Limiting Time Warner Distribution 'Not a Good Strategy,' AT&T CEO Says

AT&T isn't buying Time Warner to use that content to drive value to its distribution business but the opposite, with aims of using its distribution arm to get more value out of the content, AT&T CEO Randall Stephenson testified Thursday in U.S. v. AT&T and TW. Limiting content "is not a good strategy," he said, saying when he first presented the TW idea to the AT&T board in September 2016, one of the issues discussed was how to do such a deal without hurting TW's wide distribution. AT&T/TW rested after Stephenson's testimony, with DOJ then calling a rebuttal witness, Ron Quintero of Chartered Capital Advisers, to testify on the deal's claimed efficiencies.

Separately, Wednesday night, AT&T yanked plans to sell stock in an initial public offering of its Latin American DirecTV/digital business Vrio (see 1804050032). The telco cited "current market conditions."

Stephenson laid out the two-pronged rationale for a TW deal: access to premium video content and a quicker path to a "data-driven business model" of using viewer data in creating targeted advertising and in making content creation decisions. Stephenson said AT&T, in its small targeted ad efforts now, using mobile and DirecTV set-top box data, receives three to five times the revenue per impression that Turner does. He said the distributor gets only two minutes per half hour of TV programming for its ads, but AT&T could largely ramp up its targeted ad business if it had the 14 minutes per half hour of a programmer. All that benefits the consumer by taking pressure off subscription costs, with advertising being a bigger revenue stream, he said.

AT&T Senior Executive Vice President John Stankey, in DOJ cross-examination of his testimony Wednesday (see 1804180026), was challenged on deal synergies estimates. DOJ antitrust attorney Eric Welsh pressed him on whether TW expressed skepticism at AT&T plans for content intelligence -- use of viewer data in programming decisions like casting. Justice also pushed Stankey on the pace of change in the traditional pay-TV industry, with a department lawyer citing SNL Kagan data predicting there will be 78 million traditional pay-TV subscribing households in the U.S. in five years and the rate of subscriber losses will start slowing. Stankey acknowledged some resistance from some TW staffers, but "people have to learn new tricks."

Stankey and Welsh disagreed over estimates Stankey labeled in notes as "SWAG" -- typically an acronym for "sophisticated wild-assed guessing," though the definition was given only partially in court. A line of DOJ questioning about a presentation the company received from an outside consultant in 2016 indicating AT&T buying a premium programmer would give it more leverage in affiliation talks was shut down after an AT&T/TW objection and sidebar discussion with the judge.

The move into video comes as video traffic on AT&T's network is up 250,000 percent since the mid-2000s and the introduction of 3G, Stephenson said. He said today, more than half of the company's network traffic is video, and the move to 5G will be like "your cellphone with a fiber optic cable hooked to it." He said 5G will allow "Buck Rogers things" like driverless cars, as well as the mobile industry being a more direct competitor to cable broadband, all of which will in turn allow even more video consumption via mobile.

'Arm's Length Deals'

Citing an October 2016 letter to AT&T and TW employees on the takeover in which AT&T said TW would still be about broad content distribution, Stephenson said that stands. He said New AT&T would be organized into four independent business units that set their own strategies: a communications business of consumer products, including DirecTV, wireless and broadband; a media business of content that includes Turner, HBO, Warner Brothers, regional sports networks and various digital properties; an advertising company housing AT&T's ad technology and data aggregation; and its international properties. He said DirecTV and Turner would operate under "arm's length deals," with the two negotiating affiliation agreements the same way Comcast and Turner would and not sharing confidential business information.

Stephenson dismissed the anticompetitive concerns of DOJ as "absurd." He said restricting rival MVPDs' use of HBO as a promo tool "defies business logic" since that programmer needs those rival MVPDs as its sales force. He said the idea New AT&T and Comcast might coordinate efforts against virtual MVPDs is "a stretch" since AT&Ts wireless business wants to see more video consumption. "Whether it's our video or not, we're somewhat ambivalent," he said. He said AT&T within weeks will launch AT&T Watch, a $15 a month DirecTV Now skinny bundle package that doesn't include sports, as a means for driving mobile video consumption. It will be free to AT&T Unlimited customers, he said.

On Stephenson's cross-examination, DOJ challenged the idea that broader distribution of video is always the most profitable route, with DOJ antitrust attorney Craig Conrath questioning Stephenson on why the company then doesn't halve the cost of HBO to get more subscribers. Conrath said even with AT&T's growing ad revenue, it hiked DirecTV prices by about 5 percent a year in recent years. Advertising is still a small, nascent business for AT&T, Stephenson said.

The two disagreed whether New AT&T's vertical integration would be similar to the vertical integration model of subscription VOD operators like Netflix, as Stephenson said, or very different, as Contrath maintained. Conrath also tried to tear holes in the idea New AT&T would be digital ad competition for Google, since much of that company's ad revenue is from search. Stephenson said New AT&T's goal isn't digital ads, but video advertising with a similar model of being targeted. They also disagreed about AT&T's supposed interest in partnering with rather than competing with Facebook. Conrath cited a 2017 email exchange between Stephenson and Facebook CEO Mark Zuckerberg. Stephenson called it "a passing kind of exchange" that wasn't followed up on and that Facebook is both a competitor and customer.

Conrath challenged Stephenson on the supposed rate of change in the traditional MVPD industry. "So it's declining but still pretty substantial," Conrath said. Stephenson said that sentiment reminded him of earlier arguments about wireless likely taking a long time to supplant the wireline business, noting DirecTV lost 1.2 million subscribers last year.

Conrath said Justice had discussed with AT&T other video options, such as acquiring just Warner Brothers.