AT&T Wins In Court, But FCC Holds Cards
By TED HEARN -- Multichannel News, 3/11/2001 7:00:00 PM
WASHINGTON-Even with a major court victory in hand, AT&T Corp. might not have an easy time escaping the conditions imposed by the Federal Communications Commission in last June's MediaOne Group Inc. merger order.
The legal victory helps. But AT&T still needs to persuade a politically divided FCC to act on the company's behalf.
According to various sources, the FCC indeed could make life quite simple for AT&T by saying that, in light of the U.S. Court of Appeals for the District of Columbia Circuit's March 2 action that struck down FCC cable-ownership rules, AT&T now complies with the merger conditions and no more asset sales are required.
Last week, FCC chairman Michael Powell-who rarely has a kind word for ownership caps-underscored that view when he said the agency would review the merger conditions in the wake of the AT&T-friendly court ruling.
"The merger order discussed the statute. Anything that might have been based on a statute that has been declared inappropriate or unconstitutional has to be reviewed," Powell told reporters after a speech to the United States Telecom Association. "I don't find anything about that remarkable."
The FCC is evenly divided between two Republican commissioners and two Democrats. While Republican Powell can count on the support of fellow Republican Harold Furchtgott-Roth, he would need a vote from one of the FCC's two Democrats- Susan Ness or Gloria Tristani-to let AT&T off the hook.
AT&T declined to comment last week on how it would react in a regulatory sense to the appeals panel's verdict. But the company was clearly examining its options, both in terms of substance and timing.
"Do they want to do it now, with four members here?" an FCC source wondered. "How they present it makes a whole lot of difference, and when they present it."
PUBLIC-INTEREST RUB
Assuming both support the merger conditions, Ness and Tristani could stick to their guns by saying they backed the merger not only based on the cable-ownership rules, but also on the broad public-interest standard that the FCC is charged with enforcing.
"They could say, 'There is still a problem because [AT&T] owns too much,'" a Washington cable attorney said. "The [court] decision does not automatically do away with the provisions of the merger order."
Powell told reporters he was mindful that the public-interest argument could be a challenge.
"That's one argument," he said without elaboration.
Ominously for AT&T, Powell also noted that it could take until the fall to install a Republican majority at the agency.
If Powell fails to break the deadlock, AT&T would be forced to plow ahead with the sale of its 25-percent interest in Time Warner Entertainment by May 19. Though it's under no FCC obligation to do so at the same time as it's selling the TWE stake, AT&T is also trying to spin off Liberty Media Group-provided it can obtain an Internal Revenue Service ruling that allows the transaction to occur without a tax penalty.
Powell indicated that the May 19 deadline could be flexible.
"We don't know that, either. That's part of the review," the chairman said.
In the court case, a panel of the D.C. circuit threw out a rule that limited one cable company to 30 percent of the 85 million subscribers to cable, direct-broadcast satellite or other providers of multichannel-video programming.
The court said the rule violated the First Amendment because the agency failed to offer substantial evidence that the cap would not place a substantial burden on free-speech rights of TWE, AT&T or other cable operators.
In the MediaOne merger order, the FCC calculated that AT&T had at least 40 percent of the market. Helping to push AT&T over the cap was the MSO's minority interest in TWE and Cablevision Systems Corp.
AT&T was the only cable operator that had exceeded the cap.
The FCC held that AT&T's stake in the TWE limited partnership counted toward the 30-percent cap because AT&T owned cable networks that sold their services to the partnership, perhaps giving AT&T and TWE too much control over subscribers and programmers.
In a break for AT&T, the three-judge panel tossed out the FCC's limited-partnership attribution rule, asserting that the FCC draws "no connection between the sale of programming and the ability of the limited partner to control programming choices."
As a result, the decision voided the FCC's ability to enforce both the subscriber cap and the program-sale rule, which required AT&T to group its 16 million wholly owned subscribers with all of TWE's approximately 9.7 million subscribers.
"Right there, that makes TWE not attributable to AT&T," another cable attorney observed.
The lawyer said it would make sense for AT&T to ask the FCC to declare that the MediaOne merger conditions with regard to assets sale had been met.
"I would be surprised if AT&T didn't seek that. Why wouldn't they," the lawyer said.
The impact of the decision could have a far-reaching impact on the FCC's ability to limit the size of media companies.
Blair Levin, a telecom and media analyst for investment firm Legg Mason, told clients in a research note that the court's First Amendment analysis betokened further relief for cable, TV networks, and direct-broadcast satellite carriers.
The case would strengthen cable's hand in blocking dual carriage of local TV signals, he said, and would help Fox and NBC in their court challenge of an FCC rule that limits TV-station ownership to 35 percent of U.S. TV households. Open Internet-access mandates on cable are also in jeopardy, he said.
COURT SAW DBS ROLE
"The court's decision gives the networks both a factual and First Amendment opening to attack the existing rules," said Levin, who was FCC chief of staff under chairman Reed Hundt.
Part of the court's reasoning for invalidating the cable rules was grounded in the FCC's apparent unwillingness to recognize the check on cable's market power by the soaring DBS industry.
Under law and FCC rules, DBS carriers DirecTV Inc. and EchoStar Communications Corp. are required next January to carry all local TV stations in each market they serve to the extent they carry any. The companies and the industry's leading trade group have mounted a First Amendment challenge to the must- carry law and accompanying FCC rules.
"The [court] ruling would indicate that the government has it backwards: Instead of placing duties on satellites to make the platform more regulated like cable, the right response is to remove duties from cable to make it more unregulated like satellites," Levin wrote. "Specifically, this decision strengthens the satellite industry's challenge to its own must-carry obligations."
Consumer groups and advocates that oppose giant media conglomerates expressed outrage at the court's decision.
"This ruling is wrongheaded and threatens competition in cable, satellite and broadband Internet. There will be a strong political backlash against those in the cable industry, such as AOL Time Warner and AT&T, who use this ruling to justify their monopolistic practices," said Jeff Chester, executive director of the Center for Media Education.
The decision could influence the debate on Capitol Hill regarding the deregulation of broadband services provided by the four Baby Bells.
Some lawmakers expected AT&T, however grudgingly, to support the bill if it includes legislative relief from the FCC's ownership caps.
"I had frankly hoped that we would be in a position to legislate some changes on the cable-ownership cap as part of a more comprehensive measure that would address some other problems within the general telecommunications marketplace," said Rep. Rich Boucher (D-Va.) last week. "I think these changes are better made as a part of larger legislation where you can expect all parties to make some contribution to solving those range of problems."
House Energy and Commerce Committee Rep. Billy Tauzin (R-La.), chief advocate of the Bell-relief bill, declined to endorse Boucher's assessment.
"I think it was very clear from the beginning that they were not going to trade this issue for anything else. So I don't think it was a tradable item with them," Tauzin said. "They expected they were going to win this case. They expected they were going to win it in the courts or at the FCC."
Neither Boucher nor Tauzin said they disagreed with the court decision.
Tom Tauke, senior vice president of public policy and external affairs at Verizon Communications-a Bell company seeking data relief-said he never expected AT&T's support in moving legislation to the White House.
"I would never predict what AT&T would think," Tauke said. "We never anticipated that AT&T would be brought to the table about lifting the cable caps."
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