AT&T Presses Challenge Of FCCs Subscriber Cap

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WASHINGTON -AT&T Corp. last week was expected to remove the mystery from its plans for compliance with the Federal Communications Commission's MediaOne Group Inc. merger order.

But the company plans to continue its campaign to soften the cable-ownership rules that forced it to divest assets in connection with the MediaOne deal.

During the last few months, AT&T's discussions with FCC officials and key Capitol Hill lawmakers were handicapped by accusations that the only reason it wanted to relax the rules was to evade the agency's MediaOne merger conditions released in June.

But moves to comply with the commission's conditions would give AT&T the freedom to pursue new rules in a less-hostile environment.

Two weeks ago, AT&T general counsel and executive vice president James Cicconi acknowledged the company ran into problems with its cable-rules lobbying due to the perception that it disliked the outcome of the MediaOne merger at the FCC.

"I think the only pushback we've gotten anywhere on this is the suggestion that this is an effort to simply get out of the merger conditions that the FCC imposed," said Cicconi, who turned to Capitol Hill for help after the FCC refused to back AT&T's position.

FCC chairman William Kennard took note of AT&T's lobbying on Capitol Hill and urged lawmakers to reject the company's entreaties.

By last Friday (Dec. 15), AT&T had to decide whether to divest programming interests, including Liberty Media Group; sell 9.7 million cable subscribers or shed its 25-percent stake in Time Warner Entertainment, which includes at least 9.7 million subscribers, Home Box Office and the Warner Bros. film and TV studio.

As part the MediaOne merger-approval process, the FCC required the asset sale to bring AT&T under the agency's cable-ownership rules, which limit one MSO to serving no more than 30 percent of subscribers to cable, direct-broadcast satellite or other pay-TV services. The FCC pegged AT&T's ownership at about 41 percent.

Even after AT&T complies with the 30 percent cap, Cicconi said, the company has ongoing concerns about the agency's enforcement of the rules and would strive to get them changed.

By way of example, Cicconi said if Cablevision Systems Corp.-in which AT&T owns 30-percent equity-decided at some point to make a cable-system acquisition, AT&T would have to sell cable subscribers it wholly owns in order to retain that partial investment.

"If they go out and decide to merge with Adelphia [Communications Corp.], for example, we end up having all of the new subscribers from Adelphia attributed to us-mind you, without any influence or control on them. And we end up having to sell something that we do actually own and control," Cicconi said.

S.G. Cowen & Co. cable analyst Gary Farber said if AT&T were required to sell cable systems today, it would be selling in a weaker market than the one that existed as recently as a year ago.

"Even if they wanted to unload systems, supply greatly exceeds demand," said Farber, who noted that some cable systems fetched $6,200 per sub at the market's peak. "I think it's a buyer's market."

In 1992, Congress passed a law that authorized the FCC to place limits on cable ownership. But AT&T believes the agency's interpretation that non-controlling interests should count is too broad.

"That's unfair and we think it violates congressional intent," Cicconi said. "All we're saying is very simple: If you own it, count it; if you control it, count it; if you're influencing programming decisions directly in that entity, count it. If you aren't doing any of those things in a passive investment, don't count it."

AT&T will continue to press its argument that purely passive cable-system investments, in which the minority partner has no operational control, should be exempt from the 30-percent cap.

"We've made that case to the FCC-at least to this point, in vain-and we've made that case on the Hill. And we'll make it to anybody that will listen," Cicconi said.

AT&T asked judges from the U.S. Court of Appeals for the District of Columbia Circuit to void the FCC's rule that a 5-percent voting stock stake in a cable company represents sufficient influence and control to attribute 100 percent of the company's cable subscribers to AT&T.

That appeals-court panel has not yet issued a ruling.

Meanwhile, Time Warner Entertainment is challenging the constitutionality of the 1992 law that authorized the FCC to adopt cable-ownership limits. After it lost in lower court in May, TWE filed an appeal with the U.S. Supreme Court, but the high court has not decided whether to take the case.

If AT&T is right at the 30-percent cap, the company has to worry that its operations could be disrupted by actions taken by other cable companies beyond its control, Cicconi said.

For instance, he said, AT&T could be forced to tell a would-be subscriber that he or she cannot receive cable service from AT&T until someone else within the company's cable-system portfolio dropped his or her subscription.

"We will be in the odd situation there of effectively having to say no to a subscriber in a city we serve," Cicconi said. "Even if his neighbors have cable, we have to deny him a connection because of the interpretation of the rules."

But that scenario seems unlikely, because the overall 85-million-subscriber cable/DBS universe continues to grow by millions of subscribers each year. And under FCC rules, as the overall market increases, so does the number of subscribers AT&T may serve under the 30 percent cap.

Scott Cleland, a telecom analyst with the Precursor Group, said he doubted AT&T would ever have to reject a customer because of the cap.

"The number and the cap do not have anything like that level or precision where you would know that," Cleland said. "The FCC is not going to enforce it to that level. It's probably going to be judged on an annual basis."

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