“I’ve concluded the merger will harm consumers,” Shapiro told the court. “The harm is significant.”
Shapiro’s testimony serves as the linchpin of the government's case, because antitrust suits frequently turn on demonstrated impacts on consumer prices. Although economic testimony can be abstract and complex, Shapiro took pains to walk U.S. District Judge Richard J. Leon through every step of his analysis.
The effort earned Shapiro an early rapport with Leon; as the two traded jokes, Shapiro deftly explained key business concepts that the Justice Department had trouble getting across using previous witnesses whose arguments Leon had dismissed as merely opinion.
For example, Shapiro conveyed the significance of possible changes in bargaining leverage between AT&T and other cable companies, should the merger be approved.
“Why will they have more leverage? What’s new is that AT&T and DirecTV will benefit if Charter doesn't have Turner’s content,” said Shapiro, referring to popular programming owned by Time Warner. “Charter is going to be a weaker competitor. You go through the logic, this is the fundamental [idea].”
Anticipating Leon’s questions, conceding the limits of his own abilities and telegraphing what he would argue before laying out his research, Shapiro made three key points about the merger to a packed courtroom.
First, he said, AT&T risked raising the price of content to other cable companies and driving up their costs.
Second, across the nation's 1,100 subscription television markets, AT&T could benefit by drawing customers away from rival TV providers that decided not to carry Time Warner content over pricing concerns. AT&T could also make more money by using its control over Time Warner content to retain customers — and discourage them from switching to cable companies that didn’t carry those channels. Those two dynamics, Shapiro said, could cause rival cable companies to lose between 9 and 14 percent of their subscribers over the long term.
Third, Shapiro argued, AT&T could plausibly coordinate with Comcast to restrict access to popular Time Warner and NBC content in ways that could hurt the emerging crop of online cable alternatives such as Dish Network’s Sling TV or Sony’s PlayStation Vue. This type of coordination would not need to be explicit or even illegal to impair consumer choices, he said.
But Leon and Shapiro diverged on a key issue: the post-merger relationship between AT&T and Time Warner.
Leon appeared unconvinced that AT&T and Time Warner would each act to maximize the profit of the combined company. When Shapiro referred to AT&T employees’ negotiating with other cable companies over the price of Time Warner’s content, Leon interrupted to clarify that it would be a Time Warner employee doing the negotiating.
Technically, that would be correct, Shapiro later said, but it would be a distinction without a difference.
“I think they’ll operate in the joint interest of AT&T,” Shapiro said, calling it a “core” assumption in the field of economics. “The merged company will operate to maximize its joint profits.”
Shapiro proved equally confident under questioning by AT&T and Time Warner lawyers. Daniel Petrocelli, the lead attorney for the two companies, sought to apply his usual litigator’s pressure, confronting Shapiro with conflicting testimony from Comcast and Turner Broadcasting executives. Those officials had told the court that the merger is unlikely to change how Turner negotiates with other cable companies. And the economist acknowledged that he did not consider AT&T’s offer of outside arbitration for cable companies who disagree with Time Warner on price. But Shapiro appeared unfazed by the criticisms, and said he stood by his analysis.
Petrocelli also tried to undercut Shapiro’s model by showing him third-party estimates of the number of subscribers Suddenlink lost in a 2014 content dispute with Viacom. Petrocelli rattled off other studies and testimony showing that real-world harms to cable companies were much less than Shapiro claimed when considered over a one- or two-month basis. And he persuaded Shapiro to concede that parts of a government-commissioned survey in the case overstated the share of subscribers who would hypothetically abandon a cable company if it did not carry Turner content for one month.
“He’s not even in the same universe [as other estimates]," Petrocelli said of the survey by John Hauser, a marketing professor at the Massachusetts Institute of Technology. “He’s way off base.”
“That 8 percent number seems high, yes, I agree,” Shapiro said.
But Shapiro went on to argue that many of the short-term estimates Petrocelli had cited were inappropriate for the merger analysis. Consumers who expect a blackout to be limited are less likely to switch providers, so a short-term analysis is not as informative, he said. Besides, companies such as AT&T measure customer value not only in customers who switch, but also in customers who are retained and who continue to generate revenue for the company. Longer-term data, Shapiro said, can help shed light on the amount of money a rival cable company would have earned had it not been harmed by a potential merger.
“If we had to use [the short-term figures] I suppose I’d find a way,” Shapiro said. “But we have much better data.”