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AT&T's new bid raises federal concern

Following federal approval of its merger with Tele-Communications Incorporated, AT&T's bid for MediaOne is raising new warning flags in Washington.

Following federal approval of its merger with Tele-Communications Incorporated, AT&T's bid for MediaOne is raising new warning flags in Washington.

If MediaOne accepts the long distance giant's $62 billion offer, the purchase will push AT&T far ahead of the rest of the cable industry.

AT&T also would gain close to a 50 percent stake in Road Runner, the second-largest national cable Internet access service. The company already claims a controlling stake in @Home, the largest cable Net access provider.

In a joint statement last night, the chairman and ranking minority member of the Senate antitrust subcommittee said the offer called for close scrutiny.

"This proposed purchase of MediaOne Group by AT&T is a big roll of the dice for consumers," the senators said.

The bid has the potential to increase telephone competition, they noted. But "it also raises many tough questions regarding cable concentration, ownership caps, program exclusivity, and competition throughout the industry," they added. "Lawmakers and regulators are going to have to take a serious look at this takeover attempt."

Analysts also said the bid would likely give new weight to cable "open access" proponents, like America Online, who want federal regulators to give outside Internet service providers direct access to cable Internet subscribers. Currently, most cable Internet users must use one of the ISPs affiliated with their cable operator, such as Road Runner or @Home.

"This raises the stakes," said Legg Mason Precursor Group telecommunications analyst Scott Cleland. "This puts the issue back front and center."

FCC officials were not available for comment.

Ma Cable versus the Baby Bells?
AT&T's biggest critics warn that the company is trying to recreate Ma Bell, the local and long distance phone monopoly that regulators broke up in 1984.

If AT&T is successful in its MediaOne bid, it will have the ability to offer telephone, video, and high-speed Internet services to about 50 percent of U.S households though cable wires, according to a company spokeswoman. That figure is based on the number of homes potentially served by the cable networks of both companies and AT&T's joint ventures.

But this broad range of proposed services makes it difficult for policy makers to untangle the company's growing control of cable lines from its ability to boost competition in other communications markets.

The driving force behind AT&T's move into cable is the desire to offer local phone service that competes with the big local phone companies like Bell Atlantic or SBC Communications.

This kind of competition was one of the main goals in the passage of the Telecommunications Act of 1996, and many analysts say that AT&T's cable push is the quickest way to see that competition in the marketplace.

In this light, some regulators see the increasing concentration of cable ownership as an acceptable trade-off for genuine competition in local phone markets.

"It's good for the consumer if cable is at least as concentrated as telephone markets," said Reed Hundt, the former chairman of the Federal Communications Commission. "What you want from a policy perspective is for cable and telephony to be able to slug it out together down the IP highway."

Internet protocol, or IP, is the transmissions medium for the Net.

Several years ago, the FCC did try to limit the reach of any single cable company's network to 30 percent of potential U.S. customers. But a federal judge blocked that rule, and regulators have not since revisited the issue.

AT&T's acquisition of MediaOne would bring it close to this 30-percent ceiling, however. The actual figure depends on how the numbers are calculated--AT&T head C. Michael Armstrong said that the company's direct ownership would bring it only to about 26 percent of the market.

But Armstrong himself was counting differently last year, when he said that his TCI acquisition would give AT&T access to nearly a third of the cable market, noted Yankee Group cable analyst Bruce Leichtman. If all of AT&T's affiliates and joint ventures are added into the mix, AT&T would in fact have direct access to about 41 percent of the cable market, Leichtman added.

Hundt said that the FCC would likely have to return to this question in its merger review process. The Justice Department would also have to look at the acquisition along traditional antitrust grounds as part of the normal approval process.

For their part, AT&T executives have dismissed the prospect of regulatory hurdles, saying they can work out any bumps in the road with little difficulty.

"We believe that our merger is fully consistent with the policy underlying the ownership limits that were contained in the now-suspended FCC cable ownership rules and is strongly in the public interest," Armstrong said in his offer letter to MediaOne yesterday.

"However, should any questions arise with respect to this issue, we are ready to take such actions as are necessary to ensure timely legal and regulatory approval of the merger," Armstrong wrote.

Open access to cable pipes
The other hurdle possibly facing AT&T's bid is a resurgence of the drive to open its cable networks to competitors.

Executives from AOL, MindSpring, and other ISPs, along with a coalition of consumer groups, have pushed policymakers to open cable networks to service providers other than those affiliated with the cable companies. Current law allows AT&T and other operators a monopoly over one of the few broadband conduits to consumers' homes, they say.

To date, the issue has raised interest, but little action, in Washington. The FCC declined to take up the matter as a part of AT&T's purchase of TCI or as another separate review of broadband availability.

The debate hit the headlines again earlier this month, when a Senate committee chaired by presidential candidate Sen. John McCain (R-Arizona) took up the issue. McCain said the group wanted the FCC to study the issue further, but indicated there shouldn't be any hasty action.

Legg Mason's Cleland said the FCC was close to moving more aggressively on the open access issue during AT&T's first cable bid, but that threats from the long distance company to pull back from its cable telephony drive cooled regulators' interest.

"The reality was, it was very close, a neck-and-neck battle in February," he said. But since AT&T now has its TCI telephony drive underway, the FCC may be induced to revisit the issue, he added.

Backers of the open access drive said AT&T's bid would spotlight the argument they have been making all along.

"I don't think it changes the fundamental logic of our argument," said MindSpring CEO Charles Brewer, who has been one of the chief spokesmen for open access. "But it might help focus attention on our arguments. It might help the cause that way."

MediaOne has about a month to look for a new bid from Comcast, which had already agreed to acquire the company before AT&T's proposal. A final decision should come by the end of May.