Analysts Expect U.S. to Approve Deal

When he announced his decision late Wednesday to sell AT&T; Corp.’s cable operations to Comcast Corp., AT&T; Chairman C. Michael Armstrong predicted that federal regulators would find the deal “very appealing.”

That’s probably a stretch. The deal already is facing opposition from consumer groups and competitors, as well as concern from some lawmakers. But few believe that the Bush administration’s antitrust enforcers will be sufficiently worried by the $52-billion merger that they will try to block it or order big changes.

“This deal stands an excellent chance of getting approved,” said Josh Bernoff, a cable industry analyst at Forrester Research.

The merger promises to be the first major test of how the Bush administration plans to cope with the rapidly consolidating media and communications markets.

The deal would combine the nation’s No. 1 and No. 3 cable operators. AT&T; Broadband serves 13.7 million customers, and Comcast has 8.4 million. At 22.1 million customers, the combined company would account for about 25% of the nation’s pay-television market, not counting AT&T;’s minority stake in AOL Time Warner Inc.’s cable operations.

Comcast is expected to sell the 25% stake in Time Warner Entertainment back to AOL Time Warner in a separate deal.

Though critics worry that the cable industry soon could be reduced to just two or three major players, Michael Powell--who was installed by Bush this year as chairman of the Federal Communications Commission--has been a vocal critic of the agency’s ownership caps, including rules that limit how many customers a single cable company can serve.

The rules were created to ensure that viewers receive a diversity of cable programming options. But Powell has argued that the rules are outdated and that consumers already have access to a variety of programming, thanks to the Internet and satellite technologies.

In September, Powell said the FCC would reexamine many of its ownership caps, including a regulation that prevented cable companies from controlling more than 30% of the pay-television market. Some experts predict the FCC may raise the cap to 40% or eliminate it. A decision is not expected until next year.

FCC officials declined to comment Thursday.

Bolstering Powell’s position, a federal appellate court tossed out the 30% cap this year, saying it was unconstitutional because the FCC had failed to justify it. The Supreme Court recently refused to hear an appeal.

“The ownership rules are going to change soon in a way that will open up lots of opportunity,” said Blair Levin, analyst at Legg Mason.

But even if the old ownership cap remained, the AT&T-Comcast; deal would fall below the 30% limit, analysts said. By contrast, AOL’s unsuccessful bid for AT&T; would have created a cable giant that skirted on the line of the old limit.

Consumer groups, however, said Thursday that the AT&T; Broadband-Comcast merger still raises serious antitrust problems because the new company, AT&T; Comcast Corp., would dominate cable service in several large U.S. cities, such as Chicago.

“This underscores the need for the FCC to go back to the drawing board and come up with a way to validate the caps,” said David Butler, a spokesman for Consumers Union, which is urging the FCC to reject the deal.

Butler said the group will ask regulators to require the companies to sell operations in certain markets to improve competition.

Some lawmakers also voiced concern. Sens. Herbert Kohl (D-Wis.) and Mike DeWine (R-Ohio), ranking members of the Senate Judiciary antitrust subcommittee, said they will hold hearings early next year on the implications of the deal, according to CBS MarketWatch. The scale of the merger gives the legislators serious concerns, they said.

Broadcasters and content providers, such as Walt Disney Co., also may raise alarms about the deal. Disney fought last year to oppose the AOL Time Warner merger, complaining that the combined company might use its clout to block or restrict Disney’s ability to offer programming to Time Warner’s cable customers.

In a much-publicized feud, Time Warner briefly booted the Disney-owned ABC network off its cable lines last year during a contract dispute. As a result, regulators made AOL Time Warner promise it would not discriminate against rival programmers as a condition to its merger.

A Disney spokesman declined to comment Thursday. But this fall, the company’s chief lobbyist said he opposed further cable industry consolidation, particularly involving operators that also offer their own programming.

Satellite television operators, who compete against cable companies for customers, said Thursday that the AT&T-Comcast; deal illustrates their own need to consolidate.

EchoStar Communications Corp., which serves 6.4 million satellite television customers, is facing an uphill battle to convince federal antitrust regulators to approve its bid for rival DirecTV, which serves 10.3 million customers. The combined entity would control 90% of the satellite market, effectively eliminating competition. Company officials say they need to merge to compete against large cable operators.

“This further consolidation among cable companies illustrates why the pending merger of EchoStar and [DirecTV parent] Hughes Electronics is essential,” EchoStar Chairman Charlie Ergen said in a statement.

“Simply put, the [EchoStar-DirecTV] merger is the best hope to create the efficiencies necessary to compete effectively against these cable behemoths.”