AT&T/Time Warner merger will raise TV bills $436 million a year, US says

AT&T's proposed purchase of Time Warner Inc. would raise the total amount Americans pay for TV service by $436 million a year, the US Department of Justice alleges in its lawsuit attempting to block the merger.

"If TV-program distributor AT&T acquires TV-program producer Time Warner, American consumers will end up paying hundreds of millions of dollars more than they do now to watch their favorite programs on TV," the DOJ's trial brief said last week. "In short, the transaction violates Section 7 of the Clayton Act, because its effect 'may be substantially to lessen competition.' Prices for current services will go up and development of emerging competition will slow down."

AT&T scoffed at the government's calculations, disputing the methodology and saying that even if the DOJ is correct, the average customer bill would rise by only 45 cents a month.

AT&T would demand higher prices, US says

The DOJ cites calculations by economics professor Carl Shapiro of the University of California at Berkeley, who will be one of the government's expert witnesses at the trial, which starts Monday at the US District Court for the District of Columbia. The DOJ summarized Shapiro's analysis in its brief last week, but it will be presented in more detail at the trial.

AT&T-owned DirecTV will save money on programming if AT&T is able to buy Time Warner, and it could pass those savings on to consumers. But other TV providers will have to pay a lot more for Time Warner-owned Turner content and would likely pass those price increases on to their subscribers, the brief says.

"Professor Shapiro's model predicts that the merger will cause a price increase to rival MVPDs [multichannel video programming distributors] for Turner content of 18.4 percent on average, translating into a total increase of about $61 million per month, or about $731 million per year," the DOJ brief says.

After the merger, the combined AT&T and Time Warner "would be able to recapture some of Turner's lost revenue if negotiations with a distributor break down because some subscribers would switch from the competing MVPD to AT&T in order to continue to receive the desired Turner content," the DOJ said. This will boost Turner's bargaining leverage, "and AT&T would have the ability and incentive to extract higher prices for its content from AT&T's distributor rivals."

While non-AT&T TV providers would pay an extra $60.9 million per month under the government's estimates, DirecTV would save an estimated $30.8 million per month. That would suggest a rise of $30.1 million per month in total TV bills, but the number got bigger after Shapiro performed a merger simulation that accounts for the different levels of competition in the various local markets throughout the US. Whether a local market has more or less competition can "affect the strategic responses of DirecTV and its rivals to changes in their costs," the DOJ brief said.

After accounting for those factors, "Professor Shapiro's model predicts that, nationwide, consumers will pay about $36 million more per month, and about $436 million more per year, for MVPD services," the DOJ wrote.

Shapiro "used conservative estimates of a number of key inputs," and his analysis thus "likely underestimates the true harm from the merger," the DOJ said.

AT&T calls projected price hikes “insubstantial”

The DOJ didn't say what the average increase for each consumer would be. AT&T's brief said the DOJ's projections amount to an "insubstantial 45-cent monthly increase, all of 0.4 percent per bill, which is where the government currently stakes its case."

A 45-cent monthly increase would add up to $36 million a month if the numbers are based on a nationwide TV subscriber base of about 80 million households. But the increase to customers of non-AT&T providers would be more than that. AT&T has about 24 million of the nation's TV customers via DirecTV and its wireline services.

AT&T also disputes the government's contention that it will be able to "drive harder bargains with AT&T's distribution rivals, forcing them to pay higher prices to avoid losing access to Turner programming."

"To Turner, withholding programming means immediate, catastrophic losses in licensing and advertising revenue that can never be recovered," AT&T wrote. "Because those losses will not be any more sustainable after the merger than before, any threat to withhold content will be just as hollow as it was before."

The DOJ supports its case against AT&T in part by pointing to previous AT&T and DirecTV statements about the programming market. AT&T told the Federal Communications Commission in 2012 that "vertically integrated programmers continue to have the incentive and ability to use (and indeed have used whenever and wherever they can) that control as a weapon to hinder competition to their downstream cable affiliates by withholding popular programming from competing MVPDs."

DirecTV made similar statements to the FCC when the commission was reviewing Comcast's 2011 purchase of NBCUniversal, the DOJ noted. DirecTV told the FCC that a "vertically integrated programmer can much more credibly threaten to withhold programming from rival MVPDs than can a non-integrated programmer" and that "the proposed transaction would enable Comcast/NBCU to use such threats to demand higher prices and more favorable terms—and withhold programming from any MVPD that failed to acquiesce."

Trial to last 15 days

The DOJ often allows acquisitions when the merging parties agree to conditions, as happened in the Comcast/NBC case. But the DOJ and AT&T were unable to reach a compromise after the DOJ reportedly told AT&T that it could complete the merger either by selling DirecTV or by having Time Warner sell CNN. After negotiations broke down, the DOJ sued AT&T in order to block the merger.

"The trial is scheduled to last 15 days and is expected to feature testimony from AT&T Chief Executive Officer Randall Stephenson, Time Warner Chief Executive Officer Jeff Bewkes, officials from AT&T competitors that have concerns about the scale of the combination, and economists," according to Bloomberg .

AT&Ttried to prove that President Trump's hatred of CNN played a role in the DOJ's lawsuit. But US District Judge Richard Leon ruled against AT&T's request for more records of internal government communications on the topic,saying AT&T hadn't provided any evidence suggesting that the DOJ's prosecution of the merger had "discriminatory effect and discriminatory intent."



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