Federal Appeals Court Questions DOJ Economic Concerns Regarding AT&T/Time Warner Union

Federal Appeals Court judges Dec. 6 questioned lawyers representing the Department of Justice about the government’s economic concerns regarding AT&T’s $85 billion acquisition of Time Warner.

The Justice Department’s antitrust division filed an appeal of a district court judge’s June approval of the merger that resulted in the formation of WarnerMedia — citing the deal would lead to higher pay-TV pricing and content blackouts for consumers, among other issues.

Government attorney Michael Murray argued U.S. District Court Judge Richard Leon erred in “economic logic and reasoning” in relation to possible blackouts of consumer access to content occurring during carriage disputes between content holders and pay-TV and over-the-top video distributors.

“‘Incentives remain the same’ for a super company to threaten a ‘blackout,’ in which it withholds content from distributors, in order to cripple rivals,” said Murray, as reported by CNN Business.

But D.C. Circuit Court of Appeals Judge Robert Wilkins countered that there exist arbitration procedures in place for carriage disputes  — systems Wilkins said Judge Leon used in his decision.

“So how can we just ignore that and say the district court has irrationally switched positions?” asked Wilkins.

Speaking Dec. 4 the UBS 46thAnnual Global Media and Communications confab in New York, AT&T Randall Stephenson remained optimistic the appeals court would validate the merger.

Specifically, Stephenson said the appellate court is looking for errors in law, not whether the district court judge “gets the facts right or not.” He said AT&T hired appellate lawyers during the original trial to consult on the strength of their case as it applied to the rule of law.

“We feel like Judge Leon wrote a pretty tight order and it was an order that was very fact-specific to the AT&T/Time Warner case, and so we feel like we have an order that should stand up well in the appellate review,” Stephenson said. “And so, we’re anxious to get this piece of it behind us.”

 

CFO: Comcast Wants ‘Healthy’ Relationship with Hulu

Hulu, the subscription streaming video service and online TV platform co-owned by Disney, Fox, Comcast and WarnerMedia, is valued by its corporate parents at more than $9 billion – despite posting hundreds of millions of dollars in equity losses.

Disney’s pending close of its $71 billion acquisition of 20th Century Fox Film, which includes Fox’s 30% stake in Hulu, will make the media giant majority owner going forward.

With WarnerMedia revealing a desire to sell its 10% Hulu stake, that leaves Comcast as a minority stakeholder to Disney’s vision for the 11-year-old over-the-top video platform going forward.

Speaking on last month’s fiscal call, Disney CEO Bob Iger said the company planned to incorporate Fox’s television production to up original programming at Hulu

“We feel [that] will enable Hulu to compete even more aggressively in the marketplace,” said Iger.

Meanwhile, Comcast reported a $132 million equity loss at Hulu for the fiscal period ended Sept. 30 – up from an equity loss of $62 million during the previous-year period. Through nine months Hulu generated a $370 million equity loss for Comcast – more than double the cabler’s $168 million equity loss last year.

Speaking Dec. 4 at the UBS 46th Annual Global Media and Communications confab in New York, Comcast CFO Michael Cavanagh reiterated the company’s support for Hulu and belief that “some form of direct-to-consumer” product “will make sense for us.”

Whether that includes Hulu remains to be seen. Cavanagh wouldn’t offer any insight on possible changes in management’s mindset, saying only that the platform remained a good home for select NBC Universal programming.

“We want to continue to have a healthy relationship with Hulu,” he said. We think much of our content finds a great home on that platform. And one way or the other, we want to make sure we have a good and healthy and constructive for everybody ongoing relationship with Hulu.”

 

Hulu Eyeing 23 Million Subs by Year’s End

Hulu is reportedly expected to top 23 million subscribers by the end of the year, according to comments made Dec. 4 by CEO Randy Freer at the Business Insider’s Ignition confab in New York.

The SVOD service co-owned by Disney, Fox, Comcast and WarnerMedia includes online TV platform Hulu Live with TV as part of its subscriber growth. The tally suggests Hulu added more than 3 million subs since it disclosed reaching 20 million subs at its upfronts content presentation earlier this year.

