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Cleared for Takeoff

Washington— Comcast Corp. is the king of cable, a four-decade ascent that began with 1,000 subscribers in Tupelo, Miss., where another king — Elvis — was born in a two-room bungalow.

Last week, both the Federal Communications Commission and the Justice Department agreed to allow Philadelphia-based Comcast to combine with AT&T Broadband. Some merger reviews drag on for a year or more but this, the largest cable merger ever, took regulators just under nine months to complete.

The Justice Department's opposition was discounted weeks ago. FCC approval was never in doubt, because Comcast and AT&T Broadband are not competing cable-TV providers. Approval was just a matter of time.

"We are very pleased that the FCC has favorably concluded its review of our merger," Comcast president Brian Roberts, who becomes CEO of the new company, said in a terse statement. "We look forward to moving ahead expeditiously to closing."

The merger is expected to close this week.

AT&T Corp., parent of Broadband, said last week that its board of directors declared a special divided to AT&T shareholders, scheduled for Nov. 18, which would effectively spin off the cable unit on that date.

Immediately following that spin-off, AT&T Broadband is expected to combine with Comcast and the shareholders of both AT&T Broadband and Comcast will become shareholders of the new Comcast Corp.

Call it Comcast

Separately, AT&T and Comcast said the new entity would be called Comcast Corp., not AT&T Comcast Corp., as had been previously announced. Although AT&T shareholders would own about 56 percent of the new company, the name change was made to avoid customer and market confusion, the company said in a prepared statement.

AT&T and Comcast also announced that five new members will join the new Comcast's board: Armstrong, retiring chairman and CEO of AT&T, who will serve as chairman of the board of Comcast; J. Michael Cook, retired chairman and CEO of Deloitte & Touche LLP; George M.C. Fisher, retired chairman and CEO of Eastman Kodak Co.; Louis Simpson, president and CEO of capital operations, Geico Corp.; and Michael I. Sovern, chairman of Sotheby's Holdings, Inc.

Two new jointly appointed board members also were named: Kenneth J. Bacon, senior vice president of multifamily-housing lending and investment at mortgage company Fannie Mae; and Judith Rodin, president of the University of Pennsylvania.

Roberts, along with his father Ralph, becomes the de facto leader of the cable industry, a title that used to belong to John Malone before he sold Tele-Communications Inc. to AT&T Corp. in 1999. Until he decided to combine AT&T Broadband with Comcast, AT&T chairman C. Michael Armstrong was cable's top industry official.

Earned the mantle

While those are big shoes to fill, Stifel, Nicolaus & Co. cable analyst Ted Henderson said Roberts is up to the job.

"Brian Roberts is the truest sibling who earned the mantle from the ground up," Henderson said. "Of all the family-run cable operators and family-run businesses, I think the guy who clearly took the appropriate path to the top, learning the business from the ground up and has the aptitude, the personality and the discipline to run an operation as large as Comcast is Brian Roberts. I think he earned that mantle, I don't think it was a mantle that was handed to him."

Although Roberts has taken some criticism in the past for not being an innovator, Henderson said that's not what the industry needs today.

"Comcast doesn't need to be a technological innovator," said Henderson. "Anybody with a technological innovation that has anything to do with broadband is going to be knocking on Comcast's door."

According to the FCC, Comcast will serve 27 million cable subscribers (not 22 million as widely reported), giving the company 29 percent of the entire pay TV market. Evidently, AT&T has an ownership interest in about 5 million cable subscribers contained in partnerships not controlled by AT&T.

The FCC voted 3 to 1, along partisan lines, to approve the $54 billion merger. It imposed one condition, but it was something the companies volunteered from the outset: The agency said the new company must place its interest in Time Warner Entertainment L.P. in a trust, and divest that asset within five and a half years.

In a brief statement, FCC chairman Michael Powell said the "benefits of this transaction are considerable; the potential harms negligible."

Ferree: Big, not bad

Powell, a no-show at the FCC-held press conference last Wednesday, let Media Bureau chief Kenneth Ferree explain the agency's decision to the press.

Big isn't always bad, he said.

"In short, it's easy to react viscerally to the combination of any two large companies. On the facts here, this combination solves problems, it does not create them," said Ferree said.

Immediately after the FCC announced its decision, the Justice Department declared that it would not block the deal.

