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If you need the complete document, download the WordPerfect version or Adobe Acrobat version, if available. ***************************************************************** Before the Federal Communications Commission Washington, D.C. 20554 In the Matter of Applications for Consent to the Transfer of Control of Licenses and Section 214 Authorizations from MediaOne Group, Inc., Transferor, To AT&T Corp. Transferee ) ) ) ) ) ) ) ) ) ) ) ) ) ) CS Docket No.99-251 MEMORANDUM OPINION AND ORDER Adopted: June 5, 2000 Released: June 6, 2000 By the Commission: Chairman Kennard issuing a statement; Commissioner Furchtgott-Roth concurring in part, dissenting in part and issuing a statement; Commissioner Powell concurring and issuing a statement; and Commissioner Tristani concurring and issuing a statement. Table of Contents Paragraph I. INTRODUCTION 1 II. PUBLIC INTEREST FRAMEWORK . . . . . . .8 III. BACKGROUND. . . . . . .14 A. The Applicants . . . . . . .14 B. The Merger Transaction and the Application to Transfer Licenses. . . . . 30 IV. ANALYSIS OF POTENTIAL PUBLIC INTEREST HARMS . . . . .35 A. Video Programming. . . . . .36 1. Diversity and Competition in Video Program Purchasing. . . . . 39 a. The Merged Firm's Cable Ownership Interests ...41 b. The Merged Firm's Video Programming Purchasing Power ..50 c. Potential Harm to Competition and Diversity in Video Programming 52 d. Compliance With the Horizontal Ownership Certification Provision .74 2. Program Access Issues. . . . . . . . . . . . . . . . . . .77 3. Channel Occupancy Limits . . . . . . . . . . . . . . . . .84 4. Arguments That the Cable Rules Apply to Internet Access Services . . . . . . .86 5. Electronic Programming Guides. . . . . . . . . . . . . . .87 6. MVPD Competition . . . . . . . . . . . . . . . . . . . . .94 B. Cable Equipment. . . . . . .96 C. Broadband Internet Services. . . . . 102 1. Background . . . . . . . . . . . . . . . . . . . . . . . 103 2. Discussion . . . . . . . . . . . . . . . . . . . . . . . 110 3. Findings.. . . . . . . . . . . . . . . . . . . . . . . . 116 D. Local Exchange and Exchange Access Service . . . . .129 E. Mobile Telephone Service . . . . . . 137 F. Bundling . . . . . . .140 G. Universal Service/Deployment . . . . . . .144 V. ANALYSIS OF POTENTIAL PUBLIC INTEREST BENEFITS. . . . . .154 A. MediaOne . . . . . . .161 B. AT&T . . . . . . 168 C. Joint Venture and Other Contractual Arrangements . . . . . . .170 D. Applicants' Deployment Projections . . . . . . 176 VI. PROCEDURAL MATTERS. . . . . . . 179 VII. CONCLUSION. . . . . . 183 VIII. ORDERING CLAUSES. . . . . .184 Appendix A List of Commenters Appendix B Safeguards Relating to Video Programming I. Introduction 1. In this Order, we consider the joint application ("Application") filed by MediaOne Group, Inc. ("MediaOne") and AT&T Corp. ("AT&T") (collectively the "Applicants" or "AT&T-MediaOne") for approval to transfer control to AT&T of certain licenses and authorizations controlled by MediaOne and its affiliates and subsidiaries, pursuant to Sections 214(a) and 310(d) of the Communications Act of 1934, as amended ("Communications Act"). To obtain Commission approval of their Application, the Applicants must demonstrate that their proposed transaction will serve the public interest, convenience, and necessity. In this regard, we must weigh the potential public interest harms of the proposed merger against the potential public interest benefits to ensure that the Applicants have shown that, on balance, the benefits outweigh the harms. 2. We review this merger in the context of an unprecedented convergence of communications services, including a trend toward consolidation in communications industries generally and the cable industry in particular. Cable companies are upgrading their systems to provide a full range of video, data, and voice services. In this proceeding, the Applicants contend that the proposed merger will allow them to provide local telephony and new services more quickly and effectively in order to compete directly with incumbent local telephone exchange carriers ("ILECs"). In contrast, many commenters argue that the merger would create a web of relationships that will allow the Applicants to dominate communications conduits through their cable infrastructure and dominate media content through their vertical integration with content providers. In the proposed merger, the nation's largest cable operator, AT&T, would acquire the nation's fourth largest cable operator, MediaOne, which holds a 25.5% interest in the nation's second largest cable operator, Time Warner Entertainment, LP ("TWE"). 3. The merged firm's attributable ownership interests in cable systems serving approximately 51.3% of the nation's cable subscribers and a significant number of video programming networks, raises concerns that the merged company will be able to exercise excessive market power in the purchase of video programming. Commenters opposing the merger argue that the merged entity will have the power to determine which video programming networks are successful, thereby limiting the diversity of programming available to viewers. In addition, commenters argue that the merged entity will be able to command excessively large discounts or exclusive contracts from programming networks, thereby hindering competition from alternative providers of multichannel video service. We find that the proposed merger violates the Commission's cable horizontal ownership rules, which are designed to address threats to diversity and competition in the video programming marketplace. 4. Accordingly, as a non-severable condition to our grant of the Application, we will give the Applicants a period of 12 months from the effective date of the horizontal ownership rules, May 19, 2000 to (a) divest their interests in TWE, (b) terminate their involvement in TWE's video programming activities (pursuant to the limited partnership exemption and the officers/directors attribution waiver provisions of the cable ownership attribution rules), or (c) divest their interests in other cable systems, such that they will have attributable ownership interests in cable systems serving no more than 30% of MVPD subscribers nationwide. We also will require the merged firm to file with the Cable Services Bureau, within six months from the closing of the merger, a written document specifying which of the foregoing three compliance options it has elected to pursue. If the merged firm is not in compliance by the May 19, 2001 deadline, then we will require it to place into an irrevocable trust for the purpose of sale the assets that it must divest pursuant to the compliance option that it elected in the foregoing filing to come into compliance with the 30% limit. We also will adopt the Applicants' proposal that, 60 days before the expiration of the 12-month period, May 19, 2001, the Applicants shall file with the Cable Services Bureau a written document (a) stating that it will be in compliance by the May 19, 2001 deadline, or (b) stating that it will not be in compliance and describing the irrevocable trust arrangement that it will establish by the May 19, 2001 deadline for the sale of any assets that it must be divest in order to effectuate the compliance option it had elected. In addition to the above conditions, we will mitigate the potential harm to the diversity of programming and competition during the compliance period by imposing interim conditions on the merged entity. The merged firm must abide by the interim conditions and their enforcement mechanisms, attached hereto as Appendix B, until such time as it has taken the foregoing compliance action. 5. In the broadband arena, the merged firm will be able to provide high-speed Internet access over a vast cable infrastructure. The merged firm also would have major ownership interests in the nation's two largest cable broadband Internet service providers ("ISPs"), Excite@Home and Road Runner. Excite@Home and Road Runner are the exclusive ISPs serving broadband subscribers over the cable systems of AT&T, MediaOne, TWE, Cox Communications, Inc., and Comcast Corporation, among others. Commenters raise concerns that the Applicants, through their cable infrastructure and ownership of Excite@Home and Road Runner, will dominate the provision of broadband Internet services and threaten the openness and diversity of broadband Internet content, software applications, and network architecture. We note that the Department of Justice has entered a proposed consent decree with the Applicants, pursuant to which the merged entity will divest its interests in Road Runner. Given the nascency of broadband Internet services, we find in this Order that growing competition from alternative broadband access providers, the Applicants' commitment to give unaffiliated ISPs direct access to the Applicants' cable systems, and the terms of Applicants' proposed consent decree with the Department of Justice requiring the divestiture of Road Runner make it unlikely that the merged firm would be able to dominate and threaten the openness and diversity of the Internet. Accordingly, we decline to impose conditions in this regard. Nevertheless, we will scrutinize broadband developments closely and review our policies if competition fails to grow as expected, especially if the merged firm fails to fulfill its commitment to open its cable systems or otherwise threatens the openness and diversity of the Internet. 6. In this Order, we also consider whether the proposed merger would result in the violation of any other Commission rules or federal communications policies. In this regard, the Applicants have adjusted the programming services of four cable systems in order to avoid potential violation of the Commission's channel occupancy rules, and MediaOne has reduced its ownership in Time Warner Telecom ("TWT") in order to avoid a potential violation of Section 652(b) of the Communications Act. 7. After reviewing the record in this proceeding and the arguments of the Applicants and commenters, we conclude that the potential public interest benefits, on balance, outweigh the potential public interest harms of the merger. We find that the merger is likely to benefit consumers by enhancing the merged entity's ability to compete more effectively with incumbent local exchange companies ("LECs") in providing facilities-based local telephony and other new services to residential customers. Accordingly, subject to the conditions discussed herein to mitigate the potential public interest harms, we conclude that approval of the Application to transfer control of Commission licenses and authorizations from MediaOne to AT&T will serve the public interest, convenience, and necessity. VIII. PUBLIC INTEREST FRAMEWORK 9. Before the Commission can approve the transfer of control of authorizations and licenses connected with the proposed merger under Sections 214(a) and 310(d) of the Communications Act, we must weigh the potential public interest harms of the merger against the potential public interest benefits to ensure that, on balance, the transfer of MediaOne's licenses and authorizations to AT&T serves the public interest, convenience and necessity. 10. The Applicants bear the burden of proving that the transfer will advance the public interest. In applying this public interest test, the Commission considers four overriding questions: (1) whether the transaction would result in a violation of the Communications Act or any other applicable statutory provision; (2) whether the transaction would result in a violation of Commission rules; (3) whether the transaction would substantially frustrate or impair the Commission's implementation or enforcement of the Communications Act, or would interfere with the objectives of the Communications Act and other statutes; and (4) whether the transaction promises to yield affirmative public interest benefits. 11. The Commission's analysis of public interest benefits and harms includes, among other things, consideration of the possible competitive effects of the transfer. Our public interest analysis is not, however, limited by traditional antitrust principles. In the telecommunications and cable industries for which we have statutory responsibility, as in most others, competition is shaped not only by antitrust rules, but also by the regulatory policies that govern the interactions of industry players. An antitrust analysis such as that undertaken by the Department of Justice in this case focuses on whether a proposed merger will reduce existing competition. Our public interest analysis, however, also requires us to determine whether the merger violates our rules, or otherwise would frustrate our implementation or enforcement of the Communications Act and federal communications policy. As we stated in Bell Atlantic-NYNEX, "[t]he 1996 Act set a clear national policy that competition leading to deregulation, rather than continued regulation of dominant firms, shall be the preferred means for protecting consumers." In addition to considering whether the merger will reduce existing competition, therefore, we also must focus on whether the merger will accelerate the decline of market power by dominant firms in the relevant communications markets. 