Let's see, after spending $100 billion to amass a cable portfolio whose systems own desperately needed links directly to homes, Mike Armstrong now has three choices:
- Dump investments in systems accounting for half the AT & T chairman's subscriber base.
- Sell a 26% stake in the nation's second-biggest cable-system collection, Time Warner Entertainment.
- Or spin off tracking stock subsidiary Liberty Media, an affiliate over which AT & T has zero control and adds nothing but regulatory headaches.
Is this a trick question? Many industry and Wall Street executives think so, contending that Armstrong, AT & T's chairman and chief executive, will most likely comply with last week's FCC terms for approving AT & T's long-delayed takeover of MediaOne Group Inc. by spinning Liberty off to its shareholders.
Handing Liberty over to its chairman and controlling shareholder John Malone wouldn't interfere with Armstrong's ambitions to use cable systems to enter the residential telephone business.
FCC staffers and commissioners worry that the MediaOne-AT & T combination would create an MSO with too much influence over video programming, owning all or part of systems serving 34.4 million subscribers, or 42% of all cable and DBS homes.
The conditions aim to reduce that influence by forcing AT & T to either shrink its holdings or sever any control over programming entities, including Liberty and Cablevision Systems' Rainbow Media unit, which owns American Movie Classics, Bravo and other cable networks.
One option is selling wholly or partly owned systems serving 9.7 million subscribers, essentially every joint venture and partly owned system operation the AT & T Corp. executive has, including premier investments like a 33% stake in Cablevision.
Option two is to sell off MediaOne's 26% stake in Time Warner Entertainment, which holds 80% of the 12.7 million subscribers served by Time Warner Cable.
Option three is spinning off Liberty Media, which is so insulated from AT & T that not only does "owning" it offer no benefits, but also Armstrong would get to watch John Malone busily invest in competing telecom companies.
But AT & T executives insist they haven't made a choice. Speaking in careful legalese, they say over and over that they have no "intention" to split off Liberty. That's because of arcane IRS rules that would penalize Liberty shareholders mightily if AT & T bought Tele-Communications Inc. and its Liberty tracking stock unit, with the ulterior plans to spin the tracking stock off entirely within two years. Even if they wait the full two years-ending next March 9-Liberty shareholders could be taxed on a spin-off if AT & T executives had any intention to separate the companies along the way.
"That's why we have all this ridiculous wordplay that they have no intention of a spin-off," said Banc of America media analyst Doug Shapiro.
AT & T has the right, in December, to demand that Time Warner register AT & T's TWE shares to be sold to the public. That dovetails with an FCC deadline.
The company will have until May 19, 2001, to come into compliance with the 30% cap on U.S. video subscriber share, and must declare which of the three options it will choose within 6 months of closing the deal. AT & T also was ordered to comply with safeguards aimed at preventing the company's programming operations from influencing the content decisions of cable systems it controls.
The company's pledge includes giving cable-modem customers a choice of Internet service providers, treating unaffiliated ISPs on fair terms, allowing streaming of online video and limiting AT & T, Liberty Media and Cablevision Systems from influencing each other through interlocked boards of directors for 12 months.
"My continued support for the commission's vigilant restraint policy ultimately depends on how AT & T fulfills its voluntary commitments in the broadband area," says FCC Chairman William Kennard.
The chairman says that, despite "serious concerns" about AT & T's hold over cable subscribers and programming, he supports the deal because of conditions imposed on the company and AT & T's pledge to help the commission meet a long-term FCC goal by increasing local telephone competition by offering telephony over its cable plant. "This decision strikes the appropriate balance between promoting competition in local telephone service and protecting competition in cable and high-speed Internet service."
AT & T officials were joyously trumpeting the FCC's terms last week. "All of us are delighted by the decision," said AT & T General Counsel James Cicconi. "Our main goal was to be able to have a full range of options for coming into compliance, and, secondly, to have the necessary time to make a decision and implement it."
Cicconi said the company plans to close on the acquisition no later than the first week of August.
Although AT & T officials voiced enthusiasm over the FCC's decision, the company is pursing a challenge to the 30% cap in federal court. The federal appeals court in Washington on May 19 upheld the 1996 law that provides the underpinning for the rules, but a second suit challenging the FCC's implementation is still pending.
Despite winning a victory by securing a strict divestiture order, consumer groups criticized the decision because it provides a "road map" that could lead the way to domination of the broadband and cable industry by one company.