Commentary: The At&T Media One Deal: What The Fcc Missed

Federal Communications Commission Chairman William E. Kennard was clearly seething on June 7 after it was reported that AT&T planned to boost basic rates on its residential long-distance service. "AT&T promised to pass on savings to all consumers," Kennard said in a statement. "Their new rate plan does not do that. It is in our order, and I'm going to enforce it."

AT&T immediately backed down. And why not? The telecom giant already has gotten from the FCC a concession in its $58 billion takeover of cable operator MediaOne Group.

MURKY. The break: AT&T is being allowed to decide how to reduce its own cable dominance. This means that it could choose to retain its 25% stake in the nation's other big cable carrier,

Time Warner Entertainment Group. AT&T will be allowed to operate under the same roof, so to speak, as its biggest online rival, AOL Time Warner. That kind of cross-ownership within any other industry would certainly raise red flags. The danger: As the top two U.S. cable operators--which are also vying to offer high-speed Internet access to consumers--they could decide to cooperate rather than compete.

Why would the FCC make such a move? In the fast-moving world of telecom, regulators are entering uncharted territory, where they must make complex trade-offs. In this case, the regulators got a promise from AT&T that it will use MediaOne's cable systems to provide local phone service in competition with the powerful Bells--a key goal of the 1996 Telecommunications Act and a priority for the Kennard regime. Perhaps that explains, at least in part, the intensity of Kennard's response when AT&T appeared to be breaking another pledge.

The approval of AT&T-MediaOne didn't let the companies off scot-free. To its credit, the FCC will require AT&T to divest some cable properties because of the impressive 42% of pay-TV subscribers AT&T will control once it completes the MediaOne deal. That far exceeds the 30% cap on the amount of the national pay-TV market any one company may own. So the regulator gave AT&T three options to comply with the cap by May 19, 2001: Divest the 25% holding in Time Warner Entertainment that AT&T will inherit from MediaOne, sell Liberty Media Group and other programming interests, or shed 9.7 million cable subscribers. Most analysts think Liberty Media will be the part to be shed.

COURT FIGHT. The FCC believes its role isn't to run AT&T's business and make its choices for it. The agency's 30% rule is also under challenge in court, and a heavy-handed regulatory move in AT&T's case could invite yet another challenge from that company. "We struck the appropriate balance," says Kennard.

What's the solution? Luckily, trustbusters at the Federal Trade Commission and the FCC are reviewing the related megamerger of AOL and media giant Time Warner Inc. The Time Warner Entertainment stake "might give them some headaches," says Janney Montgomery Scott Inc. telecom analyst Anna-Maria Kovacs. One nightmare scenario that the agencies should consider: If both AT&T and AOL Time Warner's broadband cable services favor using AOL and Time Warner content, other programmers might have problems getting into the broadband market. Another possibility: AT&T's cable systems may choose to deliver AOL's new interactive TV service in exchange for delivery of AT&T's local phone calls over Time Warner cable systems. Under that cozy arrangement, AT&T might not push its own competing interactive TV service. Less competition usually equals higher prices for consumers.

For now, these are hypothetical dangers. But the door to mischief has been left open by the FCC--and it now seems to be up to them and to the FTC to slam it shut.

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