12. We conduct our public interest review against the backdrop of the "broad aims of the Communications Act," which include, among other things, the implementation of Congress' pro-competitive, deregulatory national policy framework designed to open all communications markets to competition; the preservation and advancement of universal service; and the acceleration of private sector deployment of advanced services. Our public interest analysis may also entail assessing whether the merger will affect the quality and diversity of communications services or will result in the provision of new or additional services to consumers. In making these assessments, the Commission uses its expertise to consider the trends within, and needs of, the communications industry as well as Congress' preference for competitive market structures and outcomes. 13. Following passage of the Telecommunications Act of 1996 ("1996 Act"), local communications markets have been undergoing a transition to competitive markets, so a transaction may have predictable yet dramatic consequences for competition over time even if the immediate effect is more modest. Therefore, when a transaction is likely to affect local communications markets, our statutory obligation requires us to assess future as well as current market conditions. In doing so, the Commission may rely upon its specialized judgment and expertise to render informed predictions about future market conditions and the likelihood of success of individual market participants. 14. Where necessary, the Commission can attach conditions to a transfer of licenses and authorizations in order to ensure that the public interest is served by the transaction. As noted in AT&T-TCI, many transfer applications on their face show that the transaction would yield affirmative public interest benefits and would neither violate the Communications Act or Commission rules, nor frustrate or undermine federal communications policies and enforcement of the Communications Act. Such cases do not require extensive review. This is not the case with respect to the merger of AT&T and MediaOne. We analyze the potential public interest harms and benefits of this proposed merger in the next sections. We limit our analysis to those issues that have been raised by the parties to the proceeding and those additional issues that may significantly affect the public interest. XV. BACKGROUND A. The Applicants 16. AT&T. AT&T is the nation's largest provider of domestic and international long distance telephone service. In March 1999, AT&T acquired Tele-Communications, Inc. ("TCI") to integrate its telecommunications business with TCI's cable networks in order to build facilities-based local residential communications networks where TCI operated cable systems. As a result of its acquisition of TCI, AT&T is currently the nation's largest cable operator with a total of 18,959,000 owned and attributable subscribers. AT&T also provides other communications services, including local telephone, wireless mobile telephone, and Internet access services. AT&T's revenues from communications services totaled $59.6 billion in 1999, of which $25.1 billion were derived from business services, $22.0 billion from residential local, long distance, and narrowband Internet access services, $7.6 billion from wireless mobile telephone services, and $4.9 billion from cable and broadband services including broadband Internet access. 17. At the time of its merger with AT&T, TCI was principally a cable operator, although it held a variety of interests through its three business groups: TCI Communications, Liberty Media Group and TCI Ventures Group. The cable systems formerly owned and operated by TCI Communications are now owned and operated by AT&T Broadband & Internet Services ("AT&T BIS"). Liberty Media Group, the programming and content arm of TCI, and TCI Ventures Group, the international and miscellaneous holdings arm of TCI, were combined to form a single group called Liberty Media Group ("Liberty"). AT&T wholly owns Liberty through its 100% ownership of the outstanding capital stock of Liberty Media Corporation ("LMC"), for which it issued two classes of Liberty tracking stock, Liberty Group A and Liberty Group B, in order to track Liberty's performance. Liberty tracking stock is held by the shareholders that held TCI- Liberty tracking stock and TCI Ventures tracking stock prior to the AT&T-TCI merger, as well as others that have purchased these publicly traded shares subsequent to that merger. 18. Cable Systems and MVPD Services. Many of AT&T's cable television subscribers are served by systems owned and operated directly by AT&T; however, many are also served by systems that are owned in part by other cable operators. For example, AT&T has a 33% equity and 8.9% voting interest in Cablevision Systems Corporation ("Cablevision"), and it has the right to nominate two Cablevision directors. In addition, AT&T owns a 50% interest in two cable partnerships with Time Warner Cable: Kansas City Cable and Texas Cable Partners, LP. 19. AT&T generally divides its interests in cable systems into three categories: (1) owned and operated systems -- AT&T owns 100% of these systems; (2) consolidated systems -- AT&T's interest in these systems is greater than 50% but less than 100%; and (3) non-consolidated systems -- AT&T has an interest of 50% or less in these systems. As of April 2000, AT&T owned-and-operated systems provided service to approximately 10.6 million subscribers, AT&T consolidated systems provided service to approximately 485,000 subscribers, and AT&T non-consolidated systems provided service to approximately 7.4 million subscribers, for a total of 18,959,000 subscribers through all three categories of cable systems. In total, AT&T has attributable ownership interests in cable systems serving 28.3% of the 67.1 million cable subscribers nationwide and 23.0% of the 82.36 million subscribers to multichannel video programming distribution ("MVPD") services nationwide. 20. Video Programming Networks. AT&T BIS holds all of AT&T's video programming interests, such as AT&T's wholly owned subsidiary Liberty Media Group and AT&T's programming interests held through interests in other cable operators, such as Cablevision. These programming entities deliver a wide range of video programming to their subscribers, including local broadcast stations; national, regional, and local cable programming services; premium movie and pay-per-view services; and sports programming services to homes and businesses nationwide. 21. Through its interest in Liberty, AT&T holds interests in numerous national, international, and regional programming networks. Liberty's programming interests include a 100% interest in the Encore Media Group, which operates video programming networks such as Encore, MOVIEplex, Starz!, and many others. Liberty holds a 49% interest in Discovery Communications, Inc., which operates cable networks such as the Discovery Channel, The Learning Channel, and Animal Planet, and holds minority interests in numerous other programmers. Liberty owns approximately nine percent of the common stock, with less than one percent voting rights, of Time Warner Inc., which in turn owns 74.49% of Time Warner Entertainment ("TWE"), which owns substantial programming assets. In addition, Liberty holds interests in a number of foreign programming service providers, including Flextech P.L.C. in the United Kingdom and Jupiter Programming Co., Ltd., in Japan. 22. In addition, AT&T has a 33% direct interest in iNDEMAND (formerly Viewer's Choice), which purchases the broadcast rights for special events and sells them to other MVPDs for carriage. AT&T also holds programming interests through its direct interest in Cablevision. AT&T has a 33% equity and 8.9% voting interest in Cablevision and has the right to appoint two directors to Cablevision's board. Cablevision in turn has a 75% ownership interest in Rainbow Media Holdings, Inc. ("Rainbow"). Rainbow owns seven national programming networks and, in partnership with FOX Sports Net New York ("Fox"), owns several regional sports networks. Rainbow's programming interests include American Movie Classics, Independent Film Channel, Bravo, and Much Music. Rainbow's programming interests in partnership with Fox include Madison Square Garden Network, Fox Sports Chicago, Fox Sports New England, and Madison Square Garden Metro Guide. 23. Internet Services. When it acquired TCI, AT&T acquired an interest in At Home Corporation ("@Home"), which provides content-enriched, high-speed Internet access service over the cable television infrastructure. On May 28, 1999, @Home merged with Excite, Inc. The newly merged company is now called Excite@Home. AT&T holds a 74% voting interest in Excite@Home. The Excite@Home service allows subscribers to connect their personal computers via cable modems to a high-speed network developed and managed by Excite@Home, and obtain access to the public Internet and other online content. AT&T plans to begin offering Excite@Home through set top boxes this summer and fall offering a scaled-down version and a full-service version. Excite@Home is the exclusive provider of cable high-speed Internet access service over the cable systems of AT&T, Comcast, Cox, Cablevision, Shaw, and other cable operators. Excite@Home is the nation's largest cable high-speed Internet access service provider, serving approximately 1.5 million subscribers in the United States as of April 2000. AT&T also provides narrowband Internet access service to approximately 1.8 million customers through its wholly owned subsidiary AT&T WorldNet Service ("AT&T WorldNet"). 24. Local Telephone Service. In addition to providing long distance telephone services, AT&T also provides local exchange services. As of July 1999, AT&T had approximately 200,000 resale customers and approximately 15,000 cable telephony customers via the cable facilities it acquired in 1999 from TCI. As of May 2000, AT&T provides local telephone service to more than 555,000 resale, unbundled network elements platform ("UNE-P"), cable telephony, fixed wireless, and MDU customers nationwide. AT&T plans to use its wireless spectrum to deliver local exchange service through a fixed wireless system in certain areas where it does not intend to have a cable presence. AT&T has a fixed wireless trial underway in Dallas, Texas and offers service commercially to residential customers in Fort Worth, Texas. AT&T plans to offer fixed wireless local exchange service commercially in two additional markets by the end of 2000. Finally, on March 31, 2000, an AT&T-led consortium announced that it will acquire a 39% voting stake in Net2Phone, the leading provider of Internet Protocol ("IP") telephony and other web-based communications services. AT&T Chairman Michael Armstrong said that AT&T, together with Net2Phone, will develop the next generation of voice-enhanced web-based communications services and create a standard in IP telephony. 25. AT&T also offers local exchange service to business customers through its wholly owned subsidiary Teleport Communications Group ("Teleport"), which it acquired in 1998. AT&T acquired Teleport to expand its offering of local exchange and exchange access services for businesses. At the time of its acquisition by AT&T, Teleport was the nation's largest competitive local exchange carrier ("CLEC") and had initiated the development of local telephone networks in 83 metropolitan areas in 28 states throughout the United States. From these operations, through which it served primarily the business market, Teleport had earned revenues of $494.3 million in 1997. AT&T's total business and residential local exchange operations (including the formerly separate Teleport) yielded $901 million in revenues in 1998, and $10.5 billion in revenues in 1999. 26. Mobile Telephone Service. In addition to the foregoing wireline services, AT&T provides wireless mobile telephone services through its ownership and operation of AT&T Wireless Services Inc. ("AT&T Wireless"). AT&T Wireless operates and holds interests in commercial mobile radio service ("CMRS") systems in 26 of the 30 largest service areas in the United States. In 1999, AT&T Wireless generated revenues of approximately $7.6 billion from a client base of 12.2 million. 27. MediaOne. MediaOne is principally a cable operator, though it holds a variety of other interests, including a direct interest in high-speed Internet access provider Road Runner and direct interests in nine video programmers. In addition, through its cable systems, MediaOne provides local telephone service on a limited basis, and holds a 4.9% passive equity interest in wireless telecommunications provider Vodafone Air Touch. MediaOne's combined revenues were approximately $2.9 billion in 1998 and $2.7 billion in 1999. 28. Cable Systems and MVPD Services. As of April 2000 MediaOne's domestic owned-and- operated cable television systems provided service to approximately 5 million subscribers. MediaOne also has a 25.51% interest in TWE, which provides cable service through its subsidiary Time Warner Cable. The remaining 74.49% interest in TWE is held by Time Warner, Inc. ("TWI"). Under the TWE partnership agreement, MediaOne had co-management rights over Time Warner Cable and standard limited partner rights over TWE. However, when MediaOne sent TWE notice that it was intending to merge with AT&T and was thus terminating the non-competition provisions of the TWE limited partnership agreement, MediaOne's co- management rights over TWE Cable were terminated. Nevertheless, MediaOne retains veto rights over important TWE partnership decisions. Applicants represent that after the merger "AT&T will have no right or ability to participate in the management of the TWE cable systems." As of March 2000, TWE's cable systems served approximately 12.6 million subscribers nationwide. Counting MediaOne's owned-and- operated systems together with the TWE systems in which MediaOne holds a 25.51% interest, MediaOne holds interests in cable systems that serve approximately 17.6 million subscribers, or 26.2% of cable subscribers and 21.4% of MVPD subscribers nationwide. 