DOJ Worries of New AT&T Run Contrary to TW Business Model, TW CEO Says

The idea that being part of New AT&T would give Turner leverage to raise its affiliate fees on distributors is like speaking Greek to the programmer universe, Time Warner CEO Jeff Bewkes testified in the U.S. v. AT&T and TW antitrust trial Wednesday. “It’s not how this works,” he said, saying any blackout of Turner would be “catastrophic” in lost advertising revenue and lost affiliate fees. He likened increased incentives to a Turner blackout under New AT&T to the equivalent of a 950-pound weight falling on that company’s head versus a 1,000-pound weight on TW’s head. AT&T CEO Randall Stephenson is scheduled to testify Thursday.

Bewkes said when TW was vertically integrated with Time Warner Cable, the notion of it having an incentive to cause blackouts never came up, nor were concerns raised about lesser Turner leverage after the TWC spinoff, since that increased leverage being part of a vertically integrated company “didn’t exist to begin with.” He estimated a permanent Turner blackout would cost an MVPD at most 1 to 2 percent of its subscriber base -- a fraction of the 12 percent DOJ alleged (see 1803290022).

If the issues at play in the AT&T and TW decision to combine -- like direct-to-consumer (DTC) video trends and increased emphasis on targeted ads -- were in play in 2009, TW “maybe” wouldn’t have spun off TWC, Bewkes said. Those issues “weren’t on anybody’s top of mind,” he said.

Bewkes testified going DTC lets TW’s Turner networks make more effective choices in programming and in recommending and selling of packages to consumers. He said HBO’s DTC offering required it go through third parties like Apple and Amazon to handle marketing, billing and customer service -- capabilities TW lacks. He said TW went DTC with its FilmStruck streaming service, but that's a few hundred thousand customers and can be handled in house, whereas TW systems couldn’t handle dealing with tens of millions of subscribers directly on its own. He said the idea New AT&T could coordinate with Comcast/NBCUniversal to hurt virtual MVPD competition runs contrary to Turner's business reliance on being on as many distributors' lineups as possible. Ditto the idea New AT&T might block rival MVPDs from using HBO as a promotional tool, since HBO relies on those rivals to sell the service to their subscribers, he said.

With Facebook and Google dominating online ads, which are increasingly leaching dollars from TV ad spending, TW needs consumer data like those companies have to compete, Bewkes said. At U.S. District Court for the District of Columbia, he said efforts to get that data through other means -- like buying it from Comcast or buying an automated content recognition company -- came to naught.

Meanwhile, vertical integration with an MVPD opens the door to innovations, Bewkes said. He cited TWC freeing up channels in the 1990s for multiple HBO feeds. He said that's an innovation other cable operators soon followed, something that wouldn’t have happened if TW had tried that experiment via negotiations with an MVPD.

AT&T/TW grew out of an August 2016 lunch between Bewkes and AT&T CEO Randall Stephenson in New York City at which the two were talking about the challenges facing their respective industries -- programming and distribution -- and it became clear they had complementary assets, Bewkes said. He said AT&T brings 150 million customer relationships and data capabilities for DTC and targeted advertising, plus the infrastructure of retail stores, call centers and a large distribution network. He said New AT&T would also be able to compete with Facebook and Google more quickly and at lower cost and risk than TW could on its own.

On cross examination of Bewkes, a DOJ lawyer brought up how many TW digital initiatives were already underway before the announced AT&T deal. The attorney questioned supposed business challenges TW says it faces, citing internal long-range plans that predict business growth independent of any AT&T deal. The lawyer challenged the supposed value of the viewer data TW says it would get from being part of New AT&T, saying global ad revenue for Comcast had uneven growth since its buy of NBCU. Justice also questioned what benefit AT&T is seeing now from having that data. Justice's representative questioned Bewkes about his stock and options holdings and the nine-figure returns he'll see from his equity in AT&T/TW. Bewkes replied he would make more in compensation if there was no takeover and he stayed through the remaining couple of years on his contract.

His replacement, AT&T Senior Executive Vice President John Stankey, testified that after AT&T closed on DirecTV in 2015, it ran into reticence from programmers as it tried to launch a variety of new video offerings. Stankey, heading up the AT&T/TW transition, said New AT&T's aims range from a mobile-friendly version of CNN and more 4K content, particularly of sporting events, to video programming married to social networking components. He said AT&T originally considered a "string of pearls" set of smaller video programmer transactions but then decided to be more aggressive. He said AT&T wants to have a more diversified revenue stream that includes a bigger advertising component since its competitors, like Google, are ad-centric and don't charge consumers.