Stephenson told a federal court in Washington that before settling on acquiring Time Warner, he wrestled with AT&T's strategy to make a series of smaller acquisitions — creating a “string of pearls” — that could slowly lead the telecom giant into its next phase. But with the television and media industries changing rapidly around him, Stephenson said, he became convinced that only a large deal with a major content company — Time Warner — could put AT&T on the best track for the future.
To get even further ahead of the competition, Stephenson said, AT&T expects to launch an online streaming service in the coming weeks called AT&T Watch. Priced at $15 per month, the new app will provide live television content but without sports programming. It is designed to be a cheaper, slimmed-down version of AT&T's DirecTV Now app, said Stephenson. AT&T Watch had not been previously announced.
Stephenson's testimony caps off AT&T's defense of its $85 billion deal to acquire Time Warner, as the government seeks to block the deal with antitrust arguments Stephenson on Thursday said were “absurd” and “defied logic.” By allowing AT&T to expand its data-driven advertising business and lower the subscription price for its DirecTV customers, Stephenson said, the merger is a technological investment that cannot be missed.
“I have a philosophy that if you’re not investing at the top tier … if you miss one technology cycle, it may not kill you, but it will make you sick for a very long time,” Stephenson said.
The chief executive said he looked at a number of other media companies as possible acquisition targets but that Time Warner's premium content made it the ideal choice. “Time Warner was one where every time you looked at it, you came back to it,” he said.
The more he considered the company, the more excited he became, he said. So he called Time Warner chief executive Jeff Bewkes and asked him to lunch. “A quick lunch,” Stephenson said, “turned into a very long afternoon.”
Stephenson aspires to build a digital advertising empire to rival the likes of Google and Facebook. With Time Warner's extensive content portfolio — which includes CNN, HBO, TBS, TNT and Warner Bros. — AT&T hopes to deliver highly engaging video content to mobile devices, bringing more advertising opportunities as well as the use of AT&T's core asset, its wireless network.
Upcoming changes in technology will only increase AT&T's profile in this space should the deal be approved, Stephenson said. For example, because self-driving cars will allow consumers to reclaim time that they now spend having to stay alert behind the wheel, AT&T will have even more chances to capture its customers' attention.
Stephenson denied claims that AT&T could use its control over Time Warner content to put other cable companies and TV providers at a disadvantage by making AT&T's own network the exclusive distributor of Time Warner programming.
“That strategy is not a good approach to creating value,” said Stephenson, saying that AT&T would make more money by distributing Time Warner's content as widely as possible.
The proposed change in business model, Stephenson acknowledged, would reflect a major shift for the company, which has historically made its money selling access to connectivity. That's why Stephenson imposed a number of requirements on himself as he explored the deal. The merger couldn't dilute the company's earnings or its cash flow, he said. It couldn't harm the company's dividend, as many investors rely on AT&T stock to generate income for their portfolios. And the deal also couldn't jeopardize AT&T's financial health, such as by harming its credit rating.
“I called it my box,” Stephenson said.
Stephenson's early outreach to Bewkes was not all sunshine and roses. In their initial phone call to set up lunch, Stephenson discussed Bewkes' then-impending deal with Hulu to acquire a 10 percent stake in the online video company and to put Time Warner content on Hulu's new streaming video service, Hulu With Live TV. Stephenson's notes on the call, as read in court, appeared to reveal some frustration on AT&T's part that Time Warner was circumventing traditional TV distributors.
“You were afraid [of] them being part-owners of Hulu,” suggested Justice Department attorney Craig Conrath, implying that AT&T feared Time Warner might give Hulu preferential treatment over other content distributors such as AT&T — an argument that could help the government demonstrate that similar criticisms of the AT&T-Time Warner deal are reasonable.
“I was just trying to make sure we had the same access as others,” said Stephenson.
Asked by Judge Richard Leon to forecast the next seven years of his business, Stephenson said that as consumers shift increasingly to mobile devices and away from traditional cable and satellite television, the more content they will consume. That proliferation of content and programming, he said, will inevitably drive the cost of that content down.
That can only be good for consumers, he said.