Washington -- By acquiring MediaOne Group Inc., AT&TCorp. would be in violation of federal cable-ownership limits, according to a finding bythe Federal Communications Commission that could force AT&T to sell cable systems orpartial stakes in other operators or programming interests, such as Liberty Media Group.
The bad news arrived at AT&T's doorstep in recentweeks. Since then, AT&T and MediaOne lobbyists have sought an 18-month waiver to buytime to restructure investments in order to come into compliance with the law, accordingto government and industry sources who asked not to be identified.
"I am pleased, though not surprised. I think that isthe right reading of the law, and it is consistent with the signs and indications that thecommission has been sending," said Andrew Jay Schwartzman, president of the MediaAccess Project, who has pressed the agency to apply the cap against AT&T.
Under FCC rules adopted in October, a cable operator isbarred from serving more than 30 percent of subscribers to pay TV providers. If all of itscable interests count toward the cap, AT&T would end up with 39 percent of pay TVsubscribers after buying MediaOne.
Pushing AT&T over the top is MediaOne's 25 percentstake in Time Warner Entertainment, a limited partnership with 9.7 million subscribersthat also includes the Warner Bros. studio and the Home Box Office premium-cable channel.
In the October rules, the FCC said it would not attributelimited-partnership interests if the limited partner can demonstrate that it is "notmaterially involved," directly or indirectly, in the video-programming activities ofthe partnership.
The FCC has determined that because AT&T owns Libertyand has a partial stake in Rainbow Media Holdings Inc. -- both of which sell programmingnetworks to TWE -- AT&T would be materially involved in TWE's video-programmingactivities as the new owner of MediaOne.
One communications lawyer said the FCC's decisionshould not have been a surprise to AT&T. "The commission told them back inOctober, but AT&T didn't want to hear about it," the lawyer said.
AT&T spokesman Jim McGann declined to comment on theownership issue. He also said AT&T was not commenting on a report last week that theDepartment of Justice wanted the company to divest its stake in one of the two high-speedcable-modem services it would own after buying Media One -- Road Runner and Excite@HomeCorp.
Throughout the ownership debate, AT&T has calledLiberty a semiautonomous subsidiary, the financial activities of which are divorced fromthose of the parent. That being the case, AT&T said, the FCC should have no concernsabout the fact that Liberty sells programming to TWE.
In addition, AT&T told the FCC that MediaOnesurrendered virtually all of its management rights in TWE last year when it agreed to beacquired by AT&T, leaving Time Warner Inc. in charge of TWE's programmingactivities. By agreeing to be sold to AT&T, MediaOne triggered noncompete clauses inthe TWE partnership agreement.
Nevertheless, FCC staff has made it clear that the agencydoes not share AT&T's analysis, which has caused the merger review to progress tothe next stage: How does AT&T come into compliance?
At a Feb. 4 public hearing, AT&T general counsel JimCicconi said the company would make the necessary transactions to satisfy the FCC'sconcerns. After the hearing, Cicconi told a reporter he had been referring to cablesystems, and not to programming interests. AT&T officials later disputed that account,insisting that the company has never indicated what it would sell to come into compliance.
Another issue is when AT&T has to come into compliance.
Hanging over the controversy is the legal status of the 30percent rule. The FCC, on its own motion, is not enforcing the cap because a federaldistrict court judge held in 1993 that the statute authorizing the cap wasunconstitutional under the First Amendment.
A panel of the U.S. District Court of Appeals for theDistrict of Columbia Circuit heard oral arguments in December, and it is expected to handdown a decision soon.
Assuming that the court upholds the law, the FCC has toldAT&T that it would have 180 days from the date of the decision to come into compliance-- a much shorter time than the 18 months AT&T is seeking.
"We think the waiver is unjustified," Schwartzmansaid.
Separately, AT&T and Time Warner are asking the samecourt to strike down the 30 percent cap, but oral arguments have not been heard. Thelatter case would likely become moot if the court affirms the unconstitutionality of thestatute.
In a March 7 joint brief, AT&T and Time Warner told thecourt the 30 percent subscriber cap violated both the First Amendment and theAdministrative Procedure Act.
In cases where the general partner dictates programmingchoices, "There is no rational basis for a categorical assumption that the limitedpartner is materially involved in the video-programming activities of [the] limitedpartnership," AT&T and TWE said in their 45-page filing.
The effort to force AT&T to comply with the 30 percentcap could prove positive in the end. AT&T could divest its TWE stake in exchange forits coveted telephony deal with Time Warner and America Online Inc. And it could hastenhigh-speed Internet-access agreements, with AT&T agreeing to carry Road Runner, AOL,or both, and with AOL Time Warner Inc. agreeing to carry Excite@Home.
"There's a lot of currency there," aWashington cable attorney said.