Microsoft, AOL Join the Fray

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Microsoft Corp. and America Online Inc. entered the fight
for control of MediaOne Group Inc., possibly representing the additional clout that
Comcast Corp. needs to counter AT&T Corp.

Late last week, Microsoft and AOL said they had formed
confidentiality agreements with MediaOne, opening up negotiations between the companies.

That announcement came days after AT&T said it had a
similar confidentiality agreement with the Englewood, Colo.-based MSO to discuss the $62
billion acquisition offer that AT&T made April 22.

AT&T secured commitments last week for $42 billion in a
syndicated credit facility that will be used in part to help finance its MediaOne bid.

It wasn't clear at press time whether Microsoft and
AOL made specific offers for MediaOne, or whether Comcast -- which saw its March 22 offer
for MediaOne topped by AT&T's -- was involved with the group.

To top AT&T's offer, Comcast would probably need
to come up with a lot of cash to add to its previous all-stock bid. AT&T's offer
included up to about $20 billion in cash.

MediaOne would only confirm the confidentiality agreement,
and it made no further comment.

Microsoft's and AOL's entrance heightened the
drama that has surrounded MediaOne since it first accepted an offer to be purchased by
Comcast in March.

AT&T stunned the industry with its attempt to top
Comcast's offer for the MSO. Its bid was about 17 percent higher than Comcast's.

"This is going to get complicated," SG Cowen
Securities Corp. cable analyst Gary Farber said. "The more parties that show up, the
more complicated it gets, and the less clear it is how this is going to play out."

Many industry observers believe that Comcast will make a
competing bid. But first, they said, it is likely that MediaOne will announce -- maybe as
soon as last weekend, after press time -- that it considers AT&T's offer to be

This would trigger a series of events and open a five-day
window in which Comcast can make a counteroffer. After that, a 21-day extension period
kicks in, giving MediaOne until May 26 to pick a suitor.

"What happens from here is that at some point in the
next few days, you will hear from MediaOne that their board has considered the AT&T
offer and considers it superior," said a source close to the process, who requested

"There's no telling when that would happen -- it
has to happen before [May] 6 --but you also have to expect that it will happen
before then. If I were in [AT&T's] shoes, I would be pushing as hard as I can to
get a sign-off from MediaOne so that you could get it to the board ASAP [as soon as
possible] and minimize the time that Comcast has available."

AT&T chairman C. Michael Armstrong told analysts in a
conference call about AT&T's earnings last week that he was skeptical that a
better offer for MediaOne would come to the table.

"I really believe that we can bring more value to that
property [MediaOne] than any other company or combination of companies in the world,"
Armstrong said.

While the industry remained abuzz over the potential of an
AT&T/MediaOne combination, some Washington legislators were a bit leery.

Sen. Ron Wyden (D-Ore.) said last week that he had concerns
about AT&T's offer to buy MediaOne, citing fears that AT&T was trying to
control the Internet-access market through cable-system acquisitions.

AT&T controls high-speed Internet company @Home
Network, which AOL has criticized as a closed system that denies subscribers the choice of
picking their Internet-service provider.

"I am going to look at this deal very carefully. I
think that there is a real risk that it will chill competition," Wyden said, after
addressing the annual meeting of the American Cable Association (formerly the Small Cable
Business Association).

Wyden said AT&T's control of MediaOne could give
the MSO too much market power. He added that he felt that AT&T was attempting to gain
a "toehold in a very key sector of the economy in a way that is going to reduce
competition and chill choice."

But Rep. Michael Oxley (R-Ohio), vice chairman of the House
Telecommunications Subcommittee, said he was not troubled by the merger possibility.

"From what I get of their game plan, it makes a lot of
sense," Oxley said, adding that the merger would promote local phone competition and
position AT&T as a global telecommunications powerhouse.

When AT&T announced its bid to acquire
Tele-Communications Inc. last June, Federal Communications Commission chairman William
Kennard greeted the news by saying that the deal was "eminently thinkable."

But last week, Kennard was mute on the AT&T-MediaOne
deal. His spokeswoman, Joy Howell, declined to provide an explanation. "We're
just not commenting on it," she said.

Some top FCC aides said it was improper to comment while
various companies were considering counteroffers to AT&T's bid.

Were AT&T to win control of MediaOne, the merged entity
could be too large under FCC rules.

The FCC prohibits a cable company and its affiliates from
reaching more than 30 percent of U.S. homes. The commission is considering changing the
horizontal limit to a test based on a percentage of subscribers to multichannel-video
programming, including cable and direct-broadcast satellite services.

The FCC's current 30 percent rule (which can climb to
35 percent if minority groups are part-owners) has never been enforced because a federal
court declared that the provision in the 1992 Cable Act authorizing the cap was

During an April 23 conference call with analysts, Armstrong
said AT&T-MediaOne could adjust to almost any cable-system-ownership limits that the
FCC might eventually adopt.

He suggested that the various AT&T joint ventures and
partnerships that add to its subscriber count could be revamped to ensure compliance with
federal rules.

"Whatever the redefinition of attribution is, whatever
the bar is, we have significant flexibility in trading ownership levels to accommodate
that," Armstrong said.

Regulatory matters aside, a competing Comcast offer for
MediaOne might also have votes for MediaOne shareholders -- something that was excluded
from the first Comcast bid.

"It's the Amos Hostetter factor," Stephens
Inc. cable and media analyst John Corcoran said. "If you're not going to
overwhelm them with price, you have to overwhelm them with control, or maybe a mixture of
the two. That's the Hobson's choice [that Comcast president] Brian Roberts is
facing right now."

Hostetter, the former Continental Cablevision Inc. chairman
and 9.3 percent shareholder in MediaOne, opposed the Comcast deal, partly because of the
nonvoting stock that was offered. He is now in the AT&T camp.