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Cable slams the cap

The cable industry last week continued its legal attack on federal ownership
caps and channel lineup restrictions.

Led by Time Warner and AT & T, the cable industry is fighting FCC rules
preventing cable operators from reaching more than 30% of U.S. multichannel
subscribers. The rules also bar a cable operator from devoting more than 40% of
its first 75 channels to programming in which it has a stake.

Although the rules are opposed by the cable industry in general, they
particularly affect AT & T, the nation's top MSO, because its acquisition
of MediaOne Group in June pushed it over the cable-ownership cap to 42%. Time
Warner, the second-largest system, hits only about 15% with 12 million
customers, but it has fought fiercely against cable-industry restrictions.

The federal appeals court in Washington this May upheld the 1992 law
ordering the FCC to establish a cable-ownership limit. The current case, before
the same court, will decide whether the FCC was justified when it established
the 30% limit and decided how it would "attribute" cross-company investments
toward each company's subscriber reach.

AT & T argues that it should not have to make any divestitures, because
its investment in Time Warner Entertainment should not count toward the

The three-judge panel hearing last week's arguments in Washington appeared
to have little problem with the FCC's 30% limit but also seemed sympathetic to
cable-industry arguments that the FCC acted arbitrarily in setting rules and

"The court appeared not to be buying the cable industry's argument against
the 30% cap, but it's much less clear what the outcome will be on the
attribution rules," said Media Access Project President Andrew Schwartzman.

It's unclear how the decision will affect AT & T, even if the cable
industry wins. AT & T must tell the FCC how it plans to comply with the
MediaOne divestiture order by Dec. 15. It must make good on its pledge by May
and is not allowed to alter its plan. The company, however, is hoping it can
amend its plan if the FCC's rules are struck down.

To cover its bases, AT & T is also asking Congress for help. At the
company's behest, Sen. Ted Stevens (R-Alaska) is trying to amend one of several
spending bills with a provision that would make limited partnerships such as AT
& T's TWE stake non-attributable to the cable cap.

FCC officials, however, insist that AT & T must carry out one of the
divestiture options, because they were deemed to be in the public interest.

Anticipating FCC intransigence, the company also has asked the agency to
condition the AOL-Time Warner merger on forcing TWE to cut its ties with AT
& T. Officials at AT & T say they can't get a fair price from Time
Warner without that condition. Time Warner attorney's last week called AT &
T's claim "simply untrue" and said AT & T could sell to a third part or
spin off its TWE stake in a public offering if it didn't like Time Warner's

Under rules the FCC revised last October, any voting interest of 5% or more
of equity is attributable. Limited partnerships are exempt, however, unless the
stakeholder is involved in the partnership's programming operations. (AT &
T's stake in TWE is a limited partnership but is attributable because AT &
T supplies programming to TWE through its Liberty Media subsidiary.)

Time Warner's attorney David Carpenter argued that the 30% reach cap is an
arbitrary limit and that no research demonstrates that greater levels of market
concentration will cause any harm.

The judges, however, didn't aggressively question FCC attorney James Carr on
the cap.

Judge Stephen Williams even noted that the FCC last year altered the cap to
account for the growth of direct-broadcast satellite and other multichannel
subscribers. Previously, a cable company's audience reach was capped at 30% of
homes passed by cable. The change allowed AT & T to reach an additional 4.5
million subscribers.

But they pressed Carr to explain the basis for the attribution rules and
even suggested that prohibitions on preferential deals between cable companies
and their programmers would be sufficient to avert collusion.