Time Warner's Jeff Bewkes: Department of Justice Theories Are 'Ridiculous'
Time Warner Chairman and CEO Jeff Bewkes

As Time Warner Inc. (TWX) Chairman and CEO Jeff Bewkes testified in the trial over the company's merger with AT&T Inc. (T) , the executive said the government's arguments are "ridiculous" and did not "make sense."

Turner would risk a blackout with pay-TV networks if it tried to negotiate with higher prices, knowing that AT&T's DirecTV could benefit if a rival lost subscribers. 

"It's not how this works," Bewkes said in his testimony on Wednesday. Blackouts are "catastrophic," he said, noting that Turner lost $150 million during a roughly one-month stand stand-off with Dish Network Corp. (DISH) . 

Perhaps channeling Road Runner and Coyote from Time Warner's Looney Tunes, Bewkes suggested that a blackout is like having a 1,000 pound-weight hanging over you. 

The government's theory that AT&T would risk a blackout to gain bargaining leverage, Bewkes said, would be akin to saying "don't worry, it might just be a 950-pound weight."

Defense counsel Dan Petrocelli of O'Melveny & Myers LLP, representing AT&T and Time Warner, asked Bewkes about projected subscriber losses that a pay-TV firm might suffer in a Turner blackout. University of California Berkeley economist Carl Shapiro, an expert witness for the government, projects that in a permanent blackout of Turner's networks, a cable, satellite or online video provider might lose 12% of its subscribers.

"No, half of that would not sound reasonable to me," Bewkes said of the estimate, noting that even 5% would not be likely. While protracted blackouts are rare, Bewkes said he was not aware of any where subscriber losses went beyond 1% to 2%.

Turner has two revenue streams tied to its customer rolls. The company receives more subscriber fees and can charge higher advertising rates if it has more viewers. Meanwhile, HBO is an add-on network, and depends on cable networks selling its network to subscribers to grow. 

Since the "skinny bundles" of networks that Sling TV and YouTube TV offer are cheaper than traditional cable, Bewkes suggested, the extra monthly cost for HBO's Game of Thrones and other content may be easier for subscribers to stomach. "It's better for us to sell HBO on top of a $20 package than on top of an $80 package," he said.

The government charges that AT&T's DirecTV would coordinate with Comcast to withhold programming from virtual multichannel video programming distributors (MVPDs) such as Dish's Sling TV and Google's YouTube TV.

"That makes no sense," Bewkes said. "We want to be on all of the virtual MVPDs."

The Time Warner boss had a similar response to the government's argument that AT&T and Time Warner would restrict other cable operators from using HBO in promotions.

"No, it doesn't make sense," Bewkes said, noting that Time Warner gives pay-TV companies discounts as their subscriber counts grow. "We work hard at getting the laggards" to increase their subscriber counts.

According to Bewkes, the idea for the merger grew out of a lunch he had with AT&T Chairman and CEO Randall Stephenson in the summer of 2016. The companies were both looking for answers as companies such as Netflix Inc. (NFLX) , Amazon.com Inc. (AMZN) , Alphabet Inc.'s (GOOGL) Google and others were changing the rules of TV subscriptions and advertising.

Netflix and Amazon are already vertical, Bewkes said. They own content and have direct ties to consumers that provide immense data about viewing habits and other information. 

By merging with AT&T, Time Warner would be able to tap consumer information from wireless and satellite TV networks. By gaining information about viewers, Time Warner could have a better sense of how to shape its programming and could sell targeted ads. 

"It moves us into the direction of being able to compete with the Googles and Facebooks," he said.

Before starting merger talks with AT&T, he said, Time Warner considered buying automated content recognition companies that can provide data about consumer viewing habits. Such companies have contracts with smart-TV makers that allow them to collect anonymous viewer data. But Bewkes said he was concerned about renewing the contracts when they expired.

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Editor's note: This article was originally published by The Deal, a sister publication of TheStreet that offers sophisticated insight and analysis on all types of deals, from inception to integration. Click here for a free trial.

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