News

D.C. to Weigh Mega Combo

12/23/2001 7:00 PM Eastern

Another year puts another huge cable deal in Washington regulators' laps.

First came AT&T Corp.'s 1999 purchase of Tele-Communications Inc. Then, AT&T gobbled up MediaOne Group Inc. in 2000. That was followed quickly by the mega-merger of equals between America Online Inc. and Time Warner Inc. in early 2001.

Now — a little less than 12 months since the last deal — along comes Comcast Corp.'s definitive agreement to acquire AT&T Broadband, thus forming the largest pay-TV company in the United States, with at least 22 million wholly owned subscribers. The two parties hope to close the deal by late next year.

Both AT&T Corp. chairman and CEO C. Michael Armstrong and Comcast president Brian Roberts said the merger would accelerate the deployment of high-speed Internet access, local phone service, and video-on-demand and interactive-television products.

Critics take a different view. They claim that AT&T Comcast Corp. would be much larger than 22 million subscribers, creating a too-powerful media colossus that would raise prices and limit choice with respect to television and the Internet.

"They intend to place a chokehold over a vital sphere which is the essential foundation of a thriving democracy — a communications system which supports the free flow of information from diverse sources," said Center for Digital Democracy executive director Jeff Chester.

Armstrong and Roberts must sell the deal to Washington regulators, including the Federal Communications Commission and either the Justice Department or the Federal Trade Commission. Justice is likely to get the nod because of that agency's historic involvement in AT&T Corp.-related regulatory issues.

In late October — when EchoStar Communications Corp. and DirecTV Inc. announced their plans to merge into a direct-broadcast satellite company with at least 14.9 million subscribers — FCC chairman Michael Powell voiced concern that the deal would create significant concentration and established an internal task force to review it.

Last week, Powell said nothing about the much-larger cable deal. He has no plans to create a special team to review the AT&T-Comcast transaction, said FCC spokesman David Fiske.

A key voice in all of this will be Charles James, chief of the Justice Department's antitrust division, who recently engineered the settlement of the Microsoft Corp. case.

In a recent speech, James outlined his merger-review principles. He described them as flexible in recognizing that size yields efficiencies that benefit consumers, yet firm in knowing that some deals create or increase market power.

"The antitrust division does not and should not punish success," James said. "Everybody tells you, 'We have to get bigger to compete.' We understand that. By the same token, we just don't take it on faith, that stuff."

CABLE DEALS STEP UP

The Washington regulatory apparatus has never digested a cable deal this big. Although consumer groups are already preparing to fight for conditions — if not outright rejection of the merger — once the dust settles, many policy experts here expect regulatory approval.

"I think it will be hard to say no, with [AOL Time Warner] out of the picture. You can't say 'sail through,' but it will be approved with all the normal holdups and bureaucratic process and red tape," said Manhattan Institute economist and cable expert Tom Hazlett.

At 22 million subscribers, AT&T Comcast would control about 25 percent of all U.S. pay TV subscribers, based on the universe of 88.7 million households that AT&T supplied the FCC in an Oct. 22 filing.

That figure would comply easily with the 30 percent limit the FCC had enforced prior to March, when a federal court declared the cable-ownership cap unconstitutional under the First Amendment.

The fact that AT&T Comcast would be at less than 30 percent helps its efforts at the FCC, because both Powell and commissioner Kevin Martin — two-thirds of the agency's Republican majority — have maintained that deals which fall within established ownership caps should be presumed lawful.

Past AT&T cable deals have been complicated by efforts to define the precise number of cable subscribers the company actually controls under FCC attribution rules. Those rules determine how big a minority interest must be in order to be treated the same as a majority interest, for the purpose of determining whether a cable operator exceeds the 30 percent cap.

In October, AT&T told the FCC that it owned 21.9 million cable subscribers under the most unfavorable reading of the attribution rules.

The MSO noted that the 21.9 million figure excluded 9.56 million subscribers AT&T held through its 25 percent stake in Time Warner Entertainment L.P., and 1.8 million subscribers involved in other arrangements with AOL Time Warner.

Combining Comcast's 8.4 million subscribers with all of AT&T's interests would yield a cable company with about 42 million subscribers, or 47 percent of the pay TV market.

At a press conference last Thursday, Comcast's Roberts said he never viewed the TWE property as a strategic asset. Armstrong said AT&T would do its best to dump the TWE stake, with or without AOL Time Warner's help. (AOL Time Warner owns the remaining 75 percent of TWE.)

