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Counsel to AT&T Inc. (T) - Get AT&T Inc. Report and Time Warner Inc. (TWX) took aim at the economic projections underpinning the Department of Justice lawsuit to block their merger, in closing arguments on Monday afternoon. 

Dan Petrocelli of O'Melveny & Myers LLP said the DOJ's case is a "house of cards" that relies on the economic model by University of California Berkeley economist Carl Shapiro, an expert witness for the government. The model contains too many flaws for him to address in a 90 minute closing statement, the lawyer said. "I'd be here for hours," he said.

The government argues that DirecTV parent AT&T will have the "incentive and ability" to drive prices higher for rival pay-television companies if it buys Time Warner. By threatening a blackout, Justice argues, Time Warner's Turner networks can jack up prices for networks such as CNN, TNT and TBS. Earlier Monday the government urged Judge Richard Leon to reject the merger, or at least to require the sale of either DirecTV or the Turner networks. 

Shapiro's model is the basis for the case.

The economist presents a range of estimates of how much cable bills would rise following an AT&T purchase of Time Warner. The report itself is not public and the parties at times cite figures from different years and differing parts of his price range, which complicates analysis.

One scenario projects a 27 cent increase in cable bills per month per subscriber, though Petrocelli said the government witness uses outdated or incorrect data for a number of variables. When correcting the model to include current profit margins, the effects of cord cutting, the impact of Turner's current contracts with pay-TV companies and other factors, Petrocelli said, Shapiro's model shows that cable bills would actually decrease by 54 cents per month per subscriber.

The government ignored actual data on pricing changes following other vertical deals that combined content production and distribution, the defense argues. "That's the definitive issue in this case," Petrocelli said, noting that the defense had to go to court to get pricing data from the government.

The lawyer noted three examples. News Corp. acquired a controlling stake in DirecTV in 2003, but spun it off in 2008. Time Warner controlled Time Warner Cable Inc. for years, but spun off its position in the cable operator in 2009. Comcast Corp. (CMCSA) - Get Comcast Corporation Class A Report purchased a majority stake in NBC in 2011.

Prices did not increase during the vertical combinations, he said. "If Professor Shapiro were right it would have happened each of those times," Petrocelli said.

The defense also criticized Justice's argument that Turner will use the threat of a blackout to raise prices.

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"It's like the most hollow threat that you can make in this business," Petrocelli said, noting that nobody but Dish Network Corp. DISH Chairman Charlie Ergen aggressively uses blackouts as a negotiating tactic.

Turner might lose $200 million if it pulled content from a distributor. If DirecTV gained subscribers that fled the rival pay-TV company, as the government argues it will, AT&T might pare its losses to $195 billion. The damage to AT&T and Turner would still be "catastrophic," he said.

Additionally, he said, Turner provided pay-TV companies with an offer to arbitrate any price disputes that includes a pledge not to withhold content. "If you can't blackout, you can't threaten to black out," Petrocelli said.

During the government's rebuttal, DOJ attorney Craig Conrath addressed likelihood that blackout threats would occur despite the arbitration. 

"Isn't this like a kabuki dance?" Leon asked the Justice attorney, suggesting that cable programmers and distributors both threaten to go dark but rarely do.

Conrath noted that blackouts do occur. Earlier Monday he noted testimony from Charter Communications Inc. (CHTR) - Get Charter Communications, Inc. Class A Report , Dish and other pay-TV companies that criticized AT&T's arbitration proposal, and might be reluctant take the company up on the offer. 

In defense of Shapiro's model, Conrath said the projections provide context to testimony by other pay-TV companies that AT&T would have greater negotiating leverage and could raise the prices. "You don't have to quantify the harm of a merger down to a penny," he said.

Judge Leon said at the conclusion Monday that he will rule on the $108.7 billion deal by June 12, though his written opinion may not be ready at that date. The Time Warner deal has a June 21 expiration date.

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