Skip to main content

RCN Telecom Services LLC CEO Jim Holanda was the last witness the Department of Justice called in the trial over the merger of AT&T Inc. (T) - Get AT&T Inc. Report and Time Warner Inc. (TWX) , in the U.S. District Court in Washington on Tuesday. Later in the hearing, AT&T and Time Warner attacked data the government deploys in its economic model that calculates the potential damages of their merger.

As Holanda explained his apprehension about AT&T's deal, he cited tactics that Comcast Corp. (CMCSA) - Get Comcast Corporation Class A Common Stock Report and NBCUniversal have used following their vertical merger in 2011.

RCN, backed by TPG Capital and Alphabet Inc.'s (GOOGL) - Get Alphabet Inc. Report  Google Capital, is an "over builder," the industry term for a cable operator that enters markets with incumbent cable operators. Unlike Charter Communications Inc. (CHTR) - Get Charter Communications Inc. Report and Cox Communications Inc., RCN competes directly against Comcast in some if its footprint.

Following the merger with Comcast, Holanda said, NBC limited RCN's ability to sell NBC programming in its basic package. The RCN CEO suggested that AT&T and Time Warner would have similar incentives. 

AT&T, which owns DirecTV, has provided rival pay-TV companies an arbitration offer to assuage concerns that it will gouge prices or withhold content. 

Holanda said the proposal is "a good start" but is lacking in several respects. The arbitration offer applies to the Turner networks but does not include HBO or regional sports networks, he said. The arbitration proposal would not give RCN access to information about what other distributors are paying, he said. The RCN executive also wants the National Cable Television Cooperative, through which it buys programming with other pay-TV companies, to have a clear right to take part in arbitration, among other matters. 

Under cross examination the defense showed Halanda a document indicating that Turner had invited the NCTC to arbitration. Halanda said he was not aware of that, but said "the devil is in the details" of the invitation.

The defense also informed Halanda that RCN had discovery rights regarding information on terms with other cable distributors. However, under re-direct, Justice lawyers suggested that the rights kick in only after it had made its offer.

Later Tuesday, David Christopher, who heads AT&T's Entertainment Group, testified about data that the government's outside economic expert used in a model to calculate the likely rise in cable costs from the Time Warner deal.

University of California Berkeley economist Carl Shapiro created an economic model for the Department of Justice suggesting that cable bills will rise $436 million per year, using 2017 rates, and would rise by $571 million in 2021.

Scroll to Continue

TheStreet Recommends

AT&T and Time Warner have attacked the model on numerous points, including Shapiro's use of June 2016 estimates of lifetime value of DirecTV customers.

Lifetime value equals the expected length of the contract times the profit margin mines the cost of acquiring a customer. The higher the value, theoretically, the greater incentive AT&T has to use Time Warner's content to drive subscribers to DirecTV.

Christopher's department calculates the figure, which the court has kept confidential to protect AT&T's sensitive information. However, AT&T disclosed that the June 2017 figure is 40% lower than the 2016 number, which the defense says undermines Shapiro's calculations. 

Christopher said the decline in lifetime value represents the crunch that pay-TV companies are experiencing.

In cross examination, the Department of Justice noted that the June figure is less than other lifetime value calculations from 2017. Justice also pointed out Christopher produced the June 2017 number in February, just before his deposition, and months later still does not have the July figure. 

"Did you rush those June numbers for your deposition," Justice lawyer Dylan Carson asked, which Christopher denied.

The AT&T executive testified that the number takes seven to nine months to calculate, and has been delayed because of the relocation of a department and executive changes. 

The court has not released a schedule of upcoming witnesses, though testimony from Time Warner Chairman and CEO Jeff Bewkes and AT&T Chairman and CEO Randall Stephenson is anticipated in the coming days.

Jim Cramer and the AAP team hold positions in Comcast and Alphabet for their Action Alerts PLUS Charitable Trust Portfolio. Want to be alerted before Cramer buys or sells CMCSA or GOOGL? Learn more now.

Editor's note: This article was originally published by The Deal, a sister publication of TheStreet that offers sophisticated insight and analysis on all types of deals, from inception to integration. Click here for a free trial.