Five questions that could decide the AT&T-Time Warner merger
Melissa Repko
For six weeks, Dallas-based AT&amp;T and the Justice Department duked it out in court over a merger that would marry the giant telecom with Time...
Dallas News
For six weeks, Dallas-based AT&T and the Justice Department duked it out in court over a merger that would marry the giant telecom with Time Warner, the entertainment company it has long sought after. Now the anxious suitor waits for a judge's blessing: Will AT&T finally get its wish or will its bid be rejected?

The antitrust trial wrapped up Monday after closing arguments, and the judge's deliberations kick off what could be the last stretch of a lengthy engagement.

AT&T announced in October 2016 that it had reached an agreement to acquire Time Warner. The deal would turn AT&T — a major wireless carrier and largest pay-TV company in the country — into a media and entertainment powerhouse. It would become an owner and a distributor of popular content, including the TV shows and movies of HBO, CNN and Warner Brothers. The deal is valued at nearly $109 billion, including debt.

But a year later, AT&T's entertainment ambitions ran into a roadblock. The Justice Department sued to stop the merger in late 2017, saying the combined companies would result in "fewer innovative offerings and higher bills for American families."

The months leading up to the trial were full of intrigue: contentious closed-door negotiations between AT&T and the government. Speculation that President Donald Trump, a vocal critic of the deal and Time Warner-owned CNN, may have influenced the Justice Department's decision. A court filing by AT&T to get secret White House communications.

The high-stakes trial drew long lines at the federal courthouse. Some spectators stood for hours before courtroom doors opened or hired people to stand in line on their behalf. It was followed closely by insiders in media and entertainment capitals on both coasts.

In the end, though, it came down to the nuts and bolts typical of antitrust cases: dueling economic models and battling expert opinions. The judge cut off any argument about political influence. He listened to testimony from AT&T and Time Warner top executives, cable and satellite TV competitors and economists. And even he grew tired, at times, of the trial's plodding pace, urging attorneys to speed it up.

The trial went off without provoking a single presidential tweet.

U.S. District Judge Richard Leon, who is deciding the case, said he would issue a ruling June 12. That's about a week before June 21, a merger deadline when AT&T or Time Warner could otherwise walk away. Leon could approve the merger, reject it or approve it with conditions. But his ruling may not be the final word, since AT&T or the Justice Department could appeal.

As both sides wait, here are some key questions that came up during the trial and may influence its outcome:

Would the merger spark innovation or squelch it?

During his testimony, AT&T chief executive officer Randall Stephenson emphasized that the legacy telecom wants to be just as bold as its new Silicon Valley rivals — and Time Warner will give it the tools to do that. He was quick to note that the merger's upsides extend beyond the boardroom. He went as far as making a surprise product announcement on the stand, saying AT&T will launch a new streaming service with a "skinny bundle" of channels and a $15 per month price tag.

Consumers could expect more mobile-friendly products and sports programming in 4K resolution, too, said John Stankey, the AT&T executive tapped to run Time Warner's media business if the merger goes through.

But attorneys from the Justice Department said AT&T is exaggerating the merger's consumer benefits and ignoring its harms. They said some of AT&T's predictions about its DirecTV merger never came true and meanwhile, consumers prices keep going up.

And competitors from companies, such as Dish, whose Sling TV offers "skinny bundles" of content at a lower price than cable or satellite TV, questioned how the merger would affect them. Warren Schlichting, group president of Sling TV, testified that if AT&T owned Time Warner, it could force the service to carry more Time Warner networks, leaving customers stuck with a "bloated TV bundle."

Is Turner — and other Time Warner-owned TV and movie content — "must-have" TV?

Attorneys from the Justice Department used testimony from AT&T rivals like Cox Communications and Sling TV to argue that companies need Time Warner programming to compete. If AT&T owns Time Warner, competitors argued the company could use the valuable TV programs and movies as a "weapon" in negotiations and drive up prices for competitors and consumers.

