When the University of Maryland-Baltimore County delivered a historic upset over the University of Virginia's college basketball team last week, the game was carried on a cable channel owned by a company AT&T is trying to buy for $85 billion — and which is at the center of a landmark antitrust lawsuit between the telecom giant and the Department of Justice.
Government attorneys said Thursday that the match is an example of the kind of popular content that could become more expensive to watch if AT&T is allowed to purchase Time Warner, one of the world's biggest entertainment companies.
“Time Warner would be a weapon for AT&T because AT&T's competitors need that programming,” said government attorney Craig Conrath.
Speaking in front of a full federal courtroom in Washington that included the chief executives of both Time Warner and AT&T, Conrath claimed that AT&T's merger defense is a “frontal attack” on the law because it threatens competition in the TV industry. The federal judge overseeing the case, Richard Leon, sat impassively and nodded along.
At issue is a “vertical merger” in which one company involved in one line of business, telecommunications, is purchasing a company in another line of business, media and entertainment. The combination would turn AT&T into a seller of entertainment content produced by brands such as HBO, CNN and Warner Bros. The government argues that the deal could allow AT&T to raise the price that other cable companies must pay for that content — and give itself a discount. The result would be an unfair advantage for AT&T's legacy TV subscription business as well as its streaming video service, DirecTV Now, said Conrath.
The government's court battle to block the AT&T deal is the first of its kind since the Nixon administration.
Antitrust economist Carl Shapiro, an expert for the Justice Department, has estimated that Americans' cable bills could go up as much as $436 million a year, or about 45 cents per month per subscriber. Shapiro used what is known as a Nash bargaining model.
But AT&T disputed the economic model in arguments Thursday, spending much of its 45 minutes of opening testimony seeking to undercut Shapiro's analysis. AT&T and Time Warner's attorney, Daniel Petrocelli, said Shapiro based much of his analysis on a flawed assumption: that a substantial portion of customers belonging to AT&T's rivals would switch away from their TV providers if they were unable to watch Time Warner content on those networks or if they had to pay more for it.
Petrocelli called Shapiro's assumption that AT&T's rivals could lose 12.5 percent of their customers “an astronomical number that has never happened in the history of pay-TV before.” It is “preposterous,” he argued, that AT&T would seek to harm competitors in the rapidly growing streaming video space because the company itself offers a streaming video app.
Petrocelli also argued that antitrust officials deliberately overlooked evidence that would have disproved their case: consumer prices in the aftermath of Comcast's 2011 purchase of NBCUniversal, a similar deal. That vertical merger did not trigger hikes in consumer prices, said Petrocelli, so it is unreasonable to claim that AT&T's merger will.
AT&T said its own analysis using the government's economic model showed that the merger would lead to a $500 million a year drop in consumer prices. It also said the deal could benefit consumers by adding new programming for mobile devices and increasing competition against tech titans such as Facebook, Google and Netflix.
The government's first witness in the case was Suzanne Fenwick, an executive from Cox Communications. Cox is a rival of AT&T's pay-TV business that could face higher prices for Time Warner content — some of which would be passed onto consumers, according to regulators. But while Justice mostly used its time with Fenwick to establish basic facts about the media industry, AT&T wasted no time grilling the government's witness.
Petrocelli sought to undercut Fenwick's credibility as a knowledgeable market expert, asking questions about Cox's competition that Fenwick had difficulty answering. Fenwick was unable to cite, for example, the number of channels offered by SlingTV, a streaming video service from Dish Network. She also could not say how many top-ranked shows are produced by Turner Broadcasting, one of Time Warner's premiere assets, despite previously describing Turner's cable programming as "must-have" content.
But Petrocelli's sharpest cut came when Fenwick said she had not performed any estimates to determine how many customers Cox might lose in a programming dispute with Turner. Despite saying she believed it would be "a large number," Petrocelli argued that Fenwick's beliefs did not constitute hard evidence.
"You think you can just come in here and give your opinion… and you've never done a single bit of quantitative analysis?" said Petrocelli.
AT&T's aggressive questioning followed a number of probing questions days earlier by Judge Leon, who reminded antitrust regulators to think carefully about whether their witnesses could back up their assertions with data.
The last time the Justice Department went to court to block a vertical deal was in 1972, when the government successfully blocked Ford's purchase of Autolite, a spark plug maker, over concerns that the acquisition could prevent new spark plug manufacturers from entering the market.
Thursday marks the third day of AT&T's trial, which is expected to last six to eight weeks. The president of SlingTV, Warren Schlichting, is expected to take the stand on Monday when the trial resumes.