Biggest Cable Merger Hits D.C.

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Another year, another cable deal in the lap of Washington regulators.

First it was AT&T Corp. buying Tele-Communications Inc. in 1999, then
AT&T gobbling up MediaOne Group Inc. in 2000, followed quickly by America
Online Inc.'s merger of equals with Time Warner Inc. in early 2001.

Now, a little less than 12 months since the last deal, along comes Comcast
Corp. with a definitive agreement to acquire AT&T Broadband and form the
largest pay TV company in the United States, with at least 22 million wholly
owned subscribers.

The companies hope to close the deal by late next year.

Both AT&T 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, video-on-demand and interactive-television
products.

Critics take a different view, claiming that the merger is much larger than
22 million subscribers and creates a too-powerful media colossus that would
raise prices and limit choice on television and the Internet.

Armstrong and Roberts have to sell the deal to Washington regulators,
including the Federal Communications Commission and the Department of Justice or
the Federal Trade Commission.

The DOJ is likely to get the nod due to its historic involvement in
regulatory issues associated with AT&T.

In late October, when EchoStar Communications Corp. and DirecTV Inc.
announced their merger to form 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 he established an internal
task force to review the deal.

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

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

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

At 22 million subscribers, AT&T Comcast Corp., as the company will be
renamed, would control about 25 percent of all pay TV subscribers based on a pay
TV universe of 88.7 million subscribers -- a figure AT&T supplied the FCC in
an Oct. 22 filing.

Control of 25 percent would easily comply with the 30 percent limit once set
by the FCC, but in March, a federal court voided the 30 percent cap as
unconstitutional under the First Amendment.

The fact that the merger is below 30 percent helps at the FCC because both
Powell and commissioner Kevin Martin -- two-thirds of the agency's Republican
majority -- maintain that deals that fall within established ownership caps
should be presumed lawful.

Past AT&T cable deals have been complicated by efforts to come up with
the precise number of cable subscribers the company actually owns under FCC
attribution rules, which determine at what level minority ownership interests
should be treated the same as majority interests for purposes of calculating the
30 percent cap.

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

The MSO noted that the 21.9 million-subscriber figure excluded 9.56 million
subscribers held through its 25 percent stake in Time Warner Entertainment and
1.8 million subscribers in other deals with 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 Thursday, Roberts said he never viewed the TWE property
as a strategic asset.

Armstrong said AT&T would do its best, with or without the help of AOL
Time Warner (which owns the remaining 75 percent of TWE), to dump the TWE
stake.

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