WATCHING THE BIG GUYS

When you're big, you draw looks - and not just admiring ones, as AT&T and Time Warner learned last week. On Thursday, the Justice Department announced it will approve the AT&T/MediaOne merger as long as it trims the new company in ways that still may not win an OK from the FCC.

Meanwhile, across town in the committee rooms of Capitol Hill, the proposed Time Warner/America Online deal was drawing unwanted attention from congressmen irate over alleged questionable cable marketing tactics.

In a move that was telegraphed in March, AT&T and the DOJ agreed on a proposed consent decree that says the DOJ will approve the AT&T/MediaOne merger if it agrees to sell the Road Runner cable Internet shares.

AT&T has voting control of Excite@Home, the leading cable ISP, and regulators have expressed fears that allowing the carrier to acquire MediaOne and its 25.5% stake in Road Runner would lead to too much market concentration.

"The divestiture assures that AT&T will not acquire undue leverage in its dealings with broadband content providers," Assistant Attorney General Joel Klein said in announcing the proposal.

Under the decree, AT&T must sell Road Runner interest by the end of 2001, but it can retain assets used to deliver broadband services to MediaOne customers. After divestiture, the carrier can convert MediaOne Road Runner customers to Excite@Home.

That could be a boon to Excite@Home, which has more than 2 million subscribers. Road Runner currently has about 730,000 customers.

The carrier expected to rid itself of some properties to get DOJ approval, said James Cicconi, AT&T general counsel. "The Road Runner divestiture is an obligation we always assumed we would face, and the decree proposes a schedule and process that are fair and feasible," he said.

The DOJ's antitrust approval is one of two gates the AT&T/MediaOne merger has been trying to pass for more than a year. Divesting Road Runner may help it navigate the other barrier: the FCC's decision on whether the combination serves the public good.

The FCC has maintained that combining AT&T and MediaOne would violate its rule that a company may not control more than 30% of the cable and direct satellite homes in the country, or about 26 million homes.

That rule, imposed in 1992 but suspended almost immediately for judicial review, was upheld last week by a U.S. appeals court, which ruled that Congress had given the FCC power to make such rules.

FCC Chairman William Kennard immediately declared the rule in effect, giving carriers six months to comply. AT&T has asked for 18 months to fit its network to the new requirement.

In the Time Warner case, Rep. Billy Tauzin, R.-La., lambasted the carrier for reportedly persuading employees in Houston to apply for - and then cancel - residential DSL access from Southwestern Bell. The scheme allegedly attempted to test the carrier's DSL coverage and installation capacities.

Tauzin, chairman of the House Commerce Committee's telecom subcommittee, said Congress "never guessed these games would occur" when it passed the Telecom Act of 1996. "All we wanted was open and fierce competition," he said, suggesting Congress might want to re-examine whether the act promotes local competition as intended.

Each DSL cancellation would have counted against SBC Communications' recently filed application to offer long-distance phone service in Texas, Tauzin said. It is not known whether any Time Warner employees actually participated in the DSL sign-up scheme.

Time Warner has denied corporate responsibility for the plan.

But Southwestern Bell parent SBC complained to the Public Utility Commission of Texas, maintaining that such a ploy constitutes fraud under Texas law.