The Justice Department said Turner's live news and sports content is especially valuable as more people record TV or pull shows up on demand. As evidence, it pointed to the approximately $1.1 billion fee that Turner pays the NBA each year for rights to broadcast basketball games. Turner networks has exclusive rights to broadcast NBA and MLB playoffs. It shares the rights to air the NCAA men's basketball tournament with CBS.

AT&T sought to poke holes in the argument. That put the company in an awkward position of downplaying the value of Time Warner's TV and movie programming — the same content that it plans to pay billions of dollars to own. One of its prominent witnesses, Turner CEO John Martin, argued that his company's own network is content that competitors can live without.

Martin said AT&T would lose subscription revenue and advertising dollars if it kept programming from rivals or priced it too high.

Does AT&T need Time Warner to stay competitive?

AT&T and Time Warner's lead attorney Daniel Petrocelli argued that the companies need to merge because the content landscape is changing rapidly. Tech companies like Facebook, Apple and Google are spending millions, and in some cases, billions of dollars, to produce original content and streaming services that compete with traditional pay-TV. He said the companies have a major edge over AT&T and Time Warner: consumer data. Facebook and Google have used that data to become dominant in digital advertising. That's something that AT&T would like to do, too, he said.

But attorneys from the Justice Department said streaming services like Netflix are not direct competitors to AT&T and their TV and movies complement, rather than replace, Time Warner's programming. For example, they said, if a basketball fan wants to watch the NBA playoffs, a movie or original drama simply won't do. AT&T does compete with streaming services that have a cable-like lineup of live TV channels delivered over the internet, such as Dish's Sling TV. It also has its own live TV streaming service, DirecTV Now.

Could other remedies be used to offset potential harm?

Throughout the trial, as AT&T's attorneys vowed that Time Warner content would not be kept from competing services, competitors were skeptical. So the company pledged to go a step further and put that in writing — at least when it comes to Turner programming.

Turner has offered an arbitration option to companies negotiating for content. Under the agreement, Turner would commit to no blackouts. If the two companies reached an impasse in negotiations, they would submit their best offer to a third-party arbitrator and he or she would pick one based on fair market value. Petrocelli pointed to arbitration offer as evidence that AT&T would not strong-arm competitors with higher prices or threaten them with blackouts.

Schlichting, the group president of Dish's Sling TV, and Suzanne Fenwick, who leads content negotiations for cable company Cox Communications, said the arbitration offer didn't ease their fears. They said the arbitration terms would not apply to HBO content, which AT&T could still use as price leverage, and they said it glosses over the nuances of contract negotiations that go beyond price, such as rights to stream the programming on mobile apps.

Leon asked questions about how the arbitration would work. The extensive back-and-forth about the arbitration offer raised the possibility the judge could impose remedies, such as arbitration terms, to offset possible harms of the merger if he approves the deal.

Would the merger drive up prices for consumers?

The government's economic model became a central part of the case, though the exchanges over numbers were more in the weeds. Carl Shapiro, a University of California at Berkeley professor and an economist who testified on behalf of the Justice Department, ran through his economic model that predicts the merger would tip bargaining leverage in AT&T's favor and raise prices. He estimated customers would pay at least 27 cents and as much as 45 cents more per month on their bills, if the deal is approved.

Attorneys sparred over profit margins and percentages and accused the other side of twisting the numbers. Petrocelli said the government's economic analysis exaggerated the share of customers who would cut their cable or satellite TV if that provider didn't have Turner content and overestimated the number of departing customers who would sign up for AT&T's DirecTV. If the government used accurate numbers, he said, it'd have found customers would save about 50 cents per month.

Shapiro later conceded in court that customers could see a smaller price increase of 13 cents per month with the deal. He revised his projections based on newer profit margin data from AT&T, which he said had not been available to him earlier.

Petrocelli contested any increase in customers' bills but also poked fun at the government for filing a major antitrust lawsuit over such a minor amount of money. He said the projected price increase for a customer wouldn't even cover the cost of a fancy cup of coffee.