New Cable Rules to Impact Ownership Limits

As cable providers move to cluster their services and consolidate their operations into large geographic centers, industry-watchers wonder whether the trend of amassing sheer size will be allowed to continue.

Specifically, questions have arisen over whether AT&T will be able to complete its $58 billion acquisition of MediaOne without having to shed some of its interest in other cable companies.

The Federal Communications Commission was poised to make changes last Friday, Oct. 8 (as High Yield Report went to press), to the cable attribution rules and ownership limits that have shaped the industry since the 1996 Telecommunications Act opened up the telecom sector to competition. On the agenda for Friday's open meeting was a review of the 1996 Act as well as a review of the implementation of the 1992 Cable Television Consumer Protection and Competition Act.

"It will be very interesting to see what the FCC does on Friday," David Staples, senior director at Fitch IBCA said last week. "AT&T has a vested interest in these regulations, but so do investors and consumers."

Because the new rules had not yet been announced at press time, it was difficult for industry-watchers to speculate how any changes might affect bondholders.

"In a sense, cable valuations are very high," Staples said. "To the extent that people are forced to divest of their assets if caps go up, that could be very positive for bond investors because it'll prevent consolidation from going beyond where it is. But, if caps are loosened, it could be a negative."

One investor, Margaret Patel of Pioneer Investment Management, said it was "unlikely" the FCC would move to further cap growth. "All other rulings that they've made have been very positive for companies' growth potential in acquiring both other subscribers and systems," she said.

According to FCC officials, the new rules will address how many subscribers a single cable company can hold and how ownership is attributed. The agency hopes to strike a balance between "protecting programming choices for consumers while allowing companies to compete and provide services efficiently in the marketplace," said one official.

Currently, ownership is capped at 30% of homes passed. FCC officials said no cable company is over the limit, not counting pending acquisitions. Officials would not comment on how the new rules would affect cable companies' abilities to tap into new markets or what percentage of the cable subscriber base they might be able to maintain.

They did suggest, however, that the definition of horizontal ownership (the number of homes a single cable company is allowed access to) might be changed to reflect how the industry has changed since the passage of the 1992 and 1996 laws.

The rules are expected to address whether the 30% cap is too small for a telecom player with nationwide operations and whether the "homes passed" standard should be abandoned in favor of a "subscriber" standard.

The new rules are also expected to clarify the attribution rules which one analyst labeled "confusing, unclear and complicated." Two weeks ago, in anticipation of the FCC ruling, Cablevision Systems Corp. announced a plan to sell off the cable services it currently provides to approximately 714,000 subscribers outside the New York metropolitan region. Aryeh Bourkoff, media, telecom and cable analyst at CIBC World Markets suggested Cablevision's motivation emanates from its 33% shareholder, AT&T, in its attempt to assuage the FCC. Bourkoff suggested Cablevision might sell off more than 50% of these assets for cash proceeds to be used to pay down existing debt.

The review has been on the FCC's agenda since April of last year, just one month before AT&T and MediaOne announced their merger plans. One FCC official said that she considered it best to announce new rulings at the outset of the merger rather than "wrangle it to come into compliance" after the fact.