29. Video Programming Networks. MediaOne holds direct ownership interests in seven national programming networks and two regional networks. Those programmers include Food Network, Sunshine Network, Music Choice, E! Entertainment Television, Speedvision, Outdoor Life, iNDEMAND, New England News Network, and Fox Sports New England. MediaOne owns an 11% direct interest in iNDEMAND (previously Viewer's Choice). MediaOne also holds interests in video programmers through its 25.51% partnership interest in TWE, which holds large ownership interests in major cable networks including Home Box Office, Turner Network Television, Cable News Network, Cartoon Network, Cinemax, Comedy Central, and the WB broadcast network. 30. Internet Services. MediaOne holds an approximate 34.67% interest in the content-enriched, cable high-speed Internet access provider Road Runner. After Excite@Home, Road Runner is the second largest provider of cable high-speed Internet access services in the United States. Road Runner is the exclusive provider of this service over the cable systems of MediaOne, Time Warner, and other cable operators with which Road Runner has exclusive contracts. As of April 2000, approximately 730,000 households nationwide purchased Road Runner services. 31. Local Telephone Service. In 1998 and early 1999, MediaOne began offering facilities-based local exchange service to residential customers in seven metropolitan areas: Atlanta, Georgia; Los Angeles, California; Jacksonville and Pompano Beach, Florida; Boston, Massachusetts; Detroit, Michigan; and Richmond, Virginia. As of July 1999, MediaOne had approximately 26,000 local telephony customers nationwide with an overall penetration rate of less than three percent of the homes that it had upgraded to provide local exchange service. As of May 2000, MediaOne has approximately 100,000 local cable telephone customers, representing an overall penetration rate of approximately 4%. In addition, MediaOne also holds an approximate 6% equity and 7.7% voting interest in Time Warner Telecom ("TWT"), a CLEC that provides local exchange and exchange access service primarily to large business customers in urban areas. TWT serves approximately 20 cities, including four cities in New York; three cities in North Carolina; four cities in Texas; two cities in Florida; two cities in Ohio; and several other cities. A. The Merger Transaction and the Application to Transfer Licenses 32. Proposed Transaction. On May 6, 1999, AT&T announced its intent to merge with MediaOne. Under the terms of the agreement, AT&T will acquire all shares of MediaOne. MediaOne's shareholders will have the option to convert their shares into cash, shares in AT&T, or a combination of both, based on each shareholder's election. Through the merger, AT&T plans to integrate its communications businesses with MediaOne's cable networks and build on AT&T's multi-billion dollar acquisition of TCI to foster new facilities-based competition in the provision of local telephone service. The Applicants believe that the integration of their networks also will increase consumers' access to a wide array of packaged and a la carte services, including video and content-enriched high speed Internet access. The Applicants contend that the merger will combine AT&T's strong brand name and communications expertise with MediaOne's "last mile" cable facilities and cable telephony expertise, thereby expanding and accelerating the merged entity's ability to compete with ILECs in providing communications services to residential customers. 33. The proposed merger would join the nation's first, second, and fourth largest cable operators. AT&T, the nation's largest cable operator with 28.3% of all cable subscribers nationwide, would acquire MediaOne, the nation's fourth largest cable operator with 7.5% of all cable subscribers. In addition, AT&T would acquire MediaOne's 25.5% interest in TWE, the nation's second largest cable operator with 18.9% of all cable subscribers. After the merger, AT&T would have attributable ownership interests in cable systems that serve 51.3% of the nation's 67.1 million cable subscribers. Of the nation's total 82.36 million television households that subscribe to MVPD service, the merged firm would serve 34.4 million or 41.8% of them. 34. Shortly before entering into the merger agreement, AT&T also entered into a letter agreement with Comcast Corporation ("Comcast"), which contemplates an exchange between AT&T and Comcast of certain cable systems. Upon consummation of AT&T's proposed merger with MediaOne, and the fulfillment of certain other conditions, Comcast and AT&T will transfer certain cable systems to one another. In addition, after the filing of the Application, AT&T sold all of its interest in Lenfest Communications, Inc. to Comcast. 35. Federal Review. In addition to Commission review, the proposed merger is also subject to review by the Department of Justice ("DOJ"). On May 25, the Department of Justice announced a consent decree with AT&T under which AT&T would be required to divest MediaOne's interest in Road Runner by December 31, 2001. Under the consent decree, AT&T also must obtain prior approval from DOJ before entering into certain types of arrangements with AOL or Time Warner that involve residential broadband Internet service. 36. Local Franchising Authority Review. Applicants have completed initial regulatory filings with approximately 512 local franchising authorities. Pursuant to Section 617 of the Communications Act, local franchising authorities with jurisdiction to review such transfers or sales of cable systems have 120 days from the date of Applicants' request for a franchise transfer to render a decision. Of the 512 local franchising authorities that have received Applicants' franchise transfer requests, 506 approved the requested franchise transfers without conditions. Two denied the request. Six franchise authorities approved the transfer but imposed Internet access provisions. In three of those six locales, the Internet access provisions were struck down. Appeals are still pending in the remaining cases. XXXVII. ANALYSIS OF POTENTIAL PUBLIC INTEREST HARMS 38. Parties opposing the merger have alleged that the combination of AT&T and MediaOne may harm the public interest with respect to the provision of various services. We address below the effects of the merger on only those services that may be affected adversely by the merger, based on commenters' allegations and our own analysis. Specifically, we examine the merger's potential effects on (1) video programming, (2) cable equipment, (3) broadband Internet services, (4) local exchange and exchange access service, and (5) mobile telephone service. We also address concerns related to (6) the bundling of services and (7) the deployment of services. A. Video Programming 39. In this section, we consider the proposed merger's impact on video programming sold by program networks to MVPDs, who then deliver the networks via their distribution systems to their subscribers' television sets. MVPDs include cable, direct broadcast satellite ("DBS"), multichannel multipoint distribution services ("MMDS"), and satellite master antenna television ("SMATV") providers. The relevant services offered by MVPDs using different distribution technologies are sometimes not perfect substitutes for each other (e.g., DBS providers currently may not offer any or may offer only a select number of local broadcast channels in certain areas, which cable, MMDS, and SMATV systems are able to offer). Subscribers, however, can combine services (e.g., by using an antenna to receive broadcast programming over the air when subscribing to DBS services) to obtain services equivalent to those provided by other MVPDs. 40. Companies that own programming networks produce their own programming and/or acquire programming produced by others, then package this programming for sale to MVPDs. As discussed above, AT&T, MediaOne, and TWE have ownership interests in a large number of programming networks, such as American Movie Classics, Cinemax, Home Box Office, and Comedy Central, among others. AT&T, MediaOne, TWE, and other MVPDs also purchase video programming and deliver it on their distribution networks (e.g., cable or DBS) to their subscribers. 41. The proposed merger would combine AT&T and MediaOne, which itself has a 25.5% ownership interest in the TWE partnership. AT&T, TWE, and MediaOne are respectively the nation's first, second, and fourth largest cable companies. Post-merger, AT&T would have attributable ownership interests in cable systems serving 51.3% of cable subscribers and 41.8% of MVPD subscribers nationwide. We analyze below the effects of the merger on the provision of (a) video programming and (b) electronic programming guides ("EPGs") used in advanced cable set-top boxes to direct subscribers to such programming. We also examine the application of the Commission's horizontal ownership rules, program access rules and channel occupancy rules to the merged entity's provision of video programming and Internet services. We conclude that the merger will violate the cable horizontal ownership rules and accordingly order the Applicants to take compliance steps as a condition of this Order. With regard to the remaining video and EPG contentions, we find that the merger will not violate any other Commission rule or the Communications Act, nor frustrate the implementation of the Communications Act or its goals. 1. Diversity and Competition in Video Program Purchasing 42. Commenters have raised two types of potential harm that may arise due to the merged firm's increased subscribership. First, the merged firm may exercise excessive power in the purchase of video programming, allowing it to threaten the launch and survival of new and unaffiliated programmers. The result would be a diminishment of the diversity and number of media voices available to the public.Second, because the merged firm will purchase programming for a significantly larger subscriber pool than would either Applicant acting alone, the merged entity may be able to negotiate large programming discounts and exclusive contracts with video programmers. Such action, some commenters argue, would hinder competition from the Applicants' smaller MVPD competitors (e.g., DBS providers and cable overbuilders), who would be unable to offer the same programming choices and/or competitive prices. 43. In applying the four-prong public interest test, we find that the merger will violate the cable horizontal ownership statute and rules, which establish limits on a cable operator's size in order to prevent it from threatening diversity and competition in the provision of video programming. Accordingly, as a condition to our grant of the Application, we will require the Applicants, within 12 months from the effective date of the horizontal ownership rules, May 19, 2000, to (a) divest their interests in TWE, (b) terminate their involvement in TWE's video programming activities (pursuant to the limited partnership exemption and the officers/directors attribution waiver provisions of the cable ownership attribution rules), or (c) divest their interests in other cable systems, such that they will have attributable ownership interests in cable systems serving no more than 30% of MVPD subscribers nationwide. We find that this divestiture requirement, together with other interim conditions and enforcement mechanisms discussed below, will mitigate sufficiently the merger's potential to frustrate or impair the Commission's implementation or enforcement of the Communications Act and its objectives. a. The Merged Firm's Cable Ownership Interests 44. As a preliminary matter, we must determine the extent of the merged firm's cable ownership interests. In the horizontal ownership limits statute, Congress directed the Commission to establish limits on the number of cable subscribers "a person is authorized to reach through cable systems owned by such person, or in which such person has an attributable interest . . .." Our cable ownership attribution rules define what constitutes an "attributable" interest such that the holder of the interest should be subject to the horizontal ownership limit: The attribution rules seek to identify those corporate, financial, partnership, ownership and other business relationships that confer on their holders a degree of ownership or other economic interest, or influence or control over an entity engaged in the provision of communications services such that the holders should be subject to the Commission's regulation. 