The biggest U.S. antitrust case of this century kicked into high gear Thursday as a government lawyer warned that AT&T Inc. wants to buy media giant Time Warner Inc. to “weaponize” its must-have content — a move that would raise prices for consumers and hinder innovation.
“Time Warner would be a weapon for AT&T because AT&T’s competitors need Time Warner’s programming,” Justice Department lawyer Craig Conrath said in opening arguments in the government’s lawsuit to halt the planned $85-billion deal.
AT&T’s added leverage over pay-TV competitors to withhold content from some of the most valuable assets in entertainment — including HBO, CNN, TBS, TNT and Warner Bros., Hollywood’s largest TV and film studio — would cause prices to rise by more than $400 million a year for Americans, Conrath said.
AT&T also would be able to use the leverage to hinder the growth of online competitors, such as Google Inc.’s YouTube TV and Dish Network’s Sling TV, Conrath said as the antitrust showdown began in a Washington courtroom after two days of sparring over evidence.
The outcome of the closely watched case, to be decided by U.S. District Judge Richard Leon after an estimated six- to eight-week trial, will have major ramifications for Hollywood and the rapidly evolving television industry.
AT&T’s lead attorney, Daniel Petrocelli, strongly disputed what he called “preposterous” government allegations in his opening arguments. He said consumer prices actually would go down because of cost efficiencies and higher advertising revenue generated by combining the telecommunications giant’s subscriber information with data about viewers of Time Warner programming.
Online rivals such as Google and Amazon.com Inc. have “radically transformed” the media industry, and AT&T is trying to bulk up to compete, Petrocelli said. The Justice Department’s case doesn’t recognize that, he said.
“The government is pretending we’re trying this case back in the 1980s or ‘90s,” he said.
Even though AT&T doesn’t believe there will be a consumer price increase, Petrocelli said the government’s $400-million estimate amounted to just 45 cents a month for each of the nation’s 90 million pay TV subscribers. He spent a chunk of his opening argument questioning the validity of the calculations by UC Berkeley economist Carl Shapiro.
Petrocelli also tried to dismiss the government’s argument that AT&T’s DirecTV would stand to gain customers who would ditch competitors’ services if AT&T withholds Time Warner content.
“You know how hard it is to cancel your pay-TV service?” he said, adding that customers have to call their provider and then stay home to wait for a new installation. “It’s a big pain.”
Conrath acknowledged the changing media landscape but said traditional providers still dominate the market. The largest of them is AT&T, which purchased DirecTV three years ago. The company now has more than 25 million customer homes. AT&T also has more than 100 million customers for mobile service, an increasingly vital market as younger Americans prefer to watch programming on their phones.
Conrath said the threat from innovative new rivals is fueling AT&T’s desire to buy Time Warner, adding that AT&T is desperate to keep its existing customers as new services try to lure them away.
“They’re coming right for AT&T’s cash cow, but these innovators need Time Warner’s content,” Conrath said. “Buying Time Warner would give AT&T a weapon to slow down innovation and protect AT&T’s cash cow.”
It was one of several times Conrath used the words “weapon” or “weaponize” in his 45-minute opening argument.
AT&T Chief Executive Randall Stephenson and Time Warner Chief Executive Jeff Bewkes, both expected to testify during the trial, watched the opening arguments from seats in a federal courtroom packed with reporters, lawyers and average Americans. The crowd spilled into an adjacent overflow courtroom supplied with an audio feed of the arguments.
Petrocelli, a high-powered Los Angeles lawyer, and the rest of AT&T’s large legal team sat amid boxes of files and a wheeled cart stacked with two dozen thick binders holding thousands of pages of documents.
Leon, a no-nonsense veteran judge appointed to the bench in 2002 by Republican President George W. Bush, warned both sides that he did not want the case tried in public and suggested those who talked to the media about the case outside the courtroom could be held in contempt.
Leon is familiar with big media antitrust cases, having approved the Justice Department’s deal to impose conditions on Comcast Corp.’s 2011 acquisition of media giant NBCUniversal. But this is his first antitrust trial.
After opening arguments, the Justice Department called its first witness, Suzanne Fenwick, a vice president at cable company Cox Communications who handles content acquisition. She testified that she feared negotiations to carry Turner programming owned by Time Warner, such as CNN, TNT and TBS, after the merger. AT&T would have added leverage because DirecTV could pick up customers who would leave Cox if it lost that “extraordinarily valuable” content.
“We are very concerned we’re going to be presented with a horribly ugly deal,” Fenwick said.
The loss of Turner programming would cause Cox to “lose a lot of customers,” she said. DirecTV, which Fenwick called Cox’s “toughest competitor,” would pick them up.
Petrocelli attacked Fenwick’s testimony, getting her to acknowledge she had no studies to back up her assertions. He said AT&T had no incentive to cut off cable companies from Turner programming after the merger because it would still lose a lot of money from lost licensing fees and advertising revenue even if DirecTV did pick up some new customers.
He also disputed that Turner programming was must-have content, noting it had none of the top 500 rated TV shows.
Petrocelli pressed Fenwick on whether Cox would go out of business without Turner programming.
“It would significantly impact the viability of our video model,” Fenwick said.