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Neither the Justice Department nor AT&T Inc. offered a slam-dunk case on whether the telecom giant should be allowed to merge with Time Warner Inc.
“Neither side landed a knockout blow,” Harold Feld, senior vice president at consumer watchdog Public Knowledge, told Bloomberg Law, but neither side made a fatal error in presenting its conflicting versions of the facts.
The $85.4 billion merger is in the hands of U.S. District for the District of Columbia Judge Richard Leon. Regardless of which side wins, his decision may not be the last word, because each side has indicated it would appeal if it loses at the district court level.
An appeal would be to the U.S. Court of Appeals for the D.C. Circuit. That court has affirmed 56 percent of Leon’s decisions in the past five years and reversed 15 percent, according to Bloomberg Law’s Litigation Analytics. The remainder of his appealed opinions were reversed in part and affirmed in part.
The case will have “a huge impact for years to come” regardless of who wins, Feld said. There are other big mergers of nonrivals pending before regulators, such as the CVS Health Corp. merger with Aetna Inc., and there is little law on the books about how to analyze potential harms from these vertical deals, he said.
The outcome of the case may hinge on how much weight Leon is willing to give to the testimony of the government’s witness, Carl Shapiro, an economics professor at the University of California at Berkeley, according to Bloomberg Intelligence.
“Economic analysis was pivotal, as is generally the case,” said economist Hal Singer, a principal at Economists Inc.
Singer wasn’t involved in the trial, but he told Bloomberg Law that he watched the cross-examination of Shapiro, and the government’s economic model was underwhelming. “That’s not Shapiro’s fault,” he said, adding that the appointed economist can only use “the best tools in the toolkit.”
The government did show a real price increase was possible for cable TV subscribers as a result of the merger, Singer said, but it was only 17 cents for customers that don’t subscribe to AT&T’s pay TV service, DirecTV.
Testimony from AT&T’s economic expert Dennis Carlton and cross-examination revealed that if Shapiro had used alternative inputs to predict what would happen, “the price effects effectively disappeared,” Singer said. “I thought AT&T’s lawyer was a bit harsh on the bargaining model, but I understand that’s his job.”
The DOJ said the merger is dangerous to the pay TV market because it melds DirecTV, the biggest pay TV provider, with one of the largest content suppliers in Time Warner. It threatens price increases to consumers and AT&T’s rival pay TV distributors, the government said.
The government can seek to block mergers that are likely to substantially harm competition in a market under the Clayton Act. “We have a Clayton Act precisely because of deals like this,” DOJ trial attorney Craig Conrath argued on behalf of the government.
The government said the merger violates the Clayton Act because AT&T could hold Time Warner’s “must-have” content hostage, such as HBO or some sports channels, and force other pay TV distributors to accept higher prices for the content or onerous contract terms that stifle their ability to effectively compete.
AT&T, on the other hand, said the actual danger in the market isn’t in traditional pay TV but in streaming video services such as Hulu or Amazon.com. Daniel Petrocelli, arguing for AT&T and Time Warner, said the “thin, tenuous claims” from the government about the pay TV market presented “no credible evidence of harm.”
The streaming market isn’t at issue, Conrath countered. The government’s case focuses on the impact the merger would have on pay TV. “The fact they would like to compete in a new market doesn’t mean they can suppress competition in the pay TV market,” he said.
The government presented testimony from rival industry participants, who said the merger would hurt them, as the foundation of the government’s case. Petrocelli derided those competitors as disgruntled about facing a stronger, more efficient competitor in the post-merger AT&T.
They may be AT&T’s competitors, but they also are important customers of Time Warner, Conrath countered. When a merger harms customers, that’s a proxy for harm to consumers, he said.
Leon is weighing the competing versions about markets and data. “As with any court case, the judge has to decide who was more credible,” Feld said.
Leon has said he will have a decision by June 12, Bloomberg reported.
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