45. Under the Commission's cable ownership attribution rules, the merged entity will have attributable ownership interests in cable systems serving approximately 41.8% of MVPD subscribers nationwide. Approximately 15.3% of the merged entity's subscribership base will derive from its attributable interest in TWE. TWE will be attributable to the merged firm in two ways. First, under our attribution rules, a company that appoints a director or officer to a company or partnership, or shares common directors or officers, is deemed to have an attributable interest in that entity. This rule is based on the economic reality that a director or officer has the power to direct the operations of the entity. Accordingly, if the merged firm appoints directors to the TWE board of directors or management committee, or shares common directors and officers with TWE, then TWE is attributable to the merged firm. 46. Second, our cable ownership attribution rules provide that all partnership interests are attributable because, unlike a corporate shareholder, a limited partner may influence or control the operations of the partnership even if its percentage equity interest is very small. In this case, the merged entity's 25.5% partnership interest representing an investment estimated to be worth some $14 to $18 billion in TWE clearly give it an attributable interest. The consent of the merged entity will be required for many major decisions of the TWE partnership. AT&T has emphasized that its partnership interest and multi-billion dollar investment in TWE will create "an aligning of interests" between AT&T and TWE that will facilitate AT&T's provision of local telephony service over the TWE cable systems. Nothing in the record suggests that this alignment of AT&T and TWE's economic interests will not extend to coordination in the video programming arena. However, as discussed below, the cable ownership attribution rules permit AT&T to maintain its partnership interest in TWE and to appoint or share common directors and officers without attribution of ownership, if AT&T has no involvement in the partnership's video programming activities. (i) Waiver of Attribution of Directors and Officers 47. As discussed above, any directors or officers (or the equivalent thereof) that the merged entity appoints to a TWE board or management committee renders TWE attributable to the merged firm. In addition, if the merged firm and TWE share any common directors and officers, then TWE is attributable to the merged firm. In order to avoid this attribution rule, the Applicants may request that the Commission waive attribution for any TWE director or officer, if his or her duties and responsibilities are wholly unrelated to TWE's video programming activities. In addition, if the merged entity and TWE share common directors and officers, the Applicants may seek a waiver from attribution for those directors and officers if their responsibilities are wholly unrelated to both AT&T's and TWE's video programming activities. (i) The Insulated Limited Partnership Exemption 48. The Applicants may render their partnership interest nonattributable as follows: Under the insulated limited partnership ("ILP") exemption, a limited partnership interest shall not be attributed to a partner that "is not materially involved, directly or indirectly, in the management or operation of the video- programming related activities of the partnership and the relevant entity so certifies." In order to satisfy this standard, the limited partner may not engage in the following seven activities (the "ILP test"): (1) The limited partner cannot act as an employee of the partnership if his or her functions, directly or indirectly, relate to the video programming enterprises of the company; (2) the limited partner may not serve, in any material capacity, as an independent contractor or agent with respect to the partnership's video programming enterprises; (3) the limited partner may not communicate with the licensee or general partners on matters pertaining to the day-to-day operations of its video programming business; (4) the rights of the limited partner to vote on the admission of additional general partners must be subject to the power of the general partner to veto any such admissions; (5) the limited partner may not vote to remove a general partner except where the general partner is subject to bankruptcy proceedings, is adjudicated incompetent by a court of competent jurisdiction, or is removed for cause as determined by a neutral arbiter; (6) the limited partner may not perform any services for the partnership materially relating to its video programming activities, except that a limited partner may make loans to or act as a surety for the business; and (7) the limited partner may not become actively involved in the management or operation of the video programming businesses of the partnership. To take advantage of the ILP exemption, the limited partner must file with the Commission a certification, with supporting facts, stating that it is not involved in these seven activities. 49. The cable ownership attribution rules preclude insulation where a limited partner sells video programming to the partnership, based on the recognition that such sales relationships provide the limited partner added capability and incentive to influence the partnership's video programming choices. This preclusion was in effect at the time the proposed merger was announced and remains in effect today. The attribution rules adopted in 1993 permitted insulation where the limited partner did not provide "services for the partnership materially relating to its media activities." The rules specifically stated the criteria for insulation under this standard: The criteria which would assure adequate insulation for purposes of this certification are described in the Memorandum and Order in MM Docket No. 83-46, FCC 85-252 (released June 24, 1985) ["1984 Attribution Order on Reconsideration"] as modified on reconsideration in the Memorandum Opinion and Order in MM Docket No. 83-46, FCC 86-410 (released November 28, 1986) ["1984 Attribution Order on Further Reconsideration"]. 50. The 1984 Attribution Order on Reconsideration explains that an insulated limited partner may not perform any services that materially relate to a cable operator's media activities. Again in the 1984 Attribution Order on Further Reconsideration, the Commission stated that "an exempt limited partner should not perform any services to the limited partnership relating, in any material respect, to its media activities." Given that a cable operator's core media activity is the provision of video programming, there can be no service more material to a cable operator's video programming than the sale of programming to the cable operator. Because video programming is at the heart of "media activities," the Commission in 1989 held that an investor could not shield its investment from attribution if it sold video programming to the investment. Last year, the Commission noted that the sale of video programming was a service materially relating to media activities under the parallel broadcast attribution rule. 51. In the 1999 Attribution Order, we replaced the term "media activities" with the term "video- programming related activities" and required the limited partner to certify that it does not provide any service materially related to the partnership's video-programming activities. We amended the rule in order to allow a limited partner to insulate its partnership interest even if it participates in the partnership's other media activities, including the provision of telephony services, so long as it is not materially involved in the partnership's video-programming related activities. We emphasized that our amendment to the ILP rule would not permit a limited partner to insulate itself if it provided services materially related to the limited partnership's video programming activities. Therefore, the new rule maintains the 1993 rule's prohibition against the insulated limited partner's sale of video programming to the partnership. 52. As discussed above in Section III, AT&T and MediaOne hold attributable interests in numerous programming affiliates, including among others, Encore, Bravo, Discovery, New England Sports, BET, American Movie Classics, and STARZ! These affiliates in turn sell their programming to TWE. The Applicants' sale of programming, via its attributable programming affiliates, to TWE is a service for TWE "materially relating to its video programming activities" and provide the Applicants with the added capability and incentive to influence TWE's video programming choices. Accordingly, the merged firm will be deemed materially involved in TWE's video-programming activities, precluding application of the insulated limited partnership exemption. The merged firm thus will have attributable ownership interests in cable systems serving approximately 41.8% of MVPD subscribers nationwide. a. The Merged Firm's Video Programming Purchasing Power 53. Having determined the merged firm's ownership interests and subscribership base, we next consider how this subscribership base translates into the ability to affect competition and diversity in the delivery of video programming to consumers. As discussed above, MVPDs purchase video programming and deliver it on their distribution networks (e.g., cable or DBS) to their subscribers. Each MVPD negotiates license fees with programming networks for the right to carry the networks on the MVPD's distribution systems. The license fees are based, in part, on the MVPD's total subscriber numbers. In addition, the network often grants the MVPD a portion of the network's advertising time, which the MVPD in turn sells to its own advertisers for advertising revenue. Large MVPDs, such as AT&T, MediaOne, and TWE, are likely to purchase programming networks for delivery to their entire nationwide subscribership. Programmers attempt to reach subscribers on a regional or national basis to increase the value of their programming to advertisers. 54. Start-up video programmers need to reach a critical level of subscribership quickly in order to achieve long-term financial viability. Video programmers' need for a large number of subscribers confers on AT&T, MediaOne, and TWE, which have access to a large number of subscribers, significant bargaining power. Because cable operators purchase programming based on the number of subscribers they serve, we found in the Horizontal Third Report and Order that the number of subscribers served by a cable operator most accurately reflects that cable operator's purchasing market power. The Commission also recognized that measuring the market in terms of cable subscribers alone is inappropriate. DBS operators and other MVPDs purchase video programming for their subscribers from the same market and thus directly affect a cable operator's market power. Consequently, a cable operator's purchasing power should be measured in terms of the percentage of all MVPD subscribers that it serves. Under this MVPD subscriber standard, which we use in our cable horizontal ownership rules and in our analysis below, the merged firm would have attributable ownership interests in cable systems serving approximately 34.4 million, or 41.8%, of the nation's 82.36 million MVPD subscribers. a. Potential Harm to Competition and Diversity in Video Programming 55. In Section 613(f)(1)(A) of the Communications Act, Congress directed the Commission to establish limits on a cable operator's size, because Congress was concerned that concentration in cable system ownership might harm competition and diversity in video programming. Pursuant to this statutory directive, the Commission enacted the cable horizontal ownership rules, which provide that no cable operator may serve more than 30% of MVPD subscribers nationwide. The Commission voluntarily stayed the horizontal ownership rules pending the United States Court of Appeals for the District of Columbia Circuit's ("D.C. Circuit") consideration of a constitutional challenge to Section 613(f)(1)(A). The D.C. Circuit upheld the constitutionality of the statute on May 19, 2000, on which date the Commission's voluntary stay was automatically lifted and the horizontal ownership rules became immediately effective. In the Reconsideration of the Horizontal Third Report and Order, we stated that parties in violation of the rules on the date of the court's decision must come into compliance with the rules within 180 days thereafter. The merged entity's attributable ownership interest in cable systems serving 41.8% of the nation's MVPD subscribers clearly would violate the 30% horizontal ownership limit. We discuss below our horizontal ownership rules and their application to the merged entity. 56. Section 613(f)(2)(A) directs the Commission to set a horizontal ownership limit which would ensure that [N]o cable operator or group of cable operators can unfairly impede, either because of the size of any individual operator or because of joint actions by a group of operators of sufficient size, the flow of video programming from the video programmer to the consumer. . . 57. Pursuant to this directive, we found in the Horizontal Third Report and Order that, if a cable operator, by itself or in concert with others, can determine the success or failure of a new programming service, then we must conclude that it has excessive purchasing power in the video programming market. 