AT&T Expert Calls DOJ's Model 'Theoretically Unsound'

The first witness that AT&T Inc. (T) and Time Warner Inc. (TWX) called in the legal battle with the Department of Justice testified that an economic model central to the government's case is "theoretically unsound," in the U.S. District Court in Washington on Thursday.

University of Chicago professor Dennis Carlton, the economic expert witness for AT&T and Time Warner, took aim at the model that University of California Berkeley economist Carl Shapiro presented to the court on Wednesday. While Carlton is a witness for the defense, the government has not rested its case.

Shapiro created "quite a complicated economic model" with "lots of simplifying assumptions" and a number of problematic variables, Carlton said. Shapiro suggested that AT&T would use its increased bargaining leverage to drive up cable prices, among other anticompetitive behavior.

The defense witness argued that Shapiro and the DOJ did not incorporate pricing data from three recent vertical deals in their analysis. The transactions include News Corp.'s (NWSA) acquisition and spin off of a stake in DirecTV Group, Time Warner Inc.'s (TWX) spin off of a controlling stake in Time Warner Cable Inc. and Comcast Corp.'s (CMCSA)  purchase of NBC.

"Ignoring that evidence is a big mistake," Carlton said. NBC's fees to pay-TV providers grew slower than the industry following its 2011 purchase by Comcast, the largest U.S. cable company, Carlton said.

Carlton also testified that Shapiro did not account for an arbitration proposal from AT&T that includes a pledge to not withhold programming from pay-TV providers during a rate dispute.

"Blackouts are what this driving this model," Carlton said, noting that AT&T has proposed an arbitration offer to pay-TV providers that would prohibit it from withholding content.

"The central element of his economic model doesn't apply," he said regarding the blackout pledge.

Carlton criticized other elements of Shapiro's model. Turner's contracts with cable, satellite and online providers would prevent Shapiro's projected price increases. Shapiro used outdated numbers for profit margins that overstated the price increases, he argued. The model he created for the government shows cord cutting slowing.

Shapiro's proposed rate increases suggest an increase pennies per month on cable bills that may run $140 per month, Carlton added.

Vertical deals often lower prices, he said, because they eliminate "double marginalization," the need for two companies to derive profits from the business that can be combined in a merger.

"You stand a risk of stopping a merger that could benefit consumers," Carlton said.

Carlton was still under direct examination when Judge Richard Leon broke for lunch.

Justice antitrust head Makan Delrahim, who has previously attended the trial, made a formal appearance Thursday morning.

"My goodness gracious," Judge Richard Leon said when the U.S. Assistant Attorney General for the Antitrust Division approached the podium.

"Honored to be here," said Delrahim.

Justice gave no indication of whether Deltahim would handle cross examination.

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