Court Upholds Federal Limit on Cable Subscribers

An appellate court upheld a federal regulation Friday limiting the number of customers any single cable operator can serve, a setback for industry leaders Time Warner Inc. and AT&T; Corp.

Time Warner, the nation’s second-largest cable operator, had challenged the constitutionality of a Federal Communications Commission rule setting the ceiling at 30% of pay-television subscribers. Based on 82 million cable and satellite TV customers, no cable company can serve more than 25 million subscribers.

Time Warner serves 12.7 million cable homes--still well under the limit.

But AT&T; could exceed the limit after its pending acquisition of MediaOne Group Inc.

“This ruling indicates that the AT&T-MediaOne; merger is against the law,” said Gene Kimmelman, co-director of Consumers Union’s Washington office. “AT&T; must sell cable systems serving more than 10 million subscribers to come into compliance.”

AT&T; would have about 23.5 million customers after the MediaOne acquisition, but would exceed the limit if it is required to count minority stakes in cable systems. MediaOne owns a 25.5% interest in a partnership with Time Warner that controls about 10 million cable customers.

AT&T; maintains that the Time Warner subscribers should not be attributed to its total because it has relinquished all operating control over those customers, which would bring its count to more than 33 million homes. AT&T; and Time Warner have previously said they would restructure the partnership, and sources say one scenario that has been discussed is dividing up the cable subscribers.

The FCC staff, which is finishing up a regulatory review of the AT&T-MediaOne; deal, has recommended that as part of its purchase of MediaOne, AT&T; be required to shed its stake in Time Warner Entertainment or sell Liberty Media Group, the AT&T; programming arm that is controlled by cable mogul John Malone. Liberty sells programming to Time Warner Entertainment, and the FCC staff is concerned that the combined company would have too much control over programming.

AT&T; said Friday’s court decision is not a setback because the FCC and AT&T; have both been operating on the assumption that the 30% limit is valid.

In challenging the FCC rule, Time Warner had argued that it violates cable companies’ 1st Amendment rights by limiting the number of customers their programming could reach. The U.S. Court of Appeals in Washington disagreed, saying the rule was content-neutral and was aimed at promoting a diversity of voices.

“The Congress drew reasonable inferences, based upon substantial evidence, that increases in the concentration of cable operators threatened diversity and competition in the cable industry,” U.S. Circuit Judge Douglas Ginsburg wrote in the court’s opinion.

The FCC, which had stopped enforcing its ownership restrictions during the court case, reinstated the rules and gave companies 180 days to comply.

The shares of New York-based Time Warner fell $2.19 to $78.88, New York-based AT&T; slipped $1.13 to $35.75 and Englewood, Colo.-based MediaOne dipped $1.56 to $66.13. All trade on the New York Stock Exchange.

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Bloomberg News was used in compiling this report.