58. As noted above, programming networks generally need to reach a large number of subscribers fairly quickly in order to achieve long term financial viability. In the Horizontal Third Report and Order, we found that 15 million subscribers, or close to 20% of MVPD subscribers nationwide, is the minimum number necessary to give a video programmer a reasonable chance of long-term success. In setting the horizontal limit, we also analyzed the new programmer's probable rate of success in reaching subscribers through MVPDs that do not flatly deny it carriage. We found that, on average, a new video programming network is likely to capture approximately 50% of the subscribers that are available to it. Accordingly, we concluded that approximately 40% of the market needs to be available to a new video programming network to give it a reasonable chance of reaching the 15 million subscribers (or 20% of the market) it needs for long-term success. To ensure that, even if two cable operators collectively deny carriage to a new programmer, at least 40% of MVPD subscribers nationwide would still remain available to the programmer, we determined in the Horizontal Third Report and Order that a 30% horizontal limit was appropriate. 59. We note that some commenters argue that the Commission should use its public interest authority to require the Applicants to divest TWE instead of permitting the Applicants to choose alternative methods to comply with the horizontal rules. MAP argues that the merger of "interests in the first, second, and fourth largest cable MSOs, and in many of the most popular cable program services, substantially threatens the viability of emerging cable programmers." In enacting the Section 613(f)(2)(A) directive for the Commission to adopt a horizontal limit that would protect against the threat that "joint actions by a group of operators" would impede the flow of video programming to the consumer, Congress recognized a significant likelihood that cable operators would coordinate their program purchasing decisions. Because cable operators generally do not compete against each other in their respective franchise areas, they may incur no loss from carrying the same programming networks and have little economic disincentive for coordinated action. There is instead the potential for cable operators to gain by carrying the same programming networks in order to spread the costs of such programming over a larger subscriber base. Coordination in purchasing could increase cable operators' ability to get exclusive contracts with unaffiliated networks, to the detriment of alternative MVPDs (such as DBS) seeking to compete against the incumbent cable operators. 60. The concern about coordinated action reflected in the horizontal ownership rules only becomes stronger in light of recent consolidation in the MVPD industry. In 1999 alone, in addition to the proposed merger between AT&T and MediaOne, other announced mergers and acquisitions include those between Adelphia Communications, Century Communications, and FrontierVision; between Comcast, Jones Intercable, Prime Cable (Maryland), and Lenfest Communications; and between Cox Communications, Media General, Prime Cable (Las Vegas), and TCA Cable. Vulcan Ventures acquired Marcus Cable and Charter Communications (which previously had acquired Falcon) in 1998 and purchased control in numerous MSOs in 1999, including Fanch Communications, Avalon, Greater Media, Helcion, Renaissance, and Rifkin. Concentrated markets are more prone to collusive outcomes than are competitive markets. 61. We agree with commenters that the merged entity presents an especially potent force in the video programming market because AT&T, MediaOne, and TWE are the industry leaders both in their operation of cable systems and their ownership of video programming networks. Beside being the first, second and fourth largest MVPDs nationwide, AT&T, TWE, and MediaOne also have ownership interests in a significant number of video programming networks (including, among others discussed in Section III above, TWE's HBO, Comedy Central, CNN, TNT, Cartoon Network, Cinemax, and the WB broadcast network; Liberty's Encore, Starz!, Discovery Channel, Telemundo Network, BET, USA Networks, and the Learning Channel; Cablevision's Bravo, American Movie Classics, and the Independent Film Channel; and MediaOne's Golf Channel and Speedvision). TWE owns 100% of three of the top six program networks by number of subscribers, and AT&T owns 49% of one of the top six program networks. In addition, AT&T and TWE together own 100% of four of the top six premium networks. Not only will the merged entity have attributable interests in a vast number of programming networks, including many of the networks with the largest number of subscribers nationwide, but new networks will reduce their chances for long-term success if they do not meet the terms and preferences of the merged firm. The combination of these two factors makes the merged entity a potentially powerful gatekeeper that could affect the diversity of video programming delivered to consumers. 62. We believe these potential harms are sufficiently mitigated by compliance with Section 613(f)(1)(A) and the horizontal ownership rules. Accordingly, as a condition to our grant of the Application, we will require the Applicants to (a) divest their interests in TWE, or (b) terminate their involvement in TWE's video programming activities pursuant to the limited partnership exemption and the officers/directors attribution waiver provisions of the cable ownership attribution rules, or (c) divest their interests in other cable systems, such that the merged firm will have attributable ownership interests in cable systems serving no more than 30% of MVPD subscribers nationwide. We discuss below the compliance period, interim conditions, and enforcement mechanisms that we are adopting pursuant to this condition to our grant of the Application. (i) Applicants' Arguments regarding Lack of Potential Harm 63. The Applicants make four arguments that, they contend, demonstrate that their post-merger size will not threaten competition and diversity in the provision of multichannel video-programming, notwithstanding the findings of the Horizontal Third Report and Order supporting our 30% horizontal ownership limit. The Applicants do not request a waiver of the horizontal ownership rules based on the particular characteristics of this merger; thus, they are required to abide by the rule. Nonetheless, in the interest of a complete record, we will address the Applicants' four arguments. 64. First, the Applicants argue that increased competition from other MVPDs, particularly DBS, diminishes the Applicants' program purchasing power because video programmers will be able to obtain carriage on other MVPDs. Although we agree that non-cable MVPDs limit the Applicants' market power, we already have considered this factor in our analysis supporting the horizontal ownership rules and found that basing our ownership limit on the number of total MVPD subscribers, rather than cable subscribers alone, adequately accounts for video programmers' ability to obtain carriage from other MVPDs. No merger- specific facts suggest that other MVPDs will have such greater effect on the market behavior of the parties to this transaction that the general rule should not apply. 65. Second, the Applicants argue that the expanded channel capacity of their cable systems will permit them to carry more programmers and therefore diminish their ability to harm programmers. In the Horizontal Third Report and Order, we found that this argument had little merit because, among other reasons, the growth rate of new programmers rapidly outpaces the growth of new channels and an increase in sheer number of channels cannot be assumed to indicate an increase in the diversity of channels. 66. Third, the Applicants argue that other Commission rules, such as program access, program carriage, must carry, leased access, and the channel occupancy rules foreclose their ability to exert excessive programming market power. While those rules are important, they are complements rather than substitutes to the horizontal ownership rules. Just as Congress and this Commission found reasonable horizontal limits to be necessary despite the existence of those other rules, those other rules do not eliminate the need to apply the horizontal ownership limit in this case. 67. Fourth, apparently arguing that the merged firm should be able to serve 35% of the nation's MVPD subscribers, the Applicants claim that that the Department of Justice has "effectively established a 'safe harbor' against monopsony power challenges when the [purchaser] firms in question account for less than 35% of total purchases." The Applicants claim that the Department of Justice created this safe harbor by disposing of such matters through what the Applicants contend are "routine Business Review" letters. However, the Department of Justice does not "conduct business reviews for proposed mergers." Rather, the Department of Justice issues business review letters when business entities seek to ascertain the Antitrust Division's enforcement intentions with respect to "potential civil, non-merger, conduct." Moreover, the three business review letters that the Applicants cite involve concerted action by numerous unaffiliated purchasers rather than a single entity or affiliated entities, and thus are factually dissimilar to the proposed merger. In any event, the Department of Justice's business review letters cannot negate the Commission's rules nor our merger analysis, which is guided by different public interest principles. (i) Applicants' Waiver Request and the Compliance Conditions 68. The Applicants request that the Commission waive the cable horizontal ownership and ownership attribution rules for 18 months, at the end of which period the Applicants would come into compliance with the rules in effect at that time. The Commission's rules may be waived for good cause shown. A waiver is appropriate only if the applicant shows that (1) special circumstances warrant a deviation from the general rule and (2) a deviation from the rule would better serve the public interest underlying the rule's promulgation. Commission rules are presumed valid, and "an applicant for waiver faces a high hurdle even at the starting gate." For the reasons set forth below, we find that the Applicants have not shown good cause for an 18-month waiver of our ownership rules. Based on the complexity of the business arrangements involved and the many varied interests which the Applicants must divest to ensure compliance, however, we find it appropriate to grant the Applicants a period of 12 months from the effective date of our horizontal ownership rules, May 19, 2000, to effectuate the divestitures required by our current horizontal ownership rules, subject to certain interim conditions and enforcement measures. 69. As the first ground for their waiver request, the Applicants previously argued that the nature of their interests in TWE and programming affiliates such as Liberty and Rainbow does not grant them sufficient control over the day-to-day operations of these entities to implicate the public interest concerns of the cable ownership attribution rules. The Commission has thoroughly considered and rejected these specific arguments in the cable ownership attribution rulemaking proceeding. In that rulemaking proceeding, the Applicants expressly argued that the Commission should apply an "actual control test" and should not deem their interests in Liberty, Rainbow, and TWE to confer influence or control on the Applicants. The Commission rejected these arguments in adopting the revised ownership attribution rules. A "waiver applicant traditionally has a heavy burden to demonstrate that the arguments advanced in support of the waiver request are substantially different from those that have been carefully considered at the rulemaking stage." The Applicants are merely repeating here the arguments and facts that they presented in the rulemaking proceeding. The Applicants have not shown how a waiver based on these arguments, which were rejected in the Attribution rulemaking proceeding, would serve the public interests underlying the ownership attribution rules rather than undermining the integrity of the rules. 70. Second, the Applicants argue that an 18-month waiver of the horizontal ownership and ownership attribution rules would better serve the public interest than strict adherence to the rules because of the public benefits that the Applicants argue the merger will bring. As a preliminary matter, the Applicants have not demonstrated why their claimed local telephony public interest benefits will be obtainable if they have 18 months in which to divest, but not if they have a shorter period for divestiture. More importantly, the waiver standard requires the Applicants to demonstrate that deviation from the cable horizontal ownership and ownership attribution rules would better serve the public interest underlying these rules, and the Applicants have failed to satisfy this burden of proof. The attribution rules are designed to identify investments and other interests that confer on their holders influence or control. The Applicants' claimed local telephony public benefits cannot negate the harm to video programming competition and diversity that would result from the merged entity's influence or control over the nation's first, second, and fourth largest cable operators. Moreover, the Commission considered the Applicants' arguments regarding the benefits of clustering, economies of scale, and competition with LECs when it adopted the cable attribution rules. The Applicants have presented no new arguments in this regard. Accordingly, we cannot grant the Applicants' request that the Commission waive the cable horizontal ownership and ownership attribution rules for 18 months and allow the Applicants to come into compliance with those rules in effect at the end of that period. 