Pressures Off

AT&T can keep its empire, but content battle rages

The nations two largest cable powers are sharpening their knives to carve up the market after a judicial victory that swept aside limits to their growth.

AT&T and AOL Time Warner were the winners Friday, March 2, when a federal appeals court threw out Federal Communications Commission cable ownership limits.

The Washington, D.C., appeals court, in an unanimous ruling, said the FCC exceeded its authority with rules that limited a cable company from owning more than 30 percent of the U.S. market.

The ruling means AT&T may not have to unload a big chunk of its cable empire to satisfy federal regulators.

"Were pleased that the D.C. Circuit Court of Appeals agreed with the key arguments we presented in this case," said Jim Cicconi, general counsel at AT&T. "Were continuing to review the opinion carefully."

The FCC could appeal the ruling to the U.S. Supreme Court or adjust its rules to comply. With new FCC Chairman Michael Powell at the helm, the regulatory body is likely to loosen the reins on cable. Most FCC watchers Friday thought it was likely that any new ownership limits would be relaxed.

Newly minted media colossus AOL Time Warner had been using the rules to try to cram content down rival AT&Ts pipeline, although they were fighting the FCC rules together.

Flexing its muscles for the first time since acquiring Time Warner earlier this year, AOL had the upper hand as AT&T tried to sell back its 25.5 percent stake in Time Warner Entertainment because of the rules.

AT&T was facing a May deadline to unload the shares, and only AOL Time Warner wanted to buy them.

In exchange for getting AT&T out of its regulatory fix, AOL Time Warner had reportedly been seeking side agreements to send AOLs Internet content through AT&Ts high-speed broadband network or give Time Warners programming more bandwidth on AT&Ts digital cable.

Consumer groups had argued strongly for the two cable giants to separate their ownership.

"The arguments in support of the divestiture, we saw as a clean break between AT&T and Time Warner," said Consumers Union spokesman David Butler. "Any attempt to retain a semblance of a connection, we would oppose."

Consumers Union has called the concentration of power in the hands of a single cable company a threat to competitive pricing. To win approval of last years acquisition of cable operator MediaOne Group, AT&T agreed to reduce its holdings to the legal limit, because its market share had surpassed 42 percent.

Although AT&T had agreed to sell its TWE stake, it was also seeking the legal remedy that it won Friday.

The two sides had been hard at work negotiating the sale of AT&Ts TWE shares, with both sides playing hardball. AOL Time Warner offered what AT&T considered an unacceptably low $9 billion and special access to AT&Ts cable system. For its part, AT&T was threatening to sell the shares on the open market.

TWE controls not only Time Warner Cable, but also Warner Bros. film studios and the premium movie channel Home Box Office.

AT&T is also attempting to spin off Liberty Media, but is likely to rethink the move in light of the ruling.