Day Of Reckoning For AT&T

AT&T's $120 billion bet that it can turn most of the nation's cable television systems into launchpads for its re-entry into local telephone service may hit a roadblock: a Federal Communications Commission that has to prove it's not in the back pocket of the best-known communications company in the country.

This Friday, Oct. 8, the FCC is slated to deliver its verdict on just how much of the nation's cable infrastructure a single company can own. If the FCC forces AT&T to give up a large number of the cable systems it is committed to buying, the company may have to retrench and rethink how it becomes a local telephone competitor.

"We will know the outcome Oct. 8, and we will take it from there," FCC Cable Bureau Chief Deborah Lathen said. "And AT&T will take it from there in terms of how they structure themselves in relation to the rules."

Lathen wouldn't say how much adjustment might be in store - but any reductions would make it harder for AT&T to be a nationwide provider of both local and long-distance service.

"It's going to put a huge crimp in [AT&T's] national-reach plans," said Legg Mason Precursor Group's Scott Cleland, an AT&T critic. "The question is not if they're going to have to divest; it's how much they're going to have to divest."

AT&T has bought Tele-Communications Inc., long the leader in cable systems. It is in the process of spending another $58 billion on MediaOne Group in a bet-the-farm strategy that would allow it to serve more than half of America's households with telephone service, as well as television programming and high-speed Internet access.

Following the purchase of MediaOne, AT&T cable systems would serve 35 million, and pass 55.8 million, households in a country with approximately 100 million homes - requiring the FCC to relax a long-standing proposal that no cable system operator own systems passing more than 30 percent of households.

AT&T is trying to get the commissioners to relax their grip - arguing, first of all, that just because it holds the dominant share of the cable business doesn't mean it actually dominates the pay-television business. Consumers now have other choices, including wireless and satellite alternatives.

But AT&T is also arguing that the FCC shouldn't count subscribers it reaches through minority holdings in other cable operators.

Commissioners, including Chairman William Kennard, remained open to hearing that argument. There would be a condition, though: that the carrier exclude itself from the programming decisions the regulations are concerned with, a key commissioner's aide said.

That change may be crucial. The aide said if Time Warner Entertainment's 16 million homes passed were attributed to AT&T by virtue of a stake gained through MediaOne, "AT&T will far exceed that cap" and face serious divestments. But if AT&T gets them excluded, "they probably will be under the [30 percent of homes] cap as proposed," the aide added.

The FCC's dilemma

If the FCC doesn't adopt rules that effectively block the MediaOne takeover, or force AT&T's sale of major cable holdings, there will be other risks - to the FCC itself.

If the agency backs off on rules that it has steadfastly propounded for the past seven years, it will be criticized as a patsy for AT&T; and the Kennard commission may well appear to lack backbone.

AT&T has spared no effort in making its case. Several members of AT&T's armada of about 90 Washington advocates were scrambling, up to an Oct. 1 lobbying deadline, to persuade the FCC to lighten up. AT&T's full-court press has seen cable and Internet President Leo Hindery Jr., as well as Chairman C. Michael Armstrong, make pilgrimages to the commission. Armstrong even took to meeting with staff members - an effort falling way below the normal levels of lobbying protocol.

The main focus of the efforts: Commissioners Linda Tristani and Michael Powell, the most centrist members and likeliest swing votes. "It's a 3-2 vote either way," said Consumer Federation of America Research Director Mark Cooper.

An unexpected position

That AT&T finds itself in this position is unexpected. When it announced the MediaOne takeover in May, AT&T dismissed the potential for any regulatory hitches. General Counsel James Cicconi - hailed as a lobbying genius for rousing the giant from its previous bureaucratic sloth - even publicly ridiculed some ownership rules as "absurd."

Kennard signaled that AT&T had misread the situation. The FCC chairman - who had greeted AT&T's 1998 purchase of TCI as "eminently thinkable" if it were to bring an "all-star competitor" to local telecom services - was much less enthusiastic about the MediaOne takeover. "Because of it size and reach and the many novel legal issues and policies involved, this warrants very careful scrutiny," he said.

Now, AT&T is taking the issue dead seriously, despite procedural options and uncertainties.

The company could ask the FCC for a waiver, but that would entail a huge exception to a rule that can only cover a few big companies to start with. The FCC could put off rule enforcement, as it did with its old ownership limits. But if it does that, it will be expected to make approval of the MediaOne takeover subject to later application of the cap, only making matters worse. AT&T could invest in building up MediaOne properties - and then have to let them go.

AT&T could sue, but some of its issues already are in pending litigation due for appellate decision next year. A ruling favorable to AT&T would gut federal cable and related broadcasting regulation and seems highly unlikely, according to many analysts. "We feel pretty confident" the pending case will uphold the law, Lathen said.

But AT&T does have two preliminary wins under its belt.

The carrier in September prevailed upon the commission to put off an imminent disaster. The FCC, by all accounts, was prepared to reimpose rules setting the limit at 30 percent of households passed by cable - and to count against that cap the entire subscriber base of cable systems in which an investor has a stake as low as 10 percent for passive investments and 5 percent for active investments. Passive investors are pension and mutual funds, insurance companies and others under legal obligations not to interfere with a cable operator's management.

