Cable Ruling Is a Setback for AT&T
By Peter S. Goodman
Washington Post Staff Writer
Saturday, May 20, 2000; Page E01
The U.S. Court of Appeals for the District of Columbia yesterday affirmed the constitutionality of a federal law limiting the number of cable television systems a single company may own, dealing a blow to AT&T Corp.'s enormous bet on cable as the means of reaching into millions of homes with telephone and high-speed Internet connections.
The ruling all but ensures that AT&T will face an unpalatable choice in gaining federal approval of its latest cable purchase, MediaOne Group Inc.: It could sell MediaOne's 25 percent stake in Time Warner Entertainment, which owns cable systems in major cities such as New York, or spin off Liberty Media, a holding company with substantial stakes in video programming. Liberty trades as an AT&T tracking stock.
The Federal Communications Commission, which is reviewing the AT&T-MediaOne merger along with the Justice Department, will impose that condition as part of its approval. The FCC is expected to release its order next week, sources said.
Had the court struck down the law capping the allowable ownership of cable systems, the FCC's authority to demand the sale of those assets would have been stripped, analysts said. Upon news of the decision, the FCC promptly lifted a stay on the controversial rules.
"One of the rays of hope that AT&T was holding out for was that the court would rule that the cap was illegal," said Michael Goodman, an analyst with the Yankee Group in Boston.
AT&T officials noted that the court challenge was brought by Time Warner on First Amendment grounds, adding that they never expected the case to prevail. They said they continue to hope the company's own more limited challenge of the numerical limit the FCC has established on cable holdings will still be upheld in a case scheduled for argument this fall.
Yesterday's court decision marks the latest turn in a long and complicated battle that far precedes AT&T's effort to use cable systems to gain connections into homes. Congress, via the Cable Act of 1992, sought to prevent those who own broadcast systems from gaining undue influence over those who produce programming. Time Warner filed suit, claiming the law violated freedom of expression protections, the argument the court rejected yesterday.
"I am pleased that the court has validated laws that promote programming diversity and protect consumers against undue consolidation," FCC Chairman William E. Kennard said.
To implement the law, the FCC drafted rules specifying that no cable company may own more than 30 percent of the nation's cable systems, though it stayed those rules pending resolution of the constitutional challenge. The FCC eased the cap last year, expanding the market it covers to include satellite providers of television programming, and not just cable systems. It also ruled that cable holdings would not be counted toward the cap if a company can show it has no influence over programming on the holdings in question.
Those rules were widely construed as an opportunity for AT&T to close its MediaOne deal without major divestitures. The company argued it does not control Liberty and has no authority over Time Warner's programming. AT&T acknowledged it would own about 41 percent of the market were its Time Warner holdings counted. But because it doesn't have influence over Time Warner's programming, it argued that those holdings shouldn't be counted.
But, in a recommendation widely expected to be adopted by the commission, the FCC Cable Bureau rejected that argument. It countered with a different view: Liberty sells programming to Time Warner. Because AT&T owns Liberty, it has the ability to influence Time Warner's programming. Therefore, its Time Warner holdings should count toward the cap and either Liberty or Time Warner must go.
In upholding the law, the court effectively left AT&T in that same bind. "Now that the rules are going into effect, there will have to be divestitures," said Scott Cleland, an analyst at Legg Mason Precursor Group. "It makes real what was highly contested."
AT&T has lobbied the FCC to waive the rules for 18 months, giving it time to get in compliance. In the draft order now being circulated, AT&T would instead receive a year. But yesterday, consumer groups noted that the FCC's revised rules specify that a company must come into compliance within six months of a court decision on the legality of the rules.
"The commission should just follow the law and its own rules," said Gene Kimmelman, co-director of Consumers Union. "It would be outrageous, and show clear favoritism to one company, to give AT&T more time."
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