Washington-AT & T Corp. chairman C. Michael Armstrong and the company's top lawyer, James Cicconi, were understandably pleased with themselves when they got on the phone with reporters in a joint conference call last fall.
The Oct. 8 call occurred moments after the Federal Communications Commission adopted new cable-ownership rules that AT & T-after weeks of intense lobbying by Armstrong and Cicconi-had won from the agency as a steppingstone toward gaining approval to buy MediaOne Group Inc. for $56.4 billion.
The AT & T leaders told reporters that the FCC's new rules-which substantially relaxed the 30 percent ownership cap and tweaked the attribution standards with regard to programming activities-would provide a "path" for pushing the MediaOne deal through the agency.
Press reports at the time largely echoed AT & T's spin-namely, that the commission's changes would allow the Media-One merger to clear the FCC without the telco having to divest either Time Warner Entertainment or Liberty Media Group.
As it turned out, AT & T's path was hardly a pretty country lane. Instead, it was a bumpy byway filled with potholes dug, in some cases, by AT & T itself.
AT & T was also tripped up by an event outside of its control: America Online Inc.'s stunning decision to buy Time Warner Inc., the largest corporate merger ever at the time of its announcement Jan. 10.
According to government and cable-industry sources, AT & T made several critical mistakes in lobbying the FCC over the past nine months-one strategic mishap and a few tactical ones.
Taken together, the miscues-one of which fell into the category of a blunder-resulted in the agency's preliminary decision to force AT & T to divest either TWE or Liberty within one year, perhaps jeopardizing Armstrong's vision of AT & T as the dominant force in the digital economy.
"I think it was obvious that this was going to happen," one Washington cable lobbyist said. "I can't say whether they blew it or they failed to see the writing on the wall."
At the National Show in New Orleans last week, Armstrong said he remained convinced that AT & T would come out fine in the end. "I can't comment on the MediaOne merger negotiations that are going on, but I am confident that it will get out of regulatory [review] with an approval," he said.
Daniel E. Somers, president and CEO of AT & T Broadband, was bolder in his prediction. "There will be no spinoff of Liberty. I guarantee it," Somers told a group of reporters. Regarding TWE, Somers was more circumspect. "We will have flexibility," he offered.
When AT & T filed the merger last summer, FCC chairman William Kennard ordered the Cable Services Bureau to vet the deal and issue recommendations.
In the ensuing months, AT & T sent waves of lawyers and lobbyists into the bureau for countless hours of meetings to drive home the fine points of complex business contracts and the intricacies of AT & T's many equity investments in cable operators and programmers.
AT & T's strategy was clear: to press the two key points Armstrong and Cicconi made in the conference call. The first was that the TWE investment should not count toward the 30 percent cap because Time Warner runs TWE. And the second was that Liberty's sale of programming to TWE was immaterial because Liberty, while owned by AT & T, was under the semiautonomous control of chairman John Malone.
AT & T had to state its case in that way because inclusion of TWE's 9.4 million subscribers would have put AT & T in control of 40 percent of all pay TV subscribers, well above the FCC's cap.
Cicconi assembled a large team of lawyers to help the FCC digest it all: Betsy Brady, Joan Marsh and Stephen Garavito from AT & T's Washington office; Howard Symons, Michelle Mundt and James Casserly of Mintz Levin Cohn Ferris Glovsky and Popeo P.C.; Wes Heppler of Cole, Raywid & Braverman; and Michael Hammer of Willkie, Farr & Gallagher.
Even though the merger agreement required AT & T to obtain all necessary regulatory clearances, Cicconi padded his lineup with two more lawyers-Susan Eid and Frank Eichler of MediaOne-bringing to at least 11 the number of people who had hands-on roles in dealing with the FCC.
Cicconi's forces made repeated visits to the FCC and filed an endless assortment of documents. FCC staffers said there were days when it seemed as if the only people roaming its corridors were AT & T lobbyists.
Commission sources said meetings could drag on for hours as AT & T lawyers tediously plowed through stacks of exhibits intended to show no conflict between the merger and FCC policies.
AT & T was relentless in its quest to get the FCC staff to adopt its TWE-Liberty analysis, even though agency officials told virtually anyone who asked that AT & T's arguments were implausible even under the new rules.
If the FCC followed the logic of AT & T's arguments, then one cable company could control almost a limitless number of cable subscribers, provided that the company structured itself as a string of limited partnerships that had placed any programming interests into a subsidiary tied to a tracking stock.
Under those circumstances, the FCC would have no cable-ownership cap to enforce, and the law preventing one cable operator from exercising too much power in the program-acquisition market would be nullified.