71. In June 1998, long before the Applicants' merger negotiations, the Commission had put the industry on notice that parties in violation of the horizontal ownership rules at the time our voluntary stay is lifted would be required to comply with the rules within sixty days after the lifting of the stay. We specifically warned "particular parties that are now entering into business arrangements that would violate the rules but for the existence of the stay, [that they] should be well aware of the existence of the rules and thus have a full opportunity to comply with them." Thus, at the time of the Applicants' merger negotiations in 1999, the Applicants were on notice that they should not enter into any transaction that would be difficult for them to divest within 60 days after the stay was lifted, and they assumed the risk that they would be forced to divest within 60 days if and when the stay is lifted. In the Horizontal Third Report and Order which we adopted in October 1999, three months after the filing of the Application, the Commission decided that 180 days was a more reasonable timeframe for divestitures after the stay was lifted. 72. The Commission has allowed divestiture periods of more than 180 days in similar situations, however, where parties were required to divest properties in order to comply with Commission rules. Indeed, the Commission has granted parties a period of 12 months in order to comply with our ownership rules in a number of instances involving complex business transactions, most recently in granting the license transfer applications attendant to the merger of CBS and Viacom. 73. In this case, all three of the divestiture options available to the Applicants involve complex business transactions. For example, one means for the Applicants to divest their interest in TWE is to activate their registration rights under the TWE Limited Partnership Agreement and sell their interest in a public offering. However, under the terms of the TWE Limited Partnership Agreement, the Applicants cannot start this process until January 2001, and they will have to follow a series of complex procedures (including an assessment by investment bankers) to effectuate a public offering. Alternatively, if the Applicants choose to cease involvement in TWE's video programming activities and make TWE non-attributable pursuant to the insulated limited partnership exemption and directors/officers attribution waiver provisions, among other steps to assure non-involvement, Applicants would have to divest a variety of video programming network ownership interests, including AT&T's attributable interests in Liberty and Rainbow. The Applicants have emphasized, in particular, the complicated corporate procedures and tax issues involved in the spin-off of Liberty. Finally, if the Applicants choose to retain an attributable interest in TWE and instead divest their ownership interests in other cable systems, they will have to divest from a large number of cable systems, serving approximately 11.8% of MVPD subscribers nationwide, in order to comply with the 30% ownership limit. Consistent with our precedents, we find that the complexity of these transactions supports the granting of a 12-month period for the Applicants to effectuate the necessary divestitures. There is no support in the record, however, for going beyond a 12-month period to give the Applicants 18 months to divest their attributable ownership interests in order to come into compliance with the 30% horizontal ownership limit. 74. Accordingly, as a non-severable condition to our grant of the Application, we will give the Applicants a period of 12 months from the effective date of the horizontal ownership rules, May 19, 2000 to (a) divest their interests in TWE, (b) terminate their involvement in TWE's video programming activities (pursuant to the limited partnership exemption and the officers/directors attribution waiver provisions of the cable ownership attribution rules), or (c) divest their interests in other cable systems, such that they will have attributable ownership interests in cable systems serving no more than 30% of MVPD subscribers nationwide. We also will require the merged firm to file with the Cable Services Bureau, within six months from the closing of the merger, a written document specifying which of the foregoing three compliance options it has elected to pursue. If the merged firm is not in compliance by the May 19, 2001 deadline, then we will require it to place into an irrevocable trust for the purpose of sale the assets that it must divest pursuant to the compliance option that it elected in the foregoing filing to come into compliance with the 30% limit. We also will adopt the Applicants' proposal that, 60 days before the expiration of the 12-month period, May 19, 2001, the Applicants shall file with the Cable Services Bureau a written document (a) stating that it will be in compliance by the May 19, 2001 deadline, or (b) stating that it will not be in compliance and describing the irrevocable trust arrangement that it will establish by the May 19, 2001 deadline for the sale of any assets that it must be divest in order to effectuate the compliance option it had elected. 75. In addition to the above conditions, we will mitigate the potential harm to the diversity of programming and competition during the compliance period by imposing interim conditions on the merged entity. We adopt in this Order the Applicants' proposed interim conditions, subject to certain modifications to fit our divestiture requirements. The interim conditions and their enforcement mechanisms are attached hereto as Appendix B. The Applicants' proposed interim conditions and enforcement mechanisms fall far short of the insulated limited partnership exemption and directors/officers waiver provisions of the cable ownership attribution rules that would establish their non-involvement in TWE's video-programming activities. We deem them sufficient, however, to limit the merged firm's involvement in TWE's video programming activities solely during the period granted by the Commission for compliance with this Order and as a condition for granting the Applicants 12 months from the effective date of our horizontal rules to come into compliance. The merged firm must abide by the interim conditions specified in Appendix B until such time as it has taken the foregoing compliance action. 76. The foregoing conditions will bring the merged firm into compliance with Section 613(f)(1)(A) and our cable horizontal ownership rules, thereby satisfying the first two prongs of our public interest test. Finally, under the third prong of our public interest test, we conclude that the Applicants' compliance with the above divestiture requirements also will ensure that the merger will not frustrate nor impair the Commission's implementation of the Communications Act and its objectives with regard to the promotion of competition and diversity in the provision of video programming. a. Compliance With the Horizontal Ownership Certification Provision 77. Consumers Union raises two procedural arguments to deny the merger and a collateral, but substantively related, request for forfeiture. First, Consumers Union argues that the Application is procedurally defective and should be dismissed because it does not contain a cable horizontal ownership certification pursuant to Section 76.503(c) of the Commission's rules, which was in effect at the time the Application was filed. The horizontal certification provision in effect at that time required cable operators that reach 20% or more of homes passed nationwide to certify, prior to acquiring additional systems, the percentage change in ownership resulting from such acquisition. Consumers Union argues that the former Section 76.503 required that the horizontal certification be made at the same time that applications for transfers of licenses are filed with the Commission. Second, Consumers Union filed a request with the Commission ("Consumers Union Forfeiture Request") under Section 1.41 of the Commission's rules requesting that the Commission initiate a forfeiture proceeding based on allegations that AT&T has made material misrepresentations to, and failed to be candid with, the Commission regarding AT&T's filing practices under Section 76.503(c), that AT&T has filed its certifications late, and that AT&T has failed to report in its certifications sufficient information for the Commission to assess the impact of the reported transactions. Third, Consumers Union filed a supplemental pleading in this proceeding to argue that the Commission should deny the Application on the grounds that the facts alleged in the Consumers Union Forfeiture Request demonstrate that AT&T does not have the requisite character to hold Commission licenses. 78. AT&T disagrees with Consumers Union's interpretation of the former Section 76.503(c) and argues that this provision required only that AT&T file the certification prior to closing a transaction, not at the time it filed its Application in this proceeding or applications for transfers relating to other transactions. While AT&T admits that some of its Section 76.503(c) letters were filed after transactions had closed, AT&T states that pre-closure filing was not always possible because, in some instances, AT&T and its predecessor TCI were unable to obtain cable homes passed information from the systems they were acquiring prior to closing. 79. Findings. In the Horizontal Third Report and Order, we revised the horizontal certification provision to require information on the number of cable subscribers, a more readily accessible number than cable homes passed, and to clarify that certifications must be filed concurrently with applications for transfers of licenses. This new certification requirement went into effect on February 9, 2000. In the future, applications for transfers of licenses by cable operators serving 20% or more of the MVPD market will be rejected if not accompanied by the new Section 76.503(g) certification. However, former Section 76.503(c) did not specify that certifications be filed concurrently with applications for license transfers. Under these circumstances, and given the extensive homes passed and subscriber information provided in the Application, we find that AT&T's representations to the Commission with regard to its interpretation of the rules and its filing practices do not indicate bad character that would justify denying the Application. Consumers Union's motions to dismiss are therefore denied. However, given that the former rule clearly required that certifications be filed prior to closing, on delegated authority, the Cable Services Bureau granted the Consumers Union Forfeiture Request in part and issued a Notice of Apparent Liability to AT&T for apparent violations of former Section 76.503(c). 1. Program Access Issues 80. The program access rules are designed to prevent vertically integrated programming suppliers from favoring affiliated cable operators over unaffiliated MVPDs in the sale of satellite-delivered programming. Commenters request that the Commission apply the program access rules to AT&T's affiliated programming that is delivered terrestrially and prohibit AT&T from entering into exclusive contracts with unaffiliated networks. Commenters argue that AT&T's increased size will give it the ability to force unaffiliated programmers to enter into low-cost and/or exclusive carriage agreements with AT&T, thereby denying competing MVPDs and their customers access to popular programming. In addition, commenters argue that the merger would increase the possibility that AT&T will migrate affiliated programming from satellite to terrestrial delivery so that it will not be required to give competing MVPDs access to this programming. The commenters argue that AT&T has the ready means to migrate programming to terrestrial delivery because AT&T possesses a coast-to-coast fiber optic network. Commenters add that the merger will increase AT&T's size so that it can cluster more systems, which would further facilitate the terrestrial delivery of programming, especially regional programming. The commenters argue that AT&T's purported ability to lock up unaffiliated programming through exclusive contracts and to shield terrestrially delivered affiliated programming from the program access rules will substantially impair the ability of other MVPDs to compete. 81. Several commenters also request that the Commission reaffirm that Liberty's programming is subject to the program access rules. Ameritech requests that, if AT&T divests its interests in Liberty, Liberty be subject to the program access rules for five years thereafter. In addition, Ameritech requests that the Commission require AT&T to offer affiliated programming to all MVPDs on the same terms, conditions, and prices that the programming is provided to AT&T cable systems and affiliates. 