WASHINGTON (CN) - AT&T's chief executive Randall Stephenson rigorously defended his company's proposed $85 billion merger with Time Warner on Thursday, calling the government's argument that it would harm competition "absurd."
The only harm to competition has been the government’s delay of getting the merger to the marketplace, Stephenson asserted from the witness stand.
The Department of Justice sued to block the merger in November. During five weeks of the antitrust trial, the government has argued repeatedly that the merger with AT&T will allow Turner Broadcasting Systems Inc., a division of Time Warner, to jack up prices for other pay-TV distributors like Dish Network or Charter Communications, giving the new merged company leverage to black Turner content out if it so chooses.
In one of his final questions to Stephenson, AT&T defense attorney Daniel Petrocelli asked for his reaction to the claim.
"On its face the premise is absurd," Stephenson said.
Turner is already getting a fair price for its content, which is the result of aggressive and expensive negotiations with distributors, Stephenson continued. The idea that its content would somehow suddenly be worth more under AT&T's umbrella "defies logic," he added.
Stephenson is the last defense witness in the government's case to block the merger. At the close of his testimony late Thursday afternoon, the defense rested its case. But not before Stephenson offered up a detailed origin story of how the proposed merger came to be.
Pointing to major shifts in the industry, and the ability of companies like Netflix and Amazon to create and deliver content to consumers without the help of cable and satellite companies, Stephenson said that AT&T - which became the largest pay-TV provider in the United States after it acquired DirecTV in 2014 - decided in 2016 it wanted to own content, too.
So it began evaluating opportunities to acquire smaller companies, or a "string of pearls," to help the company evolve in that direction. But the process of buying them, Stephenson said, was hard and long. Because AT&T wanted to go for scale, Time Warner came into Stephenson's focus as just the ticket to help the company reach its content ownership goal faster.
Time Warner owns HBO, Turner and Warner Brothers, all of which have studios and produce original content. Stephenson said Thursday he thinks Time Warner has the best content library in the world. He also noted that Turner has a large advertising inventory that would be useful to AT&T.
In the months before Stephenson approached Time Warner, he says he spent hours in his home office pouring over Time Warner's annual reports and financial information, soaking up all the knowledge he could about the company.
"The more I looked at it, the more enthusiastic I got about it," Stephenson said.
Finally he called up Time Warner CEO Jeff Bewkes to arrange a lunch meeting in August 2016, suggesting at the time that they discuss their respective industries.
"A quick lunch turned into a long afternoon," Stephenson said.
As the two talked that day, a compelling opportunity became clear to both of them. But by then, Stephenson said he already had his eye fixed on Time Warner.
"Time Warner was one that every time you looked at it, you came back to it," Stephenson said when defense attorney Petrocelli asked how he singled Time Warner out for a possible deal.
Stephenson said he and Bewkes discussed the possibility of content creation, aggregation and distribution into the wireless world.
"We both got very excited about it," Stephenson said, so they decided to approach their respective boards.
But not before Stephenson drew up a “box” of limitations. Anticipating that the proposed merger and the company’s strategy shift would be a “head snapper” for shareholders, he determined the deal could not dilute the company’s earnings, its cash flow or harm AT&T’s dividend. He also didn’t want it to hurt the company’s financial or credit health.
When Stephenson briefed the board on Sept. 1, 2016, he said he couldn’t calm nervous board members with any concrete synergies, a concept referring to the increased value and performance of merged companies.
As an example, Stephenson said AT&T's 2014 acquisition of DirecTV generated $2 billion in synergies per year. Such synergies allow AT&T to invest money in developing other innovative technology, Stephenson said.
Stephenson noted that the DirecTV synergies helped AT&T acquire the rights for mobile video, which led to a brand new TV platform - DirecTV Now - that enabled subscribers to view TV video content on their mobile devices.
Despite the lack of concrete synergies, Stephenson said the board ultimately approved the merger unanimously.
He testified that he hopes the merger with Time Warner will enable the company to develop a data-driven business model to influence content production and bring more premium video content to mobile users. But he said he also hopes to draw TV advertisers back to video content.
If the merger goes through, Stephenson said the new company will have an advertising component that combines the advertising inventory from Turner with the data from the communications division to drive targeted, digital advertising for video content viewed on mobile devices.
Targeted advertising uses data to determine which audiences will be most receptive to certain ads.
With the acquisition of Time Warner, Stephenson said he hopes to build a digital advertising component that can compete with Google and Facebook.
During his testimony Wednesday, Time Warner chief executive Bewkes said that tech giants like Facebook and Google have siphoned off a huge chunk of television advertising dollars, which are now being funneled into digital advertising.
Bewkes pointed to AT&T’s customer data as a valuable asset for Time Warner, which wants to switch to targeted, digital advertising but currently lacks the platform, infrastructure and data to do it.
During the government's cross-examination of Stephenson on Thursday, Department of Justice attorney Craig Conrath tried to pick apart Stephenson's argument that the merger will drive digital advertising. Conrath called digital advertising “broad,” and suggested that many digital ads – like job listings or paid classified ads - don't show up on TV anyway.
Stephenson quickly brushed the suggestion off.
"It's not relevant," he responded.
If AT&T gets the model right, Stephenson said advertisers have told him they would love to spend more on premium video ads.
AT&T is trying to create a platform to bring advertisers back to video, Stephenson said. That could drive up advertising revenue, which would allow the company to lower – or at least contain – consumer prices.
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