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AT&T-Time Warner Trial: Randall Stephenson Takes Stand and Defends Merger

WASHINGTON — AT&T CEO Randall Stephenson defended his company’s $85 billion plan to merge with Time Warner as he took the stand in one of the most anticipated moments of the antitrust trial.

He called the government’s chief reason for blocking the merger “absurd.” The Justice Department argues that the combined company will have the incentive and ability to raise prices on rivals for Time Warner’s Turner networks like TNT, TBS, and CNN, but Stephenson said that the idea that “somehow Turner’s content is worth more [after the merger] defies logic to me.”

Often speaking directly to the judge, Stephenson testified on the origins and rationale for the merger, but his examination also veered into other topics, like an email exchange he had with Facebook CEO Mark Zuckerberg following last year’s Allen & Co. Sun Valley conference. He even revealed a new product offering, AT&T Watch, a $15-per-month bundle of channels, countering the Justice Department’s point that AT&T is still raising prices on its traditional DirecTV satellite service.

He emphasized that AT&T wanted “wide broad distribution” for Time Warner content, implicitly pushing back against the government’s claim that the combined company would use “must have” channels as a “weapon” to extract higher fees from rivals.

“A $160 billion company doesn’t buy a $30 billion company, hoping the $30 billion company can make its value greater,” Stephenson said, adding that the situation was the opposite. “It’s a matter of math.”

AT&T-Time Warner’s lead counsel Daniel Petrocelli introduced notes that Stephenson had taken in the summer of 2016, just after he and Time Warner CEO Jeff Bewkes first talked about a combination, in which he made some of the same points.

“It’s really simple: The more people who watch your content, the more your content is worth,” Stephenson said.

The Justice Department argues that the company will demand higher prices for Turner content from rivals, and those increases eventually will be passed on to pay-TV consumers.

Stephenson tried to show that the ability to gain increased leverage in distribution was never the rationale for the merger. In notes he wrote after his initial lunch conversation with Bewkes, Stephenson described the potential merger as a “vision deal,” and said that he didn’t want to give the AT&T board of directors “the expectation that there would be these significant cost synergies” if they paid a premium for the company. He explained that he wrote the note before his team did a full study of the transaction, and savings have since been identified.

On Sept. 1, 2016, the board gave him the greenlight to pursue the merger, and approved the transaction in a unanimous vote on Oct. 22 that year.

He said AT&T, starting in 2016, set out to pursue the acquisition of a content company, given the changes taking place in the media business, citing Netflix and Amazon, and their ability to gain valuable consumer data on what their subscribers are watching, as well as Google and Facebook and their offering of targeted advertising tied to a specific consumer’s likes and dislikes.

The CEOs of those companies, Stephenson said, say that their businesses are “all about engagement” with the consumer.

He talked of the benefits of AT&T’s wireless and DirecTV’s set-top box data in creating a new targeted advertising platform for Turner’s channels, with the ability to deliver “three, four, five” times the return on what traditional spots currently get.

He said the merger represented a “significant shift in strategy” for AT&T, as it had previously tried to buy two smaller content businesses but “to no avail.” The merger with Time Warner, he said, would allow AT&T to make a giant leap into the content business more quickly.

“We knew we had to have scale,” he said.

He pointed out the decline in subscribers to DirecTV and U-verse, as younger consumers in particular migrate to cheaper platforms or go without pay-TV subscriptions altogether.

The Justice Department’s lead attorney, Craig Conrath, tried to show that the traditional pay-TV picture wasn’t as dire as described, pointing out price increases of 4% to 5% in 2018 and 5.1% in 2017, as well as hikes in previous years.

Stephenson acknowledged that DirecTV subscription prices rose as there were cost synergies from AT&T’s acquisition in 2015. He said that “content costs increase year in and year out,” but said that it is getting “harder and harder to pass those costs” along to consumers.

Other highlights:

A new service. AT&T Watch will be the cheapest bundle, with no sports programming, but one that its wireless unlimited subscribers will get for free.

Stephenson’s description of the new service seemed to come at an opportune time — just as Petrocelli asked him about the company’s willingness to offer lower-priced bundles of pay-TV programming. AT&T already offers a $35-per-month package called DirecTV Now. Stephenson also emphasized the availability of the packages while acknowledging price increases for traditional DirecTV subscribers.