"You can expect that both AT&T between now and closing, or the combined AT&T Comcast after closing, is committed to monetizing the TWE partnership," Armstrong said.

Media Access Project president Andrew Jay Schwartzman complained that AT&T and Comcast were disguising the TWE stake by claiming their deal had 22 million subscribers.

"They are not counting TWE in that. I am. They can say they are going to dispose of it, but the transaction as presented is not that," Schwartzman said.

Legally, AT&T had good cause for not counting the millions of TWE subscribers. The FCC had said TWE was attributable to AT&T because AT&T sold programming networks to Time Warner Cable. At the same time that the court struck down the 30 percent cap, it also voided the rule allowing the FCC to fuse TWE to AT&T.

AN ASSIST TO ERGEN?

The largest cable merger ever apparently comes at a good time for EchoStar and DirecTV, which can now say that their merger is a relative minnow compared to the whale proposed by AT&T and Comcast.

In a statement issued last Thursday, EchoStar chairman and CEO Charlie Ergen dismissed the idea that AT&T and Comcast would control 22 million subscribers. He said the figure was much larger, providing further evidence that DBS needs to bulk up to take on big cable.

"When you include AT&T's 25 percent interest in Time Warner Cable systems and other attributable subscribers, that number jumps to over 40 million subscribers," Ergen said. "This further consolidation among cable companies illustrates why the pending merger of EchoStar and [DirecTV] is essential."

On Capitol Hill, neither Senate Commerce Committee chairman Ernest "Fritz" Hollings (D-S.C.) nor the panel's senior Republican, Sen. John McCain of Arizona, would comment on the AT&T-Comcast deal.

An aide to Massachusetts Rep. Edward Markey, the senior Democrat on the House Subcommittee on Telecommunications and the Internet, said the deal posed the greatest danger to programmers that need access to multiple cable systems, if industry giants shut them out.

But the Markey aide said a groundswell of opposition was unlikely, because programmers "fear antagonizing the very people they have to do business with."

Ken Johnson, spokesman for House Energy and Commerce Committee chairman Billy Tauzin (R-La.), said AT&T Comcast's dominant position could help EchoStar's merger plans. It could also improve the chances of passing a Tauzin-sponsored bill that calls for the deregulation of local telephone companies' broadband offerings.

"Big is not synonymous with bad. But clearly, a combined AT&T and Comcast behemoth would change the dynamics of the marketplace," Johnson said. "It could well bolster EchoStar's bid to acquire [DirecTV], and it most certainly helps us to make the case for passing the Tauzin-Dingell broadband bill."

Precursor Group telecommunications analyst Scott Cleland said the antitrust analysis for the cable deal would be different from the DBS deal. AT&T-Comcast is a horizontal merger that doesn't lessen competition for consumers, he said.

"What's different about Comcast and AT&T is that consumers are not getting a reduction in choice," Cleland said. "Merging [the DBS firms] would eliminate one of their choices, so they are completely different mergers, from an antitrust perspective."

The only thing the AT&T-Comcast merger does for EchoStar-DirecTV, Cleland said, is to give the satellite companies "sympathy points and P.R. points. It doesn't change the fact that they are reducing choice."

SG Cowen Broadband & Satellite Services Research Group DBS analyst Mike French estimated that cable operators pay less for programming than satellite carriers. A DBS merger should not be rejected if those firms are trying to realize the same economies of scale as cable operators, he said.

"As cable continues to consolidate, it increases their leverage with program providers and thus increases their ability to reduce the cost of their product," French said. "It seems reasonable to allow a DBS platform to do the same thing, so the price it charges is comparable to what its competitors are able to charge."

At the local level, AT&T and Comcast might encounter problems.

Nick Miller, a Washington attorney who represents municipal interests, said it was possible that some local governments might take a run at requiring cable systems to carry multiple Internet service providers — particularly in the wake of the bankruptcy of MSO-owned data-over-cable provider Excite@Home Corp., which briefly interrupted service to some customers. (Comcast and most AT&T Broadband systems were Excite@Home affiliates.)

"I think both Comcast and AT&T are going to have a tough time on the cable-modem issue," Miller said. "How many cities will take than up, I don't know."

The deal would require localities to approve the transfer of hundreds of franchise agreements, he added.

From the way the deal is structured — a Comcast takeover that results in majority control by AT&T shareholders — it appears that Comcast, not AT&T, must seek permission to transfer franchises. "The way this is being put together, it looks like it may be a change in control of all the Comcast franchises," Miller said.

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