82. Findings. The program access rules apply to cable operators and to programming vendors that are affiliated with cable operators and deliver video programming via satellite to a cable operator. The Commission adopted these rules pursuant to Section 628 of the Communications Act, through which Congress sought to minimize the incentive and ability of vertically integrated programming suppliers to favor affiliated cable operators over nonaffiliated cable operators or other MVPDs in the sale of satellite cable and satellite broadcast programming. Among other restrictions, the rules prohibit any cable operator that has an attributable interest in a satellite cable programming vendor from improperly influencing the decisions of the vendor with respect to the sale or delivery, including prices, terms, and conditions of sale or delivery, of satellite cable programming or satellite broadcast programming to any unaffiliated MVPD. The rules also prohibit vertically integrated satellite programming distributors from discriminating in the prices or terms and conditions of sale of satellite-delivered programming to cable operators and other MVPDs. In addition, cable operators generally are prohibited from entering into exclusive distribution arrangements with affiliated programming vendors. 83. For the reasons stated in the Program Access Order, we decline to apply the program access rules or equivalent restrictions to terrestrially delivered programming distributed by the merged company. We recognize, however, that the integration of MediaOne's cable systems and content with AT&T's coast-to-coast fiber optic network may provide the merged entity with the ability and the cost and quality incentives to migrate video programming from satellite to terrestrial delivery. Such a migration could have a substantial impact on the ability of alternative MVPDs to compete in the marketplace. As we indicated in the Program Access Order and the AT&T-TCI Order, we remain aware of the potential for this type of migration and the possible need to address it in the future. As we stated in AT&T-TCI, if it appears that the movement of programming from satellite to terrestrial delivery is frustrating the pro-competitive purposes of Section 628, we will so notify Congress. 84. We further decline to condition the merger on the imposition of anti-exclusivity restrictions that are not required by the program access rules. If parties believe any existing exclusivity agreements violate the program access rules, the program access complaint process is the appropriate forum in which to resolve any such grievance. Commenters have not alleged that existing exclusivity arrangements are unlawful, and we do not find that this merger provides a basis for the Commission to declare unlawful AT&T's future exclusivity agreements to the extent that they conform to current rules. 85. We also reject Ameritech's proposal that the Commission mandate the sale of AT&T's affiliated programming on certain prices, terms, and conditions. Neither the merger nor the Commission's rules provide any basis for the imposition of a mandate that AT&T price its programming at any particular level, provided the pricing is not unlawfully discriminatory. 86. We reaffirm that the program access rules apply to Liberty by virtue of AT&T's ownership interest in Liberty and its directors on Liberty's board. However, we find no basis in the rules to subject Liberty to the program access rules if AT&T divests its interest in Liberty and Liberty is no longer affiliated with a cable operator. In short, we find that it would be inappropriate to apply to non-vertically integrated cable operators and programming vendors program access rules that were adopted to address anticompetitive harms arising from vertical integration. 1. Channel Occupancy Limits 87. The Commission's channel occupancy rule provides that a cable operator may not devote more than 40% of its activated channels to the carriage of affiliated programming networks. Bell Atlantic argues that, given the number of cable networks in which AT&T and MediaOne have attributable interests, the merged entity will be in violation of this rule. Bell Atlantic requests that the Commission require the Applicants to provide a market-by-market disclosure of their channel line-ups and demonstrate that they will not violate the channel occupancy rule. 88. In response to the Commission's request, the Applicants reviewed the channel line-ups on their systems and determined that the proposed merger would cause channel occupancy rule violations in four systems in Decatur, Illinois; Battle Creek, Minnesota; Minot, North Dakota; and Westport, West Virginia. However, AT&T states that it has adjusted the channel line-ups in all four systems such that there will be no channel occupancy violations when the merger closes. Accordingly, the proposed merger will not result in any violation of the channel occupancy rules. 1. Arguments That the Cable Rules Apply to Internet Access Services 89. Some commenters argue that the merged firm's carriage of Excite@Home and Road Runner will cause it to violate the program carriage and the channel occupancy rules. These rules, however, apply solely to the carriage of video programming. As we found in IVI, ISP Internet access services, similar to those services provided by Excite@Home and Road Runner, do not constitute "video programming" as that term is defined in the statute and the Commission's rules and orders. In IVI, the Commission did not decide whether a service that comprises only video programming delivered over the Internet would constitute "video programming" as that term is used in the Commission's rules and the Communications Act. However, Excite@Home and Road Runner are not services comprised only of video programming. Thus, we disagree with commenters' contentions that AT&T and MediaOne are in violation of the program carriage rules by denying carriage to unaffiliated ISPs and by AT&T's decision to limit Internet video-streaming provided by ISPs and carried over its cable systems to ten minutes. For the same reason, we reject Bell Atlantic's argument that the merged firm's provision of Internet services through its affiliates Road Runner and Excite@Home should count towards the channel occupancy limits. 1. Electronic Programming Guides 90. In this section, we examine the proposed merger's potential impact on the use of EPGs. We find that the proposed merger will not violate the Communications Act or any Commission rules as they may pertain to EPGs, nor will it frustrate the implementation of the Communications Act or its goals. Thus, the merger will not result in public interest harms with respect to EPGs. 91. EPGs are on-screen directories of programming delivered through advanced set-top boxes. These programming guides are interactive, with searching and sorting capabilities that take viewers directly to video programming listed on the screen. The purchasers of EPGs are MVPDs such as cable operators and DBS operators, as well as subscribers. Liberty currently owns a 44% share of EPG provider TV Guide, Inc., which in turn owns Prevue Guide, another EPG provider. AT&T has a ten-year contract with TV Guide, Inc. under which TV Guide will provide the exclusive EPG for AT&T systems. 92. Commenters argue that the proposed merger poses three types of harms with regard to EPGs. First, commenters argue that AT&T will harm unaffiliated video programming networks and interactive service providers (collectively "content providers") by using EPGs to steer subscribers toward affiliated content providers and away from unaffiliated content providers. Second, commenters argue that AT&T will harm unaffiliated EPG providers by selecting AT&T-affiliated EPGs for its cable systems. Third, commenters argue that AT&T will lock EPG providers into exclusive contracts and thereby prevent such EPGs from dealing with other MVPDs. While we find that AT&T's compliance with the video programming conditions discussed above will mitigate the possibility of these three alleged harms, we find also that the record here does not demonstrate that special requirements should be placed on AT&T in this regard. In a rulemaking proceeding of general applicability, the Commission has committed to monitor the EPG market to determine whether Commission action is necessary. 93. We find that our requirement that AT&T reduce its attributable cable system ownership interests will circumscribe AT&T's purported ability to harm unaffiliated content providers, unaffiliated EPGs, and other MVPDs because AT&T, post-divestiture, will serve a smaller share of the MVPD market. The video programming conditions will limit the number of MVPD subscribers for whom AT&T may select an EPG. To the extent that AT&T may steer its own subscribers away from unaffiliated content providers via AT&T's own EPG, we note that the divestiture requirement limits AT&T's size and ensures that other MVPDs will provide sufficient alternative outlets for unaffiliated content providers. 94. With regard to unaffiliated EPG providers who would like access to AT&T's cable systems, the record does not demonstrate that AT&T will exercise undue influence in a purported EPG marketplace by using only one EPG. Because AT&T's horizontal size will be limited as a result of this Order, unaffiliated EPGs will have access to more MVPD subscribers that are not affiliated with AT&T. Moreover, the limited evidence presented in this record appears to demonstrate that even AT&T's own subscribers will have access to alternatives to TV Guide. 95. The record also does not demonstrate that the proposed merger will enable AT&T to prevent EPG providers from serving other MVPDs. TV Guide is free under its ten-year contract with AT&T to offer its EPG to other MVPDs. We find insufficient grounds to conclude that AT&T will lock EPG providers into exclusive contracts. 96. The commenters have not demonstrated that special requirements should be placed on AT&T alone in its selection and use of EPGs. Under our general rulemaking authority, in order to promote consumer choice, we have committed to "monitor developments with respect to the availability of electronic programming guides to determine whether any action is appropriate in the future." Therefore, to the extent that evidence accrues that demonstrates the necessity of Commission action in the EPG market, we will consider it at that time. We also note that, to the extent that commenters are concerned that cable operators may steer viewers away from broadcast programming via EPGs, we have requested comment in the digital must carry proceeding on "whether any rules are necessary to ensure fair competition between electronic programming guides controlled by cable operators and those that are controlled by broadcasters." 1. MVPD Competition 97. BellSouth argues that the merger will eliminate current and future MVPD competition between AT&T and MediaOne in local areas where the Applicants have overlapping or adjacent cable franchise areas. BellSouth contends that, in the absence of the proposed merger, AT&T and MediaOne would build over ("overbuild") each other's cable systems, thereby offering consumers in those areas two MVPD cable choices. However, we find no evidence in the record to suggest that AT&T and MediaOne would overbuild each other's cable systems such that the proposed merger would diminish competition in these local areas. 98. AT&T and MediaOne own small overbuilt systems in only two areas. First, in 1993, one of AT&T's predecessors acquired a system in Fayetteville, Georgia, which overbuilt in part a system of one of MediaOne's predecessors. As of February 21, 2000, AT&T's and MediaOne's Fayetteville overbuilt systems passed 975 homes in common, and AT&T served 447 subscribers. Second, in 1991, AT&T's predecessor acquired a system in Powder Springs, Georgia, which overbuilt in part a system of one of MediaOne's predecessors. As of February 21, 2000, AT&T's and MediaOne's Powder Springs overbuilt systems passed 1,931 homes in common, and AT&T served 152 subscribers. Since the initial acquisition of the Fayetteville and Powder Springs overbuilt systems, the system owners have not constructed anymore overbuilds, and there is no evidence to suggest that AT&T and MediaOne would overbuild one another absent the merger. AT&T and MediaOne hold overlapping franchise authority in 13 other areas, but have no overbuilds in these areas. There is no evidence that they would overbuild each other in these areas absent the merger. We find that the proposed merger is unlikely to diminish MVPD competition between the Applicants to a degree that would warrant the denial of the Application or the imposition of conditions. A. Cable Equipment 99. In this section, we consider the proposed merger's potential public interest harms with respect to cable equipment. This equipment is the hardware that cable companies use to deliver services to the home. It includes cable modems, cable telephony equipment, and set-top boxes that deliver a range of services to the subscriber. The Bell telephone companies argue that AT&T's size will enable it to favor affiliates to the detriment of unaffiliated cable equipment manufacturers, deny cable competitors access to cable equipment, and exercise excessive market power against equipment manufacturers in general. Commenters also argue that AT&T will be able to dictate set-top box architecture, thereby reducing innovation and consumer choice. These commenters request that the Commission deny the merger or prohibit AT&T from entering into exclusive, proprietary agreements with hardware and software manufacturers of cable equipment. 