AT&T deals send regulators scrambling

Take two of the world's largest companies, both with current or past antitrust problems, put them together in a multibillion-dollar technology alliance, and what do you have?

A potential problem, say some in government and regulatory circles--but not one that today's laws can do much about.

In the space of just a few months, AT&T, already the largest U.S. long distance company, has become the country's largest cable company. This also gives the firm increasing control over the two dominant Internet-over-cable companies, @Home Network and Road Runner.

On the heels of AT&T's cable purchases, Microsoft has invested $5 billion in the communications giant in return for a contract to provide software for the set-top boxes that will serve as the brains of AT&T's broadband cable access system.

AT&T's merger binge and Microsoft's input has many concerned that the companies are building a technological alliance that may prove to be the economic equivalent of a monopoly. Yet today's convergence of communications technologies appears to have outpaced regulators' traditional ways of addressing antitrust concerns.

"Regulators are scratching their head trying to figure out how to approach this," said Rachelle Chong, a former FCC commissioner who is now a partner at San Francisco's Coudert Brothers law firm. "I don't think [today's rules] fit. That's the biggest challenge for policymakers."

Microsoft's purchase of about 2.6 percent of AT&T is certain to raise eyebrows among regulators. The Justice Department and 19 states, already locked in a landmark antitrust lawsuit against the Redmond, Washington, software company, are likely to scrutinize AT&T's promise to use Microsoft software in up to 10 million set-top boxes.

The recent cable push by AT&T--whose long distance monopoly was dismantled in the 1980s--only heightens concerns that the company is working to rebuild its once-dominant position in the telecom world.

Over the past year, AT&T has made major inroads into related communications markets through deals with British Telecommunications and IBM.

Regulators "have looked very carefully [at those deals] and it stands to reason they're going to look at [the Microsoft-AT&T transaction] here," said Scott Flick, an antitrust attorney at Howrey & Simon. Investigators "are going to be looking at the implications of combining AT&T's position in cable access with Microsoft's resources in technical areas."

Ultimately, however, the recent deals are not likely to trigger antitrust laws, three legal experts said, as the companies involved have few overlapping businesses.

"A merger between two firms that only make complementary products is very hard to challenge under existing law," said Herb Hovenkamp, a professor of law at the University of Iowa. "The only mergers that get any serious examination are ones where companies are competitors or close to being competitors."

The point applies both to Microsoft's investment in AT&T--which legally counts as a merger--as well as to the long distance carrier's buyout of MediaOne, Hovenkamp added.

Although Microsoft and AT&T rivals are expected to formally oppose the recent deals, legal action blocking them would be tough for other reasons. For one, the commitment to use Microsoft's Windows CE is not exclusive. AT&T has repeatedly stressed it is free to use competing software, including Sun Microsystems' Java, and has plans in the works to do so.

Opposition to AT&T's deal with MediaOne will similarly be softened by arguments that it will open up competition for local telephone service, which remains dominated by the Baby Bells three years after Congress passed laws aimed to encourage local competition.

Steeper hurdles elsewhere?
"Ultimately, with some qualification, I think that all of these transactions will go ahead," said William Kovacic, a professor of law at George Washington University, who added that scrutiny from state and local regulatory agencies may end up being where the real action takes place.

"All of those review processes are inherently more political than the federal antitrust agencies, and the competitors know they can fight the same battle all over again in each arena," Kovacic said.

If the AT&T deals provide little for antitrust regulators to sink their teeth into, they may give regulators on other fronts more traction.

As part of the 1992 Cable Act, Congress instructed the Federal Communications Commission to set a cap on the size of any single cable company, largely in an attempt to limit the ability of operators to influence programming.