AT&T, Malone battle over Starz!

Adding to the list of things AT&T and John Malone are fighting over, AT&T's cable unit is disputing its affiliation deal with Liberty Media's Starz Encore pay movie operation.

AT&T Broadband is disputing the amount of money it has to pay for Starz! and has withheld at least $40 million in license payments. AT&T Broadband has notified Liberty that it believes the entire affiliation agreement is "voidable."

The dispute centers on an extraordinary license fee deal the old Tele-Communications Inc. signed with Starz!, a joint venture with TCI "tracking stock" subsidiary Liberty. Rather than paying Starz!'s standard $3 per-subscriber monthly license fee and Encore's typical 77 cents, TCI signed a flat rate deal. It guarantees Starz! $270 million in the first year and $360 million in 2003 for as many subscribers as TCI was able to sell. In addition, Starz has a clause resembling the escalator operators are screaming about in ESPN's affilation agreements. AT&T has to shoulder some of the escalation of Starz!'s spending on Hollywood movies, particularly under its deal with The Walt Disney Co.

An AT&T Broadband spokeswoman acknowledged that the company has refused to pay the $40 million that accrued in the first quarter but would not comment further. It's not clear how much the company would owe in the second quarter.
"They have an unlimited liability," said one Wall Street analyst, who estimated that AT&T Broadband has a just two million Starz units.

AT&T acquired the deal when it bought TCI. The company ostensibly "owns" Liberty but the economic interests of all Liberty's assets go to a separate set of shareholders, most notably Liberty Chairman Malone. An SEC filing shows that the deal has stuck AT&T with a license fee that's double what other operators are paying.

The deal was always one of the stronger examples of how Malone used his control of TCI's systems to benefit Liberty's network holdings. "We believe that it's inappropriate, with inarporate prices and not market flexible," said an AT&T executive. "We will renegotiate it, whether we do it in the courts, or not."

A Liberty spokesman said that AT&T is continuing to pay its standard license fees. "We believe we have a legally binding contract," he said. - John M. Higgins
Starz Encore is Liberty's most significant operating asset and AT&T accounts for a third of the company's revenues. But the fees are huge, even to AT&T. The $40 million surcharge comes to about $1 per AT&T basic sub and would cut 2 points out of AT&T's cash flow margin.