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FCC approves AT&T-MediaOne merger

The Federal Communications Commission grants final approval to the merger, a multibillion-dollar deal that will make Ma Bell the nation's largest cable operator.

The Federal Communications Commission today granted final approval to the merger between AT&T and MediaOne Group, a multibillion-dollar deal that will make Ma Bell the nation's largest cable operator.

The FCC nod represents the last major regulatory hurdle before closing the MediaOne purchase for AT&T, which last year embarked on a $110 billion strategy of acquiring cable companies to deliver local phone service by buying Tele-Communications Inc. (TCI) and announcing its intention to purchase MediaOne.

"This merger will mean real choice and lower prices in local phone service, faster Internet access and better cable TV," said AT&T chief executive C. Michael Armstrong. "For consumers, that's a home run in any ballpark."

michael armstrong As expected, the FCC's approval comes with significant requirements that will force AT&T to comply with federal cable ownership limits, which the company would have exceeded. Cable operators are forbidden from controlling, either directly or via joint ventures, more than 30 percent of the market, and although the FCC tweaked those regulations last year, AT&T would have controlled nearly 42 percent of the market.

The FCC gave AT&T three options for attaining compliance including selling its stake in Liberty Media, the company's cable TV programming unit, or selling MediaOne's 25 percent stake in Time Warner Entertainment.

The conditional approval also suggests a third option, which would require AT&T to sell enough cable systems--reaching about 9.7 million customers--to bring it in line with the ownership rules. However, the last option represents more than half of AT&T's current cable subscribers, making it appear to be the least likely given the lengths Ma Bell has gone to acquire the subscribers in the first place.

AT&T will have six months following completion of the merger to inform the FCC which of the three options it will pursue and until May 19, 2001, to complete its specified course of divestiture. AT&T executives said they expect to close the merger as soon as possible, likely by, if not before, early August.

In addressing fears that Ma Bell would dominate the high-speed Internet access market, the Justice Department already required AT&T, the largest investor in cable modem service provider Excite@Home, to divest itself of MediaOne's stake in Road Runner, a similar cable Internet company. AT&T must sell its stake in Road Runner within 18 months.

FCC chairman William Kennard said the agency had tried to strike a balance between speeding the development of cable telephone service and consolidation. Allowing AT&T and MediaOne to merge might not bring cable phones to market faster, but would likely allow the market to develop in a "more predictable" way, he said.

William Kennard Kennard also defended the choice not to force AT&T to open up its cable lines to other broadband Net service providers, an issue the agency has remained steadfast about for months.

"The most important thing this country needs now is more investment in broadband," Kennard said, echoing comments made after the agency approved AT&T's merger with cable firm TCI. "In order to foster that investment, we need to let this market develop."

The close of AT&T's purchase of MediaOne, which is expected later this summer, is likely to touch off a series of negotiations between Ma Bell and Time Warner, two communications and entertainment powerhouses and competitors.

AT&T executives plan to close the deal as soon as possible, but because of MediaOne's ownership stake in Time Warner and a related "non-compete" clause that expires Aug. 3, Ma Bell could be forced to get Time Warner's OK before finalizing the deal or wait until Aug. 4.

Also, because Time Warner is another major investor in Road Runner, the companies will need to determine how AT&T should divest itself of that cable Net access asset and whether Time Warner will buy that stake. Time Warner and AT&T also are likely to negotiate on a local cable telephony alliance, which was agreed upon last year but never finalized.

The negotiations could be more complex given America Online's pending purchase of Time Warner. AOL, the world's largest Internet service provider, wants wholesale access to Excite@Home's high-speed network, adding another wrinkle to the situation.

Stock in AT&T gained 3 percent to close at $36.19, while MediaOne shares added more than 3 percent to finish at $69.31.

News.com's John Borland contributed to this report.