News

FCC, AT&T at Odds Over Ownership Cap

5/16/1999 8:00 PM Eastern

Washington -- AT&T Corp. has some damage control ahead
of it here, beginning with convincing the Federal Communications Commission that it
won't have access to two-thirds of American homes in the wake of its $56.4 billion
MediaOne Group Inc. acquisition.

Under FCC rules that have been stayed, no cable operator
can own systems that reach more than 30 percent of U.S. cable homes. The FCC is not
enforcing the cap, but it could win judicial authorization to do so as soon as early next
year.

Although AT&T maintained that it is complying, or very
close to complying, with the ownership limit -- even after tossing in MediaOne and a 25
percent stake in Time Warner Entertainment's 10.8 million cable subscribers -- FCC
numbers show otherwise.

In fact, according to the FCC, AT&T has attributable
ownership interests in cable systems that pass about 67 percent of U.S. homes.

FCC officials said they were irritated that AT&T
chairman and CEO C. Michael Armstrong failed to be more frank about the conflict in his
comments to analysts and reporters in recent weeks.

According to a cable-industry source, Kennard was upset,
but he declined to be critical of Armstrong in public. Instead, Kennard authorized his
chief of staff, Kathy Brown, to get his message out to AT&T and the media.

"If there was some miscommunication there, I am
certainly sorry they feel that way," said Jim Cicconi, AT&T's general
counsel and chief Washington lobbyist.

AT&T's ownership rules are just one facet of a
transaction that regulators expect to examine closely.

Other issues that will get FCC attention include
AT&T's ownership stakes in high-speed-data services Road Runner and @Home
Network; the impact of Microsoft Corp.'s $5 billion AT&T investment on the
electronic-programming-guide market; and programming-ownership-concentration levels with
regard to Time Warner Inc. and AT&T's Liberty Media Group.

For now, however, the sharpest division between the FCC and
AT&T hangs over the appropriate method for counting partial ownership interests.

AT&T claimed that the FCC's method produces
unreasonable results, while the commission said its method accomplishes the goal for which
it was designed: to measure one cable operator's ability to create a distribution
bottleneck that would be fatal to new cable networks attempting to gain carriage.

Under FCC rules, a 5 percent voting stake or 10 percent
passive interest is enough to trigger attribution. This means the cable systems involved
are deemed as commonly owned for the purpose of measuring things like the number of homes
a cable operator is reaching with its wires.

"How you count minority interests is a big part of the
question," Cicconi said. "Any rule that treats a 5 percent interest the same as
a 100 percent interest is going to have problems on judicial review."

With the purchase of MediaOne, AT&T said it would
wholly own systems with about 16 million subscribers, with access to around 25 percent of
U.S. homes.

But AT&T inherited from Tele-Communications Inc. seven
joint ventures and five partnerships with companies like Time Warner Cable, Cablevision
Systems Corp. and Falcon Cable TV Corp., which include 9.9 million subscribers. That total
excludes AT&T's future stake in TWE.

Under AT&T's counting methodology, its minority
interests would take its homes-passed total from 25 percent to between 35 percent and 39
percent.

But Armstrong has said AT&T could restructure some of
its joint ventures and partnerships to get to 30 percent.

"We feel we have the flexibility to trade ownership
levels to accommodate whatever the redefinition of attribution is," Armstrong said
last month.

AT&T and the FCC have arrived at widely different
figures because AT&T's formula backs out about 14 million subscribers represented
by TWE and by AT&T's existing 33 percent stake in 3.4 million-subscriber
Cablevision.

Cablevision had previously suggested to the FCC that
TCI's ownership should not be attributable because voting control of Cablevision was
firmly in the hands of chairman Charles Dolan, CEO James Dolan and other family members.

AT&T contended that it would have only a passive
economic interest in TWE -- except that AT&T could block a sale of the partnership or
of partnership assets amounting to more than 10 percent of the total value.

"It would not be a totally passive interest, but we
would have very limited rights in that ownership. In fact, we would have fewer rights than
MediaOne," Cicconi said.

The FCC stayed its 30 percent-ownership cap in 1993, after
a federal court said the underlying statute was unconstitutional. The commission's
rule and the statute are being appealed, with oral arguments expected in December and a
decision perhaps coming in the first quarter of 2000.

U.S. Supreme Court review could extend the litigation by
another year, or longer.

"Ultimately, if the statute is not constitutional,
none of this matters as far as the ownership rules go," said cable analyst Paul
Glenchur, director of Schwab Washington Research Group.

If the courts uphold the law, the FCC could decide to raise
the 30 percent cap and modify the attribution rules to avoid a massive restructuring or
divestiture by AT&T.

The FCC expects to complete action on new attribution rules
by the end of September. It is also considering shifting the ownership-measurement test
from homes passed to either a percentage of cable subscribers or a percentage of all
multichannel-video subscribers, including direct-broadcast satellite.

Government sources said adopting a subscriber-based test
would not help AT&T because its homes-passed percentage and subscriber percentage were
roughly proportional.

So in the end, what AT&T really needs from the FCC is a
change in the attribution rules.

"They are working on the rules as we speak,"
Glenchur said. "My guess is that there will be some flexibility."

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