U.S. v. AT&T: Dish Executive Testifies Time Warner Merger Could Doom Skinny Bundles

The second week of trial begins with an industry executive testifying about his worries. "That breaks our model," says Warren Schlichting.
Courtesy of dish
Warren Schlichting

As the U.S. government continues its attempt to halt the $85 billion merger between AT&T and Time Warner, the trial is moving into its Beautiful Mind stage. That would be the 2001 Oscar-winning film about mathematician John Nash, whose pioneering work exploring game theory earned him a Nobel Prize. The movie was specifically referenced during opening statements last week because the government's expert has used Nash's models to predict how the merger would mean higher prices for consumers. Before the expert testifies, though, the government called Dish programming executive Warren Schlichting to the witness stand to showcase a real-world application of Nash's bargaining theories.

Schlichting became the first witness during the second week of trial, but he didn't begin his testimony until after lunch thanks to some unexpected morning drama. The hiccup occurred after Dish's lawyers shared transcripts of the opening statements with Schlichting. This potential taint had U.S. District Court Judge Richard Leon considering striking him as a witness. Ultimately, though, Schlichting was allowed to speak at trial and give his viewpoint that the merger could spell doom for Dish and "skinny bundles" of television programming.

Guided by a Justice Department lawyer, Schlichting began talking about the "must-haves" in the television business and those programmers who are less important. ABC, NBC, Fox, CBS, and, of course, Time Warner, made the cut, but not Viacom because as the exec put it, the company tries to sell 27 channels to distributors after having not invested enough in its product. (Schlichting acknowledged that Viacom's new leadership is trying to change the situation.) Those who are on the important end, said Schlichting, are there because of live sports rights, or in the case of Time Warner's CNN, because everyone is paying attention to politics right now. In a world of DVRs and Netflix binge watching, that's why a lot of people haven't totally cut the cord.

The Dish executive continued by introducing the Sling service, which streams live programming to consumers and, just as crucially, does so in a cheaper way by not forcing customers to rent a cable box and not sticking them with every last channel on the dial.

Schlichting also went through the contentious negotiations with Turner in late 2014 that briefly caused CNN to go dark on Dish platforms.

Eventually, his testimony got to the main point.

"These negotiations are tough," said Schlichting. "That's so even without the merger. Turner has a good negotiating team. With the merger, all the incentives change, and we have one of our most important licensors teaming up with our biggest adversary. I just don't know what incentive Time Warner would have to get a deal done."

By adversary, he's talking about DirecTV, which is owned by AT&T. Schlichting's point is that if AT&T's Time Warner can't get to a deal with Dish, at least AT&T would know that it might get Dish customers to defect to DirecTV. 

"DirecTV has a national service," testified the Dish executive. "It is more lucrative to take subscribers than to collect programming fees. ... In a typical programming negotiation, they will say they want every one of their networks distributed broadly with a rate hike per subscriber. This time [after the merger], I just don't see them having any motivation to move [off such demands]."

Given this is an antitrust proceeding about the harmful effects of vertical integration — that is, a merger between a supplier and a distributor — such a point is critical to the government's case. It's not just higher prices, the feds contend, but also a potential blow to innovation.

Schlichting spoke how there were a lot of "unsettled issues" in the last negotiation — and how Dish has been single-minded about limiting the number of networks on its Sling service. This skinny bundle has attracted 2.2 million subscribers to date, but Schlichting expresses concern about what's going to happen if Time Warner — followed perhaps by NBC, Fox and Disney demanding the same — insist Sling accept the lesser channels. For instance, Dish might want TBS, TNT, and CNN...but not, Turner Classic Movies, Adult Swim, Boomerang and TruTV.

Would it have enough leverage to resist?

"It's easy to imagine someone with this clout saying you need to take all eight," said Schlichting. "That breaks our model."

Schlichting also provided a rebuttal of sorts to something that Daniel Petrocelli, attorney for the defendants, made during opening statements. According to Petrocelli, nobody wants to wait around for the cable or satellite guy, so while people might tell a pollster they'll switch services without a certain network, the truth is few actually do. But Schlichting says that Dish has purposely designed Sling to be easy to subscribe as well as cancel. "The switching costs are close to zero," he says, adding that he could see many choosing to go "across the street" to DirecTV Now, a service that is, for now, pretty similar to Sling.

A Justice Department lawyer also asked Schlichting about AT&T's offer to go to "baseball-style arbitration" with any distributor who can't come to a renewal agreement with Time Warner. In such a scenario, both sides would present their best offer, with an arbitrator analyzing marketplace evidence and picking whichever offer seems most fair.

Schlichting called it too much risk.

"That's a hard proposition for us," he said. "Sling is new and innovative. It's easy to see it getting crushed. This is asymmetrical risk where we'd be all in, but it would be a temporary blip for them if things didn't go as planned."

With cross-examination set for Tuesday, the Dish executive added, "Sling is fledgling. It doesn't take much of a shift to affect Sling's future."

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