12:32pm PT by Eriq Gardner
AT&T Urges Open Court Proceedings for Merger Trial
Although both sides in the huge antitrust trial that will decide the fate of the AT&T/Time Warner merger won't begin delivering opening statements until Thursday, a two-day evidentiary hearing in D.C. federal court is providing a forum for the parties to test their main arguments and stack the odds in their favor.
Take the issue of confidentiality.
Much of the Justice Department's case to block the merger rests on the prospective harm to consumers that government lawyers say will come if AT&T uses its newfound leverage from owning HBO, CNN and TBS. To analyze this issue, the judge will hear testimony at trial from industry executives who may discuss closely guarded contractual arrangements between programmers and distributors. This could mean revelations, which has third parties including Fox, Disney and Sony on edge about what might be aired in open court. Accordingly, at the evidentiary hearing, U.S. District Court Judge Richard Leon is deciding some of the ground rules for the trial that could last as long as two months.
But while sensitivity to third parties presents the surface issue, there's also a deeper game at play. Both sides plainly see the openness of the courtroom as potentially coloring the testimony that will be offered.
On one hand, the government is pushing back on AT&T's broad designations of confidentiality when it comes to its own business arrangements. But on the other, the government expresses concern that some of its witnesses could be placed in difficult situations should observers be watching. That means competitors, the media and, not to be ignored, the army of investment firm consultants in attendance. Thus, the government has proposed that certain examinations of witnesses happen behind closed doors with no onlookers.
"Giving away negotiating strategies is a recipe for getting hammered," said the government's lead trial attorney Craig Conrath, basically arguing that industry executives need a safe space to discuss competitively important bargaining positions. "We don't want confidentiality used as a weapon."
Daniel Petrocelli, the attorney for the defendants, attacked this line of thinking.
"Conrath is calling them customers," he said. "But antitrust law is concerned with consumers. [These witnesses] are competitors. They have an interest in testifying in a closed courtroom. ... No one is going to say the world is going to end and the industry is going down the tubes with analysts in the courtroom, but they will say it in a closed courtroom."
The defense attorney asserted that openness meant more candor, and later added, "It's important that this trial occur in the light of day."
Judge Leon is attempting to find the right balance, but he has expressed his inclination to keep proceedings as open as possible.
Petrocelli also appears to come from the school where no opportunity before a judge should ever be wasted. On Monday, that meant undercutting the government's position that whatever DirecTV said to regulators during the Comcast-NBCU merger eight years ago amounted to admissions. On Tuesday, it meant attacking a government case that he called "preposterous."
Under the guise of this confidentiality issue, Petrocelli walked the judge through the way that distributors license television stations as well as the government's theories on why the vertical merger between AT&T and Time Warner is prospectively too harmful to allow.
The defense attorney talked about the blackouts that occur when a programmer like Turner gets stuck negotiating renewals of carriage deals with distributors like Cox or Comcast. With newfound leverage post-merger, the fear is that Turner may wish to hold up distributors with extortionate licensing demands.
"Here's the problem," said Petrocelli. "When programmers can't make a deal, it's catastrophic. ... It means they lose money for fees and advertising."
The attorney acknowledged the argument from critics of this merger that some Cox or Comcast subscribers would then cancel service and sign up for DirecTV, a subsidiary of AT&T, thus allowing defendants to recoup money in lost license fees.
"Their whole theory is that it is slightly less disastrous," said Petrocelli. "It's preposterous ... very overstated. Starting tomorrow, we'll show this. We don't need to close the courtroom."
At trial (with opening statements on Thursday instead of Wednesday due to snowy weather), AT&T will be putting forward that efficiencies from the merger will mean lower costs for consumers, and even accepting the truth of the analysis from the government's economic expert, AT&T submits that a 45-cent monthly increase to an average cable subscriber's bill isn't enough cause to block the merger. Especially not when AT&T has offered to commit to arbitration with distributors to prevent blackouts. Petrocelli told the judge that 20 small distributors have already agreed to its arbitration offer, with the others awaiting the outcome of the trial before signing up.
Perhaps getting wise to the mini-trial before the real one, Conrath made his own presentation.
"Both sides use the threat of blackouts," he said. "They are not good for either side. But one of the things that distributors have got to worry about is that it is pretty hard to get a customer back [after they've terminated service]. From a programmers' perspective, they don't get fees, but once the spigot gets turned on, they get the money again."
For this reason, he added, it was important to give the executives as much room as possible to testify about bargaining leverage.
"The defense idea is clear," Conrath continued. "They are going to say it's all preposterous. But these witnesses will testify using sound business reasoning."
The government lawyer also ridiculed AT&T's arbitration offer.
"[Time Warner] sent out thousands of letters," he said. "If they only got 20 to sign up, I think that's an indication how [distributors] are voting with their feet."
Conrath also addressed the notion that the government's case came down to a 45-cent price increase. He told the judge that his expert had accounted for supposed pro-competitive impacts like AT&T reducing the price for Time Warner content to itself while "counterbalancing" how the prices would go up for other distributors. Conrath also added that the expert looked into claims of efficiency and didn't find merit there. "If mergers could be be approved because CEOs say everything will be great, they all would," he said.
Leon, though, was interested in a different aspect.
The judge wanted to know whether there would be testimony and evidence about AT&T needing this merger to better compete for content with much larger companies. He specifically singled out Google and Facebook.
Conrath told the judge that such a defense has never truly been established as existing by a court, but added, "That issue will come up."
Said Leon, "Maybe this case presents an apt situation."