AT&T, DOJ Lawyers Spar as Opening Arguments Are Held in Antitrust Trial

Section 7 of the Clayton Act says a deal shouldn't go through if there's reasonable probability it harms consumers, and New AT&T's ability to do that via Time Warner content and its incentive to do so due to its "massive investment" in the traditional MVPD space shows that probability, said DOJ antitrust trial attorney Craig Conrath during opening argument Thursday in DOJ v. AT&T and Time Warner in the U.S. Court of Appeals for the D.C. Circuit. By ignoring over-the-top competitors and digital advertising, DOJ is "fundamentally stuck in the past," companies' outside counsel Dan Petrocelli of O'Melveny replied. A Washington executive says similar.

Turner "is a tough negotiator and has a lot of leverage" because of the must-have nature of its programming, testified Cox Communications Vice President-Content Acquisition Suzanne Fenwick, the first plaintiff witness. Fenwick said Cox is concerned about a "horribly ugly" affiliation agreement offer from New AT&T for TW programming since AT&T is a rival distributor that could try to pick up Cox customers. She criticized the arbitration offer Turner made to MVPDs (see 1711280063), saying it makes the arbitrators choose a deal solely on fair market value and doesn't give them the opportunity to look at individual conditions: "It's an all or nothing offer." On cross-examination, Petrocelli questioned whether Cox in talks with DOJ had sought conditions on the AT&T deal that included arbitration. Sling TV Group President Warren Schlichting will testify for the plaintiff Monday, as will adverse witness Turner CEO John Martin, Conrath said.

The would-be buyer is “hopeful” a compromise can be worked out in DOJ’s lawsuit, said AT&T Senior Executive Vice President Bob Quinn in an interview for C-SPAN’s The Communicators. The episode is set to be telecast Saturday and comments by Quinn indicated it was recorded before the start of the trial, which began Monday. AT&T has “all kinds of ideas” for a settlement that wouldn’t involve divestiture “of large products,” Quinn said, though he said “the ball is really not in our court.” Quinn wouldn’t comment on whether divesting smaller products was on the table, or if AT&T had made any settlement offers. “We remain reasonable,” he said.

DOJ’s case that the deal would be anticompetitive depends on “a very 1990s” view of the media landscape, and doesn’t acknowledge competition from companies that aren’t MVPDs, he said. The suit is “very backwards-looking,” Quinn said. DOJ’s evidence for how the deal would harm competition doesn’t take into account a binding arbitration offer from AT&T that would resolve conflicts without blackouts, Quinn said. With that offer, the deal presents no consumer harms, he said. Quinn's confident the evidence will show damages to competition from the deal “don’t really exist.”

"Stop the merger, stop the harm," Conrath said, saying Clayton Act language makes clear the government needs to show that probability of harm, not certainty. He said AT&T's 23 million video subscribers are "a cash cow" that New AT&T would be incentivized to protect. He said New AT&T would have incentive to raise TW programming prices for rivals more than such prices would have gone up if the company remained independent, and to stifle virtual MVPD competition through those price hikes or withholding content. He said the defense likely will downplay the estimated consumer impacts of New AT&T -- $5 to $6 per month per subscriber in higher cable bills -- but "that's why we have the Clayton Act." He said the estimated 10 percent price increase for Turner content if the deal goes through is "a huge unjustified wealth transfer."

Conrath argued TW content is must-have, with many MVPDs using HBO promotions as a tool for attracting subscribers. He said New AT&T would be far less likely to allow that use of HBO: That YouTube TV launched last fall without Turner content but subsequently added it means "the market has spoken" about the importance of such content.

The department hasn't met the burden of proof that it's probable New AT&T would lessen competition substantially, Petrocelli said. He said a vertical deal is anticompetitive if the resulting company has control of a critical input, but there's no argument to be made New AT&T would withhold TW content since it would be "financially ruinous" if that content weren't widely distributed. He said the targeted ads New AT&T could provide would lead to lower cable bills as ad revenue grows. He said a vertically integrated AT&T would let it compete more effectively in the digital ad world with dominant Facebook and Google. That NBCUniversal content pricing didn't rise abnormally after the Comcast merger is "a critical piece of evidence," he said.

Petrocelli criticized the government's economic modeling, saying the $5-$6 monthly bill increase estimates are "dead wrong." He said the government estimates a Turner blackout potentially costing a rival MVPD 12 percent of its subscriber base, but the lost pay-TV subscribers from a past one-month Turner blackout was 0.5 percent. He said AT&T/TW economic modeling shows consumers would end up with cable bills dropping 50 cents a month, or $500 million annually. He said Justice ignored that New AT&T would be subject to FCC program access rules that would "take care of" any potential pricing abuse.

Petrocelli waved off criticisms about New AT&T incentives to collude with Comcast/NBCU. Wireless AT&T and wireline Comcast have "totally different business interests and alignment," Petrocelli said. He said New AT&T would have less leverage over rival MVPDs, since they would be less likely to go into deals for TW content that would help AT&T.

Both sides pointed to the FAANG companies -- Facebook, Apple, Amazon, Netflix and Google -- as being a key part of their arguments. The FAANGs "are running away with" the video industry through their low-priced virtual MVPD and subscription VOD services, leeching subscribers from traditional MVPDs, Petrocelli said. No, they are actually very small players in pay TV, with Google, for example, having less than 1 percent of the market, Conrath said. He said the more-targeted digital advertising envisioned by New AT&T might be good for New AT&T and for advertisers, but proving a benefit to consumers "is going to be a real burden."

Among those in the courtroom were AT&T CEO Randall Stephenson, TW CEO Jeff Bewkes and DOJ Antitrust Chief Makan Delrahim. Both Stephenson and Bewkes will testify, Petrocelli said. Conrath said Sling TV Group President Warren Schlichting will testify for the plaintiff.