By Diane Bartz and David Shepardson
WASHINGTON (Reuters) – The U.S. Justice Department squared off on Thursday with AT&T Inc in a long anticipated trial, as the two sides disputed whether AT&T’s $85 billion purchase of Time Warner Inc would be good for consumers or an expensive drag on innovation.
During opening statements, Justice Department lawyer Craig Conrath asked for the deal to be blocked, saying it would hike prices for consumers by more than $400 million annually, or an average of $0.45 a month for pay TV subscribers, by making rival pay TV companies pay more for Time Warner content.
“Time Warner would be a weapon for AT&T because AT&T’s competitors need Time Warner,” Conrath told U.S. District Judge Richard Leon, who will decide the case after a trial expected to last six to eight weeks.
Conrath also said AT&T would be able to use content from movie and TV show maker Time Warner, including its Turner unit, to slow innovation in online video.
In opening remarks, Daniel Petrocelli, speaking for AT&T and Time Warner, ridiculed the Justice Department’s case and suggested the government was “fundamentally stuck in the past” with arguments that were “divorced from reality.”
Petrocelli said the deal would actually lead to a 50-cent decrease in prices for pay TV subscribers, citing what he said were errors in a government expert’s model of how the transaction would impact future prices.
The Justice Department, Petrocelli said, “cannot meet their burden of proof. They cannot prove that this would lessen competition.”
The merger is about the companies trying to better compete with technology businesses like Alphabet Inc and Amazon.com Inc, Petrocelli said.
The internet companies, including Netflix Inc, pose two challenges to pay TV. They either compete with cable and satellite television for ad dollars or provide cheaper online video that has hurt pricey pay-TV. Some do both.
Petrocelli added that the combined company would be better at using customer data to target advertising. Companies like General Motors Co and Mastercard In will pay more for higher quality advertising and consumers will pay less, he said.
The Justice Department filed suit in November to stop AT&T, which has some 25 million pay-TV subscribers, from closing the deal. AT&T says a merger would benefit consumers by creating efficiencies. AT&T is the biggest pay-TV provider via subsidiary DirecTV.
Conrath suggested that AT&T would be able to hike fees that Turner charges for its content by about 10 percent if the merger were approved and that the company could withhold content from rival distributors. He referenced an internal email from Turner executives that Dish Network Corp’s Sling service would be “crap” without Turner content, as he paraphrased the stronger language in the email.
President Donald Trump publicly criticized the deal as a candidate and as president, and the Republican president often has excoriated Time Warner’s CNN news network.
For its first witness, the Justice Department called Cox Communications content buyer Suzanne Fenwick, who described Time Warner’s movies, television shows and sports programming as “must-have content” for the cable TV provider.
If the merger went through, she said, she feared the next negotiation. “We’re very concerned that we’re going to be presented with a horribly ugly deal,” she said.
Petrocelli, in response, pressed her in vain to show any analytics to prove that Cox needed Time Warner to prevent customers from moving to DirecTV. “You’ve never done a single bit of quantitative analysis,” he concluded.
GOVERNMENT LOSS MEANS MORE DEALS
If the government loses, that could open up the field for more tie-ups between distributors and content providers. But a win could strengthen the hand of antitrust regulators looking at other, similarly structured mergers.
AT&T and Time Warner are not direct competitors, making the deal a so-called vertical merger between companies on the same supply chain. The vast majority of challenged mergers involve one rival buying another.
The merger would hand AT&T, if it becomes the new owner of Time Warner, the motive and opportunity to refuse to license March Madness NCAA basketball tournament games, along with premium cable channel HBO and other content, to pay-TV rivals and online distributors, the Justice Department has said.
Petrocelli had asked for access to communications between the White House and Justice Department about the deal, but the judge denied the request. Trump’s opposition to the merger did not come up during opening statements.
If the government loses, Verizon Communications Inc and Charter Communications Inc could strike deals to buy movie or television makers and squeeze smaller pay-TV providers.
AT&T has said the merger would result in more than $2.5 billion in annual cost savings by 2020.
(Reporting by Diane Bartz and David Shepardson in Washington; Editing by Will Dunham and Cynthia Osterman)