AT&T CEO Randall Stephenson Challenged on Witness Stand at Merger Trial

Randall Stephenson - Getty - H 2018
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"I believe we are on the cusp of a moment."

Those were AT&T CEO Randall Stephenson's words on Thursday at a consequential antitrust trial in DC Federal Court.

But what kind of moment? Will it be one where the nation's biggest telecom takes command of highly valued content (Warner Bros., HBO, CNN...) and uses its newfound leverage to extract greater licenses fees while also muscling out streaming competition? Or is it the beginning of less bargaining friction between content suppliers and distributors? A moment when innovation flourishes and the government gets out of the way of vertical integration?

Much is at stake in the Justice Department's legal effort to block the $85 billion merger between AT&T and Time Warner. So much so that one joke running through the courtroom among the army of analysts is that hedge funds are planning on hiring a lip reader to figure out what U.S. District Court Judge Richard Leon is saying in sidebars. The stock price of Time Warner has certainly been moving based upon expectations of the outcome. Fortunately, after a month of trial action, the end is now in sight as the defense called its final witness, Stephenson.

Daniel Petrocelli, the showy attorney who almost acts as though this case is being tried before a jury instead of merely the judge, directed the first portion of Thursday's storytelling.

During direct examination, Stephenson walked through the 140-year history of his company, which he dated to inventions by Alexander Graham Bell. He told the judge that AT&T has repeatedly underwent reinvention (sometimes forced by the government) and now finds itself as the leading provider of wireless. The AT&T chief explained 1G and 2G and 3G ("the internet became mobile ... AT&T was exclusive service provider of first iPhone") and 4G and 5G.

The latter, Stephenson said, was going to be "transformative," with mobile phones moving at fiber optic speeds and driving up video consumption in such a way that it was going to compete with the cable TV market in the home.

Stephenson said owning premium content has become critical and believes that AT&T can get more out of advertising. This explains the rationale behind the Time Warner merger, he says.

"The government is claiming this will harm competition," said Petrocelli. "The government says that simply on account of the merger, Turner will raise prices to other distributors. That the merged company has an incentive and ability to do so. Your reaction?"

"On its face, the premise is absurd," responded Stephenson. "The idea that all of a sudden Turner under AT&T's umbrella is worth more, I don't understand how that works. It defies logic."

Petrocelli then turned to the government's contention that AT&T might coordinate with Comcast to harm virtual MVPDs like Dish's Sling, which streams a skinny bundle of television channels. Doing so might protect AT&T's satellite TV business, DirecTV.

"You have to live in this industry to appreciate what a stretch that is," answered Stephenson. "We compete every day with Comcast. Wireless distribution is our advantage. ... It's actually the opposite. We like going over the top. It generally means wireless and serves our interests. We want to propagate that."

"Do you want to impede skinny bundles?" asked Petrocelli.

"No," said Stephenson. "Anything that drives mobilization is a good thing."

In fact, during his testimony, Stephenson broke news of how AT&T would be launching within weeks a new $15-a-month skinny bundle package without sports.

Perhaps in an attempt to preempt the government, Petrocelli presented a series of documents that in another light could be viewed as damaging. For instance, there were notes to AT&T's board of directors how this was a "vision deal" and that he couldn't identify synergies. Stephenson explained those notes came during the early part of negotiations when AT&T hadn't yet had a chance to do legwork. Another document was a list of concerns from Stephenson, including a question about how to advantage the company's distribution platforms without harming the content business. The exec said he was attempting to show the board that limiting distribution of content wasn't the right approach. He said that when a $160 billion company buys a $35 billion company, it's not to grow the former as much as the latter.

Stephenson also said that Time Warner and its other digital media properties would be run as a separate division with dealings with the other divisions on an arms-length basis.

The direct examination finished with a return to the theme that these were two storied companies merging at a seminal moment.

On cross-examination, the government attacked Stephenson's "absurd" critique of its claims, pointing out that while he may profess that wide distribution is always best, HBO will hardly be cutting its subscription price in half to gain more customers.

The government got Stephenson to admit that DirecTV has continued to raise prices for consumers even when it was cutting costs.

There was also sharp exchanges about supposed competition from tech titans.

Stephenson was reminded that he said that live TV was critical, and asked to confirm how Netflix doesn't have live sports or news. The government attempted to bring the focus on live TV distribution and asked whether video-on-demand was really just a complementary service.

But Stephenson held tight, insisting that for half of millennials, "It's not a complement. It's a replacement."

Then, a little while later, the government's lawyer tried to get Stephenson to admit that Netflix wasn't the same kind of vertically integrated company as AT&T would be with Time Warner under its thumb. While AT&T has wireless and broadband networks, it was pointed out that Netflix runs over someone else's network.

"I disagree," responded Stephenson. "They create, develop and distribute to consumer. They have a billing relationship and ability to communicate to consumers. Not a lot of difference in terms of market behaviors."

The documents that the government challenged Stephenson on may not have been the ones the defense predicted.

For example, there was email correspondence between Stephenson and Facebook CEO Mark Zuckerberg. Stephenson had written that AT&T could give Facebook more advertising in exchange for building ad capability. The government wanted to know if this suggested cooperation rather than competition. The exec responded that relationships often call for different things, and as Facebook indicated interest in premium content, that it was wise to keep the relationship open.

There was also the presentation of correspondence between Stephenson and Time Warner CEO Jeffrey Bewkes before the merger when Time Warner had just announced a 10 percent stake in Hulu. At the time in the summer of 2016, Bewkes expressed hope that it wouldn't change their relationship with Stephenson, but the latter was doubtful, questioning the assurance that DirecTV would have access to Time Warner content.

"I wouldn't say I was annoyed," Stephenson defended the convention. "Just trying to make sure we had the same access as others."

The long day of testimony addressed other topics, from AT&T's culture clashes with HBO to talks with the Justice Department during the merger review.

Even Judge Leon had a question at the end.

“Where do you think this ecosystem will be seven years from now?”

Stephenson acknowledged his prediction would have been off seven years ago but spoke of a future where content creators have direct and immediate access to consumers. Of course, he thinks the judge won't let the government impede his vision of vertical integration.