Government and AT&T face off in opening of major antitrust case

Why the AT&T-Time Warner trial matters
Why the AT&T-Time Warner trial matters

Long lines formed Thursday morning for opening statements in the government's lawsuit over AT&T's planned purchase of Time Warner, which observers are watching as potentially the most consequential antitrust case in years.

AT&T CEO Randall Stephenson, Time Warner CEO Jeff Bewkes and Justice Department antitrust chief Makan Delrahim were all in attendance, as were the lead lawyers on the case, Craig Conrath for the government and Dan Petrocelli for AT&T and Time Warner, which owns CNN.

In his opening statement, Conrath argued that at its core, a union between AT&T and Time Warner would harm consumers because it would cause an increase in prices and would hurt the competitive landscape. He implored Judge Richard Leon to "stop the merger, stop the harm."

"This merger will take a tool [AT&T's rivals] need to compete, and turn it into a weapon," Conrath said.

Conrath argued that those competitors, whether traditional TV providers or emerging rivals like Sling TV or YouTube TV, need Time Warner because of its "must-have" content like live sports on TNT, live news on CNN, and popular HBO shows. Conrath imagined a post-merger scenario in which AT&T charged competitors more for Time Warner programming, or prohibited rivals from using HBO in promotional programs meant to entice consumers.

Related: Landmark case opens as government tries to block AT&T-Time Warner deal

"There's no good substitute for Time Warner content," Conrath said, noting for instance that only TNT carried the college basketball game last week in which an underdog team from the University of Maryland Baltimore County beat the number one seeded University of Virginia.

Conrath contended that AT&T's "ability" to hurt competition would be derived from its acquisition of Time Warner; the incentive to do so, he said, would come from a desire to protect the company's paid-TV distribution, which Conrath called AT&T's "cash cow."

Conrath focused his opening statement on one of the government's key arguments, that there are still 90 million cable subscribers nationwide, and that they would face price increases of up to $400 million per year collectively -- about 45 cents per subscriber per month -- according to an economist's calculations.

The government alleges that AT&T would charge other distributors more for Time Warner content cut and would harm innovation by hurting the development of new modes of live TV, like Sling TV and YouTube TV, executives from which will be called as witnesses.

Conrath also pushed back on an argument made by AT&T, that the merger would help level the playing field with tech giants like Facebook and Google. Those Silicon Valley juggernauts, he said, are actually the ones "chasing taillights" behind the AT&T-owned DirecTV in the paid TV space. Moreover, he said, it was "no justification at all for a merger" simply to point to big companies in other markets.

Petrocelli opened for AT&T by arguing that vertical mergers -- that is, mergers between two companies which are not direct competitors -- rarely pose an antitrust problem, and that the government will not be able to show that this vertical merger will stifle competition or hurt consumers.

Petrocelli pointed to the changing media landscape as the primary reason that AT&T needs to acquire Time Warner and its programming. The move is necessary, he said, in order to compete with newer entities like Facebook, Amazon, Apple, Netflix and Google (often collectively referred to as "FAANG").

"All of these companies are running away with the industry," Petrocelli said. "They have radically transformed it."

The government, Petrocelli said, is ignoring the new environment in which AT&T and Time Warner now operate, as they compete with the likes of Facebook and Google which are dominating the advertising space. A joint AT&T and Time Warner would be better able to compete because it would have the same type of information on its customers and their viewing habits as the "FAANG's" do, Petrocelli said, and would thus be able to bring in more advertising dollars, leading to possible price decreases for consumers.

"The government's theory is fundamentally stuck in the past," Petrocelli said.

Petrocelli also spent a significant part of his opening attempting to poke holes in the government's selected economist's analysis of the effects of the merger, saying the defense will show that prices would not increase, and that even if the economist's numbers were correct, the price increase would not be enough to cause customers to leave their cable or satellite provider because over a year it amounts to the price of a fancy cup of coffee.

At one point, Petrocelli said that he will call to the stand a representative from a survey company commissioned by a cable distributor that the government is using as evidence that consumers would cancel a cable subscription without Time Warner content. Petrocelli said the survey company representative will testify that the cable subscribers who were surveyed would not cancel their service if Time Warner's programming was no longer available.

But, Petrocelli said, the cable distributor that commissioned the survey changed the numbers to reflect the opposite conclusion, and the government's economist then relied on that faulty data.

Late in the afternoon, the government called its first witness to the stand: Suzanne Fenwick, an executive at the television distributor Cox Communications who negotiated the company's deal with Turner, which includes channels such as CNN, TNT and TBS.

Fielding questions from the government's counsel, Fenwick said she and her colleagues at Cox are "very concerned" with the potential merger. She said that in current negotiations with Turner, "whose sole job is distributing content," there is an incentive for both sides to come to an agreement. If Cox were to suddenly negotiate with AT&T, which owns DirecTV, the equation could change.

And echoing the government's line, Fenwick said that the prospect of losing Turner's content would be devastating to Cox. But Petrocelli did his part to poke holes in that argument. When it was his turn to question the witness, Petrocelli grilled Fenwick, and at times came close to ridiculing her for failing to perform research to back up her claim that Cox would lose a substantial number of customers without Turner.

"You thought you could just come in here and give your opinion...even though you have no idea how many customers you're going to lose because you've done no quantitative analysis," he said.

Petrocelli also argued that Turner would have no more incentive to lose Cox customers post-merger than it does right now. But Fenwick countered by saying the merged company could have an incentive "if they put us out of business."

The trial is expected to last six to eight weeks.


CNNMoney Sponsors