New AT&T's Running Turner and MVPD in Concert Questioned by Antitrust Trial Judge

The New AT&T risks are threefold, said University of California, Berkeley economics professor Carl Shapiro: Turner raising its affiliate fees on DirecTV Now's MVPD competition, coordination between New AT&T and Comcast/NBCUniversal to withhold content from virtual MVPDs, and restricting the use of HBO as a promotional tool by DirecTV's MVPD rivals. The end result would be "significant" consumer harm even when the person benefits in the form of lower DirecTV costs due to cheaper Turner content for it were accounted for, Shapiro said. He said New AT&T would have more leverage than Turner does today because while Turner gets no benefit from a programming blackout, the "inevitable consequence" of a blackout would be DirecTV picking up some customers from rival MVPDs subject to the blackout. Shapiro was previously Antitrust Division chief economist, as was AT&T/TW economics expert Dennis Carlton, now a University of Chicago economics professor (see 1802020064).

U.S. District Judge Richard Leon of Washington questioned the assumption that Turner negotiations under New AT&T would be part of some coordinated strategy. He cited testimony that Comcast considerations aren't part of NBCU affiliation negotiations (see 1804100022). Shapiro said there's "serious tension" between that testimony and the fundamental antitrust economics assumption a company will be run to maximize its profits. "So it's an assumption you're making?" Leon said. "That's fair," Shapiro replied, though he called it "worrisome" to allow a deal on the counter assumption a company wouldn't use combined assets to joint benefit. "That would be leaving money on the table," he said.

New AT&Ts increased leverage would translate into 76 additional cents per subscriber per month in Turner affiliate fees, or $586 million per year, based on 2016 numbers, Shapiro said. That would represent a double-digit percentage increase over what was charged in 2016, he said. He said his modeling of savings to DirecTV subscribers amounted to $1.20 per subscriber per month, or $352 million a year. He said that $586 million per year, according to his modeling, would result in $286 million in higher costs charged pay-TV subscribers, with that number growing rapidly in subsequent years, from $436 million in 2017 to 2021's $571 million.

That DOJ-commissioned analysis is based in part on lost subscriber data from long-term Viacom blackouts on Cable One and Suddenlink, Shapiro said. He said his analyses of those blackouts found both MVPDs suffered accelerated subscriber losses after the blackouts, with the net effect a 9.4 percent subscriber loss for Suddenlink and 16 percent for Cable One. He said the effects of a Turner blackout would be more pronounced for an MVPD because Turner content -- judging by affiliate fees -- is 30 percent more valuable. He said his analysis was based on a Charter Communications-commissioned study of the value of Turner content (see 1804030022) and cited a similar Comcast study that found a similar potential subscriber loss rate from a long-term Turner blackout.

Shapiro said he and Carlton use the same overall methodology, but "we balance things a little differently" and have different views on market definitions. He said the HBO and Comcast coordination issues are more generalized concerns that aren't quantifiable. He said any Comcast coordination might not be through overt or illegal efforts by the companies. He said many MVPDs frequently use HBO in promotions, but its being part of New AT&T would be "a thumb on the scale" toward such promo activity being curtailed in the future.

AT&T/TW outside counsel Dan Petrocelli of O'Melveny also challenged the idea of Turner conduct being coordinated with AT&T's MVPD operations. In cross-examination of Shapiro, Petrocelli noted previous witnesses had testified such coordination doesn't happen between Comcast and NBCU and didn't happen when Time Warner Cable was part of TW.

Petrocelli also questioned Shapiro on whether his modeling accurately reflects real-world conditions. Pointing to Shapiro's modeling predicting Dish Network affiliate fees would go up close to $300 million over the course of a three-year deal, Petrocelli questioned whether Dish Chairman Charlie Ergen would "yield to that demand." That $300 million is in the context of a multibillion-dollar deal, Shapiro said. Petrocelli in questioning went through numerous issues not accounted for in Shapiro's modeling, including existing long-term contracts and Turner's offer of baseball-style arbitration and no blackouts to MVPDs. Shapiro also acknowledged his modeling incorporated FCC program access rules but said, based on the agency's order in Comcast/NBCU, rules seemingly wouldn't play a role in mitigating anti-competitive harms of the deal. Carlton is scheduled to tesify Thursday, Petrocelli said.