FCC Rules Could Prompt Liberty Spinoff

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Washington -- The Federal Communications Commission adoptednew cable-ownership rules last Friday that could force AT&T Corp. to unload cablesystems or divest Liberty Media Group in order to acquire MediaOne Group Inc. without anyFCC waivers.

In a 5-0 vote that included partial dissents, the FCC ruledthat AT&T could serve no more than 24 million cable subscribers, or 30 percent of allsubscribers (80 million) to multichannel-video distributors.

After buying MediaOne and its 25.5 percent stake in theTime Warner Entertainment limited partnership, AT&T would have an attributableownership stake in 29 million subscribers.

AT&T could get to 19 million subscribers -- and, thus,have room to grow under the new rules -- by divesting Liberty. Even though the FCC tweakedits limited-partnership rules, AT&T's ownership of Liberty appears to make TWE anoninsulated limited partnership under the new rules, an FCC source said.

Selling its one-third stake in Cablevision Systems Corp.,with 3.4 million subscribers, would put AT&T at 25.6 million subscribers, or 1.6million above the new cap.

Nevertheless, AT&T general counsel James Cicconi saidAT&T was confident that it could show the FCC that TWE was not attributable becauseAT&T would not tell Time Warner Cable which programming to buy.

"We are fairly comfortable that we can make thatdemonstration," Cicconi said. "There are provisions there intended to insulatelimited partnerships."

AT&T's trump card in all of this is the claim that itdoes not own Liberty -- a subsidiary controlled by chairman John Malone and othershareholders.

According to one Washington cable attorney, it appearedthat AT&T's best and most likely option is to divest Liberty. "That would appearto be the solution," the lawyer said.

A second lawyer added, "I think they have left thedoor open for the AT&T-MediaOne deal to be consummated," without AT&T havingto sell its stake in TWE.

AT&T chairman C. Michael Armstrong told reporters lastFriday that the FCC's moves won't interfere with closing the MediaOne deal in the firstquarter of next year. "The new cap permits us to proceed with the MediaOnedeal," he said.

AT&T lobbied hard for a 35 percent cap (28 millionsubscribers) to avoid any serious restructuring, and almost got it, FCC sources said. Butthe tide turned at the last minute.

Armstrong and Cicconi said it was likely that the companywould fight the 30 percent cap first at the FCC, and later in court, if necessary.

FCC chairman William Kennard said the rules applied tocable operators in the context of video programming. The 30 percent cap would not apply tocable operators that form joint telephony ventures, commission sources said.

Kennard said the FCC wanted "to keep big cable incheck … while still giving them room to grow and compete in new areas -- andparticularly to compete against the regional Bell operating companies when it comes tolocal telephony."

AT&T and the National Cable Television Associationissued statements expressing disappointment.

The FCC's decision is largely academic. The agency hasnever enforced its old rules, and it declined last Friday to endorse the new ones whilethe case challenging the constitutionality of the underlying statute is still on appeal infederal court.

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