MERGER IS WATCHWORD FOR INDUSTRY IN 2002, EXPERTS PREDICT

With question of cable ownership limits pending at FCC, financial analysts were unanimous in predicting Commission would raise limits from 30%, but were less sure by how much. “I have no doubt they will go up. Will they go up to 50% or 60%? Hard to imagine, but this is the Bush Administration,” said Gary Arlen of Arlen Communications. Analyst Patti Reali of Gartner Dataquest said she thought companies might set de facto limit of 35% audience reach on themselves, while Consumers Union Washington Co-Dir. Gene Kimmelman said he believed FCC would raise limit to 35% at minimum. “It will go at least that high, if not higher,” he said. FCC Chmn. Powell will seek to raise cap to about 40%, analyst Drake Johnstone of Davenport & Co. predicted. However, Andrew Schwartzman of Media Access Project cryptically promised “startling new data” later this week that he said would justify FCC’s old 30% cap. Nevertheless, he said: “One should not bet against any merger in this Administration.” Eagan said he believed FCC wouldn’t impose limit on specific number, but instead would judge each proposal on merger-by- merger basis. NCTA Pres. Robert Sachs, who declined to comment on Comcast-AT&T deal, said it would be premature to forecast what FCC will do on ownership since Commission is still gathering comments and data on subject.

None of financial analysts surveyed saw regulators blocking AT&T Comcast deal. However, analyst Blair Levin of Legg Mason, who was chief of staff under former FCC Chmn. Reed Hundt, said that deal, combined with pending EchoStar- DirecTV merger and perhaps one other as yet unannounced cable deal, could create political pressures that might affect outcomes of all 3. True obstacle for AT&T Comcast, he said, will be antitrust questions and whether deal would create monopsony situation for program buyer market. Similarly, Arlen predicted pressures on network programmers and said vulnerabilities of programmers Discovery and NBC could result in new ownership for both. He also saw trouble ahead for vendors of set-top boxes and other equipment such as Motorola as they had fewer and fewer companies to sell to. “They're all getting pushed,” Arlen said. “This is where the consolidation really shows what it’s all about.” Reali pointed to recent remarks by Ted Turner predicting that fewer than handful of owners would hold majority of all systems within few years. Reali foresaw country being sliced into regional pieces, with each piece dominated by one MSO. Analyst Scott Cleland of Precursor Group said AT&T Comcast would put pressure on others to link up just to maintain market power, saying: “Scale matters.”

Some experts said AT&T Comcast would be forced to open its pipeline to competing Internet service providers (ISPs), in part because of precedent set by AOL takeover of Time Warner. Reali also thought so, but said AOL-TW had more red flags for FTC and FCC because it owned so much content. Kimmelman predicted FTC might place nondiscrimination requirement on new entity, rather than open access, meaning AT&T Comcast couldn’t discriminate against certain ISPs seeking entry. Comcast Pres. Brian Roberts has said his company wants multiple ISPs on system, but not govt. requirements to do so. Cleland said he doubted access requirements would be imposed on AT&T Comcast, saying AOL, as largest ISP in country, combined with content of TW posed different threats to market competition than AT&T Comcast. “This is just cable distribution,” Cleland said of AT&T Comcast. NCTA’s Sachs said govt. would be looking at “a very different set of facts” involving AT&T Comcast than it did with AOL-TW. Levin called ISP situation “irrelevant” since combined company planned to open its lines anyway.

Experts had varying opinions about what would be “the next big thing” for cable in 2002. Arlen said data and voice were likely candidates but discounted idea that video-on- demand (VoD) would be major growth driver despite fact that companies had been emphasizing VoD at trade shows and other industry gatherings. “What’s the incentive if the programming isn’t good enough and it’s just movies that are mediocre? Who’s going to pay?” he asked. But Reali said she thought this wasn’t year for telephony and expected continued rollout of VoD. Johnstone saw high-speed Internet service as major growth driver and said VoD could help cable companies maintain strong digital subscriber growth. Levin said he liked high-speed data, saying there still was room for increased penetration of cable modem service. Sachs said cable already saw “a great start” in digital subscriber growth in 2001 and probably would concentrate on further penetration in that area.

Kimmelman said rates for cable service would rise 5-10% this year, mostly because cable still wasn’t feeling enough competitive pressure from satellite. However, Sachs said cable rates shouldn’t be “viewed in a vacuum,” that cable operators were offering more services than ever before and at same time were being pressured by higher costs for programming. Said Cleland with laugh: “There are certain laws of nature, and cable rates rising is one of them.”