AT&T/TW Tears Into DOJ's Economic Modeling, Says Consumer Prices Will Drop

Actual empirical evidence from past vertical mergers and splits shows consumer pricing ultimately goes down, the exact opposite of the harm DOJ is projecting in the proposed AT&T buy of Time Warner, the companies' economic expert testified Thursday. DOJ hasn't rested, but U.S. District Judge Richard Leon of Washington said he was letting University of Chicago economics professor Dennis Carlton testify out of order so his testimony comes a day after that of Justice's own economics expert, University of California, Berkeley economist Carl Shapiro (see 1804110025).

Carlton said his research into affiliate fee pricing charged to MVPDs after Comcast's buy of NBCUniversal, TW's spinoff of Time Warner Cable and Fox's partial buy of and then subsequent spinoff of DirecTV showed no statistical evidence AT&T/TW would result in higher pricing. He said Shapiro's complicated economic modeling didn't look at such empirical evidence, which Carlton said was "a big mistake." He called Shapiro's modeling "theoretically unsound" since it was based on the conclusion New AT&T would have more leverage through its ability to black out Turner content to rival MVPDs without factoring in that Turner offered arbitration terms to those rivals that include forgoing blackouts.

Carlton said his empirical modeling uses data from a variety of sources, including SNL Kagan, DirecTV and other MVPDs. Citing lost subscriber rates after the Viacom/Cable One blackout, Carlton said Shapiro overestimated the departure rate in the event of a long-term Turner blackout, and correcting for that overestimate in the model turns estimated price increases into price decreases. He said Shapiro overestimated Cable One subscriber losses due to that blackout when he doesn't take into account that MVPDs everywhere started seeing accelerating subscriber losses at about that time.

The Shapiro model also is rife with errors and faulty assumptions, Carlton said. He said it wrongly ignores that Turner's existing affiliation agreements with MVPDs last in some cases several years into the future, and those contracts mitigate or eliminate risk of affiliate fees going up soon. He said it ignores the role the FCC's program access rules could play in preventing New AT&T misuse of its vertical integration.

The modeling problems aside, the additional 27 cents per month pay-TV subscribers would pay under Shapiro's model is statistically insignificant in the context of a monthly bill that's often close to $140, Carlton said. He also said Shapiro's model ignores such efficiencies as more targeted advertising and programming opportunities for TW using AT&T data. And he waved off concerns about possible New AT&T/Comcast/NBCU coordination and New AT&T restricting HBO's use as a promotional tool for rival MVPDs as not detailed enough. "I'm not sure what I'm supposed to rebut," he said. Carlton said the elimination of double marginalization -- the markup charged by Turner and DirecTV now -- that would come with AT&T/TW would lead to lower prices charged by DirecTV, which in turn would result in downward pressure on its competitors, too.

Under cross-examination by DOJ antitrust trial attorney Craig Conrath, Carlton acknowledged his own analysis didn't try to model what potentially could happen under New AT&T. He also acknowledged that numerous Turner agreements with MVPDs are to expire within the next year or two.

Conrath and Carlton disputed a section of Carlton's report that Conrath said actually indicated affiliate fees charged by Comcast grew more quickly after the NBCU merger. Carlton said the chart wasn't a good tool for comparing pre- and post-merger Comcast and he did that analysis later in the report. Carlton acknowledged that of four virtual MVPDs he reviewed that had launched without Turner content, one has since added Turner, one is out of business and the two others are tiny operators. Conrath also pushed Carlton on whether he studied what role FCC conditions played in ensuring there weren't vertical integration-related price hikes related to Comcast/NBCU, Fox/DirecTV or TW/TWC. Carlton said he didn't.

"My goodness gracious," Leon said when DOJ antitrust chief Makan Delrahim, who has been an occasional observer in the trial, introduced himself as among the government lawyers at the start of the day. Later, in response to Carlton's critiques of the complexity of and assumptions inherent in Shapiro's model, Leon interjected, "A Rube Goldberg contraption?" "Really complicated," Carlton said.