AT&T’s deep pockets only go so far

AT&T's deep pockets only go so far

AT&T CEO MICHAEL ARMSTRONG got way ahead of himself when he told investors that he expected a prompt federal approval of his company’s $56.4 billion purchase of MediaOne.

To make a long story short, it turns out that the threats Armstrong used to push through his $48 billion purchase of Tele-Communications Inc. won’t work this time around with MediaOne.

Last year, when the Federal Communications Commission began raising questions about the world’s largest long distance company (AT&T) taking over the world’s largest cable company (TCI), Armstrong warned that the FCC would go down in history as the entity that stood in the way of the high speed Internet and the introduction of competition in the local telephone market.

Armstrong argued that only AT&T has the kind of deep pockets necessary to upgrade TCI’s aging cable plant to the point where it can offer local telephone service and high speed Internet access. AT&T insisted that all of its future high speed customers subscribe to its @Home Internet service, and Armstrong even threatened to abandon the deal when the FCC suggested that this demand was a bit too monopolistic. At the time that Armstrong made his threat to walk on the $48 billion TCI deal, @Home had fewer than 300,000 customers.

But this time around, Armstrong faces a different business and political dynamic.

First and foremost, if AT&T does not buy Media- One, Comcast is waiting in the wings to snap up MediaOne’s 4 million subscribers. The only reason it’s Armstrong, not Comcast’s Brian Roberts, trying to get federal approval is that Roberts got outbid.

Second, Armstrong is now in too deep to walk out on his promise to provide local telephony and high speed Internet service. The anticipated revenue from those additional services is what justifies the $4,000 per subscriber AT&T paid for TCI. So even if regulators turn down the MediaOne merger, AT&T must proceed with its plans to offer high speed Internet service and local telephony.

Third, Washington is not at all enthusiastic about the deal, in contrast to the AT&T-TCI merger. Even deregulatory Republicans want to take a close look at it. Two hearings in the Senate and another in the House are scheduled to examine the merger.

THE WORRY ON CAPITOL HILL is that the federal government is about to allow AT&T to regenerate its monopoly position 13 years after a federal judge ordered its breakup into the regional Bell companies.

Given the political sentiment on Capitol Hill, FCC chairman Bill Kennard is likely to take a tough stance on the deal. Right now the FCC and AT&T can’t even agree on how big the telco/cabler hybrid will be after the proposed merger with MediaOne.

FCC staffers fired the first shot over AT&T’s bow with their assertion that the deal would give the corporate behemoth access to more than two-thirds of the nation’s homes. They also point out that the FCC has a rule, though not in effect right now, that limits cablers to 30% national coverage. The regulation is now the subject of a court dispute, not likely to be resolved before next year.

Needless to say, AT&T vehemently disagrees with the FCC’s analysis which takes in to account Media-One’s minority interest in several companies including its 25% stake in Time Warner Entertainment. Using its own accounting methods, the FCC has determined that all of Time Warner’s subscribers should count toward AT&T ownership limits along with the subscribers of companies including Cablevision Systems and Falcon Cable.

But even if AT&T can shed some of its properties and satisfy regulators’ concerns, there is another issue that has a direct impact on the cable programming community.

AT&T IS PROMISING consumers that it will offer one stop shopping for all of its telecommunications needs including telephone, Internet and cable. Well, pretty soon it might become a one-stop operation for programmers, say some worried industry insiders. If new or even established programmers don’t get the go-ahead from AT&T then they may have no choice but to abandon the field, say the execs.

So far, programmers have been silent on the issue publicly. It’s hard to blame them. Even powerhouse entertainment-industry giants worry that a word against AT&T could result in a sudden reluctance to carry their new channels on its cable systems. In the meantime, AT&T can use its position to demand equity stakes in any new entity that comes along.

For now, programmers are waiting in the wings, hoping that federal regulators will fight on their behalf. But if they wait too long, they may discover that it’s too late and have already become AT&T’s latest subsidiary.