FCC Approves AT&T;’s Deal to Buy MediaOne

AT&T; Corp. cleared one of the final hurdles to becoming the nation’s largest cable operator Monday when the Federal Communications Commission approved its $54.7-billion purchase of MediaOne Group Inc.

The approval, as expected, is contingent on AT&T;’s sale of certain cable assets to bring the company into compliance with a federal law designed to limit any one company’s clout in the cable industry.

For AT&T;, the clearance is critical to its plans for using the nation’s cable network as a pathway into America’s homes for delivering a bundle of telephone, television and data-access services. The first step was buying leading cable provider Tele-Communications Inc. last year.

With MediaOne, AT&T; would serve more than 50% of the nation’s pay TV subscribers, which include satellite TV customers. It would have 34.4 million cable customers, far surpassing the current cable leader, Time Warner Inc., which serves 12.6 million. Under current laws, one company can serve no more than 30% of the nation’s 82 million pay television subscribers.

The FCC decision immediately sent consumer advocates into an uproar. Claiming that the ruling “smacks of political favoritism” and demonstrates an abuse of power by the agency, the Consumers Union said it would demand that Congress restructure the FCC’s authority. The group said that the FCC conditions could allow AT&T; to maintain control over systems that reach 40% of the nation’s pay television households.

On Wall Street, however, investors were relieved that the FCC conditions were not more stringent. AT&T; shares jumped 3%, to close on the New York Stock Exchange at $36.19 a share.

The FCC, under Monday’s ruling, is giving AT&T; a choice of divesting either Liberty Media Group Inc., TCI’s programming arm run by cable pioneer John Malone, or selling a 25.5% stake in Time Warner Entertainment, a joint venture between MediaOne and Time Warner that serves about 10 million cable customers.

The FCC also gave AT&T; a third choice: selling off 9.7 million cable subscribers. Analysts quickly dismissed the third option as unlikely.

AT&T; gave no indication Monday of its preference. The company has until May to complete the divestiture, which is shorter than the 18-month window it sought.

AT&T; has favored spinning off Liberty Media, sources said. For one, the company would lose none of its highly prized cable subscribers. And, AT&T; Chairman C. Michael Armstrong has said that the company has no interest in owning content, such as Liberty’s stakes in cable channels USA Network, Discovery Channel, Starz, QVC and Black Entertainment Television. Besides, under his contract with AT&T;, Malone is expected to force AT&T; to spin off Liberty after March.

For the FCC, spinning off Liberty would reduce AT&T;’s influence over the programming on its own cable systems as well as rival Time Warner’s cable systems. Liberty owns 10% of Time Warner.

Timing is the main problem. AT&T; needs to wait until at least March 2001 to spin off Liberty without suffering a huge tax liability.

And, even if AT&T; sells Liberty, the company may still have to restructure MediaOne’s partnership with Time Warner.

Time Warner is the last hurdle for AT&T; in completing the MediaOne purchase. Time Warner claims its partnership agreement with MediaOne gives it the power to block its purchase by AT&T.;

Separately, last month, the Justice Department approved AT&T;’s MediaOne deal on the condition that it sell MediaOne’s 50% stake in the Roadrunner high-speed Internet service. As owner of the remaining 50% of Roadrunner, Time Warner is the likely buyer.

In addition, the two companies have yet to finalize the details of a joint venture under which AT&T; would use Time Warner’s cable facility for providing local phone service.

With this FCC decision, Time Warner and AT&T; are expected to begin the difficult negotiations to iron out these and other complications.