LANDMARK CABLE DEAL : REGULATORY ISSUES : Proposed Merger to Face Scrutiny

Despite recently passed federal legislation that encourages media mega-mergers like the proposed US West deal to buy Continental Cablevision Inc., officials say the transaction will face close antitrust scrutiny.

“We are trying to promote competition, and from that standpoint a deal of this sort might be good. But it will face close antitrust scrutiny by the relevant agencies who will determine, if at the end of the day, it meets their competitive standards,” said Larry Irving, assistant secretary of commerce for telecommunications.

The $10.9-billion deal announced Tuesday is one of the first under a new telecommunications reform law that frees the telephone and cable industries to enter each other’s markets. Fueled by exploding consumer and business interest in the Internet and emerging video services such as movies on demand, telecommunications companies are hard at work to upgrade their networks so they can become one-stop providers of entertainment and information services.

The strategy of US West Inc. is markedly different from those of its fellow Baby Bells’, which have focused on developing big wireless networks for cable and cellular phones, or have pursued less ambitious video ventures.

Three of the nation’s largest cable companies, Tele-Communications Inc., Comcast Corp. and Cox Cable Communications Inc., have already formed an alliance with Sprint Corp. to provide local telephone and cable service, although some industry experts say Comcast may be a likely target of a telephone company suitor.

Robert Sachs, senior vice president of corporate legal affairs for Continental Cablevision, said he is confident the deal will be approved. “This is about as clean a deal that can be presented--with very little overlap between us and US West,” Sachs said. “We’ve had antitrust counsel look at this and we are quite confident we’ll obtain the regulatory approvals.”

But several disgruntled consumer groups on Tuesday quickly dispatched letters to the Justice Department to urge enforcement authorities to block the deal, saying it would discourage competition by potentially giving US West control or a stake in systems that serve the a third of American homes that get cable TV.

“If this deal is consummated, US West would either directly or indirectly have access to more than one-third of all cable subscribers” as a result of its current investments in Time Warner Inc. and potential links with Tele-Communications Inc., the nation’s two largest cable operators, said Gene Kimmelman, co-director of the Washington office of Consumers Union.

“This would impose a severe impediment to more vigorous development of video competition,” Kimmelman said. “I’m not sure what telephone company would be inclined to go in and compete with these people.”

Although some federal regulators have indicated an eagerness to subject telecommunications mergers to especially tough scrutiny, most antitrust experts doubt that the federal government would block the proposed acquisition.

“Any time there’s a significant merger in telecommunications, they ought to be looked at with some care, but I don’t think there is some direct competitive relationship involved here that would” violate antitrust law, said Lawrence A. Sullivan, a professor of law at Southwestern University Law School in Los Angeles. “The mergers that tend to be problematic are horizontal mergers of two companies involved in the same kind of businesses. There doesn’t seem to be that kind of overlap in this case” between a telephone company and a cable company operating in different regions of the United States.

“This deal focuses everybody in our industry on how they are going to ready themselves to get into the telephone and video business,” Sachs said. “There aren’t that many large cable operators who are not already affiliated with a telephone company. . . . I think the feeling is that in order to be competitive in the future, you have to be able to offer your customers an entire basket of communications products.”