Warren Schlichting, group president of Sling TV, offered a dire warning about the pending AT&T-Time Warner merger during his testimony this afternoon as a witness in the government’s lawsuit seeking to block the deal.
“We would lose a lot of subs,” Schlichting said during an hour and a half of testimony in U.S. District Court in Washington, D.C. “There would be severe bleeding. It would be lose/lose for us, win/win for them.”
The Department of Justice called Schlichting as its second witness of a possible 30 as the projected eight-week trial’s second day unfolded in herky-jerky fashion. (Morning testimony was sidelined completely by the revelation that an independent lawyer representing Sling parent Dish Network had supplied Schlichting with a transcript of Thursday’s opening arguments and opening witness testimony.)
Central to the government’s case against the $85 billion deal is the idea that AT&T, once it controls both DirecTV, its skinny-bundle sibling DirecTV Now and the potent content lineup of Turner Broadcasting, Warner Bros. and HBO, could use the assets as a cudgel. Rivals and consumers would lose out, he said. The sandy-haired, even-keeled Schlichting returned to that notion repeatedly during his time on the stand, contending that AT&T would be more motivated by the potential to lure Dish subscribers than by reaching fair carriage deals.
“The gross profit of Dish subscriptions is higher than the programming fees it could collect,” he said. That would create a “Hobson’s choice” for Dish and Sling when sitting across the bargaining table from Turner. “I don’t see them having any motivation to move,” he added.
One immediate threat would be that Sling, which markets its internet-delivered service as a contract-free, bargain-priced alternative to the bloated conventional cable bundle, would be forced to carry more networks. Sling’s basic “orange” service includes about 20 networks from various companies for a $20 monthly rate. From the Turner fold, TNT, TBS, CNN and Cartoon Network are included in that package.
With AT&T calling the shots, less-viewed channels like TruTV or HLN could be forced on Sling, with rivals like Fox or Discovery following suit. “It only takes a couple of those, and the model’s broken,” he said.
The legal team representing AT&T and Time Warner is scheduled to get its chance to cross-examine Schlichting on Tuesday morning, On Thursday, when the government put forward another pay-TV exec, cable operator Cox Communications VP of content acquisition Suzanne Fenwick, lead defense attorney Daniel Petrocelli succeeded in undermining her testimony during his cross. “Don’t you think, with a merger this important, that you should have done some homework?!” he exclaimed at one point.
One fertile area for Petrocelli’s side could be Schlichting’s characterization of the profit margins. During another point in his testimony, he described Sling’s margins as “razor-thin” and AT&T has largely lost money on the launch of DirecTV Now, but has built it out as a bet on future TV consumption. Petrocelli emphasized during his opening argument that securing wide carriage for Turner networks remains a top priority for Time Warner and AT&T and forgetting that to try to punish rivals would be “economically ruinous.”
Guided by prosecutors, Schlichting sought to underscore his fear of carriage drama by pointing to an impasse between Dish and Turner in late 2014, on the eve of Sling’s launch in February 2015. In a creative turn of phrase, he likened carriage deals to “ancient Greece, with one civilization built on top of the next.” In a less felicitous metaphor, he compared carriage impasses as “like having a heart attack” for a distributor. “You can get yourself back into shape but you’re never the same again.”
As an early entrant into the skinny-bundle chase, Sling has amassed 2.2 million subscribers to lead the pack (DirecTV Now, which launched in November 2016, has about half that number.) All of that hard-won market success, Schlichting maintained, could be for naught if the DOJ does not prevail.
The merger “throws the card table up in the air,” he said. “We need each other now. I describe it as a ‘mutual headlock.’ We both know we need to get to a deal.” After a merger, he added, “all of the incentives change.”
The trial is expected to resume in closed session Tuesday morning, with Schlichting continuing on the witness stand and attorneys sorting out several pending issues. Once Schlichting then faces cross-examination, he is expected to be followed on the witness stand by John Martin, CEO of Turner Broadcasting. Martin, who last month blasted the DOJ as “clueless” and its case as nonsensical, is one of 30 witnesses being called by the government, which presents its case before resting and giving the defense its turn.
With today’s stop-and-start rhythm, plus the Monday-through-Thursday hours Leon has imposed, trial watchers are already wondering if the case will be resolved before the deadline of June 21 that AT&T and Time Warner have set to complete the get-together. That “drop-dead” date has already been pushed once, so it could always move again, though the companies — and the industry awaiting clarity on the M&A front — can ill afford many more delays.