The trial of the century is underway as the Department of Justice’s antitrust division launches its fight to prevent the merger between AT&T Inc. (NYSE:T) and Time Warner Inc (NYSE:TWX). The first witness for the DOJ was Suzanne Fenwick, VP of content acquisition for Cox Communications, the third largest cable provider in the United States with about 6 million subscribers.
Fenwick testified that Turner’s offer to go into binding arbitration over carriage disputes — meaning the amount of money a content provider wants to charge a cable operator to carry the channel — is not regarded as “real” by Cox management. The problems include giving an outside arbitrator the power to set terms, and that the terms would only last for three years, and that would leave Cox and other operators open to future price hikes.
Thus, said Fenwick, AT&T would have leverage through its DirecTV subsidiary to extort Cox for higher fees. If Cox refused to pay them, the operator would lose Turner programming, leaving customers open to being poached by DirecTV.
AT&T’s lead attorney Daniel Petrocelli embarrassed the heck out of Fenwick in his cross-examination. Fenwick admitted that she had no projections whatsoever about how many customers could be lost in such a process, or the financial impact to Cox.
What?!
Cox sent in its top person to testify on behalf of the DOJ, and she doesn’t have the most important pieces of data necessary to support its case? Petrocelli himself practically laughed her out of the courtroom, saying, “Did you think you could just come in here and give your opinion that the leverage would change, not having done a single bit of quantitative analysis. Don’t you think, with a merger this important, that you should have done some homework? … Does your boss know you are giving this testimony?”
Disaster.
Moreover, carriage licensing fights always get resolved. At the end of the day, if an operator doesn’t take the content, then it has less content against which to sell advertising. And with popular programming such as that which appears on Turner’s networks, it would be a significant revenue blow to Cox to let the channels go.
Alternatively, it’s also arguable that Cox subscribers do not view Turner programming is all that compelling, even if it were to be lost. The fact that Cox fails to come up with numbers showing how important Turner programming is to those subscribers is an even bigger blow to the government’s case.
But it also begs the question regarding arbitration proceedings. What’s so bad about having a third-party independent arbitrator decide what’s fair? That’s the whole point of arbitration. Three years is a eternity in this new world of content on demand.
Fenwick also said that Cox “does not view Netflix, Inc. (NASDAQ:NFLX) as a competitor”. Again, this claim is not credible. Not only did Petrocelli introduce a document from Cox itself that didn’t describe Netflix as a competitive threat, but there is plenty of evidence to show that Cox does consider Netflix, and streaming in general, to be a threat.
Cox itself has an entire webpage devoted to anti-streaming propaganda. The five biggest streaming competitors are listed there, including Netflix. Although Cox is a private company and thus it does not frequently disclose subscriber count, Cox admitted in an article 3 years ago that it had lost subscribers over time.
In 2015 alone, one report concluded that Netflix alone had accounted for half of the overall 3% decline in television viewing time among U.S. audiences. Netflix at that point was streaming 29 billion hours of video per year. In 2017, that number leapt to 52 billion hours. It seems ludicrous to believe that, admits all of this consumption, Cox is not losing subscribers.
Not a good start for the DOJ.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He owns shares of TWX. He has 23 years’ experience in the stock market, and has written more than 2,000 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
