FCC Rules Could Crimp AT&Ts Phone Plans

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Washington -- If AT&T Corp.'s deal to buy MediaOne
Group Inc. crumbles under regulatory pressure, Federal Communications Commission chairman
William Kennard isn't ready to take the blame.

With the FCC poised to adopt strict ownership rules Oct. 8,
AT&T might wind up having to unload the 25 percent stake in Time Warner Entertainment
it would acquire with its purchase of MediaOne.

And a cable attorney here predicted that it could get
worse: If AT&T is forced to sell the TWE stake, it might also decide to call off the
MediaOne deal, with the ensuing collapse of AT&T's local phone strategy dumped in
Kennard's lap.

FCC sources said they were well aware that Kennard could be
set up as the fall guy, and they were ready to defend their boss.

"AT&T doesn't need to own one-half of the cable
systems in the country to roll out telephony," a commission source said.

The FCC is likely to adopt a rule that bans a cable company
from serving more than 30 percent of subscribers to cable, direct-broadcast satellite and
other multichannel-video distributors. That's a modification of the current rule, which is
helpful to AT&T. Cable-industry sources said the FCC might end up raising the bar to
35 percent.

AT&T's problem is not so much with the FCC's percentage
cap, but with the agency's ownership-attribution rules. These rules determine when
AT&T's minority investments in other cable operators count toward a 30 percent or 35
percent cap.

FCC and cable-industry sources said AT&T's one-third
interest in Cablevision Systems Corp. and the TWE stake, as currently structured, put
AT&T well above a 35 percent cap. The FCC is expected to retain its rule that 5
percent voting stock triggers attribution.

Prior to an appearance on Capitol Hill, AT&T chairman
C. Michael Armstrong said he was not concerned "right now" about the FCC rules
"because they haven't gone through the process." Armstrong added that he was not
ready to concede that the FCC would force him to sell off cable properties.

FCC sources -- who said AT&T's lobbying efforts to
dilute the ownership rules have been intense -- claimed that AT&T was essentially
making two points that regulators were having a hard time accepting.

One was that AT&T is the only company with the
resources to take on the Baby Bells. An FCC source said AT&T's real motive in keeping
the TWE stake was to force Time Warner into a joint phone deal. "They don't want Time
Warner getting into telephony unless it's with AT&T," the source said.

The other point was that the proposed FCC ownership rules
would force AT&T to sell its stake in TWE. An FCC source said there would be plenty of
room in the rules for AT&T to change the nature of its TWE investment so that it would
not be "attributable" to AT&T for the purpose of calculating cable-ownership
levels.

"They can insulate TWE. They don't want to do it.
That's not our fault," an FCC source said.

A Washington cable attorney said the FCC's rules, unless
changed, could jeopardize the MediaOne deal and unwind AT&T's planned alliances with
Time Warner and Comcast Corp. to use the cable platform to enter local phone markets.

If the FCC's rules force AT&T to unload its TWE stake,
the lawyer said, "I am not sure that they are going forward with the
transaction."

Washington Research analyst George Reed-Dellinger was more
upbeat, saying that the FCC will not enforce its new rules against AT&T. "No
matter what the FCC does, they are going to be above the limit," he said. "I
think they will get a waiver."

The FCC adopted its original cable-ownership rules in 1993,
but it never enforced them because prior to their release, the statute authorizing the
rules was held unconstitutional by a Federal District Court. The case is pending before
the U.S. Court of Appeals for the District of Columbia Circuit. Oral arguments are Dec. 3.

The FCC has put cable operators on notice that they would
have 60 days to come into compliance with the ownership rules if the agency decided to
lift the stay.

FCC sources said the agency could enforce its new ownership
rules while the case was pending, but it was unlikely that the stay would be lifted next
month.

Commission and cable sources said AT&T would protest
having to comply with rules based on a statute that has been tossed out once by a court
and that could get tossed out again by another court.

Congress ordered the FCC to impose limits on cable
ownership to prevent one or a few cable operators from controlling the programming market
by discriminating against networks they do not own.

AT&T claims the rules are irrational. At one point,
they equate a 5 percent stake with majority control. At another point, where the cable
company is majority-controlled by a single entity, an AT&T investment of 49.9 percent
would not be attributable at all.

AT&T has told the FCC that there should not be
attribution unless the minority stakeholder makes programming choices. The company said it
does not have such power over Cablevision, and it would not have such power over TWE.

"AT&T has a 25 percent interest in Time Warner. No
one thinks AT&T controls those subs," Reed-Dellinger said.

The FCC is looking closely at whether Cablevision should
count toward the cap. Cable-industry sources said that even though the Dolan family
controls the MSO, the company does not meet the single-majority-shareholder exemption
because voting control is divided among several family members.

"I think it all comes down to whether Cablevision is
attributable," a cable lobbyist said.

Bell Atlantic Corp. CEO Ivan Seidenberg, whose company
opposes the AT&T-MediaOne merger, said the FCC was right to take the
ownership-concentration issue seriously.

"I think there were a lot of hidden issues in the
MediaOne transaction," Seidenberg said. "This may be one of them, and I'm glad
to see that the regulators are looking at it."

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