"From my vantage point, they got off to a bad start in that [AT & T] would not acknowledge things that were factually true," one cable MSO source said. "There are commissioners and people in the bureau who believe the cap matters."
A spokesman for AT & T, asked to comment on various points raised in this article, said, "AT & T declined to comment on the criticisms."
For AT & T, the effort to minimize the TWE-Liberty connection resulted in a serious self-inflicted wound, with FCC officials believing AT & T attempted to bulldoze the Media-One merger past them by relying too heavily on the October rules and smothering the agency in a blizzard of paper that oversimplified the complexity of the deal.
"They were a bit cocksure in that they thought nothing would happen," one FCC source said.
After a while, AT & T's efforts to get the CSB to see the light were no longer chalked up to persistence. Rather, AT & T's pressure became something of an annoyance.
Cable-industry sources said AT & T in fact had been making some headway at the FCC. But the dynamic changed perceptibly when the AOL-Time Warner merger hit and aligned AT & T, AOL and Time Warner under the same TWE banner.
The AOL deal prompted the FCC to take a closer look at AT & T's interests in TWE after its initial focus had centered on the exact relationship between AT & T and Liberty, one cable-industry source said.
Luckily for AT & T, the FCC declined to act on a request from public-interest groups that the agency combine the AT & T-MediaOne merger with the AOL-Time Warner merger. Had the FCC done so, AT & T would not have been able to close on MediaOne until the fall, if not later.
The AOL-Time Warner announcement turned out to be a bit of bad luck, but AT & T's lobbying did little to mitigate the impact of that event. Backed by an army of top lawyers and considered a master of the regulatory process, AT & T's day-to-day handling of the Media-One merger called that proficiency into question.
For example, once AT & T learned that regulatory conditions might apply, it decided to seek an 18-month waiver from enforcement. The request was not unusual, and FCC approval would not have been unprecedented.
What was strange was that AT & T buried the waiver request in a document filed a few days before last Christmas-albeit a deadline set by the FCC. That didn't sit well with the commission, and it fired up public-interest groups that were already in a huff about the deal.
Another apparent tactical mistake, also tied to the waiver issue, came to light in a letter CSB chief Deborah Lathen sent to Cicconi and Eid. The April 6 missive rebuked Brady for declining to provide AT & T with cable-scriber totals until after the FCC had acted on AT & T's waiver request.
In her response for AT & T and MediaOne, Brady disputed Lathen's assertion that she had tied release of the subscriber data to action on the waiver. In addition, Brady implied that the FCC was dragging its feet on the merger.
The Brady letter was controversial both inside the FCC and the AT & T camp. It was considered unusually bad form to release a letter that flatly contradicted Lathen and made it look as if an FCC official didn't have a grip on the facts. And capping the letter by basically telling the FCC to get a wiggle on-especially at a time when AT & T was seeking more meetings with FCC officials and plying them with more analyses-also apparently hurt AT & T's cause.
According to more than one knowledgeable cable-industry source, the Brady letter was a blunder.
At the time, AT & T spokes-man Jim McGann dismissed the episode as "much ado about nothing," claiming that the information the FCC wanted was already in the record.
AT & T made a final attempt at rescuing the merger from conditions.
On April 18, AT & T submitted an elaborate set of safeguards designed to wall off AT & T from TWE's management decisions and from any programming-sale decisions to TWE made by Liberty, Cablevision Systems Corp. (in which AT & T has a one-third stake) and MediaOne (which has stakes in about one-dozen cable networks).
AT & T even offered to give Lathen the power to veto AT & T's selections to serve on Liberty's board.
But AT & T's structural remedies apparently came too late in the process. Two days later, the CSB forwarded its merger recommendations to Kennard and the other four FCC commissioners.
An AT & T spokeswoman, while not specifically answering a question about the timing of the safeguards submission, said the point had been "simply to assure the FCC that we do not and will not have any influence on the sale of video programming to TWE."
AT & T still could gain the approvals it wants, but it would take three FCC commissioners to overrule the CSB. Kennard and commissioner Gloria Tristani, both Democrats, are expected to back the bureau, while Republican commissioners Michael Powell and Harold Furchtgott-Roth are expected to lean in AT & T's direction.
This puts commissioner Susan Ness-a Democrat whose renomination is pending in the Senate-in position to influence the outcome. According to FCC records, Cicconi called Ness'top cable adviser a few days after the bureau's recommendation hit the streets to lobby for a waiver from the ownership rules.
Ness "has always been the one who cared the most about the horizontal rules," a cable-industry source said. "If AT & T can nudge her on this, they are going to have to do something substantial that they have not shown themselves able to do so far. I think she will stay pretty close to what the recommendations are."