A Setback for AT & T, A Gain for DBS

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Washington-The recent court ruling affirming limits on cable ownership is probably

a negative for AT & T Corp., which is trying to buy MediaOne Group Inc. and the MSO's 25 percent stake in Time Warner Entertainment.

A clear beneficiary of the ruling was the direct-broadcast satellite industry, which is apparently considering seeking judicial review of the requirement that DBS carriers, just like cable operators, must carry all local TV stations in a served local market.

In the May 19 ruling, a panel of the U.S. Court of Appeals for the District of Columbia Circuit said Congress acted constitutionally by authorizing a cap on the number of cable subscribers one company could serve. Congress ordered the FCC to adopt ownership rules in the 1992 Cable Act.

The 3-0 decision gave the FCC the green light to enforce its rules, which had been stayed since 1993 after a lower court found that the ownership law was unconstitutional.

The FCC's rules now in effect restrict one cable operator to no more than 30 percent of pay TV subscribers. The agency gave noncomplying cable operators 180 days from May 19 to make the necessary ownership changes.

After buying MediaOne, AT & T would have about 29 percent of pay TV subscribers. But that number would swell to 40 percent if AT & T's stake in 9.4 million TWE subscribers counts toward the cap.

In a sharp disagreement with the FCC, AT & T insists that TWE should be exempt because TWE is managed by Time Warner Cable, which would make all of the decisions about the cable networks-even networks owned by AT & T-that are sold to TWE subscribers.

Because it wrapped up its AT & T-MediaOne merger review before the court released its decision, the FCC's Cable Services Bureau urged the five commissioners to require AT & T to either divest its TWE stake or to spin off Liberty Media Group under the commission's broad authority to protect the "public interest."

With the court upholding the ownership cap, the FCC no longer has to rely on the public-interest standard to force AT & T's hand. It now has specific rules, which it updated a second time in October, to condition approval of the MediaOne deal.

At the National Show in New Orleans three weeks ago, FCC commissioner Michael Powell indicated that he was uncomfortable relying on the public-interest standard in the absence of compelling circumstances. But Powell is said to be more comfortable with the CSB's recommendation in light of the court's action.

Another hot issue involves the amount of time AT & T will be given to comply with the 30 percent cap. The company said it needs at least one year, and the CSB went along with that. But a 12-month grace period is now in jeopardy because FCC rules demand compliance starting in mid-November.

FCC Commissioner Harold Furchtgott-Roth-a stickler when it comes to enforcing FCC rules-is apparently unwilling to provide AT & T any additional time because the FCC had given fair notice that its cap would take effect 180 days after a decision from the court.

In upholding the subscriber cap, the court found that it was a content-neutral law that advanced an important governmental interest without burdening substantially more speech than necessary-the same standard the Supreme Court adopted in 1997 when it upheld cable must-carry rules.

The "important government interest," the court said, was to prevent large, dominant cable operators from "imposing their own biases on the information they disseminate" and from precluding "new programming services from attaining the critical mass audience necessary to survive."

The court, citing the Supreme Court's analysis, said the rationale for the cap and for cable must-carry was the same: Cable had "bottleneck monopoly power" in the multichannel-video-programming-distribution market.

The court's analysis could be very helpful for the DBS industry if it ever decided to challenge must-carry law as applied to it. Starting in 2002, a DBS carrier has to carry every local TV signal in a market it has elected to serve with even one local TV signal.

Sustaining DBS must-carry could be problematic under the cable-bottleneck theory because DBS, while a rapidly growing technology, is a distant second to cable in market clout.

The court seemed to acknowledge this distinction at one point in its opinion: "As the government notes, other video programmers such as DBS lack the bottleneck power of cable operators; nor do they reach nearly as many households as does cable."

If it ever decided to challenge must-carry, the DBS industry would drive home the point that the regulation is unconstitutional due to DBS' new-entrant status as a cable competitor, citing no less an authority than the court's opinion in the cable-subscriber-cap case.

"That is the one salient distinction from the rationale on the basis of which the Supreme Court found that the cable must-carry rules are constitutional," said Washington, D.C, attorney Panetelis Michalopoulos, who represents EchoStar Communications Corp., the No. 2 DBS carrier with 3.8 million subscribers.

Nevertheless, a cable-industry attorney questioned the validity of the court's holding that cable has the kind of monopoly today that justified an assortment of structural and behavioral conditions in the 1992 Cable Act.

"The most vulnerable part [of the opinion] is the sort of anachronistic clinging to this concept of a bottleneck," the attorney said. "It could have been written in the 1970s."

The Satellite Broadcasting & Communication Association is threatening to challenge DBS must-carry in court, but it has not announced a decision.

"We're reviewing all options right now," SBCA spokesman James Ashurst said. "Certainly, must-carry is a hot-button issue for us, and it will continue to be until the issue is resolved."

TWE-the cable operator that challenged the subscriber-limit law-has 45 days to seek review by the entire D.C. Circuit and 90 days to seek Supreme Court review.

"We haven't made a decision on that subscriber-limit case, but I think it's more likely that we will [appeal]," Time Warner Cable spokesman Michael Luftman said.

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