“I think our numbers will be really impressive,” Freer said, as reported by TechCrunch.com. “But we need to get 30, 40, 50 million homes in a way that we can scale.”

Indeed, even reaching an improbable 50 million subs would keep Hulu seven million shy of Netflix’s Q3 domestic count.

“Netflix has solidified their place for now,” said Freer. “Everybody else is going to fight out over what those four or five other selections are.”

Hulu has achieved one distinction even Amazon Prime Video can’t match: “The Handmaid’s Tale” remains a weekly Top 10 streaming favorite, according to Parrot Analytics.

Launched in 2008, Hulu is the only streaming service that offers both ad-supported ($7.99) and commercial-free ($11.99) subscription streaming options. Hulu with Live TV ($39.99) bowed in May, reaching 1 million subs in September.

The service features libraries of network TV series and movies; in addition to original content such as Emmy and Golden Globe Award-winning drama “The Handmaid’s Tale,” Emmy-nominated series “I Love You, America With Sarah Silverman,” Emmy-nominated series “The Looming Tower,” “Future Man,” “Marvel’s Runaways,” “Castle Rock,” “The First” and Golden Globe-nominated comedy “Casual,” as well as upcoming series “Catch-22,” “Ramy” and “Little Fires Everywhere.”

 

Wither HBO Now?

With WarnerMedia launching a branded subscription streaming video platform next year that will incorporate original and catalog content from HBO, Warner Bros. and Turner, in addition to third-party providers, the question arises: What will become of standalone SVOD service HBO Now?

Launched in 2014, HBO Now topped 5 million subscribers earlier this year. WarnerMedia is wrapping much of its unnamed OTT product around the HBO brand, with tiers of service ranging from studio movies to original series such as “Game of Thrones” and “Westworld,” among others.

Speaking Dec. 4 at the UBS 46th Annual Global Media and Communications confab in New York, AT&T CEO Randall Stephenson reiterated that the WarnerMedia streaming platform would not be another Netflix — focusing instead on Warner, HBO and Turner content.

“The goal of [CEO] John Stankey and WarnerMedia is not to create a direct-to-consumer product that rivals Netflix in terms of being a warehouse of content,” he said, adding that traditional pay-TV business models distributing wholesale content are old-school.

“Those businesses are getting disrupted aggressively,” Stephenson said.

The executive said the market needs an OTT product that “can achieve a very high penetration of [WarnerMedia] content with audiences.”

And HBO — via HBO Now — has its foot in the door.

“All media companies are coming to grips with the reality to better establish a direct relationship with [their] audiences,” Stephenson said. And with more than 140 million pay-TV subscribers globally, HBO resonates.

“I once compared Netflix to Walmart — not derogatorily … but when I’m shopping [and] I need something … I go to Walmart,” Stephenson said. “Well, if you’re looking for video content, regardless what it is, people will go to Netflix because it is just a warehouse. And it’s an impressive warehouse. That is not our ambition.”

Stephenson said management recognizes the need to ramp up original content spending at HBO — infusing the platform with year-long new offerings in addition to platform investment.

“[HBO boss] Richard Plepler is pretty excited,” Stephenson said. “He knows how to put together programming that will attract audiences. We’re very confident we’re going to have an HBO product that’s more fulsome.”

With WarnerMedia representing 17% of AT&T’s profitability, Stephenson said Warner Bros. remains a significant creator of TV content — including producing 70 scripted TV series in the past year to third parties including Netflix.

The executive mentioned Netflix had resigned license rights to Warner Bros.’ venerable sitcom “Friends” on a non-exclusive basis.

“That means ‘Friends’ can go onto our platform as well,” Stephenson said.

“We think we have enough IP and capability we can put together a product that will be very attractive,” he said. “It’s not a pervasive library of content warehouse like Netflix, but we think it is a very impressive product that will achieve very high penetration. Expectations are very high for this product.”

