AOL-AT&T combo has politics on its side

A few votes in Florida last year may have cleared the way for a potential blockbuster deal between AOL Time Warner and AT&T Broadband.

As rumors escalate about a possible merger or major investment involving Internet and media giant AOL Time Warner and Ma Bell's cable TV unit, AT&T Broadband, recent shifts in the political landscape in Washington, D.C., could remove some regulatory skepticism that otherwise might prevent such a massive deal.

The addition of President George W. Bush, a Texas Republican who narrowly won election to the presidency after a flurry of recounts in Florida, and his ensuing appointment of Michael Powell as chairman of the Federal Communications Commission have given Capitol Hill a decidedly pro-business bent, analysts say. The new-look regulatory scene could rekindle hope for major communications and Internet industry mergers that--like Sprint-WorldCom--were previously scuttled, according to analysts.

For evidence of the more business-friendly politics, they say, one need look no further than last week's surprise decision by the Justice Department to abandon earlier plans to break up Microsoft as part of the government's antitrust case against the software giant.

A deal the size of a potential AOL-AT&T Broadband combination, however, would draw considerable attention. With businesses that range from Internet access and cable TV to local phone service and magazine publishing, such a deal would be subject to scrutiny from several federal angles.

"It would be a problem in my mind to try to combine these two companies as they're currently structured," said Mike Paxton, a senior cable industry analyst at Cahners In-Stat Group, a market research firm. "It would be a long, drawn-out fight."

Even Liberty Media Chairman John Malone, a shareholder in both AOL and AT&T, expects that an AOL-AT&T deal would eventually get a federal stamp of approval, but only at great costs.

Earning regulatory approval "would be a serious issue," Malone said in a TV interview Monday on cable financial news channel CNBC. AOL and AT&T would "probably get it through in the end, but boy it would be ugly."

But if there is a time for such a deal, the political winds dictate that the chances of success are better now than perhaps in the past, analysts say.

"There's certainly a better chance in a Bush-Powell administration than in a Clinton-Kennard administration. But I still think it will be examined closely by not only the FCC, but also either the FTC or the DOJ," said John Mansell, a senior cable regulatory analyst at Kagan World Media. "And I'd be shocked if there weren't some Congressional oversight hearings too, so it's going to be probed closely."

Powell's predecessor, William Kennard, rankled conservatives with what they viewed as a sometimes heavy-handed approach toward regulation. President Clinton's administration also spearheaded the case against Microsoft.

A looser hold on the regulatory reins
"The Powell FCC has shown that they're really not interested in clamping down on things," said Josh Wise, a senior broadband industry analyst at Allied Business Intelligence, a consulting and research firm. "It's a very hands-off approach. It definitely seems to be their M.O., so I would think (an AOL-AT&T combination) might pass."

Others say the new regime has yet to be tested.

"On the whole, the regulatory environment is much more permissive to large deals since the Bush administration came in. Certainly more than it was 12 months ago," Paxton said. "To what extent, we don't know. They really haven't had to put their money where their mouth is yet."

Gartner analyst Eric Paulak looks at the ramifications of a successful merger between AT&T Broadband and Time Warner Cable. see commentary

Officials at the FCC, where Powell was named chairman in January, have stated their intentions to support further deregulation of the telecommunications industry. Powell, in a June speech at the SuperComm telecommunications industry conference, detailed his belief that marketplace decisions should guide the industry rather than more regulation.

"Our competition policy is to be guided by the view that we will let the market pick winners and losers and hopefully not government policy," Powell said. "It is my view that government is at its worst when it attempts to pick competitive winners or losers, or worse, when it tries to pick a technology...We must resist the temptation that is so often presented to us, sometimes by competitors, to shape evolving markets in some image that we preordain."

Instead, under a Bush administration, big corporations may have more license to seek acquisitions and business deals without fear of intense regulatory scrutiny.

Indeed, some analysts believe relief for the cable industry may come in the way of relaxed rules on the percentage of U.S. households that cable operators may serve. Currently, no cable operator may serve more than one-third of U.S. homes. But some say that figure is fairly arbitrary and that the FCC is expected to reconsider those limits, potentially raising the caps to as much as 40 percent of TV households.

"I think the FCC is going to come up with a much more reasoned decision, based on a sound economic analysis," Mansell said.

Because Time Warner Cable and AT&T Broadband are the nation's top cable operators and would likely be in violation of current caps, analysts say any upward revisions would be welcome. Similarly, those caps could explain recent news reports suggesting that AOL Time Warner might be willing to take only a 49 percent stake in AT&T Broadband, allowing AT&T to retain control.

Such a move might make only about half of AT&T Broadband's approximately 14 million subscribers "attributable" to AOL Time Warner. Such an investment could reportedly also provide certain tax benefits to AT&T and its shareholders.

What's in it for me?
AOL Time Warner and AT&T Broadband have different reasons for wanting to merge, analysts say. AT&T would hope to supersede Comcast's bid, which it rejected as too low, and engineer a sexier deal with AOL. For AOL, AT&T represents a massive network with which to deliver broadband services and its war chest of varied content. It could also give AOL the network it needs to expand into telecommunications--a natural extension of its Net expertise.

"I think AOL would be interested in any deal that would extend their reach to new subscribers," Paxton said. "This is an extension of the strategy behind their decision to buy Time Warner."

Others agree. "AOL wants to solidify their position. It's a full assault to lock up potentially voice as well," Wise said. "The only piece for AOL Time Warner that's missing is telephony, and that's AT&T's core competency. They're No. 1 in cable telephony, and it's been a strong part of their strategy."

AT&T's 25 percent ownership stake in Time Warner Entertainment, the company's TV programming unit, may also play a part in any negotiations, though analysts downplay its role.

"They've been fighting about how to spin that off for 18 months. It's important, but marginally so," Paxton said.

Regardless of the motivations, AT&T has a variety of options, including Comcast's original unsolicited bid for AT&T Broadband, to consider ahead of its next board meeting. There is also interest from another cable operator, Cox Communications.

Whatever the outcome, AT&T, long a player in the communications lobbying game, may have politics on its side this time. As Malone said Monday night: "I think it'll play out over some time."