October 9, 1999

AT&T Benefits as F.C.C. Eases Curbs on Ownership in Cable TV Industry

By STEPHEN LABATON

ASHINGTON -- The Federal Communications Commission decided on Friday to loosen substantially the rules that keep one company from controlling too much of the cable industry. The new rules clear the way for AT&T to own more than a third of the nation's franchises offering subscribers television, telephone and high-speed Internet services as well as own major interests in a number of major video producers and television programmers.

Coming after a wave of huge telecommunications mergers, the decision lays down the second important policy marker of the week -- that the Government is willing to tolerate heavy concentration in one industry, like cable television, if it holds the promise of offering competition in another, like local telephone service.

In the name of promoting local service outside their areas, the F.C.C. on Wednesday approved the proposed $72 billion merger of two regional telephone companies. That ruling permitted SBC Communications Inc. and the Ameritech Corporation to form the largest Bell operating company in the United States.

Friday's vote, coming just two months after the commission relaxed the ownership rules for broadcasters, sets a framework to permit AT&T to become the nation's largest cable operator by completing its $58 billion purchase of the Mediaone Group. The old rules would have required AT&T to make significant divestitures, while the new rules may force, at most, some limited sales. But the commission, which has been bombarded by AT&T lobbyists and executives in recent weeks pleading for a relaxation of the rules, practically invited the company to seek waivers for some of the few remaining restrictions on its deal.

Precisely what effect the new rules will have on consumers, prices and quality of service is a matter of dispute. F.C.C. officials and AT&T executives said the change would lead to greater competition in local markets, and thus lower prices, as well as faster development of high-speed Internet service. But consumer groups, which had argued for tougher rules, said it would result in more concentration of cable properties, robbing cable subscribers of what little competition already exists, and could ultimately lead to higher prices.

By a vote of 5 to 0, with 2 commissioners partly dissenting, the agency redefined the rules and relevant markets in a way that might ultimately make it possible for AT&T to offer local telephone service to more than 40 percent of the nation's homes. Although the old 30 percent cap was technically not changed, the revisions to the definitions of markets and cable ownership effectively raise the ownership cap for cable television to the rough equivalent of 36 percent and even more for cable telephone service.

The agency also changed the rules to enable AT&T, after some corporate reorganizing, to maintain other properties it gets from the Mediaone acquisition that produce broadcast programming, including its 25.5 percent stake in Time Warner's cable systems, HBO network and Warner Brothers film studio. But AT&T executives will now have to present a plan to the F.C.C. demonstrating that programming decisions are sufficiently insulated from the cable transmission operations.

William E. Kennard, the chairman of the commission, said the rules were reworked in an effort to balance the 1992 cable law, which was intended to reduce ties between cable companies and programmers, and the 1996 Telecommunications Act, which instructed the F.C.C. to take steps to encourage the development of high-speed Internet access and foster competition in local telephone markets. Rapid advances in technology have enabled the companies that AT&T has been rapidly acquiring to offer all these services through an upgraded cable wire.

The laws, Kennard said, failed to fully appreciate how quickly technology was changing the marketplace.

"If big cable companies wanted to consolidate just to dominate cable broadcasting, everyone would find that troubling," Kennard said at the hearing. "But if the cable companies want to enter into arrangements to provide for new competitive ventures, like local phone service and high-speed Internet access, that's a different thing altogether. Not only would it not be a threat to competition, it could actually be a boon to competition."

In an interview later in the day, Kennard expanded on his views:

"What this week means is that the telecommunications industry is restructuring before our eyes. It will never be the same and we cannot pretend that the changes will not have an enormous impact. Although we typically cast a wary eye toward consolidation, we have to think about how it can benefit consumers."

But consumer groups called the new rules a sop to AT&T.

"This is intellectually dishonest," said Andrew Jay Schwartzman, president of the Media Access Project, a Washington group that promotes consumer rights and diversity of the airwaves. "The same F.C.C. that decried legal fictions and artificial legal constructs in August in taking the loopholes out of the broadcast ownership rules has created an even greater set of legal fictions and loopholes in the cable ownership rules."

"The script for today was written in Basking Ridge, N.J.," he added, referring to the site of AT&T's corporate headquarters.

Schwartzman and other consumer advocates said today's decision was certain to prompt related industries, like broadcasting, to return to the F.C.C. to seek a relaxation of their concentration rules. Viacom Inc., whose $37 billion purchase of CBS exceeds the broadcast ownership limits, has already said it would seek to have those rules changed so it would not have to sell any properties to complete that deal.

While the enforcement of the rules was stayed by the F.C.C. until the completion of a lawsuit that has challenged the constitutionality of the old rules, AT&T executives today said they were generally pleased with the new rules but that the F.C.C. should have gone further to reduce the concentration rules, which would enable the company to continue on its buying spree. C. Michael Armstrong, AT&T's chairman, said at a news conference that he hoped to be able to offer local telephone service through AT&T's cable network to roughly half the nation, about 50 million homes.

"The new cap permits us to proceed with the Mediaone deal," Armstrong said. "In the absence of the ruling there had been a great deal of uncertainty and doubt."

Two commissioners dissented in part from Friday's ruling. Gloria Tristani, often a close ally of Kennard, said the commission had gone too far in relaxing the rules. On the other end of the spectrum, Harold W. Furchtcott-Roth said the agency should have relaxed the rules even further.