AT&T Looking to Sell Off Hulu Stake

When AT&T acquired Time Warner for $85 billion, the purchase price pushed the telecom’s net debt skyward to about $170 billion by the end of the year.

Corporate debt (debt-to-pre-tax earnings ratio) is a relative thing. Too little and investors worry a company isn’t maximizing revenue potential. Too high and concerns about financing the debt and or worse loom into the picture. Wall Street looks for a company to have a debt ratio between 0.3 and 0.6, according to some analysts.

AT&T will end 2018 with a debt ratio of 2.8.

For CFO John Stephens, who is tasked with decreasing that ratio, the solution involves scrutinizing internal overhead costs, reducing redundancies and liquidating non-core assets — such as WarnerMedia’s 10% stake in Hulu.

WarnerMedia, which includes Warner Bros., HBO and Turner, acquired the Hulu stake in 2016 for $583 million when it was Time Warner. The SVOD and online TV platform with 20 million subscribers is co-owned by Disney, Fox and Comcast and reportedly valued at more than $9 billion.

With WarnerMedia planning to launch proprietary SVOD service in late 2019, co-owning a rival service makes little sense.

Indeed, eliminating corporate headquarters, minority investments in Sky Mexico and Hulu, among other options, could generate AT&T upwards of $8 billion in cash, according to Stephens.

“If we’re successful in that, that would bring us down to that 2.5 [debt ratio] range [by the end of 2019],” Stephens said on AT&T’s Nov. 29 analyst day event. “We’re going to focus on getting that done. With our [$500 billion] balance sheet, we are in a very good position.”

The CFO contends AT&T will have free cash flows approaching $12 billion at the end of the year, which he said will be applied to reducing the debt. The company expects to generate $26 billion in free cash flow in 2019.

AT&T expects to generate $1.5 billion in cost savings (corporate overhead, procurement purchasing, marketing, etc.) and another $1 billion in revenue savings (churn reduction, cross-selling products) by 2021, including $700 million in savings by the end of 2019, $2 billion by the end of 2020.

“People who know our company, know we’re pretty good with cost synergies,” Stephens said. “Sharing assets and capabilities across the business, we can learn from them and WarnerMedia can hopefully learn from us.”

 

 

WarnerMedia OTT Video Platform to Offer Three Service Tiers

WarnerMedia’s much-anticipated over-the top video platform launching in the fourth quarter of 2019 will include three levels of service: an entry-level movie-focused package; a premium service with original programming and theatrical movies; and a third service that bundles content from the first two plus an extensive library of Warner Bros., HBO and Turner programming and licensed content.

Speaking Nov. 29 at the telecom’s analyst day event in New York, CEO John Stankey, CEO of WarnerMedia said the company’s unnamed/unpriced SVOD service would complement existing business (i.e. HBO Now with 5 million subscribers); benefit current distribution partners; expand the audience and increase engagement around content; and provide data and analytics to inform new products and better monetize content.

Stankey said the SVOD service would be a combination of original content, movies, TV shows, library fare and third-party programming.

“It’s a software experience wrapping creative excellence, that we’re going to showcase specific brands … to help the consumer find the right kind of curated content they want,” he said. “It’s gotta be a great value proposition.”

Separately, CEO Randall Stephenson said the merger with Time Warner continues to take a lot of time …”Unfortunately, a lot of it involve[s] litigation with the government.”

The CEO was referring to the Justice Department’s decision to appeal an unfavorable federal judge’s antitrust decision approving AT&T’s $85 billion acquisition of Time Warner.

The U.S. District Court of Appeals in the District of Columbia is expected to rule early next year.

“We are well positioned for success as the lines between entertainment and communications continue to blur,” said Stephenson. “If you’re a media company, you can no longer rely exclusively on wholesale distribution models. You must develop a direct relationship with your viewers. And if you’re a communications company, you can no longer rely exclusively on oversized bundles of content.

Indeed, AT&T’s core DirecTV pay-TV service suffered through one of its worst fiscal quarters, losing nearly 350,000 subscribers. The loss were offset to a degree by DirecTV Now, the standalone SVOD service with about 1.8 million subs.

