U.S. Department of Justice. Diego M. Radzinschi/ALM.

The U.S. Department of Justice’s first witness in its challenge to AT&T’s proposed merger with Time Warner testified Thursday, warning that if the two companies merge, they would have significantly more leverage in negotiations.

The  antitrust trial, expected by many to be the most influential in decades, began in earnest Thursday with the testimony of Cox Communications Inc.’s Suzanne Fenwick, a content acquisition vice president, as well as opening arguments from lawyers for AT&T and the DOJ.

Members of the public and press lined up well before 7 a.m. Eastern Standard Time to enter the federal district courthouse in Washington, D.C., where the day’s proceedings, delayed an hour due to weather, began at roughly 11:30 a.m. before a full courtroom—including AT&T CEO Randall Stephenson, Time Warner CEO Jeff Bewkes and Makan Delrahim, the head of the DOJ’s Antitrust Division. U.S. District Judge Richard Leon is overseeing the trial.

Warnings of ‘Egregious Fees’

DOJ lawyer Lisa Scanlon questioned Fenwick first, asking her to explain how her team negotiates with networks or groups of networks, to provide their content to Cox customers. Fenwick testified that DirecTV, which is owned by AT&T, is a fierce competitor to Cox, and that HBO, which is owned by Time Warner, is “by far” one of the most popular networks among Cox customers.

Fenwick also said Cox was concerned about what AT&T’s acquisition of Time Warner would mean for the companies’ content negotiations. She said it was likely Cox would be forced to either agree to a “horribly ugly” deal with “egregious fees,” or stop providing customers with “must have” channels, like Turner networks or HBO. She also said customers would leave Cox for DirecTV in order to watch Time Warner content.

Fenwick added there would be no incentive for either party to walk away from such a negotiation, as the networks would lose revenue and Cox would lose “must have” content.

At one point in the testimony, after Scanlon asked Fenwick to explain different issues that are discussed in these types of negotiations, Leon stopped Scanlon and called the lawyers to the bench. After some discussion, he called a brief recess, saying the lawyers needed to work out a “legal issue.” It was not immediately clear what that was.

O’Melveny & Myers partner Daniel Petrocelli, the lead lawyer for AT&T and Time Warner, then attempted to discredit Fenwick. He asked if Fenwick, or anyone at her company, had done any sort of quantitative analysis to show how many customers would leave Cox if it did not show Turner content. She repeatedly replied that Cox had not, and that she did not know how many would leave.

He also asked Fenwick if she knew how many of the “most watched” television shows, sporting events and other programs in 2017 were from Turner networks. He added she must have “some idea,” given her prior testimony. She said she did not know.

Another major portion of Fenwick’s testimony focused on an arbitration agreement AT&T offered to 1,000 competitors in November as a way to calm concerns about its proposed merger. Fenwick testified that the arbitration agreement is a “very one-sided agreement” and not a “helpful tool” for competitors.

The agreement would mean that if competitors cannot reach a deal to provide Time Warner content, the companies engage in “baseball style” arbitration, with each offering its own contract proposal for a private arbitrator to choose.

Petrocelli also asked about the agreement, and whether Fenwick or anyone at Cox discussed it with anyone at Turner. She said no, because the company did not consider it a “real” proposal. Fenwick did say she discussed the agreement with the DOJ.

Opening Statements

Parties were given 45 minutes each for opening statements in what is expected to be a six- to eight-week long trial. The government’s lead lawyer, antitrust veteran Craig Conrath, was the first to address Leon, who did not say much throughout the opening statements and rarely if ever interrupted the lawyers.

Conrath told the judge that the proposed merger between AT&T, a service provider, and Time Warner, a content producer whose holdings include Turner Broadcasting System Inc., would harm competition by raising prices for consumers. He said the Clayton Act, under which the DOJ brought its lawsuit against the proposed $85 billion vertical merger last November, requires the court to make a prediction as to whether there’s a reasonable probability the merger will harm competition.

Conrath argued that while corporate leaders at AT&T and Time Warner may think the merger will be a benefit, the facts suggest otherwise.

“Courts don’t focus on intent,” Conrath said. “What they focus on is what the facts will be.”

Conrath said AT&T will use Time Warner content as a “weapon” to hinder competition because AT&T’s competitors, like Charter or Comcast, need Time Warner content, like HBO shows or the National Collegiate Athletic Association’s March Madness basketball tournament, to add and retain subscribers. He said expert analysis shows consumers will see a price increase of roughly five or six dollars a year if the merger is allowed to go through.

Conrath also argued that while AT&T claims its subsidiary, DirecTV, is losing business to internet companies like Netflix, most consumers actually subscribe to both online services and traditional pay-for-TV services. He gave the example of a game in the March Madness tournament last week, when a No. 16 seed, University of Maryland, Baltimore County, beat a No. 1 seed, University of Virginia, in a historic upset.

“There’s no substitute for watching a game like that live,” Conrath said.

When Petrocelli addressed the judge, he reminded him the government has not challenged a vertical merger, in which two companies that don’t compete, but rather are at different locations in the supply chain, since the 1970s.

He said vertical mergers that actually cause competitive harm are a “rare breed of horse,” and the one at issue is not rare. Petrocelli told the judge there was only one “clear-cut, just outcome” of the case: for Leon to deny the DOJ’s request to block the merger. He added that while AT&T believes a price increase won’t occur, a five- or six-dollar increase could not fit the description of substantially harming consumers.

Petrocelli said companies like Netflix and Google are “running away with the industry,” and that traditional pay-for-TV needs to keep up. He said Stephenson and others will testify about how changes at AT&T are intended to propel the company into the future, not stifle innovation, as the government argued.

“It’s the government’s theory, your honor, that is fundamentally stuck in the past,” Petrocelli said.

He also tried to poke holes in the conclusions of the government’s expert, Carl Shapiro of the University of California, Berkeley. He said Shapiro’s analysis of a potential price increase was based on flawed data, including a survey conducted by a company on behalf of one of AT&T’s competitors.