Zuckerberg emails. During his cross examination, Conrath asked Stephenson about an email exchange he had Zuckerberg last summer, in which they discussed the possibility of Facebook helping AT&T build up its ad capabilities.

But Stephenson said nothing came of it, and that the email was a followup after they conversed at the Sun Valley conference, and characterized the emails as a “passing kind of exchange” as part of a “customer-competitor relationship.”

Conrath appears to have been interested in querying Stephenson about the possibility of cooperating with a company that AT&T has described as one of its big new competitors.

Millennial trendlines. Conrath tried to counter AT&T’s argument of the threat that Netflix and Amazon pose to their pay-TV business, pointing out the lack of live sports and news.

Stephenson, though, said that half of all millennials have no subscription pay TV service, and instead rely on the on-demand streaming services and other options. He pointed out that DirecTV lost 1.2 million subscribers in 2016, while Netflix gained 2 million just in the most recent quarter. He compared the trajectory to that of the shift from wired to wireless phone communication.

Hulu stake. Stephenson also was asked about a conversation he had with Bewkes in the summer of 2016, before the merger was announced. Time Warner had just acquired a 10% stake in Hulu, and Stephenson expressed concern at the time that they were going “around us.” He told the court that he was “just trying to make sure that we had the same access [to Time Warner content] as others.”

AT&T history. Stephenson spent a big chunk of his testimony going through his history with the company, then to the origins of AT&T back to the days of Alexander Graham Bell, and its transformation through the years. He tried to show that AT&T had a history of innovation, and emphasized its investments in new technology, like the 5G network, something that will help realize “Buck Rogers things like driverless automobiles.”

He told of getting a job at Southwestern Bell, just after the breakup of AT&T (mandated after an antitrust trial in the same D.C. federal courthouse).

Judge’s query. AT&T-Time Warner has highlighted an offer to go into “baseball-style” arbitration rivals in the event of carriage disputes over the Turner networks. Leon asked Stephenson if the arbitration was modeled after a  provision included in the Comcast-NBCUniversal deal, and the CEO said yes. He also asked him where he saw the media ecosystem seven years from now.

“If you asked me seven years ago what the world would look like, I would have missed it so far,” Stephenson said, before adding that he believed that the availability of content was going to be “radical” — and cheaper over time. He also said that there would be an emphasis on “direct and immediate” connections with consumers.

Camera crews staked out the entrance to the federal courthouse in Washington, hoping to catch a glimpse of Stephenson as he entered.

In public appearances and statements to the media, Stephenson has suggested political motivations behind the government’s opposition to the deal, and in February said that Trump’s dislike of the transaction, and CNN in particular, was the “elephant in the room.” But U.S. District Judge Richard Leon rejected a pre-trial effort on the part of AT&T-Time Warner’s legal team to pursue that line of defense, while the DOJ’s antitrust chief, Makan Delrahim, has denied that there was White House influence.

On Wednesday, Stephenson’s counterpart at Time Warner, Bewkes, testified that the government’s arguments that the transaction will have anticompetitive effects were “ridiculous” and nonsensical. He got in a few digs at Charlie Ergen, the co-founder of Dish Network, which is opposing the merger. One of its senior executives, Warren Schlichting, the group president of Dish’s Sling TV, testified on behalf of the DOJ and warned of the changed bargaining dynamics, if the merger goes through.

The trial, now in its fifth week, has largely been free of startling testimony or dramatic revelations, and instead has unfolded slowly. Many documents are filed under seal, and some of the proceedings have taken place in closed sessions to protect confidential information of the companies and their competitors. Leon has chimed in with some comments and questions for witnesses. Last week, he remarked on the complicated nature of the economic model used by the government’s key expert witness, Carl Shapiro, and said it was like a “Rube Goldberg contraption.” On Wednesday, he asked Bewkes whether Time Warner’s streaming service FilmStruck was similar to Turner Classic Movies, another Turner channel.

Stephenson was the final witness for the defense, and the Justice Department called its first rebuttal witness late in the afternoon. Ron Quintero, a CPA, testified that AT&T’s predictions of merger synergies were not verifiable or merger specific, nor did they “pertain to variable costs.”

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