Federal Judge Could Be Considering Different Arbitration Terms in AT&T/TW Suit

The judge overseeing U.S. v. AT&T and Time Warner might be considering reworking or amending the arbitration and no blackouts affiliation offer Turner made to MVPDs (see 1711280063). At the end of testimony Wednesday by Charter Communications Executive Vice President-Programming Acquisition Tom Montemagno, U.S. District Judge Richard Leon of Washington asked Montemagno if different arbitration terms, such as "non-baseball-style arbitration," might assuage some fears about the Turner offer. DOJ witnesses raised red flags about perceived shortcomings (see 1803260047 and 1803220033).

Montemagno said the arbitration offer is effectively a guarantee against blackouts but still carries "lots of risks" for MVPDs and is a "last resort" option. He worried about New AT&T using its many minutes of advertising space in each hour of programming to drive customers from rival MVPDs to DirecTV Now. Under defense questioning, Montemagno acknowledged that Charter threatening to invoke the arbitration clause contained in the Comcast/NBCUniversal consent decree while in recent carriage talks with NBCU resulted in progress in what had been stuck negotiations. He acknowledged that Charter CEO Tom Rutledge publicly said cable companies don't need HBO for their channel lineups since HBO is also available direct to consumer. Montemagno said he didn't agree.

HBO had at least one deal with an unidentified virtual MVPD where the distributor was paying more than $15 per subscriber for the service but was going to sell it at $15 a month, testified Simon Sutton, HBO chief revenue officer. Sutton said the channel is commonly used by MVPD marketing efforts and acknowledged the programmer had seen it could play a role in helping Altice's Cablevision footprint lure Verizon subscribers.

"Uh oh," Sutton emailed in 2015 in response to a directive from TW CEO Jeff Bewkes that pushed for more coordination of TW properties in affiliation agreements. He acknowledged he had said in an email chain that such coordination would diminish HBO's ability to maximize revenue. He also acknowledged HBO once cut off talks with YouTube TV when it and Turner were at loggerheads in affiliation talks. Asked about a separate email indicating HBO taking similar steps with Altice, Sutton backtracked. Sutton acknowledged that in spring 2016, HBO readied -- but never implemented -- a sizable marketing campaign including radio ad scripts, TV ad story boards and creating a website, KeepmyHBO.com, in anticipation of a blackout on Charter. Asked whether HBO would do a similar blackout of other MVPDs if directed to do so by New AT&T, Sutton said, "I have to do what my boss asks me to do."

Sutton confirmed HBO has won numerous Emmys. DOJ has argued New AT&T could wield HBO as a weapon against MVPD rivals (see 1803260047). But Sutton later said Netflix and Amazon also won Emmys, and MVPDs have used other programmers, like Netflix, in promotional offerings. Under questioning by AT&T/TW counsel, he disputed whether HBO has substantial leverage over programmers, citing the HBO/Turner coordination in talks with YouTube TV. He said the virtual MVPD eventually launched without Turner content, though it subsequently added it, and it still doesn't carry HBO.

Any distributor blackout of HBO would be "a devastating step for us," since those lost subscribers don't necessarily automatically return when the blackout ends, Sutton said. He said New AT&T withholding HBO from rival MVPDs "would be devastating to our business" and something he would "strongly argue against."

Leon, directly questioning Sutton, asked how distributors seemingly know terms of deals rival sign with programmers. Sutton said that, between industry consolidation and that experts within the video universe move from company to company, "that information does leak."

Outside of AT&T/TW, the telco in 2016 signed a "preferred partner" deal with HBO after evaluating it and a variety of other premium networks, DOJ adverse witness AT&T Vice President-Video Marketing Hanny Patel said. She said HBO is a particularly strong brand, with the best overall content collection, and it's a "proven" driver of new subscribers. She acknowledged her evaluation indicated Showtime, by comparison, was "nice to have but not must-see TV." Under questioning by AT&T/TW outside counsel Randy Oppenheimer of O'Melveny, she said that before the preferred partnership, Starz and Showtime had better penetration with HBO subscribers than HBO due to those programmers' better incentives. She said AT&T opted for a partnership deal with HBO partly because it was a route to improve those financial terms. She said incentives the channel ultimately offered to land the partnership deal represented hundreds of millions of dollars. Minus that programmer, she said, AT&T would turn to another premium network for such a partnership: "They're all eager to work with us."

Also testifying was Vince Torres, senior vice president-marketing, AT&T Entertainment Group. He was asked about AT&T efforts to reduce video customer churn and about the company's internal effort to cut churn by 1.5 percent. Neither AT&T/TW nor Leon had questions.