NEW YORK—A class action lawsuit filed late last week alleges AT&T and a group of its senior executives fraudulently inflated subscriber numbers for its DirecTV Now virtual MVPD service in an effort to bolster the company’s case that Time Warner shareholders should accept its acquisition offer.
The suit, filed Sept. 13 in U.S. District Court for the Southern District of New York, names AT&T and 18 executives, including retiring AT&T CEO of Communications John Donovan and Randall Stephenson, chairman and CEO of AT&T Inc., as defendants.
The plaintiffs, including union pension funds and individuals, say the executive defendants “were motivated to heavily promote DirecTV Now until the Time Warner Acquisition closed.” Bringing together the telecom giant’s video distribution assets and Time Warner’s content library and production capabilities was promoted as a major reason the deal should go forward.
“The launch of DirecTV Now was an important test of the viability of AT&T’s side of that bargain,” the suit alleges. The new service’s success gave Time Warner shareholders a good reason to trade their stock shares for those of AT&T, it says.
However, the suit alleges DirecTV Now wasn’t “a viable product.” Commercialized before it was ready, DirecTV Now experienced “severe service issues” including “frequent interruptions, service freezing and buffering, app crashes, being automatically logged out, missing features and billing issues,” according to the suit.
The suit alleges AT&T encouraged employees to create fake customer accounts to build the illusion of robust DirecTV Now subscriber growth. The company used “highly discounted promotions” that resulted in high customer churn once promotional pricing ended and promoted “unreasonable and extremely aggressive sales quotas” for employees that pressured them into using “unnatural sales or flat-out fraudulent” sales tactics, according to the suit.
The company “taught and actively encouraged” employees to convert phone upgrade activation fees into subscriptions to the service “by waiving the fee, but charging the customer anyway, and applying the payment to up to three DirecTV Now accounts using fake email addresses without telling the customer they had been signed up for the subscription,” the suit alleges.
Sizable churn began to appear in early 2018, and by the summer of 2018 monthly reports and weekly analysis revealed that “more than 40-50%” of subscribers were cancelling once promotions ended, it says. The suit references a former AT&T employee who saw “a 35% ‘take rate’ (or, 65% churn rate) for DirecTV Now.”
According to the suit, AT&T disclosed on Jan. 30 that virtually none of the 500,000 “heavily discounted” subscribers remained with the service. AT&T also said “that DirecTV Now subscriptions in the fourth quarter of fiscal 2018 had declined by 267,000 subscribers—a stark reversal of supposed net adds in 4Q17 through 2Q18.”
The lawsuit, filed by Pomerantz LLP and Labaton Sucharow LLP, seeks a trial. The firms are seeking compensatory damages, costs and interest from AT&T if the company is found guilty of violating security laws.
According to an AT&T spokesperson, the company “plan[s] to fight these baseless claims in court.”