In retrospect, it can’t come as a complete surprise to learn that the AT&T Inc. (NYSE:T) bid to acquire Time Warner Inc (NYSE:TWX) would boil down to the testimonies of the experts on the matter. The Department of Justice, which is suing to block the merger, called its last (and arguably best) witness on Wednesday, while AT&T’s star witness said his piece on Thursday.
On balance, owners of T stock have to like how the opposing arguments have stacked up. Judge Richard Leon asked a couple of questions DOJ expert Carl Shapiro, an economics professor at the University of California at Berkeley, couldn’t really answer. AT&T’s guy, University of Chicago professor Dennis Carlton, took the stand on Thursday to inflict more damage on the DOJ’s case.
The “No” Argument
On the off-chance you’re reading this and haven’t heard, AT&T wants to buy TV and movie player Time Warner… a vertical integration that reflects the new norm in media and medium.
The more such deals are made though, blurring lines that haven’t been blurred in the past, the more nervous the federal government gets. Though no evidence of abuse or monopolistic behavior has materialized yet, it would be naive to think media and telco companies aren’t positioning for exactly that.
That’s how Shapiro sees it anyway, explaining on Wednesday, who opened his explanation by saying: “The merger will likely lead to an increase in fees that Turner is able to charge.” Turner Broadcasting is one of several television-related properties Time Warner owns.
The government’s fear is that ownership of an outfit that creates television content as well as a means to distribute it means it could withhold content from other providers, and in turn funnel those disgruntled consumers toward another AT&T property, DirecTV, which offers satellite-cable television service.
Shapiro even want as far as to suggest AT&T could collude with Comcast Corporation (NASDAQ:CMCSA), which owns NBC Universal, to jointly squeeze smaller players out of the market simply because… why not?
The “Yes” Case
The Department of Justice’s case makes a fair amount of superficial sense. It wasn’t too terribly difficult for AT&T’s lawyers to poke holes in the government’s argument though. The defense counsel’s Daniel Petrocelli plainly made the point that several AT&T and Time Warner executives testified they had no interest or intention of imposing higher subscription fees due to increased leverage.
Carlton, taking the stand for the first time on Thursday, was even more direct. He explained of Shapiro’s model “The central element of his model doesn’t apply … to this transaction,” adding “The evidence doesn’t support the government’s claim that this transaction will harm consumers.”
Carlton then went on to list multiple reasons why Shapiro’s assumptions were wrong, pointing out that the 2011 pairing of Comcast and NBC didn’t lead to the problems the DOJ says it’s trying to prevent from developing by barring the merger of AT&T and Time Warner.
Even Leon wasn’t quite clear that Shapiro’s logic held up. He commented to the expert, who also happens to be a former employee of the Department of Justice’s Antitrust Division, as Wednesday’s war was winding down “I look forward to re-reading your testimony. I’m not sure I got it.”
Leon’s confusion may have stemmed from the fact that there’s little empirical evidence to suggest past mergers of this ilk resulted in higher consumer costs. There was also no evidence to say withholding content and creating a “blackout” for cable providers caused a great loss of subscribers.
Bloomberg Intelligence legal analyst Jennifer Rie commented on AT&T’s attorney’s response to Shapiro’s message “The testimony on cross examination left the impression that the model used was simply an academic experiment that didn’t align with real-life behavior, which was ignored. It also looked a bit like the DOJ cherry-picked the inputs that worked for their theory.”
Looking Ahead for T Stock
The legal battle has yet to be decided, but the Department of Justice’s antitrust arm didn’t have the best of cases when it first filed to prevent the merger back in November… a point Larry Meyers made quite well last month. The government’s argument looks even weaker now.
Never say never, of course. The nation’s courts have leaned generously in the direction of “what seems fair” rather than the applying the letter of the law of late. Anything can still happen.
Still, if you’ve been uneasy about any position you may have in T stock, you have to like how this trial has unfurled so far.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.