AT&T CEO Randall Stephenson Defends Time Warner Acquisition Before Congress

AT&T chairman and CEO Randall Stephenson - Getty H 2016
Courtesy of Getty Images

On Wednesday, a Senate judiciary subcommittee had the opportunity to question AT&T CEO Randall Stephenson and others about the company's proposed $85 billion acquisition of Time Warner. Sen. Amy Klobuchar (D-Minn.) called it the "game of phones."

The deal, if it passes muster with the Justice Department and other regulators, will combine one of the nation's largest telecommunication companies with a content giant that owns HBO, CNN, TBS, TNT and Warner Bros. 

When the proposed merger was announced in October, it set off alarms across the political spectrum about the impact of massive consolidation in the entertainment and media industry. President-elect Donald Trump cited it as an "example of the power structure I'm fighting," adding it would be "a deal we will not approve in my administration because it's too much concentration of power in the hands of too few."

Despite such commentary, which was featured in the hearing, Stephenson has marched forward, calling the $85 billion deal a form of vertical integration that may necessitate merger conditions, but shouldn't be blocked. "What this merger is not about is consolidation," he said in his opening statements, referring to the proposition this isn't a combination of competitors in the classic sense, but one between a supplier and distributor. Such mergers typically get lesser antitrust scrutiny in courts, where AT&T may need to go if the Justice Department deems the deal to be anti-competitive. 

"This transaction involves no horizontal overlaps," acknowledged Senator Mike Lee (R-Utah) at the hearing. "However, if this fact ended the antitrust analysis, then this would be a very Seinfeldian hearing about nothing. Although vertical deals typically raise fewer concerns than horizontal deals, such deals nevertheless may still tend to substantially lessen competition."

In his opening remarks, Stephenson touted the benefits of the deal and pointed attention to the company's recent introduction of DirecTV Now. "We believe this is what consumers want: new lower priced option and the power to decide for themselves," he said, adding the company would support independent journalism and distribute an array of diverse voices.

Time Warner CEO Jeffrey Bewkes also appeared before lawmakers, telling them that in the past, "When we roll out innovation, we had to do it distributor by distributor." 

He asserted that this deal would make it easier to bring such innovation like TV Everywhere to consumers.

Other witnesses were split on the wisdom of the merger.

Mark Cuban said that AT&T and Time Warner aren't really in a dominant position in the media market. "We need more companies to compete with Apple, Google and Facebook," he said. "This is exactly why this is an important strategic acquisition."

Gene Kimmelman, president of Public Knowledge, rejected the analysis. 

"Ask your constituents how many broadband providers are available to them," he told the senators. "I appreciate Mark Cuban's viewpoint, but last time I checked, Google and Facebook weren't charging me $200 to get those apps."

"Will (the merger) result in lower prices to consumers?" asked Lee.

Stephenson said it would. He said the consumers now pay for content over multiple platforms and that post-merger, they would "pay for it one time."

"Sounds great to the consumer...but there are a variety of competitive harms that need to be looked at," responded Kimmelman, noting zero-rating as an example.

Zero-rating is the practice whereby a broadband or wireless distributor excludes the consumption of its owned content from consumers' data caps. The FCC has been examining this in context with its net neutrality rules, although it has held back on issuing hard rules. The media regulatory agency recently expressed concern that AT&T’s zero-rating practices may harm consumers. Trump's transition team has been skeptical about moving forward with new regulation on the issue, but Lee and a couple other senators noted zero-rating worries.

"This premise of free data if you will with DirecTV Now goes back decades," defended Stephenson. "The first instance of it was 1-800 numbers when you called Sears & Roebuck and they picked up the tab for long-distance. That actually drove down long-distance prices down over time.... We are convinced that just like 800 service drove down prices, this will drive down pricing of video services."

Stephenson also suggested later in his testimony that there are "regulatory overlaps" between the FCC and FTC and suggested Congress intervene with legislative effort to clear up confusion. He also promised AT&T would adhere to conditions, calling the company's track record "spotless." Sen. Al Franken (D-Minn.) was dubious; Lee brought up problems after Comcast's deal to acquire NBCU, while Sen. Thom Tillis (R-N.C.) warned against overregulation.

Sen. Orrin Hatch (R-Utah) addressed a broader concern by asking why wouldn't it make sense for AT&T to advantage Time Warner content over non-affiliated content.

"Limiting content that our customers can get is not smart for a distributor," responded Stephenson. "The Stephen Spielbergs would not bring content if we are limiting their distribution."

Franken thought this statement was ludicrous, pointing to HBO as an example. He ridiculed the idea that talent brought shows to HBO because it's a forum where content is widely available. "I just don't get it," he said, theorizing that talent have traditionally been attracted to HBO because it's known for offering premium content.

This set off what was perhaps the most fiery exchange of the hearing.

"Nothing would stop AT&T from charging a competitor double for Time Warner content like HBO," continued Franken. "I don't think the hypothetical is outlandish at all. This is the incentive that is created by the merger. Mr. Bewkes, do you agree that a combined AT&T/Time Warner when negotiating with others would have leverage and an incentive to use this leverage?"

"No, I don't agree," responded Bewkes. "No, it wouldn't have the incentive, nor the ability.... It would not make sense not to offer it on the Verizon. We don't have the market power either at AT&T or HBO. The market is way too competitive. There's no history of someone pulling off something like that."

Richard Blumenthal (D-Conn.) brought up Trump's comments about "too much concentration of power in the hands of too few," and while sympathizing with the viewpoint, expressed distaste for Trump's "absolutely abhorrent" promise to block the merger because of Time Warner-owned CNN's coverage of his presidential campaign.

"Donald Trump has said he's going to block this merger. And I take him at his word," said Blumenthal, saying it was a potential abuse of power. "What troubles me is that his Justice Department would enforce a different standard depending on what coverage he receives."

The issue clearly made the participants uncomfortable. There was nervous chuckling in the gallery.

"Senator, I am a novice in the realm of politics," said Stephenson. "My expectation is that the Department of Justice will make the determination whether this is competitive or not.... I'll leave it at that."

(Later, Stephenson said that AT&T was still working out whether the FCC would need to review the merger.)

Bewkes said he'd continue defending CNN as an "independent journalistic voice" and let others have their opinion about whether the cable news network practiced objectivity. He also said it was important to realize that many politicians, including Bernie Sanders and Tim Kaine, had made anti-merger comments "before any of them had the information. We are confident that once they (get) facts, will realize that this will have pro-competitive effects. We think we can prove it."