Washington-A federal appeals court here heard arguments last week in a case that could bail AT&T Corp. out of tough conditions related to its acquisition of MediaOne Group Inc.
AT&T Corp. and Time Warner Entertainment are challenging federal rules that bar a cable operator from controlling more than 30 percent of pay TV subscribers, in an effort to block a few megacompanies from ruling the industry.
Because AT&T has about 41 percent of the market, the Federal Communications Commission approved the MediaOne deal in June, on condition that AT&T trim down to 30 percent by May 19, 2001.
In addition to the cap, the FCC adopted ownership-attribution criteria designed to judge whether one cable operator has the potential to use its minority interest in another MSO to influence the programming decisions of the latter firm's majority stakeholders.
Appearing Oct. 17 before a panel of the U.S. Court of Appeals for the District of Columbia Circuit, AT&T counsel David Carpenter said the cap and associated attribution rules violated First Amendment free-speech protections.
"This 30 percent limit rests on the sheerest of conjecture," Carpenter told the court. "There is no evidence at all to support this collusion analysis."
AT&T, he added, would drive subscribers to direct-broadcast satellite services were it to load its channels with affiliated cable networks that consumers don't want.
"If we [collude], we get punished by the loss of subscribers," Carpenter said.
But FCC attorney James Carr countered that the cap is necessary to prevent a few large cable operators from joining forces to control the programming-supplier market.
He said the rules were predicated on the cable industry's control of about 80 percent of the pay-TV market, adding that Time Warner's "bitter retransmission dispute" in May with The Walt Disney Co. provided support for the view that the FCC's rules were reasonable.
Carr's characterization of the Time Warner-Disney imbroglio was challenged by Judge Stephen Williams, one of three that heard the case. He said the dispute looked like a normal business battle.
"They were fighting over terms. People bargain, don't they?" said Williams, who heard the case with Judges David Sentelle and A. Raymond Randolph.
AT&T has until Dec. 15 to decide whether to sell 9.7 million subscribers, its 25 percent stake in Time Warner Entertainment or Liberty Media Group and other programming interests.
The court is not expected to rule before Dec. 15. If the rules are struck down before next May 19, the FCC may rethink the MediaOne merger conditions, AT&T believes.
"I would hope and expect that would be a factor taken into account between December and May," said Mark Rosenblum, AT&T vice president of law, after the one-hour hearing.
Under FCC rules, 5 percent voting stock in a cable company would trigger attribution, even if the minority stakeholder has no management responsibilities. Owing to this rule, AT & T's one-third interest in Cablevision Systems Corp., the No. 7 MSO with 3.1 million subscribers, is attributable.
A limited partner would not have an attributable interest if it is not involved in the general partner's programming activities. But if the limited partner sells programming to the partnership, the limited partner would have an attributable interest.
Time Warner Entertainment is a limited partnership under the autonomous control of Time Warner Inc. But because AT&T's Liberty Media Group sells programming to TWE, all of TWE's 9.7 million subscribers are attributable to AT&T.
As a result of the FCC's rules, AT&T has about 16 million wholly owned subscribers but an attributable interest in 19 million more through TWE, Cablevision, and joint ventures, giving AT&T 41 percent of the country's 85 million pay-TV subscribers.
AT&T counsel Carpenter said the cable and attribution rules, spawned by the 1992 Cable Act, were rooted in the outdated notion that cable is a monopoly with a tight grip on the fate of programmers.
Over the last eight years, the DBS industry has emerged as a potent force undermining the bottleneck theory, Carpenter said. The FCC ignored DBS competition in its rationale for applying a 30 percent cap, he added.
As part of the same case, Time Warner is challenging the FCC's channel-occupancy rules, which prevent a cable operator from filling more than 40 percent of its first 75 channels with affiliated programming.
In May, a D.C. Circuit panel upheld the constitutionality of the law that authorizes the 30 percent cap and the channel-occupancy rules.