CONSUMER GROUPS FEAR IMPACT OF COMCAST MERGER WITH AT&T BROADBAND

House Commerce Committee Chmn. Tauzin (R-La.) met with Roberts to discuss proposed deal, but details of discussion couldn’t be revealed, Tauzin spokesman Ken Johnson said: “Big isn’t synonymous with bad. But clearly a combined Comcast-AT&T behemoth would change the dynamics of the marketplace. It could bolster EchoStar’s bid to acquire Hughes Electronics, and it certainly would help us to make a case for passing the Tauzin-Dingell legislation.” He said Congress must determine whether to deregulate phone companies or to re-regulate cable companies “to ensure consumers are protected from monopolistic behavior.” He said Tauzin was focusing on emerging broadband market and would prefer level playing field. Although Johnson mentioned cable re- regulation, he said Tauzin clearly would prefer to deregulate incumbent phone companies to ensure regulatory parity, as evident by Tauzin-Dingell’s deregulatory provisions.

Media Access Project Deputy Dir. Cheryl Leanza said deal put FCC in “terrible position” of having to evaluate sale while weighing rulemaking on cable ownership caps. Notice was prompted by U.S. Appeals Court, D.C., ruling that struck down FCC’s cap that had blocked cable MSOs from reaching more than 30% of national audience (CD March 5, p1). Without cap, there’s no legal, numerical standard by which to measure whether AT&T-Comcast is too big, critics charged. Deal would create subscriber base of about 22 million customers, which would top 30% based on figures that showed roughly 65 million cable customers nationwide. However, if whole pay TV market, including satellite, were considered, deal wouldn’t reach 30% of 88.3 million people nationwide who buy TV services. Another factor in mix is that AT&T currently owns 25% of Time Warner Entertainment, which owns nation’s 2nd largest cable operator with 12.7 million customers, as well as stakes in several other cable companies. It was unclear whether FCC would scrutinize sale before or after it created new rules.

Leanza and other observers said AT&T and Comcast were counting on 30% cap to disappear. That has given Commission “an incredible credibility problem,” Leanza said. “The mergers are premised on the idea that the FCC’s limits will not be re-imposed” and that companies can lobby to get what they want, she said. “Eventually, the FCC can well lose its ability to regulate under those circumstances.” Consumers Union said it would ask FCC to reject deal unless AT&T and Comcast were willing to divest themselves of 5-6 million subscribers and spin off AT&T’s stake in TWE.

Commission has history of evaluating deals while handling pending proceeding, one FCC official said. For example, Commission was weighing cap while examining merger of AT&T and MediaOne, which it eventually approved. Official acknowledged that some FCC critics believed Commission could cater rule to deal or, conversely, to pending rule, but said in reality 2 cases will be “completely separate” and evaluated on their own merits.

High-ranking Comcast official admitted that new company would be above 30% cap, but said by time deal was completed, it would be well within bounds. Company is measuring its reach based on multichannel video marketplace of more than 88 million subscribers, official said. Under current FCC rules, AT&T has 5 million customers attributable through Adelphia, Charter, Insight and other cable holdings, and 10 million through its stake in TWE. AT&T has 3 million customers attributable through Cablevision Systems, although it has been shedding that stake in recent months. Comcast Pres. Brian Roberts and AT&T CEO Michael Armstrong, who will be CEO and chmn. of new company respectively, said in conference call with reporters that they planned to dispose of TWE stake. Asked whether they planned to dispose of other properties, Roberts said it was too early to say. However, one Comcast official said: “When the deal closes, the deal is going to be in compliance with the FCC’s rules and policies.”

Former FCC Cable Bureau Chief Deborah Lathen said challenge for current Commission would be to evaluate deal in “a regulatory no-man’s land” with no cap in place (CD Dec 20 Special Report). “Clearly, there has been every indication given that the caps are not insurmountable,” Lathen said. “The bar has shifted on what’s thinkable and what’s not.” Lathen said current Commission, though dominated by Republican free market thinkers, would give deal “very careful scrutiny,” especially with regard to possible harm to public interest.

