WASHINGTON (CN) – Time Warner’s chief executive forcefully defended his company’s proposed $85 billion merger with AT&T on the witness stand Wednesday, arguing that the company will fall behind innovative competitors without it.
Painting Time Warner as a little fish in a big pond dominated by tech giants, Jeff Bewkes said the merger will give Time Warner the tools needed to compete in a rapidly evolving entertainment industry undergoing “tectonic changes.”
Those shifts include increased competition from internet competitors like Netflix and Amazon that also produce content, and the growth of targeted digital advertising.
Bewkes’ testimony came during the fifth week of trial in the government’s effort to block the merger, which it claims will give the newly formed company increased leverage to extract higher prices from pay-TV distributors. The government has estimated that higher prices for distributors will get passed onto customers at a cost of $436 million annually, which amounts to a roughly 45 cent monthly bill increase.
Bewkes, 65, is the first among the top brass of Time Warner and AT&T to testify. A 39-year veteran of Time Warner, Bewkes took over as the chief executive in 2008.
The government has claimed that with increased leverage, the merged company could use threats to blackout popular Turner Broadcasting System networks – like CNN, TNT and TBS – to impose more onerous terms on competitors.
Bewkes called that argument – which is central to the government’s case to try to block the merger – “ridiculous.”
“It’s not how this works,” he said.
In defending the merger, Bewkes balked at the assertion that Turner, a division of Time Warner, would use blackouts as leverage.
Calling them “catastrophic,” Bewkes said Turner lost $150 million during a month-long Dish Network blackout of Turner channels in 2014.
Rather than gaining leverage over distributors, Bewkes said the merger will bolster the company’s defenses against a seismic shift away from traditional TV advertising toward targeted digital advertising.
That shift has dealt a heavy blow to TV companies, according to Bewkes, which have relied heavily on advertising money for revenue.
But with the advent of targeted advertising, which allows companies to tailor their efforts to the most receptive audiences, advertisers no longer want to pay to show their ads on TV to people who probably don’t want to see them, he said.
During his testimony, Bewkes noted that tech giants like Google, Netflix, Apple, Amazon and Facebook have eaten up a larger share of advertising dollars that was once funneled to television programmers.
According to Bewkes, digital advertising at Google and Facebook “took off like a rocket” the last five years, with Google nearly tripling what it spent on digital advertising and Facebook’s increasing tenfold. Time Warner’s spending on advertising meanwhile remained relatively constant.
“We’re basically flat throughout this period,” Bewkes said.
Bewkes explained that Time Warner wants to be able to switch to digital targeted advertising, but lacks the platform, engineers and infrastructure to do so as an independent company.
It also lacks the rich personal data that Amazon and Netflix have to do targeted advertising effectively.
“They know all kinds of things that help them sell ads,” Bewkes said. That can include the contact information, email addresses and billing history of their customers.
AT&T, which has some 150 million nationwide subscribers, has data Time Warner needs to help with digital advertising, Bewkes argued, noting that the merger will also give the company greater opportunity to get its content in front of new subscribers.
During Wednesday’s proceedings, Bewkes described a lunch he had with AT&T CEO Randall Stephenson in August 2016 when the two discussed the changing nature of the business. During their discussion, Bewkes said it became clear to both of them that they had “complementary assets.”
The two companies reached a merger agreement in October that year but the Justice Department sued to stop it last November.
Bewkes staunchly denied Wednesday having ever discussed the possibility with Stephenson of using the merger to gain programming leverage over rivals to jack up prices.
Executives from AT&T’s rivals – including Charter Communications and Dish – have testified during the trial that they fear the merger will do just that.
“Was that ever discussed as a reason to do this deal,” defense attorney Daniel Petrocelli asked.
“No,” Bewkes responded.
Bewkes said he was not aware of a case where a negotiator articulated a theory of leverage to extract price increases from distributors. He also denied having such leverage in mind when Time Warner cable spun off in 2009.
During the government’s cross examination of Bewkes, Department of Justice attorney Claude Scott tried to poke holes in the grim picture Bewkes painted of the threat posed by tech giants, arguing that Time Warner’s TV ad revenues were growing prior to its pursuit of the merger. Scott walked Bewkes through internal documents showing that ad revenue increased by single digits between 2012 and 2017, without adjusting for inflation.
When Scott pointed out that the numbers went up, Bewkes dryly responded: “About flat.”
While affable during direct examination, Bewkes was less so during cross examination.
When Scott noted that Google gets 85 percent of advertising revenue from search engines – not TV distribution – Bewkes accused Scott of “making a false silo.”
At this point, video and search ads have intermingled to such a degree that its’ impossible to filter the search ads out, Bewkes said.
“What you’re missing is that the competition for advertising isn’t just about television,” Bewkes said. “If digital advertisers are able to target consumers with messages delivered through search or other ways, that takes away from television.”
Bewkes also shot down Scott’s assertion that he stands to earn more in Time Warner stock options if the merger goes through.
Scott pointed out that Bewkes will get more than $200 million from his shares. But the chief executive said he will actually lose money if the deal is approved.
“I understand that when the deal closes I will be terminated without cause,” Bewkes said.
According to Bewkes, a consensus emerged among AT&T and Time Warner executives that a new management team is needed for the next era, post merger.
Bewkes said he would actually earn more money if he were to complete his contract with Time Warner, which will expire in 2021 if U.S. District Judge Richard Leon decides to block the merger.
AT&T’s executive president John Stankey, who has been tapped to run the merged company, took the stand after Bewkes.
AT&T chief executive Randall Stephenson is expected to testify on Thursday.