AT&T, TCI: AOL Could Kill Deal

Author:
Publish date:

Washington — AT&T Corp. and Tele-Communications
Inc. said last week that regulations designed to pry open their high-speed-data networks
for use by competitors that haven't invested a dime in the facilities could cause the
collapse of their $48 billion merger.

AT&T and TCI, in a Nov. 13 filing with the Federal
Communications Commission representing their formal response to an array of merger
critics, said the forced unbundling of content and transport, which TCI-controlled @Home
Network currently offers as an integrated product would "severely jeopardize"
the merger.

The FCC has to approve the merger based on a finding that
the union between the long-distance and cable giants would serve the public interest. A
ruling is expected early next year.

If the merger were to collapse due to FCC conditions that
AT&T deemed unacceptable, AT&T would owe TCI a $1.75 billion breakup fee. But TCI
and AT&T sources said they were confident that the commission would not impose onerous
conditions.

While the FCC is deliberating, various AT&T and TCI
competitors are urging it to reject the merger unless the companies agree to a host of
conditions designed to make life easier for their rivals.

Among the most prominent merger critics is America Online
Inc., an online service and Internet access provider with 13.5 million subscribers who
connect to data networks via phone lines at much slower data speeds than @Home's broadband
connection.

AOL is demanding that AT&T and TCI "unbundle"
the service and provide high-speed-data links as a separate product. AOL said its
customers who want broadband access over cable lines should not be forced to pay for
@Home's content service, as well.

An AT&T official said offering @Home as an integrated
product was essential because the access plan sought by AOL would not produce an economic
return large enough to justify the billions of dollars that AT&T is planning to invest
on upgrading TCI's cable wires.

"What AOL is trying to do here is free ride on someone
else's investment and risk — risk is the key here," said James Cicconi,
AT&T's senior vice president of government affairs and federal policy. "This
would damage the economics of the deal if the FCC were to do this."

Cicconi accused AOL of using the FCC merger-approval
process to protect its business interests.

"One has to question whether this is an attempt by
them to stifle broadband so that they can continue to dominate narrowband," he said.

An AOL spokesman did not return calls for a response.

In comments to reporters in Denver last week, TCI chairman
and CEO John Malone said that if the FCC acquiesced to AOL's demands, the agency would
harm the best hope yet of introducing competition into the monopoly local phone markets
that are currently dominated by the Baby Bells.

Some of the regional Bell operating companies are calling
on the FCC to impose common-carrier regulations on TCI as a merger-approval condition.

"If they substantially delay this deal while they're
looking at this issue, they risk damaging the opportunity to get real competition into the
local telephony marketplace," Malone said.

AT&T and TCI have committed to upgrading TCI's plant to
offer both high-speed-data and local-voice-telephone service utilizing Internet-protocol
technology over cable facilities.

TCI has already completed about 10 percent of the $1.8
billion upgrade to two-way, which it expects to finish by the end of 2000. An upgrade to
voice telephony funded by AT&T after the merger could add another $8 billion to the
price tag.

AT&T and TCI told the FCC that the agency is forbidden
by law from imposing unbundling requirements on cable because cable operator provision of
Internet access is a "cable service," and not a "telecommunications
service."

Howard Symons, a Washington, D.C.-based lawyer who
represents TCI, said the FCC has ruled on prior occasions that information services
provided by entities that are not incumbent local phone companies are not
telecommunications services that are subject to unbundling requirements.

"We think that we have extra armor here," said
Symons, a partner in law firm Mintz, Levin, Cohn, Ferris, Glovsky and Popeo.

In his comments to reporters, Malone stressed that the FCC
should not be asked to tackle AOL's concerns and their broad-scale implications in the
context of one merger — especially if the FCC's consideration of AOL's demands
delayed a vote.

"If they want to consider it, they need to consider it
as a completely separate action from deciding on whether or not to allow this deal,"
Malone added.

In a recent filing, BellSouth Corp. joined AOL in seeking
unbundling requirements as a merger condition. The telco said AT&T and TCI were
incorrectly relying on the "cable-service" provision as a shield against
open-network requirements.

Internet service over cable, BellSouth told the FCC, is a
telecommunications service because households may buy it without having to subscribe to
basic cable.

"Customers who do not rely on the cable operator for
basic programming cannot be subscribers to 'cable service.' Because these customers are
not 'subscribers,' high-speed access services offered to them cannot be cable
services," BellSouth said.

BellSouth added that the FCC had no choice but to impose
resale and unbundling requirements on AT&T's future cable facilities if the agency
were unwilling to exempt incumbent local-exchange carriers from the same obligations. MCN

Related