert summoned to support AT&T’s $85 billion merger with Time Warner testified Thursday that the government has no evidence supporting its claim that the deal would raise prices for consumers and harm competition.
Dennis Carlton, an economics professor at the University of Chicago, said that the testimony delivered Wednesday by the government's star expert witness, Carl Shapiro, is unreliable.
Shapiro, an economics professor at the University of California, Berkeley, conducted an experiment for the Department of Justice in preparation for the antitrust case. He concluded that the merger would increase pay-TV prices for consumers by $571 million by 2021, and that AT&T's rivals will lose between 9 and 14 percent of their subscribers.
But Carlton said that empirical industry evidence "presents no statistical support for the government's claim that prices will rise from this transaction."
Carlton's analysis predicts that prices for DirecTV, which is owned by AT&T, will fall after the merger because it will make the company more efficient, and will eliminate double marginalization.
That means the fee Time Warner charges AT&T per subscriber for the rights to its content will disappear after the merger, making the new company more profitable and incentivizing it to aggressively pursue new customers by dropping prices.
If DirecTV prices drop, Carlton said, AT&T’s rivals will see price shifts, as well.
"A rival doesn't want to see a transaction that makes its competitor more efficient," Carlton said.
Carlton testified that he was asked to examine the competitive effects of the merger, paying special attention to the government's economic evidence. Like Shapiro, Carlton packs a meaty resume: Compounding more than 100 peer-reviewed journal articles, Carlton has experience with the Department of Justice's antitrust division, and has served as a witness in other antitrust and merger cases.
In picking apart Shapiro's testimony, Carlton pointed to two prior, real-world examples of effects from similar mergers: the 2003 News Corp. acquisition of DirecTV and the 2011 Comcast acquisition of NBCUniversal.
While those mergers are not identical, Carlton said the same anticompetitive concerns were raised beforehand in both cases, making them important examples to consider in trying to predict the outcome of the AT&T merger.
Carlton noted that Shapiro did not consider the impacts of those mergers in his model.
"Ignoring that evidence is a big mistake," Carlton said. "Professor Shapiro's model is theoretically unsound," he added.
According to data Carlton analyzed, NBCUniversal's prices are rising more slowly than those of most other networks. Shapiro had attributed that Wednesday to a number of conditions placed on the merger before regulators approved it.
But Carlton said Thursday morning that similar conditions exist in the AT&T-Time Warner merger, including AT&T's commitment to allow distributors to invoke “baseball-style" arbitration for seven years for any fee disputes involving Turner Broadcasting networks.
The Department of Justice has argued that Turner Broadcasting Systems Inc. - a division of Time Warner, which is the nation's second-largest content company - will have more leverage during negotiations with distributors after the merger.
That raises the risk that Turner can spike prices for distributors to carry its most popular channels, including CNN, TNT and TBS, and could embolden the company to simply choose to blackout its content if they won't pay up.
But under the terms of the arbitration agreement, AT&T has agreed not to black out its networks for the duration of negotiations with distributors.
Carlton said Shapiro's model is unreliable because he didn't account for that.
Shapiro conceded Wednesday that he did not factor that into his study, saying that he would need to use an entirely different model to study how the arbitration agreement would affect the merger.
"The theory he's using just doesn't apply to this transaction," Carlton said.
Carlton also noted that Shapiro's model failed to account for AT&T contracts with emerging online programming distributors. He said the terms of those contracts, which won't be up for renegotiation for years, would prevent Turner from raising prices or blacking out content after the merger.
The Department of Justice is expected to cross-examine Carlton Thursday afternoon.
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