A new shareholder complaint against AT&T claims the company encouraged employees to create fake accounts for its DirecTV Now streaming service to juice its subscriber numbers and mislead investors ahead of its acquisition of Time Warner, shareholders allege in an amended complaint filed last week as part of a lawsuit against the company.
According to the lawsuit, employees — who faced aggressive sales quotas — were "taught and actively encouraged" to convert $35 activation fees that customers paid to upgrade their phones into the price for multiple DirecTV Now subscriptions. This was allegedly executed by "waiving the fee, but charging the customer anyway, and applying the payment to up to three DirecTV Now accounts using fake email addresses."
The complaint claims customers were not told they had been signed up for a subscription, and that the company is said to have fielded regular complaints from customers who said that they were billed for accounts they did not sign up for. The complaint also details other alleged methods for increasing subscriptions without clients' consent.
The purpose of these efforts, the lawsuit alleges, was to create the false impression that the service was compensating for declines in the legacy DirecTV satellite business, and to help justify the company's acquisition of Time Warner, now called WarnerMedia. WarnerMedia is CNN's parent company.
CNN Business asked AT&T to respond to the merits of the lawsuit as well as for comment on specific allegations within it, such as claims the company pressured employees by setting aggressive sales targets and that employees were encouraged to use unrelated fees to create DirecTV Now accounts.
"We plan to fight these baseless claims in court," AT&T said in a statement in response.
Plaintiffs include Local 449, a union pension fund based in Pittsburgh, and Melvin Gross, an investor who exchanged Time Warner stock for AT&T stock as part of the acquisition.
DirecTV Now, which AT&T launched in late 2016, was billed as a key part of the company's pivot to entertainment. The lawsuit alleges that executives, including CEO Randall Stephenson, were deceitful in claiming that DirecTV Now's growth was stable, and that it was driven by "organic" demand and only limited promotions.
But beyond the alleged inflation of subscriber numbers at unwitting consumers' expense, the service also suffered from significant turnover as customers jumped from one discounted streaming service to another, according to the complaint.
The complaint says the plaintiffs and their attorneys spoke with a number of current or former AT&T employees who gave information about the alleged scheme. It refers to one former employee in Michigan who allegedly estimated that around 40% to 50% of the customers he dealt with starting in early 2017 complained of being billed for DirecTV Now subscriptions that they said they had not signed up for.
The allegations come at what is for several reasons a delicate time for the company.
Stephenson just recently elevated WarnerMedia CEO John Stankey to a position that puts Stankey in line to succeed Stephenson should he retire. (Stankey is not alleged in the complaint to have personally misled investors, but the complaint does allege that he should have known investors were being misled.)
WarnerMedia plans to next year release its own streaming service, HBO Max, into a crowded market at a price higher than many of its competitors, including Disney+ and Netflix, will charge. And Elliott Management, an activist hedge fund that has taken a $3.2 billion stake in AT&T, is demanding changes, including possibly spinning off DirecTV entirely.
The firm specifically called out DirecTV Now in a recent letter to AT&T's board, calling the service "poorly executed" and pointing to its declining subscriber base.
At the end of the fourth quarter of last year, AT&T reported that DirecTV Now had 1.6 million customers. It had 1.3 million as of July, according to its earnings report for the second quarter.
Speaking on Tuesday at the Goldman Sachs Communacopia conference, Stephenson responded to criticism that the company is too big and paid too much for its media businesses. It still "makes sense" for the company to own both a big wireless network and content, he said.
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