FCC on AT&T/TWE: Help!

Commission asks for public comment on how D.C. court's scrapping of cable cap affects decision to require asset spin-off

FCC commissioners are still trying to decide whether AT&T must sell its interest in Time Warner's cable systems despite a court decision striking down limits on one company's share of pay-TV subscribers.

At the prodding of Consumers Union and other public advocacy groups, the FCC last week asked for public input on how the court ruling affects AT&T's pledge to sell cable investments as a condition of government approval for acquiring MediaOne Group last June. The comments are due May 11; replies, May 25.

The FCC suspended AT&T's May 19 divestiture deadline following a decision by the federal appeals court in Washington on March 2 striking down the 30% limit on one company's share of pay-TV subscribers.

Consumers Union, however, says there's no reason to absolve the company of its divestiture obligations because the order was based on the FCC's authority to act in the public interest and not simply on the cable-ownership limits. "The required divestiture was not undermined or invalidated by the decision" of the court, Consumers Union told the FCC.

AT&T officials said the FCC's call for public reaction was "reasonable" and they "look forward to working within the process established by the FCC to consider the significance of the court ruling."

Consumers Union argues that AT&T is specifically obligated to sell its 25% stake in Time Warner's cable unit, known as Time Warner Entertainment.

That's because the FCC in December rejected AT&T's "failsafe" plan for complying with the government's ownership cap. Although AT&T said it preferred to get under the cap by selling cable programmers that sell TV shows to Time Warner, it would do so only if the IRS shielded the sale of programmer Liberty Media from a big capital gains hit. The FCC, led at the time by Democratic Chairman William Kennard, insisted AT&T give a definitive answer and ordered AT&T to carry out the company's second choice, which was to shed its stake in TWE.

If the FCC eventually requires AT&T to make some divestiture, will the agency stick to its guns on the TWE designation? New FCC Chairman Michael Powell hasn't said, but the company has cleared the first hurdle: The IRS two weeks ago said the Liberty spin-off would be tax-free.

Although the FCC gave AT&T three divestiture options, the other being a sale of any combination of cable systems totaling 9.7 million subscribers, Consumers Union says a forced sale of TWE should be a no-brainer. In addition to the FCC's standing order to sell the Time Warner unit, the group argues that the industry landscape has changed dramatically since the AT&T/MediaOne deal was approved last June. For starters, the merger of America Online and Time Warner has reduced competition in the media business.

Furthermore, AT&T's new plan to split its long-distance phone business from the cable and broadband operation virtually eliminates the major purported public benefit of the MediaOne merger: that greater efficiencies between phone and cable/broadband operations will speed the rollout of local phone service.

Despite Powell's repeatedly expressed misgivings about media-ownership limits, public advocates say they are optimistic that AT&T's divestiture order will be enforced.

"Powell, while he believes ownership policies should be changed, also believes commission decisions are binding," says Cheryl Leanza, deputy director of Media Access Project.

The consumer advocates, who also are fighting News Corp.'s request to expand its New York City waiver from the same-market newspaper/broadcast crossownership ban to include a second TV station, are making their stand as the courts and Republican policymakers are pressuring the FCC to relax a broad array of media ownership restrictions (see In Brief).