An expert witness for the Department of Justice has testified that the AT&T-Time Warner merger will be costly for consumers.

The government filed a lawsuit against AT&T and Time Warner this past November, arguing that the proposed merger is illegal under antitrust law because it would raise pay TV costs to consumers. AT&T has argued that the merger does not mean that prices would necessarily go up and that it would have no reason to keep content from its competitors because it would make less money in ad revenue. The trial began in mid-March in U.S. District Court in Washington, before Judge Richard Leon.

Expert Testimony

The Justice Department called Carl Shapiro to testify on its behalf. Shapiro is a professor at University at California Berkeley and an economic expert. In the past, Shapiro has held positions at the White House and the Antitrust Division. Shapiro worked on the Comcast-NBC Universal merger when he was the chief economist for the Justice Department.

Shapiro testified that the merger of AT&T and Time Warner will cost consumers an extra $436 million per year by 2017 and and extra $571 million by 2021. Shapiro said, “Consumers will be hurt. . . . They will be hurt because competitors to DirecTV will face higher costs.”

Shapiro testified that the $85.4 billion merger between the two companies will harm consumers, which is the standard that the government uses to determine if a transaction raises antitrust issues. Shapiro testified that the merger would “substantially lessen” competition.

Shapiro testified that AT&T risked raising costs to consumers by: raising the price of content for other cable companies; benefiting in customer additions from rivals that could not afford Time Warner content; and coordinating with Comcast to restrict access to Time Warner and NBC content to hurt emerging over-the-top (OTT) services, a media distribution practice that allows a streaming content provider to sell media services directly to a consumer over the internet.

Shapiro explained that AT&T would be able to restrict its rivals from using HBO as a promotional tool. HBO is used across the industry as a way for cable and satellite services to enroll new customers and retain their existing ones. Shapiro said that AT&T would have added bargaining leverage because of the threat of a programming blackout. Shapiro explained that blackouts are important because, “Even though they don’t happen very much, that’s the key to leverage.”

Cross-Examination

Attorney for AT&T-Time Warner, Daniel Petrocelli, cross-examined Shapiro. Petrocelli attempted to show that Shapiro’s model did not take into account real-world situations and the offer for Time Warner’s Turner networks to engage in “baseball-style” arbitration in carriage disputes with AT&T’s rivals. Petrocelli also questioned Shapiro over the type of data that he included in his study versus what he chose to leave out.

Shapiro argued that his methodology was in line with standards for merger with reviews and that his methods were in some ways a conservative approach. Shapiro said that his methods focused on the longer-term market structure in the event of a merger.