Fed up, court bound

Tele-Communications Inc. president and CEO John Malone continued to rattle his saber at the Federal Communications Commission Thursday, calling the new cable rate rollbacks “probably illegal and unconstitutional” and promising court challenges.

But while he continued to peg regs as the main reason TCI’s proposed merger with Bell Atlantic Corp. fell through on Wednesday, he also insisted his companywas well positioned to ride out the rate cuts — largely thanks to its programming ownership and foreign businesses.

Bell Atlantic and TCI, in separate conference-call post mortems a day after the collapse of their merger, pinned the blame mainly on government regulation.

Malone said the FCC’s rate rollback, announced Tuesday, will pull $ 140 million in cash flow out of TCI’s coffers. Even more devastating, that figure translates to a total of $ 865 million, he says, because “we’re so heavily leveraged: Every dollar of cash flow equals $ 6 of debt.”

Further, he said, the loss in total cash flow of all U.S. cable systems by the FCC-published figure of $ 2 billion means, using the multiple of six, that “the FCC is taking $ 12 billion out of our pockets. That’s the equivalent of the total capital investment of the entire cable industry.”

While diplomatically saying that “we’re not pointing fingers at the FCC, which is only doing its job,” James Young, VP and general counsel of Bell Atlantic, went on to say that the 12% annual growth in cash flow typical of the cable industry before the rate rollbacks “is now fundamentally changed to a figure of about 8%.”

Jim Cullen, president of Bell Atlantic, says that the regulations “set back incentives for investment in the information superhighway.”

Other factors

But it wasn’t only FCC regulation that derailed the merger, Malone says.

“When interest rates went up,” he says, “Bell Atlantic’s stock went down,” as did the stock of all of the other Baby Bells. The falloff in Bell Atlantic stock combined with the new regulations “made it impossible for the two of us to arrive at a mutually acceptable price” and complete the merger, says Malone.

Malone says the FCC’s rate cuts “are probably illegal and unconstitutional. We’ll be challenging them in the courts, but it’ll take many years” before a judicial decision could resolve such complicated litigation.

However, both Malone and Cullen say their companies will continue to move aggressively to provide more programming and services to their customers.

In programming, TCI owns substantial interests in such cable networks as CNN, Discovery and TBS.

TCI’s merger with Liberty Media Corp., which Malone says will be completed “by June, at the latest,” will give it ownership positions in such additional cable networks as Family Channel, Barry Diller’s QVC, Black Entertainment TV, Home Shopping Network, Court TV, Encore and a batch of regional sports channels.

“We’re in better shape than our fellow cable operators,” says Malone. “Over the last 18 months to two years, we’ve developed the technology for the delivery of 500 channels, plus the programming” needed to fill those channels. “We’re still enthusiastic about the incredible array of new products and services” to be funneled to subscribers’ living rooms in the next 10 years.

Malone says he’s convinced that when “the fine print” of the new FCC regulations comes off the presses, possibly by late April, “we’ll see strong encouragement for new programming.” He further promises “a series of announcements in the days and weeks ahead” of joint ventures between TCI and companies involved in both programming and in technology.

Bell Atlantic’s OK, too

Cullen says Bell Atlantic “has had no trouble” getting the major studios and television companies to supply theatrical movies and TV series to the subscribers of its Stargazer video-on-demand test in Alexandria, Va.

Stu Johnson, president of business information services for Bell Atlantic, says he hopes to get Stargazer into 1 million homes within Bell Atlantic’s service area by the end of 1995 and 8.75 million homes by the year 2000. Based on a federal court decision handed down last year, Bell Atlantic is the only Baby Bell that can sell programming to customers in its telephone-service area.

Goodbye discounts

The failed merger, though, means “we won’t be able to buy programming through TCI’s favorable rate card,” says Johnson, referring to the volume discounts TCI is able to negotiate as the biggest cable operator in the U.S. by far, controlling more than one in every four cable subscriptions.

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