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AT&T-Time Warner Trial: Judge Asks if ‘Mutually Fair’ Arbitration Would Satisfy Rival

WASHINGTON — The federal judge overseeing the AT&T-Time Warner antitrust trial asked whether a “mutually beneficial and mutually fair” arbitration would help alleviate concerns that the merger would leave the combined company with too much power and leverage.

U.S. District Judge Richard Leon posed the question to Tom Montemagno, a senior executive with Charter Communications and a major rival to AT&T.

Leon did not indicate whether he was asking the question as a way to find a potential merger remedy — or if it was to glean more insight about industry practices.

Montemagno, who as executive vice president of programming acquisition is tasked with negotiating for carriage rights for channels, had been critical of an offer by Time Warner’s Turner networks to go into “baseball”-style arbitration should the merger go through. The offer was made shortly after the Justice Department sued to block the merger, but Montemagno testified that it would be too risky for a multichannel distributor like Charter.

“What if it were structured so it was mutually beneficial and mutually fair?” Leon asked.

Montemagno appeared to be more amenable to such an idea.

Leon also asked Montemagno about how Charter has used the prospect of arbitration, noting that the Charter executive had seen “first hand” that threatening to go into arbitration can have “positive effects on negotiations.”

He was referring to an arbitration clause that Charter has in a deal with NBCUniversal, one that AT&T-Time Warner claims is similar to their “baseball-style” arbitration offer. Montemagno confirmed that Charter invoked the clause as a way for NBCU to negotiate more “reasonably,” but he said that he thought that arbitration was still a “last resort.”

The Justice Department claims that the merger will give AT&T-Time Warner increased leverage in carriage negotiations, ultimately driving up the price for Turner channels. The DOJ says that AT&T-Time Warner will be able to extract onerous prices from distribution rivals who would otherwise face losing carriage.

Turner’s offer would prevent its channels from going dark during arbitration. But Montemagno and other rivals have testified that “baseball-style” arbitration would be a risk because both sides would submit proposals and the arbitrator would select the one he or she deems as being “fair market value.” It also does not apply to HBO.

Other highlights:

Is HBO a ‘must have’ channel? The DOJ claims that the merger will give AT&T-Time Warner the “incentive and ability” to limit the way that rival distributors use HBO to attract and retain customers. They highlighted HBO’s dominance among premium channels, in Emmys and subscribers.

HBO’s Simon Sutton, appearing as an adverse witness for the government, said that it would be “devastating to our business” to prevent distributors from promoting the premium channel. He said that were Time Warner to pull HBO from a distributor, the premium channel would face losing its subscribers and would have to “start from scratch” in building a new list.

The Justice Department also has been trying to show that Time Warner already has tried to link HBO and Turner network carriage negotiations as a way to maximize leverage.

Sutton confirmed that he was on an email chain in 2015 reacting to a request from Time Warner CEO Jeff Bewkes to “coordinate” HBO and Turner network content negotiations. Bewkes wrote that he would designate corporate Time Warner executives to “figure out” how to do it.

Plepler forwarded the email to Sutton, with the response, “Oy.” Sutton himself wrote, “Uh-oh.” He had concerns that such an approach would diminish HBO’s ability to maximize revenue — as the offering of HBO is widely used throughout the business to entice potential cable and satellite subscribers and to retain them.

Sutton said he still followed corporate instructions. He added that such coordination didn’t necessarily mean that HBO and Turner were able to link the expiration dates of their carriage agreements.

White noise. Big chunks of the afternoon were spent with lawyers from both sides in private bench conferences with Leon, who presses a button in such instances to fill the room with white noise. Late on Wednesday, the Justice Department filed a motion to access transcripts that concerned the testimony of Daniel York, chief content officer for AT&T.

In 2017, the Justice Department reached a settlement with AT&T over claims that DirecTV  was the “ringleader” of an exchange of information with competitors so that much of Los Angeles was left without access to the Time Warner Cable-owned Dodgers Channel, which launched in 2014. The DOJ’s settlement cited York, then chief content officer of DirecTV, as the instigator of the information exchanges. The DOJ did not ask for monetary damages. AT&T acquired DirecTV in 2015.

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