Roberts, Armstrong Pitch Deal To Senate

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Some lawmakers say they have big problems with big media. But does that mean they want to bury the largest cable deal ever? Seems unlikely.

Last week, the heads of AT&T Broadband and Comcast Corp. went before a Senate subcommittee to sell their merger to a cast of lawmakers growing increasingly edgy about the mushrooming number of media deals abetted by court decisions and new thinking at the Federal Communications Commission.

Comcast president Brian Roberts and AT&T chairman and CEO C. Michael Armstrong lauded their $72-billion deal saying it would speed up the deployment of advanced services — most prominently cable-based digital local phone service — in the most cost-effective manner.

Competition from the Baby Bells and direct-broadcast satellite is promoting a healthy, choice-driven data and video marketplace, they said.

AT&T-Comcast appears to be in better shape than the proposed merger between EchoStar Communications Corp. and DirecTV Inc. parent Hughes Electronics Corp., a union that would eliminate the largest DBS provider from the market.

Whatever qualms they have about AT&T-Comcast, some senators had to admit that antitrust harms were hard to locate in the deal because the two cable companies operate in adjacent markets.

"While the EchoStar-DirecTV deal has faced a barrage of antitrust questions, this deal has not. In fact, it appears there are few if any traditional antitrust concerns raised by it," said Sen. Herb Kohl (D-Wisc.), chairman of the Antitrust, Competition, Business and Consumer Rights Subcommittee.

Nevertheless, Kohl called the cable deal the emergence of a "wide-ranging, powerful cable monopoly" that would raise rates, squeeze unaffiliated programmers, limit choice of Internet access providers and rely on proprietary digital set-tops to exclude competition for interactive revenue.

"We should be very frightened about this future and we need to (be) thinking about imposing meaningful conditions upon this merger to make it tolerable for consumers," said Kohl, in an apparent appeal to the FCC and the Justice Department, both of which must approve the merger. Merger comments were due at the FCC April 29.

Over in the House, Energy and Commerce Committee chairman Billy Tauzin (R-La.) has a more benign view of the cable deal. Although he's ordered his staff to conduct a review, he's made no decision about a hearing.

BIG: NOT NECESSARILY BAD

At first blush, Tauzin said he was not alarmed about the size of the AT&T-Comcast deal as long as consumers have choices.

"There have been a lot of big mergers. I am not one who believes bigness is badness in this marketplace. I think bigness is critical to telecom companies in a global marketplace," Tauzin said. "They have to be big in order to survive."

Kohl's notion that the merger would result in a plague of abuses was picked up by other witnesses, including Mark Haverkate, CEO of cable overbuilder WideOpenWest; Garry Betty, CEO of EarthLink Inc; and Robert Perry, vice president of marketing for Mitsubishi Digital Electronics America Inc.

Sen. Orrin Hatch (R-Utah), the top Republican on the Senate Judiciary Committee, and Sen. Mike DeWine (R-Oh.), the top Republican on Kohl's panel, also voiced concern about the clout of AT&T-Comcast in a number of markets, including video streaming.

Roberts addressed all of these concerns, though he pointedly declined to give any ground on the suggestion that AT&T-Comcast should accept a merger condition that requires carriage of unaffiliated Internet-service providers.

"I don't think it should be a condition of this deal because we don't have a gate-keeping service today," Roberts said. "We don't want to get the financial community concerned that there is going to be regulation of something that we just invented."

In December 2000, the Federal Trade Commission refused to allow AOL to acquire Time Warner unless the companies agreed to launch competing ISPs on Time Warner Cable systems prior to rolling out a high-speed version of AOL.

"I would submit that we are not AOL," said Roberts, noting that Comcast today serves 1 million Internet subscribers compared to AOL's 30 million subscribers.

Earthlink's Betty, whose firm has a carriage deal with AT&T Broadband, told the committee that AT&T and Comcast should "commit to providing customers in all their markets a choice of broadband ISPs over cable by signing commercially reasonable contracts with independent ISPs prior to the merger being approved."

PRICING COMPLAINT

Haverkate complained that Comcast and AT&T were running a price-slashing campaign that was anti-competitive because it targeted only WOW customers or Comcast and AT&T customers thinking about switching to WOW.

"They are conducting a hostile takeover of our industry one customer at a time," he said. "If it's allowed to continue, I think it's going to be successful."

Armstrong said he wouldn't price below cost whether the competitor is WOW or a Baby Bell.

"I think we got a lot of competition and overbuilders aren't the only ones we are reacting to day-to-day," Armstrong said.

Mitsubishi's Perry complained that cable was attempting to corner the advanced TV market by making it virtually impossible to build competing set-top boxes. He said the specifications for the boxes were not ready. He also protested that content providers and cable MSOs want set-top makers to agree that boxes can limit or block the output of digital video to recording devices.

"We need to make sure that the (set-top box) issued by the cable company is not a gatekeeper," Perry said.

In his biggest concession during the three-hour hearing, Roberts pledged to repair relations with the consumer electronics industry and noted he recently met with Circuit City Stores Inc. president and CEO W. Alan McCollough for the first time.

Roberts said he was motivated to develop a competitive set-top market and a market for plug-and-play HDTV sets because he didn't want to see high-end customers migrate to satellite. While attending January's International Consumer Electronics Show in Las Vegas, Roberts said he noticed that all the high definition TV sets were hooked to satellite-delivered HDTV networks.

"I came away from that saying we have to accelerate our relationship with the set-top manufacturers and to get these set-tops available at retail," Roberts said. " We are going to try to fix that."

STREAMING ADDRESSED

Questions also came up regarding video streaming and whether AT&T-Comcast would block Internet streaming to protect revenue derived from traditional cable services.

Armstrong called streaming "terrific" so long as those who place heavy bandwidth demands on the network pay for it. He noted that 30 percent of Excite@Home Corp.'s network capacity was consumed by 5,700 subscribers. The company had 3 million customers before going bankrupt.

"I'd just like to get paid for that consumption and the capital I've got to put forward to let that happen," Armstrong said.

Roberts addressed the most commercially sensitive issue in the debate: the posture of cable operators that are paying for TV networks that are streamed over the Internet for free.

"If we are being asked to pay for a channel that's then given for free over the Internet, is that a good business model?" Robert said. He said he hoped to find "an acceptable streaming model" that served consumers.

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