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Legal experts weigh odds as DOJ's AT&T/Time Warner trial starts

Lawyers representing the government and AT&T Inc. are squaring off in court this week in an antitrust case that could lead to significant repercussions for nearly every aspect of the evolving video market, including content production, pay-TV distribution and streaming services.

The U.S. Department of Justice is seeking to block AT&T's $106.40 billion purchase of Time Warner Inc. In its lawsuit, the department argues the combination of AT&T and Time Warner's assets would give the resulting entity too much power in the pay-TV and online video marketplace, a claim AT&T has disputed. The trial, which begins March 19 with two days of motions before opening arguments on March 21, is expected to last several weeks, and legal experts who have reviewed pre-trial briefs from both sides remain torn over whether AT&T or the government is more likely to prevail.

Ryan Radia, research fellow and regulatory counsel at the nonprofit, libertarian think tank Competitive Enterprise Institute, said in an interview he expects AT&T to win the case.

While he sees the government's arguments as comprising "a weak antitrust case," Radia said by contrast, "AT&T lays out pretty credible pro-competitive justifications," including its argument that a combined AT&T/Time Warner can compete more effectively in advanced advertising.

Richard Epstein, a law professor at New York University's School of Law, also expects AT&T to win, saying, "The usual presumption against interference in vertical merger cases should hold here." Regulators and courts have typically looked on vertical mergers more favorably compared to horizontal combinations, as vertical deals do not remove a direct competitor from the market.

Cleveland State University law professor Chris Sagers gives the odds to the DOJ. "I'm 60% of the view the government's going to win at the trial level."

Sagers noted that although vertical mergers have faced less regulatory resistance in the past, the DOJ in its pre-trial brief uses a bargaining model derived from the work of economist John Nash to show a combined AT&T/Time Warner would enjoy increased negotiating power as a result of the deal, specifically when Time Warner is negotiating carriage deals with rival distributors such as Charter Communications Inc.

Because AT&T owns satellite TV company DIRECTV, the government argues that AT&T could raise the affiliate fees for Time Warner's networks so high that rival pay-TV providers like Comcast or Charter would be unwilling or unable to carry them. While Turner would lose those affiliate fee revenues from other distributors, the government says AT&T would gain subscription revenue "as subscribers switch from Charter to AT&T to ensure continuity in their reception of the desired Turner content," Sagers said.

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In making its case, the government relies on testimony from economics professor Carl Shapiro of the University of California at Berkeley, who estimated the merger will cause the price of Time Warner's Turner content to increase 18.4% on average for rival video operators, translating into a total increase of about $61 million per month or about $731 million per year.

The problem with this argument, according to Radia, is that it relies more on predictive modeling than on market precedent. "That's sort of a hypothetical exercise and the actual evidence that the merged firm could get away with charging more based on past situations is a lot weaker," Radia said.

This is also an argument AT&T makes in its own pre-trial brief. Specifically, AT&T argues that the model ignores the real consequences AT&T/Time Warner would suffer if the combined entity were to withhold Turner networks from other distributors.

"In the real world … withholding content imposes devastating, unrecoverable costs on programmers, and that will continue to be the case for Turner after the merger — which is why the government's own expert openly concedes that after the merger it would still be irrational for Turner to withhold content from any given distributor," AT&T said, noting that Turner would suffer "massive losses in revenues from affiliate fees and advertising."

But Sagers expressed more confidence in the government's case, noting that a good bit of the DOJ's evidence remains redacted at this point. "We can be sure the government has already worked this case up and run the numbers and feels confident they can prove … that because of that bargaining theory dynamic, the overall price consumers will have to bear for getting video content to their houses is going to go up," he said.

Radia acknowledged that the redacted excerpts add more uncertainty around the case. But he noted that those excerpts would have to be "pretty damaging" for them to sway the judge in one direction or another.

While the trial had initially been expected to take 15 days or three weeks, Reuters on March 15 cited U.S. District Judge Richard Leon as saying the trial could instead last six to eight weeks. Regardless of the outcome of the trial, an appeal is expected, Sagers said.