Commentary: The Wrong Way To Open The Media To Minorities

Only in the wacky world of Washington could cable leviathan John C. Malone be deemed disadvantaged. But that's effectively what's happening in a $2.3 billion deal the Tele-Communications Inc. chief has cooked up with a minority business partner to buy cable-TV systems from Viacom Inc. The transaction, to be announced the week of Jan. 9, allows Malone and his partners to nab coveted cable assets at a deep discount.

Here's how the deal works: Viacom Chairman Sumner M. Redstone will sell his cable systems, with 1.1 million subscribers, to a group of investors led by Frank Washington, a businessman and former Carter Administration official who is African American. Washington will own 21% of the two partnerships set up to buy the systems. The balance will be held by Intermedia Partners IV, a San Francisco-based partnership that is, in turn, 25% owned by Malone's TCI.

PERFECTLY LEGAL. Because Washington retains voting control of the partnerships, Redstone is legally selling to a minority. And under the Federal Communications Commission's Minority Tax Certificate Program, which provides tax incentives to those who sell media properties to minorities, Viacom can defer roughly $400 million in capital-gains tax it would have had to pay on the sale. Not only that, Malone is only a passive investor. So he'll probably avoid the ire of federal regulators who have nosed around other recent TCI cable deals. If all this seems devilishly clever, that should come as no surprise: Washington dreamed up the minority-preference program as an FCC official during the Carter years.

Nobody can fault Redstone or Malone for seizing on a perfectly legal loophole. The trouble is that the system permits them to do it. The purpose of the FCC's program is to make it easier for minorities to buy TV properties by offering tax breaks. Broader ownership, the theory goes, will produce more diverse programming and workforces. The FCC is also applying the program in its awarding of licenses for a new wireless phone service, personal communications services (PCS). But in both industries, the gap between theory and practice should make it a ripe target for the Republican Congress.

Take another look at Viacom's deal. Redstone acknowledges that he would have asked for a higher price if Viacom weren't eligible for a tax break--which comes at the expense of taxpayers. Without the incentive, says Leo J. Hindery Jr., managing general partner of Intermedia Partners, the transaction may not have happened at all. What's more, Redstone is conducting parallel talks with Malone about dropping an antitrust suit he filed against TCI in late 1993. Malone's participation in the Intermedia deal could hasten that process, though a senior Viacom executive insists these issues aren't linked. While Redstone admits Malone has a stake in the deal, he says the other partners have far more: "They've got to go out and raise a hell of a lot of money."

Because it's so smart, the Viacom deal may augur more of such arrangements. In auctioning off PCS licenses this April, the FCC plans to give special breaks to small businesses, women, and minorities. The goal is to prevent a spectrum grab by well-heeled companies that could outbid entrepreneurs. But if history is any guide, these preferences will simply encourage big companies to team up with bidders entitled to the breaks. Indeed, it's all but inevitable: The cost of building a PCS system will run more than $100 million.

When Congress was run by Democrats, it encouraged special treatment for favored groups. Now the Republicans have a chance to jettison that concept. Such programs may encourage minorities to knock on the FCC's door. But as the price of communications assets escalates, there's likely to be a John Malone standing right behind them.

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