AT&T warned that elimination of promotional pricing at DirecTV Now would likely result in negative net sub adds in the fourth quarter of 2018 and in 2019.

 

 

Brad Bentley to Head WarnerMedia’s OTT Video Group

WarnerMedia has reportedly named Brad Bentley as EVP of direct-to-c0nsumer development, the unit in charge of developing the former Time Warner’s over-the-top video platform launching in 2019.

Bentley, who most-recently headed marketing at AT&T’s entertainment group, will spearhead the unnamed branded OTT service that will offer combined HBO, Warner Bros. programming, in addition to select third-party content.

Separately, Jeremy Legg, chief technology officer at Turner, will now include technology oversight at HBO as well.

“These initial changes are intended to build a direct-to-consumer organization and execution capability necessary to move the overall effort forward and answer the many questions that must be addressed prior to launch,” John Stankey, CEO of WarnerMedia, wrote in a staff memo first reported by Variety. “As work streams are better defined, I expect there will be further changes and adjustments to our operating model — exactly what, when and who, remains a work in progress that will be heavily influenced by this early work.”

Stankey, in an earlier townhall meeting following AT&T’s consummation of its $85 billion acquisition of Time Warner, said ongoing operations within Turner, Warner Bros. and especially HBO would include challenges aimed at targeting an increasingly fragmented consumer.

Indeed, Legg’s expanded management duties come just days after a technical snafu involving consumer payment software forced Turner executives to stream for free on Black Friday golf’s first-ever pay-per-view event featuring Phil Mickelson and Tiger Woods.

“I fully expect our journey in the coming months will cause us to assess, recalibrate and adjust time and again,” wrote Stankey.

 

Disney Has Big Plans for Hulu

Hulu may be losing millions in equity for its corporate parents, but that isn’t stopping The Walt Disney Co. from dreaming big going forward about the 11-year-old SVOD service and online TV platform.

Disney, which attributed $10 million in Q4 equity losses to higher programming, marketing and labor costs at Hulu, partially offset by growth in subscription (20+ million) and advertising revenue, will become majority (60%) owner of the SVOD when its acquisition of 20thCentury Fox Film Corp. is finalized.

Hulu’s other corporate owners include Comcast (30%) and WarnerMedia (10%).

Speaking Nov. 8 on the fiscal call, Disney CEO Bob Iger thinks Hulu’s sub growth, brand strength and user demographics portend an opportunity to increase investment in Hulu – especially on programming.

“With this [Fox] acquisition comes not only some great IP, but some excellent talent, particularly on the television side,” Iger said. “And we aim to use the television production capabilities of the combined company to fuel Hulu with a lot more original programming … [content] that we feel will enable Hulu to compete even more aggressively in the marketplace.”

Specifically, Iger cited Hulu’s younger user base – apparently 20 years younger than competitors Netflix and Amazon Prime Video – and penchant for off-network content.

“And that’s clearly attractive to advertisers, which I think has been somewhat underappreciated about Hulu in that it … can offer targeted ads,” Iger said.

Hulu’s base $7.99 subscription plan features ad-supported content, while the $11.99 plan is ad-free. Iger says the service – especially the $39.99 Hulu With Live TV – has some price elasticity of demand.

“I think there’s an opportunity to improve – or I should say increase our pricing there,” he said.

Notably, Iger envisions Hulu focusing on general and edgier entertainment (i.e. Fox’s “American Horror Story” and R-rated movies), with Disney+ catering to softer fare.

“We’ll leave the more family-oriented programming to the Disney+ app,” he said.

Fox Ups Q1 Hulu Equity Loss 84%

Twenty-First Century Fox Nov. 7 disclosed a first-quarter (ended Sept. 30) equity loss of $114 million regarding its 30% ownership stake in Hulu. The loss represented an 84% increase from an equity loss of $62 million during the previous-year period.

Hulu, which is co-owned by Disney, Comcast and WarnerMedia, continues to generate significant losses on paper to its corporate owners, who license hundreds of millions of dollars in content to the 20+ million subscriber over-the-top video service.

