In federal court on Wednesday, Time Warner CEO Jeffrey Bewkes gave his reasons why the $85 billion merger with AT&T should move ahead and attacked government theories on why the deal should be blocked as “ridiculous.” He expressed confidence on the witness stand during a direct examination and then skated through a fairly unchallenging cross-examination that left trial observers openly questioning the government’s strategy.
His testimony comes nearly at the one-month mark of one of the biggest antitrust showdowns in decades. The U.S. Justice Department asserts that the merger would raise prices for consumers throughout the country and inhibit innovation. Earlier this week, after satellite and cable executives testified about what they’d expect from a new content-and-distribution behemoth in the pay television space and after economists squared off about the projected effects of the merger, the government rested its case. Now it’s time for the defendants to explain to the judge the rationale behind the merger, and Bewkes was chosen to be one of the first witnesses to accomplish this.
Guided by attorney Daniel Petrocelli, Bewkes discussed what he sees as the problem area that the merger addresses for Time Warner.
The owner of Warner Bros. and television networks like HBO, CNN, TNT and TBS is a content supplier to cable and satellite distributors without a direct relationship with consumers, explained Time Warner’s chief. That means Bewkes‘ company has struggled to understand the identities of their fans and what they really want. This has become a pertinent issue with the rise of digital giants, who are selling video subscriptions and competing for advertising dollars.
“Who are they?” asked Petrocelli.
“Amazon, Netflix, Google, Youtube, Facebook…” responded Bewkes.
“Are they vertically integrated?” followed up Petrocelli.
“Yes, they are.”
Bewkes testified that about 30 percent of pay TV watchers subscribe to HBO, but says he doesn’t know much about this 30 percent. He says his company has tried to procure data in negotiations with Comcast and other distributors, but his team found that the data being offered was less than useful. He spoke about efforts to establish new direct-to-consumer streaming platforms, but testified that the ones like Filmstruck and Machinima launched were miniscule, while others including HBO Now have experienced problems.
Meanwhile, there are the tech titans, which the defense is presenting as being in position to dominate the competitive landscape. Do these tech giants have great data? Those who watched Mark Zuckerberg’s recent testimony before Congress won’t be surprised at the answer.
“Yes, they do,” said Bewkes. “They even know more about our consumers than we do.”
The exec would later say that he didn’t have the technology or engineering to competitively serve up truly relevant advertisements or even assuredly bring forth the kinds of programming that consumers wish to see, and while he believed that Time Warner might eventually get there, at the moment the challenge was speed and scale.
That’s basically where AT&T comes in — as a telecom giant that is tops in the mobile space and owns DirecTV, too.
“This combination gives us a good chance to compete effectively for digital advertising and get the benefits of being direct-to-consumers,” said Bewkes. “It moves us in the direction of competing with Google and Facebook.”
Bewkes addressed the attempt a few years ago from 21st Century Fox to acquire Time Warner and said the rationale behind that merger would have been to gain more leverage in negotiations with distributors. He said it wouldn’t “solve the problem” and so it was rejected.
As to the government’s claims that a merger would make blackouts less costly for Time Warner by swaying customers over to DirecTV, Bewkes said, “It is ridiculous. It’s not how these things work. If our channels aren’t widely distributed, it’s catastrophic for us, costing us hundreds of millions of dollars.”
During direct examination, Petrocelli also asked Bewkes about the time when Time Warner and Time Warner Cable were a single company. The point was to show that a vertically integrated company wouldn’t lead to disastrous price increases and would encourage innovation — at one point, Bewkes appeared to take credit for video-on-demand — although since Bewkes now professes to need a better relationship with consumers, this line of questioning came with an implicit acknowledgment that spinning off Time Warner Cable might not have been the wisest course in retrospect. Bewkes reminded the audience that this was before digital video platforms like Netflix took off.
Claude Scott, an attorney at the Justice Department, handled the cross-examination.
Although he presented Bewkes with a strategy memo to Time Warner’s board, he didn’t appear to have any bombshell internal emails that would undercut the pro-competitive rationale for the merger. Nor did he spend any time pushing Bewkes to identify Turner channels as being must-have, as the government took pains to do during opening statements and in the trial’s early weeks.
Instead, Scott got Bewkes to confirm that Time Warner was meeting its financial targets, launching subscription VOD services (a coming DC Comics one from Warner Bros. was mentioned), and that his company wasn’t really losing ad revenue.
To the latter point, although the percentage of ad money into television was either remaining flat or going down compared to ad money in the digital space, Scott got Bewkes to admit that the overall ad spending was increasing and that a company like Time Warner was limited by the amount of commercials that a TV audience would tolerate.
“Ad revenue went from $4.3 billion in 2012 to $4.7 billion in 2017, right?” asked Scott.
“I’d call that flat,” responded Bewkes.
Then, the government attorney pointed out that Comcast’s own revenue had remained flat, too.
“This is after they did a vertical merger, right?” asked Scott, referring to Comcast’s acquisition of NBCUniversal in 2011.
“It must have been,” said Bewkes.
Scott then followed this up by establishing that Comcast had access to consumer data — and that it was exactly the same data that Time Warner attempted to procure through negotiation.
“I know Comcast has it,” said Bewkes. “I don’t know what NBCU has.”
The questioning was hardly aggressive and created a buzz in the court during a break as the audience attempted to puzzle out where everything was heading. In the end, the government scored no major admission from Bewkes but did confirm that he would be retiring upon the merger being realized. Bewkes also said he would be leaving with a gigantic financial payout for his service.
“I’m fairly on the older side to take this out for five years,” explained Bewkes. “We need a new management team.”