Washington— By Comcast Corp.'s reckoning, its proposed merger with AT&T Broadband would give the newly formed cable giant at least 22 million subscribers, or 32 percent of all U.S. cable subscribers and 25 percent of all U.S. pay TV subscribers.
In buying 13 million wholly-owned AT&T Broadband subscribers, Comcast would become the nation's No. 1 cable operator, giving it about 10 million more than No. 2 MSO Time Warner Cable.
At that level, the deal probably wouldn't frighten the Justice Department or run afoul of Federal Communications Commission cable-ownership rules, key portions of which were struck down by a federal court in March.
But that all depends on what Comcast has to buy, what it could divest and when, and what FCC rules ultimately say about how many subscribers a single MSO may own, either in whole or in part.
Last week, Comcast said it was willing to enlarge its offer to acquire AT&T Broadband. That proposal would leave Comcast in full or partial control of more than 60 percent of cable subscribers, a level of concentration that would alarm consumer groups and perhaps raise red flags with DOJ antitrust enforcers.
In order to snag its AT&T cable prize, Comcast said it would also be willing to buy out AT&T's stakes in Time Warner Entertainment and Cablevision Systems Corp. Liberty Media chairman John Malone stepped down from AT&T's board of directors last week, urging AT&T chairman C. Michael Armstrong to ensure the TWE and Cablevision stakes were not left stranded.
TWE is a limited partnership that's 75-percent owned by Time Warner Cable parent AOL Time Warner Inc. and includes 11.3 million cable subscribers, Home Box Office and the Warner Bros. studio. Cablevision has 3 million subscribers, mostly within a massive New York City-area cluster.
Assuming Comcast has to take the whole package, it would combine its 8.4 million subscribers with AT&T's 21.9 subscribers (which includes the Cablevision interest and about 5 million AT&T subscribers in partnerships and joint ventures) and TWE's 11.3 million subscribers. Under the old FCC rules, all of the TWE's subscribers would be attributable to Comcast.
That would give Comcast an ownership interest in cable systems that serve about 42 million subscribers, or 61 percent of all cable subscribers and 48 percent of all subscribers to cable, direct-broadcast satellite or other U.S. providers of multichannel video programming.
Under the FCC's suspended rules, no cable operator could have an interest in cable systems that serve more than 30 percent of all pay-TV subscribers. According to Kagan Media Money, the U.S. has 87.5 million pay-TV subscribers, putting the 30-percent cap at about 26 million subscribers.
Last week, Comcast president Brian Roberts told reporters that his company wants to retain 22 million wholly-owned subscribers and at that level, the company would fit comfortably under the 30-percent cap were it again the law.
"We are below a cap that is no longer operative, and that's why we are saying with Time Warner and Cablevision, ultimately those are not long-term assets that we would want to hold and if they don't come with the deal, that would be fine," Roberts said.
Shedding the TWE and Cablevision properties has been painfully difficult for AT&T's Armstrong, but Comcast is evidently confident that it would have an easier time selling and demonstrating that to Washington authorities that could scrub the deal.
"We are confident that the combination does not present any significant regulatory issues," Comcast chairman Ralph J. Roberts and Brian Roberts said in their two-page letter to Armstrong on July 8.
Whatever its ultimate size, the Comcast-AT&T merger would involve the transfer of FCC licenses, triggering the need to gain the agency's approval.
Consumer groups are ready to pounce.
"Our position is that cable has been too big to begin with," said Andrew Jay Schwartzman, president of the Media Access Project.
MAP opposed AT&T's takeover of MediaOne Group Inc. and views Comcast's control of AT&T with alarm.
"It's just going to compound the felony," Schwartzman said, adding that the FCC should use its public interest authority to restrain the size of Comcast if cable ownership rules are not on the books.
On March 2, a panel of the U.S. Court of Appeals for the District of Columbia Circuit tossed out the 30-percent cap on First Amendment grounds and the ownership attribution rule that linked AT&T subscribers with TWE's 11.3 million subscribers.
The FCC, which declined to ask the full D.C. Circuit to review the panel's decision, is preparing to unveil new cable-ownership proposals at its Aug. 9 meeting, but that plan might get sidetracked if the big cable merger were to land in a few weeks.
"We are currently working on reviewing the rules and consider it a priority," an FCC source said.
The FCC, along with the Justice Department, has until Aug. 2 to seek Supreme Court review of the D.C. Circuit's holding. In April, FCC chairman Michael Powell indicated he opposed such a move and preferred crafting rules the D.C. Circuit would embrace.
David Butler, a spokesman for Consumers Union, said Powell's reluctance to pursue judicial appeal gave Comcast the incentive to hunt for a big cable purchase.
"That set the table for the dinner we are eating now," Butler said. "I think Comcast sees a window open and is going to try to get through it before it shuts on them."
The merger would likely come under close review on Capitol Hill. Last month, Democrats regained control of the Senate, putting Sen. Ernest (Fritz) Hollings (D-S.C.) in charge of the Senate Commerce Committee. Hollings is a vocal critic of excessive concentration in mass media and is holding a hearing on the subject July 17.
A Comcast-AT&T combination could be seen in a new competitive light, as News Corp. chairman Rupert Murdoch is reportedly close to announcing the acquisition of DirecTV Inc., the No. 1 DBS carrier with about 10 million subscribers.
Interestingly, Comcast cable president Steve Burke, speaking in Chicago last month at the National Cable & Telecommunications Association convention, suggested that the Justice Department should take a close look at antitrust issues associated with a News Corp.-DirecTV deal.
Burke also had said he would be troubled if News Corp. chairman Rupert Murdoch were allowed to acquire DirecTV Inc. at a time when cable operators are not permitted to own TV stations within their franchise areas.
In numerous public statements, Powell has promised to speed the merger-review process and to hold companies accountable to FCC rules currently on the books and not force them to comply with conditions that don't apply generally to industry peers and competitors. With the swearing in of Republican FCC member Kevin Martin two weeks ago, Powell now has the majority to make his views stick.
His merger policies will likely be tested when complaints are sure to arise about Comcast's refusal to sell Comcast SportsNet, its Philadelphia regional sports network, to direct-broadcast satellite rivals DirecTV and EchoStar Communications Corp. Under federal law and FCC rules, Comcast is not required to sell the network, because it's not delivered via satellite. The FCC has rejected complaints against Comcast on that basis.
The commission could take months to craft new cable-ownership rules. It could approve a Comcast-AT&T deal, while also putting the company on notice that it would have to comply with the new rules.
The processes involving the adoption of new rules would probably overlap with the Comcast-AT&T merger, giving opponents of the deal two opportunities to air their concerns.
According to cable industry sources, Powell is considering adopting more stringent merger-review policies. His plan could provide Comcast some protection from parties making charges to FCC officials without face-to-face rebuttal.
Under concepts being considered, Powell would not allow third parties to comment on the merger to the FCC privately unless Comcast had a representative present at the meeting. And documents filed with the FCC about the merger would have to be shared with Comcast at the same time.