Time Warner Used HBO as Leverage in YouTube Talks, U.S. Says

(Bloomberg) -- Time Warner Inc. used HBO as leverage in programming talks with distributors, including YouTube, exerting power that will only grow if AT&T Inc. is allowed to buy the media and entertainment company, according to U.S. antitrust officials trying to stop the deal.

HBO was at the center of talks with YouTube when the video site was starting an online TV service. YouTube didn’t want to take all of Time Warner’s Turner Broadcasting channels because it wanted to offer a slimmed-down package of channels at a lower cost than traditional cable.

That would have caused “irreparable harm" to Turner’s business model, Turner executive Coleman Breland, who negotiated with YouTube, said in an email presented in court Monday by the Justice Department. Breland told Time Warner Chief Executive Officer Jeff Bewkes about YouTube’s position, and Bewkes in turn told HBO to stop negotiating with YouTube, Breland testified.

The Justice Department is using details of programming negotiations to make its case. The government says Time Warner’s content, particularly sports such as March Madness college basketball, are must-haves for distributors. If AT&T owns Time Warner, it could use that leverage to raise prices on rivals such as Dish Network Corp., the Justice Department says.

Under cross examination from Time Warner lawyer Kevin Orsini, Breland said YouTube had increased the number of broadcasters it planned to launch with to four or more from two by the time they started negotiating, so Turner didn’t have the kind of leverage going into the talks that the Justice Department says it had.

"We thought we would be early at the party" but ended up being late, he said. "They launched without us."

"No matter what they proposed, it never went very far, because we were so far apart," Breland said, adding that hundreds of millions of dollars were at stake. "They were under the impression our rates would be lower."

The Justice Department says the AT&T deal is a particular threat to emerging rivals such as YouTube’s TV service and Dish’s Sling TV that want to offer cheaper and smaller bundles of channels. That model may crimp AT&T’s DirecTV business, so AT&T is motivated to use Time Warner to squelch it, according to the government.

Deal Making

Under a previous settlement with the Federal Trade Commission, Time Warner was prevented from tying HBO and Turner together in programming talks and conditioning the purchase of HBO on also buying Turner channels. That agreement expired after 10 years.

Time Warner is free to tell pay-TV companies "no Turner, no HBO, true?" Justice Department attorney Dylan Carson asked Breland.

"That’s true," Breland said.

Breland, during cross-examination, said he understands that the industry may be moving toward different types of packages to address changing consumer tastes and habits. He used the example of the hit Netflix show "Stranger Things," noting that all the episodes were released at once and could be viewed without commercials.

"They give a better experience," he said.

Dark Times

Breland also weighed in on the government’s assertion that Time Warner will use the threat of "going dark" -- letting its programming agreements expire during tough negotiations. That isn’t something that Turner would do lightly because it results in lost advertising revenue and hurts relationships with partners, he said.

"You never want to go dark," Breland said. Turner lost as much as $5 million in ad revenue when it went dark on Cable One in 2013, he testified. A similar dispute with Dish cost Turner more than $150 million, he said.

“I lose money the minute I go dark,” he said

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