Analysts, while expecting regulatory scrutiny, said they didn’t foresee federal govt. stopping merger. Analyst Laura Behrens of GartnerG2 said she didn’t believe either FCC or Dept. of Justice would pose serious problem. “That cap is not going to be a deciding factor,” she said. “It is perceived in the television industry that the cap goes away.” Paul Glenchur of Schwab Capital Markets said size of deal surely would “raise some concerns” but said one alternative considered by AT&T’s board, merger with AOL-Time Warner (AOL- TW), would have caused “more heartburn” than Comcast. Legg Mason analyst Blair Levin, who was chief of staff under former FCC Chmn. Reed Hundt, said he believed sale would pass muster in end. “From my understanding, from an FCC regulatory perspective, there is no hurdle [for Comcast]… since we know the 30% number is going up,” he said. However, he said deal -- taken together with proposed EchoStar-DirecTV merger -- could prod regulators to take 2nd look at market for purchasing programming. Levin said such large combinations could have significant impact on program buying market, making it more difficult for some programmers to get carriage.

Concentration of cable companies always is concern for local govts., National Assn. of Telecom Officers & Advisers (NATOA) said, because “the larger they get, the less local they become.” Saying AT&T Broadband-Comcast deal was complex, NATOA Exec. Dir. Libby Beaty said nature of transfers that would be required at local level would become clear only after sale was consummated.

Center for Digital Democracy promised to oppose sale. “Americans should be very worried about how this new combination will affect what they pay each month for cable and Internet service,” CDD Dir. Jeff Chester said, “whether they will be able to fairly access different channels and services; and, more importantly, how this new megagiant poses risks to our democratic society. They intend to place a chokehold over a vital sphere which is the essential foundation for a thriving democracy -- a communications system which supports the free flow of information.” Leanza agreed, saying new and diverse programming voices would be stifled if they must have carriage on one or 2 system operators to be heard by public.

But Roberts told reporters that acquisition could have programming benefits for consumers. Programming costs have been increasing dramatically in recent years, he said, and company with such large subscriber base would have easier time getting discounts. That could mean lower prices for consumers, although he said he didn’t want to “overstate” impact. But he said such discounts could also mean “more and more channels” at economical price.

SBC Communications said there was “urgent” need for lawmakers to establish “fair rules for all competitors” in broadband market. SBC is trying to compete against cable modem service in high-speed data market with its DSL product. SBC complained that cable companies controlled some 70% of broadband market and weren’t subject to same kinds of regulation as telephone companies -- namely, that they didn’t have to open up their networks to competitors. “The new company would also become the largest broadband provider in America,” SBC said. SBC said rules and regulations it faced added cost, lengthy delays and disincentives to deployment.

NCTA Pres. Robert Sachs said combined AT&T Comcast entity would be in better position to compete with proposed EchoStar-DirecTV. He also said consumers would enjoy benefits of “vigorous competition” among cable, telephone and satellite industries.

While calling AT&T board’s decision “disappointing,” Cox CEO James Robbins said his company, which also bid for AT&T, would be open to other deals in future: “As always, we will continue to stay abreast of merger and acquisition opportunities in the industry that will allow us to grow strategically while increasing shareholder value.” AOL-TW called deal “a major endorsement of the value of cable,” indicating it wouldn’t oppose it. During negotiations with AT&T, Microsoft was working behind scenes to scuttle deal with AOL-TW by backing Comcast and Cox bids. Roberts said Microsoft’s decision to contribute $5 billion of AT&T securities it owned and convert them to 115 million shares of new company was “a huge help… It allowed us to bid $5 billion more than we would have otherwise.”

CWA, which represents 3,000 employees at AT&T Broadband and 500 at Comcast, said their “employment future” would be union’s top concern in contract negotiations with AT&T set for May. CWA said deal “creates major antitrust issues” at federal and local level. It also sounded warning that Roberts family would own less than 1% of new company’s shares, yet would hold 1/3 voting stake through special class of stock. CWA said Comcast had “inconsistent” record on labor issues and showed “a strong aversion” to union organizing. “The impact of the merger on workers and job conditions in this industry should be a major concern of regulators,” CWA said. Armstrong acknowledged that “some consolidation will take place,” but neither he nor Roberts would predict how many jobs might be lost.

EchoStar-Hughes merger is “best hope” to “compete against cable behemoths” such as one that will be created by Comcast purchase of AT&T Broadband, EchoStar Chmn. Charles Ergen said. He said approval of EchoStar-Hughes merger was essential as market consolidation accelerated. He said 40 million subscribers will be affected by new AT&T Comcast, which will have 48% of Multichannel Video Programming Distribution Market (MVPD). By comparison, EchoStar-Hughes combination represents 17% of MVPD market, he said. -- Brigitte Greenberg

Editor’s Note: Portions of this story were included in a Communications Daily special report Wed. evening, which was distributed to all electronic subscribers, and others. To receive special reports on breaking news, send your subscriber name and e-mail address to newsroom@warren- news.com.