With MediaOne, AT&T would blow past such a cap, with about two-thirds of households. Even the calculations most favorable to AT&T would put it at more than 40 percent. The FCC suspended the rules during the appeal of a federal court ruling that held the underlying law unconstitutional.

The other notch in AT&T's belt: The FCC has decided to include satellite-dish subscribership in the total universe against which a company's ownership percentage would be determined. AT&T's actual ownership, and subscribers attributed to it because of investments, would be divided by the entire pay-TV market, a larger denominator than the cable universe. But this change wouldn't help AT&T much, because it would move its ownership percentage only a handful of points.

To salvage all or nearly all of MediaOne and TCI, AT&T is not done providing commissioners lots of suggestions. "This is like limbo and shimmy," opponent Cooper mocked. "They've got to figure out a way over, under or around these rules."

One AT&T argument is that Congress' purpose in mandating ownership limits was solely to protect programmers from exploitation by a few domineering cable operators. This was reflected in AT&T proposals that would get affiliates excluded from FCC ownership totals if a company agreed to give up its voting power and promised not to discuss programming decisions with cable companies where it held a minority stake.

Opponents contend no formal walls can keep cable companies from being influenced by the programming interests of a significant shareholding company. Besides, AT&T's autonomous but wholly owned Liberty Media Group has programming deals with virtually all cable operators.

AT&T has argued that it needs as much of the nation's cable business as it can have for the "scope and scale" needed to compete against the Bell telephone operating companies that now dominate local telephone services.

But AT&T seemingly can't have it both ways. It has attacked the "scope and scale" argument in opposing the merger of two Bell companies, SBC Communications and Ameritech. And the FCC could be swayed by the fact that AT&T doesn't have to own cable systems in order to offer telephony and high-speed Internet service. AT&T, after all, already has done so through deals with other cable companies, such as Comcast and, potentially, Time Warner.

The biggest hurdle

AT&T's biggest hurdle is the FCC's consistent defense of the need for the old limits. The commission reaffirmed the rules last year; it has vigorously defended them in court; its staff, which seeks to reflect the chairman's views, is holding firm for no significant change beyond counting satellite subscribers; and Congress has indicated cable ownership-attribution rules should track broadcast rules the FCC just recently laid down in August, which took a hard line against exemptions, according to Andrew Jay Schwartzman at the Media Access Project.

"The commission is torn between a desire to make something happen [for AT&T's local-competition efforts] and a desire not to undermine its entire regulatory scheme for broadcasting and cable," Schwartzman said.

The confrontation threatens a highly amicable relationship between the FCC and AT&T, since enactment of the Telecommunications Act of 1996.

The carrier has had "an awesome track record in recent years," analyst Cleland said, on the central issues of encouraging local phone competition and the raising of thus far unsurmounted barriers to Bell entry into long-distance. AT&T's opponents already grumble about the FCC being in AT&T's pocket. "They seem to get whatever they ask for," BellSouth spokesman Bill McCloskey said. "Whether that's because of their lobbying skills or the validity of their case, I'll leave for others to decide."

In addition to its formidable lobby at the FCC, AT&T wields great clout in Congress, which controls the commission's purse strings. Other FCC supplicants, including long-distance competitors and local carriers, have substantial lobbies of their own. But AT&T, long the nation's only phone company, has four to six decades' head start on the rest of the telecommunications industry.

"They pretty much do what other large companies do, but they're the biggest, so I think it's fair to say they do more," AT&T antagonist and U.S. Telephone Association Chief Executive Roy Neel said.

Still, FCC defenders have insisted that the institution has maintained its independence from AT&T, and that Kennard has earned his reputation for rectitude. "The idea that Bill Kennard geared something to anybody is a laughable proposition," said John Nakahata, a telecom lawyer and staff chief for Kennard predecessor Reed Hundt.

"We duke it out with AT&T, and we duke it out with everybody," Lathen said. "They don't get any better or any worse than anyone else. There is no preferential treatment given to AT&T."

The carrier didn't get its way entirely, for example, in last month's ruling on mandatory leasing of Bell network pieces, known as unbundled network elements. Even on mandatory cable-Internet access, where it might be hard to distinguish Kennard's speeches from Armstrong's, the commission put a bit of air between its legal position and AT&T's when it filed a brief to the appeals court in the battle over Portland, Ore.'s, access requirement.

Besides, if the FCC were in AT&T's pocket, why would the carrier have to pull out the stops with its lobbying campaign? Armstrong and Hindery certainly have things to do besides calling on bureaucrats, hat in hand.

The FCC and AT&T seem to get along, for the most part, because AT&T at the moment seems the best vehicle to get to the ultimate goal of 1990s telecommunications legislation: creating real competition in local phone markets. But that tight relationship may be about to come apart.

"Some commissioners and staff are beginning to be concerned, rightly, that they're [seen as] just rolling over for AT&T on everything," said Schwartzman, who doesn't believe that himself. "I think some of Kennard's friends and admirers have said this is really looking bad."