While Hulu is nominally losing several billion dollars per year, its “losses” essentially amount to the excess it pays to its four sponsors over the revenues it generates, according to Wedbush Securities media analyst Michael Pachter.

“If the four [corporate] sponsors find a way to grow Hulu’s subscriber base, it should be able to achieve breakeven, and it should manage to gain market share from Netflix,” Pachter wrote in a recent note.

The analyst expects content from Disney, Fox, Universal, and Warner to be largely unavailable to Netflix going forward, leaving the SVOD pioneer trying to buy content from Sony, Paramount, Lionsgate, MGM, and smaller studios.

“Ultimately, we expect Hulu to become a formidable competitor to Netflix, particularly should Disney and Warner Bros. layer their own streaming offerings as premium additions to a basic Hulu subscription,” Pachter wrote.

Meanwhile, 20thCentury Fox Film (which includes 20thCentury Fox Home Entertainment) reported operating income of $277 million, an 8% increase from the $256 million reported in the prior-year quarter. The increase reflected higher contributions from the television production studio led by higher SVOD licensing of animated product.

Quarterly revenue decreased 7% to $1.82 billion, primarily reflecting lower theatrical revenue from a lower volume and mix of films released in the current quarter partially offset by higher SVOD revenue at the television production studio.

“We continue to deliver against our growth plan even as we make important strides toward completing our Disney transaction and launching Fox in the first half of 2019,” executive chairmen Rupert Murdoch and his son Lachlan said in a statement.

Separately, Fox posted a $147 million equity gain from its 39% stake in British satellite TV operator Sky – up 34% from an equity gain of $110 million last year. Fox recently sold much of its Sky stake to Comcast.

Finally, the European Commission approved Disney’s acquisition of 20thCentury Fox provided it sells its stake in A&E channels (History, H2, Blaze, Lifetime, Crime + Investigation) distributed overseas.

“The commission’s decision is conditional upon full compliance with the commitments,” the EC said in a statement.

 

WarnerMedia Alleges Politics in Dish Network Dispute

WarnerMedia is accusing the Department of Justice of using a carriage disagreement with Dish Network as leverage in its appeal of a federal judge’s favorable verdict in AT&T’s $85 billion acquisition of Time Warner.

AT&T’s WarnerMedia — which includes HBO, Turner and Warner Bros. — for the first time (Nov. 1) pulled HBO and Cinemax from Dish Network after it claimed the satellite operator refused to negotiate. The move reportedly affected about 2.5 million of Dish’s 13 million pay-TV subscribers.

“Dish’s proposals and actions made it clear they never intended to seriously negotiate an agreement,” Simon Sutton, HBO president and chief revenue officer, said in a statement as reported by Reuters.

While carriage disagreements and negotiations aren’t uncommon, the AT&T/Time Warner merger is different. The deal has been entangled in partisan politics since the election of President Donald Trump.

Trump’s ongoing characterizations of certain media outlets — notably Turner’s CNN — as fake news and biased against him has prompted allegations the Justice Department’s last-minute objection to the merger was more about politics than antitrust issues.

The DOJ contends AT&T has too much power owning and controlling major content creators and distribution channels — leverage it claims hurts consumers. The carriage dispute, says the government, offers a blueprint example of that.

“This behavior, unfortunately, is consistent with what the Department of Justice predicted would result from the merger,” said a DOJ representative. “We are hopeful the Court of Appeals will correct the errors of the District Court.”

WarnerMedia says Dish is using the current political environment to extract more favorable contract terms. Indeed, it alleges Dish is collaborating with DOJ on the issue.

“That collaboration continues to this day with Dish’s tactical decision to drop HBO — not the other way around,” said a WarnerMedia rep. “DOJ failed to prove its claims about HBO at trial and then abandoned them on appeal.”

Andy LeCuyer, SVP pf programming at Dish, argues otherwise.

“It seems AT&T is implementing a new strategy to shut off its recently acquired content from other distributors,” he said.