AT&T/TW Trial Seen Starting With Many Factual, Legal Disputes

Faced with dueling claims about subscriber departure rates if a competing video service were denied Time Warner content, questions about what horizontal merger standards apply in a vertical deal, and a host of other disputed issues, U.S. District Judge Richard Leon of Washington has a heavy adjudication workload before him in the trial of DOJ's lawsuit seeking to block AT&T/TW. That's the consensus of legal and economic experts at an American University-hosted seminar Thursday on the antitrust trial.

Some saw potentially major implications for a DOJ victory. Any vertical deal where there's even a slight pricing effect on consumers could be in jeopardy, said economist Hal Singer. Echoed University of Nebraska law professor Gus Hurwitz, there would be a high bar against vertical mergers since they would be far easier to challenge in the future. He said it could make parties in vertical deals less inclined to negotiate with DOJ and instead wait for a Justice challenge, and then make commitments to address what the agency's modeling predicts.

Future vertical deal challenges would be unlikely after a DOJ loss, said antitrust expert Seth Bloom, who now lobbies for clients including Comcast. An agency loss on the facts doesn't carry particular significance but one on the law, with the court adopting a presumption vertical deals are pro-competitive, would encourage more such deals, said American University law professor Jonathan Baker.

Comcast should be worried about a DOJ win, since it would raise the odds of an extended NBCUniversal consent decree order on the company and decrease likelihood of Comcast/Fox, experts said. They said an AT&T/TW win would mean an expanded scope of potential acquisition targets for Comcast. The cable operator didn't comment.

Latham & Watkins antitrust lawyer Mandy Reeves said Leon's decision could spend notable time on the dueling AT&T/TW and DOJ views on who shoulders the burden of proof, with companies arguing it's solely the government in a vertical merger review, and DOJ arguing the companies have to prove a lack of harm. She said it's surprising the companies didn't put more emphasis on arguments of the deal being pro-competitive, though that might come out more in trial.

It's not clear there are pro-competitive aspects to the deal, said Public Knowledge Senior Vice President Harold Feld. Claims New AT&T would better compete with Facebook and Google in digital advertising aren't self-evident since they are in different addressable ad markets, he said. He said AT&T in its filings referred to skinny bundles and over-the-top competition but didn't commit to offering a skinny bundle product or any of the other "bait" that might be expected. Former DOJ antitrust trial lawyer Peter Gray said the brevity about New AT&T's supposed greater efficiency might indicate there aren't compelling arguments to make, and AT&T's arguments might focus on claims the government hasn't met its burden of proof. He said it's notable the companies' brief didn't give more attention to the bleeding of subscribers by the traditional pay-TV industry -- and thus its ability to raise prices (see 1803120003). Bloom said also notable in its absence was any argument about how the deal might affect independent or small programmers, since that discrimination has been a key issue in other recent media mergers.

In horizontal mergers, increased market share comes with a presumption there's a negative effect on consumers, but it's not clear what standards apply in looking at vertical deals, Hurwitz said. He said DOJ and companies could clash on the threshold of "likely" in the question of whether something will substantially lessen competition.

An AT&T/TW likely would lead to other companies like Verizon and Charter Communications also moving to vertically integrate, with those firms charging each other high content fees, employing most-favored nation agreements and passing all the costs on to subscribers in "a nifty way to tacitly collude," said Georgetown Law Center professor Steven Salop. But Singer called the argument New AT&T would be more likely to collude with fellow vertical integrator Comcast "highly speculative." Singer also criticized DOJ antipathy to behavioral conditions. He said the AT&T/TW offer of baseball-style arbitration and no blackouts (see 1711280063) greatly upsets the modeling the department has been using to ascertain how consumer costs will go up, since it would take away some TW leverage in talks with MVPDs.

It might be tough to convince Leon the arbitration offer undermines DOJ's theory of harm since there's no enforcement mechanism and since the condition expires after seven years, Baker said. He said the issue of presuming a vertical deal is pro-competitive could be a battleground since there's no economic basis for such an assertion.