Court punts on cable caps
Supreme Court keeps 30% limit on cable subs; AT&T faced with making decision
By Bill McConnell -- Broadcasting & Cable, 2/25/2001 7:00:00 PM
The Supreme Court last week upheld the 1992 law requiring the FCC to limit a cable company's reach. Among other things, that means AT&T is increasingly less likely to escape a government order to sell some of its cable systems.
Without issuing any additional comment, the High Court refused to hear Time Warner's appeal of a lower court decision issued last May, affirming the constitutionality of provisions in the law intended to prevent one or two companies from monopolizing the cable business. Besides providing the basis for the FCC's cable subscriber limits, the law also restricts the number of channels cable operators can devote to programming they own.
Although Time Warner brought the case, the court's decision most dramatically affects AT&T, the nation's largest cable company.
AT&T is the only company above, or even near, the FCC's 30% cap on one firm's share of U.S. multichannel subscribers and is under orders to sell a large chunk of its cable systems.
Time Warner and AT&T have one more opportunity to strike down the current FCC rules. In a second case pending before the federal appeals court in Washington, the two companies are arguing that the FCC's specific 30% limit is unjustified.
Officials at AOL Time Warner, the parent company of Time Warner, would not comment on the case. Officials at AT&T, which did not join Time Warner's challenge to the 1992 law, had no comment on the decision either.
Regardless of how the second case eventuates, AT&T could still face tough going at the FCC. Already, the company is at odds with the agency over system sales ordered as part of the FCC's approval of AT&T's acquisition of MediaOne Group last June.
Currently, AT&T's cable subscribership stands at 42% of the multichannel audience, and the company is under orders to pare its holdings below the 30% cap by May 19. AT&T can fulfill this obligation by selling its 25% stake in Time Warner Entertainment, the limited partnership that controls Time Warner's cable systems, or by divesting Liberty Media and other businesses that sell programming to the Time Warner cable operators. (Under the FCC's complex cable ownership attribution rules, limited partnerships don't count toward the cap unless the investor is "materially involved" in the partnership's video programming decisions.)
Two months ago, AT&T said its preferred route is to sell Liberty and the other programmers. Completion of the Liberty sale, however, depends on an IRS decision shielding AT&T from a big capital-gains tax. Absent a favorable IRS ruling, AT&T said it would, instead, sell its limited partnership with Time Warner outright.
The FCC isn't happy that AT&T left itself with two options when the FCC says it clearly asked for a single solution. The FCC has said it will hold the company to selling the Time Warner partnership. Despite the FCC's warnings, AT&T officials say they will stick to their multiple-choice plan and figure out how to deal with any dispute with the regulators in May.
The wild card in this fight is the change in FCC personnel since President Bush took office. It's unclear whether new agency Chairman Michael Powell will encourage his colleagues to take the same hard line as predecessor William Kennard. Although Powell has expressed confidence in marketplace forces, he has also said he has no plans to rewrite negotiated merger agreements.
Of course, AT&T hopes a victory in its case against the 30% cap will solve its problem entirely. The company's best shot, say industry sources who attended oral arguments in October, is for the judges to relax the FCC's rules for attributing limited investments and other minority ownership stakes toward the cap. The three judges who heard the case against the cap appeared sympathetic to company arguments that the FCC unfairly attributes some small ownership stakes as if the partnerships were wholly owned.
But even if the court rules in AT&T's favor, the company's problems may still not be over. Under current FCC thinking, the company is bound by the terms of its MediaOne merger conditions, regardless of any regulatory changes judges may order. It's a sure bet, though, that the company will ask the Powell FCC, which is expected to be much more skeptical of the value of industry ownership caps, to change the merger terms.
Under rules revised in October 1999, any voting interest of 5% or more equity is attributable toward a company's ownership cap. Limited partnerships are exempt unless stakeholders are involved in partnerships'programming operations.
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