Comcast will be far and away the largest MSO in the country — AOL Time Warner Inc. is a distant second with 10.8 million Time Warner Cable subscribers.

With the merger nearly behind it, the real work begins: stemming AT&T Broadband's subscriber losses and boosting cash-flow margins (cash flow as a percentage of revenue) above the current 26 percent, up to Comcast's level of more than 40 percent.

In the third quarter (ending Sept. 30), AT&T Broadband said it had lost 129,000 subscribers and expects to lose another 50,000 customers in the fourth quarter, bringing its total subscriber losses in 2002 to 533,000.

Along with stemming basic-subscriber losses, Comcast needs to spend $2 billion over two years to rebuild several Broadband systems.

Moving swiftly

Roberts did not go into this deal blindly and said he is well aware of the problems facing the company. And, he said, Comcast is up to the task.

Speaking at a Nov. 12 meeting in New York sponsored by Trinity College, Roberts said that since winning the seven-month fight for Broadband in December, he has consulted with several executives who have gone through similarly large mergers, including former General Electric Co. CEO Jack Welch and Bank One Corp. chairman Jamie Dimond.

"Everyone had the same reaction," Roberts said. "They wished they had moved faster and they wished they had moved more decisively."

Comcast has already begun to do that.

Roberts said the company has moved several executives into Broadband territory.

"We're taking a new direction," Roberts said. "We're focused very much on basic cable."

Only about 63 percent of AT&T Broadband systems are rebuilt, compared to 90 percent of Comcast's operations. But Roberts said he believes Comcast can get the Broadband systems to 90 percent rebuilt in two years.

Comcast created a new operational structure for the combined company in August, creating six regional divisions. It asked each division chief to create a preliminary operational plan.

In September, Comcast cable unit president Steve Burke and his senior managers visited each of those divisions and revised those plans, resulting in new priorities for each of its 16 markets. Among those new priorities are leveraging Comcast's structure and people; increasing revenue by repackaging and remarketing digital offerings; and setting appropriate staffing levels in the field.

Gradual gains

While most analysts believe that bringing the Broadband systems up to speed won't be easy, they have confidence in Comcast's ability to do so.

"It's going to be tough," said SunTrust Robinson Humphrey cable analyst Gary Farber. "Once you lose a customer, it's difficult to win them back. And it can be costly."

Farber said he is looking for improvement in cash-flow margins, cash flow and basic subscribers, but said any gains will likely be gradual. Farber pointed to the relatively quick success other operators that have purchased AT&T cable systems — including Comcast — have had in boosting margins simply by slashing overhead costs.

"The first quarter going out is going to be tough," Farber said. "Once they give their full guidance and have their hands around the systems for a quarter, we may see what the other guys have seen."

The easy approval of the cable merger appeared to sting EchoStar Communications Corp., whose planned merger with DirecTV Inc. parent Hughes Electronics Corp. was rejected last month. EchoStar is fighting the DOJ in federal court and has until Nov. 22 to decide how to take on the FCC before an administrative law judge.

"[The cable merger] ensures the continued consolidation of the dominant cable companies and their practice of raising rates more than three times the rate of inflation," EchoStar spokesman Marc Lumpkin said. "Thus, all the more reason why consumers need the choice of a strong satellite competitor. We believe the proposed merger of EchoStar-Hughes can provide consumers this choice."

EchoStar has been feuding with Comcast for years because Comcast refuses to sell its regional sports network in Philadelphia — Comcast Sports-Net — to either DBS provider.

FCC Republican Kathleen Abernathy and Kevin Martin joined Powell in supporting the cable merger.

Copps's dissent

FCC Democrat Michael Copps, reflecting the sentiments of consumer groups, said he voted against the merger because it would cause cable rates to rise and reduce competition in the programming-acquisition market.

"The sheer economic power created by this mega-combination, and the opportunities for abuse that would accompany it, outweigh the very limited public-interest benefits that either the [companies] or the majority find here," Copps said in a statement.

Rep. Richard Boucher (D-Va.), who supported the direct-broadcast satellite merger in hopes that broadband and high-definition television would reach his rural district, said he was "appalled" that the FCC killed the DBS merger but allowed the cable deal to sail through.

"The FCC's disparate treatment of these cable and satellite mergers demonstrates vividly that the FCC still prefers to view the digital world through antiquated, separate-technology lenses," Boucher said.