100. Findings. We find that the proposed merger will not result in any violation of the Communications Act or the Commission's rules as they pertain to cable equipment, nor will the merger frustrate the Commission's implementation of statutory goals or policies. The Commission's rules regarding navigation devices, as discussed below, alleviate concerns regarding competition in the production and sale of set-top boxes and modems. We do not find that this merger warrants the imposition of special restrictions on AT&T apart from these rules. As we stated in the Navigation Devices Order, we will monitor the market to determine whether the navigation devices rules should be amended to counter future anticompetitive conduct. 101. Section 629 of the Communications Act charged the Commission with ensuring the commercial availability of "navigation devices" equipment which is used to access video programming and other services provided by MVPDs to consumers from retailers and manufacturers not affiliated with an MVPD. Section 629 directed the Commission to: adopt regulations to assure the commercial availability, to consumers of multichannel video programming and other services offered over multichannel video programming systems, of converter boxes, interactive communications equipment, and other equipment [collectively "navigation devices"] used by consumers to access multichannel video programming and other services offered over multichannel video programming systems, from manufacturers, retailers, and other vendors not affiliated with any multichannel video programming distributor. 102. Pursuant to this directive, the Commission adopted rules requiring MVPDs to provide, upon request, technical information concerning interface parameters that are needed to produce navigation devices that will operate with their video distribution systems. Subscribers have the right to attach any compatible navigation device to an MVPD system, and MVPDs are prohibited from taking actions that would prevent unaffiliated retailers or manufacturers from making and selling compatible navigation devices. We found that "competition in the navigation equipment market is central toward encouraging innovation in equipment and services, and toward bringing more choice to a broader range of consumers at better prices." 103. The rules adopted in the Navigation Devices Order address the commenters' concerns that AT&T will exercise excessive market power in the purchase and provision of cable equipment. Under these rules, any manufacturer may produce and sell navigation devices for AT&T's systems directly to AT&T's subscribers, which AT&T cannot prohibit. We note that AT&T may increase its influence in this market by purchasing very large numbers of navigation devices that it leases to its subscribers, pursuant to the Commission's rate rules. However, by requiring MVPDs to grant all equipment manufacturers an opportunity to sell equipment to the MVPDs' subscribers, the navigation devices rules limit MVPDs' ability to exercise excessive market power and dominate the equipment market. 104. In this regard, we note that cable modems are commercially available from a variety of sources. CableLabs has developed industry-wide standards in its DOCSIS project and has already certified the modems of over a dozen manufacturers for retail sale. AT&T's cable Internet customers accordingly may buy modems from retailers, rather than rent them from AT&T. The navigation devices rules thus also ameliorate concerns that AT&T will favor affiliated manufacturers or direct its affiliates to do business together as some commenters contend. Moreover, we note that the merged firm would not have significant interests in any cable equipment manufacturer. Accordingly, we find that the merger will not create public interest harms with respect to cable equipment. A. Broadband Internet Services 105. In this section, we consider the allegations of certain commenters that the proposed merger will result in public interest harms in the provision of broadband Internet services to residential customers. We note that, in order to address the merger's potential anti-competitive impact on the provision of these services, the Justice Department has entered into a proposed consent decree with AT&T. Among other provisions discussed below, the proposed consent decree requires the merged entity to divest its interest in the broadband cable ISP Road Runner no later than December 31, 2001, and to obtain prior approval from the Justice Department before entering into certain types of agreements with Time Warner or with AOL relating to the provision of broadband services. We apply our public interest test to the facts of the proposed transaction as modified by the proposed consent decree. We find that the merger will not violate any provision of the Communications Act or Commission rules as they may pertain to the provision of broadband Internet services to residential customers. We further conclude that the proposed merger will not frustrate the implementation of the Communications Act and its goals as they pertain to the promotion of competition and diversity in the provision of these services. 1. Background 106. Internet Access Generally. We have previously described the Internet as "a loose interconnection of . . . tens of thousands of networks that communicate using the Internet protocol (IP)." The Internet supports the delivery of a range of services, such as the World Wide Web ("Web"), e-mail, and file transfer protocol ("FTP"). With these services, customers are able to use their computers to communicate with other computer users and engage in sophisticated interaction, including on-line banking, electronic commerce, and video and audio file distribution. We previously identified and described five types of entities involved in Internet services: (1) end users; (2) access providers; (3) application providers; (4) content providers; and (5) backbone providers. As discussed below, some service providers, including the Applicants, now serve a combination of these functions. 107. Narrowband Internet Access Services. Most residential and small business consumers currently receive Internet access at a relatively slow speed, typically 28-53 kilobits per second, via traditional "dial-up'' telephone connections. With dial-up Internet access services, customers must pay two separate entities. First, customers must pay for the underlying transport service a traditional local telephone connection provided by LECs. Second, customers must pay an Internet service provider (ISP) separately, typically $20 or less per month, for unlimited access to the Internet. In dial-up access arrangements, customers use modems located in their computers that are connected to twisted-pair copper telephone lines. The customer's computer communicates with the ISP's computer using voice-grade analog signals transmitted via standard telephone lines, much as fax machines communicate using telephone lines. 108. AT&T's dial-up ISP, WorldNet, is one of the largest providers of dial-up residential Internet access service that does not bundle proprietary content with its Internet access. MediaOne does not provide dial-up Internet access service. Therefore, the merger is unlikely to have an adverse effect on competition and diversity in the provision of narrowband Internet access services. 109. Broadband Internet Access Services. There are several different technological means by which consumers may obtain broadband (high-speed) access to the Internet. As of April 2000, approximately 2 million Americans used cable modems for broadband Internet access, offering speeds that range up to one to ten Mbps depending on the upgrade status of the cable system and the amount of traffic on the shared line. As of year-end 1999, approximately 340,000 Americans obtained high-speed access through digital subscriber line ("DSL") technology. DSL is provided by telephone companies (ILECs and CLECs alike) and offers speeds anywhere from 144 Kbps to well over 1.5 Mbps, depending on the local loop and the type of DSL technology used. In addition, various companies are, or will be in the near to middle term, offering broadband Internet access using a variety of wireless technologies, including fixed wireless and satellite. 110. AT&T and MediaOne each provide to households passed by their cable systems Internet services that combine (a) broadband transport through their cable systems and (b) Internet access and proprietary content through their affiliated ISPs. MediaOne and Time Warner (through TWE, TWE-A/N, and TWI) together hold an 80% ownership interest in Road Runner, and Road Runner is their exclusive cable broadband ISP. Various cable operators, including AT&T, Comcast, Cox Communications, Cablevision Systems and Shaw Cablesystems, hold ownership interests in Excite@Home, and Excite@Home is their exclusive cable broadband ISP. By virtue of a transaction with its cable partners, AT&T recently increased its voting stock interest in Excite@Home from about 57% to 74% and assumed full control of the management of Excite@Home. Excite@Home and Road Runner also have exclusive contracts with other cable operators throughout the country and abroad. Excite@Home is the nation's largest cable broadband ISP and currently has more than 1.5 million subscribers; Road Runner is the second largest cable broadband ISP and has approximately 730,000 subscribers. 111. Some commenters have raised concerns regarding the merger's impact on the provision of a related category of services, which AT&T refers to as "interactive television services and content." These interactive television services include (but are not limited to) the provision of electronic commerce (shopping), electronic banking, video-on-demand, limited or full-service Internet access, and hyperlinking, all delivered to the consumer's television set via the cable set-top box. Applicants have not yet deployed interactive television services in the mass market but plan to deliver such services to the consumer through an advanced digital set top box, utilizing TVGuide as the EPG. The digital set-top box may also incorporate a cable modem, providing the consumer with full Internet access either on the television screen or on the personal computer. 112. Because Applicants' interactive television offering will include broadband access to the Internet, those interactive services may compete with broadband Internet services delivered over the home computer. The merged entity will require its customers who access the Internet through the digital set-top box to utilize Excite@Home or Road Runner as their ISP until the termination of its exclusive contracts with these affiliated ISPs. Thus, the merged firm's provision of broadband Internet access and interactive services through the set-top box will augment its provision of broadband Internet access through the cable modem. Below, we analyze the merger's potential impact on competition and diversity in the provision of broadband Internet access, whether provided through the cable modem or the set-top box. 1. Discussion 113. The Application indicates that the merged firm would have ownership interests in the two largest cable ISPs, Excite@Home and Road Runner, and cable systems with last-mile facilities reaching nearly 63% of homes passed by cable nationwide. Commenters argue that these ownership interests will give the merged entity dominance over the provision of broadband Internet services, thereby threatening competition and diversity in the provision of Internet services, content, applications, and architecture. They observe that Excite@Home and Road Runner are the exclusive ISPs for cable modem users served by the majority of cable systems nationwide, including those of AT&T and MediaOne, and that unaffiliated ISPs currently are denied "open access" to provide broadband services over these cable systems. The issues raised by commenters generally fall into the following categories: broadband Internet content, broadband Internet applications and software, and "open/forced access." 114. Broadband Internet Content. Some commenters argue that the merged firm will control such a large portion of the broadband customer base that it could gain de facto power to dictate what content, products, and services are available to broadband customers generally, and at what price. When a consumer accesses the Internet through the broadband cable line, the first Web page the consumer sees is the home page of the cable operator's exclusive ISP. To view an alternative web page or Internet portal offered by ISPs not affiliated with the cable operators, the consumer must reconfigure his or her Internet access device or Web browser to go through the unaffiliated ISP, to which the customer must subscribe at an additional cost. 115. Excite@Home and Road Runner, together with the cable operator, determine the content that is placed on their home pages. In addition, both Excite@Home and Road Runner use "caching" technology, a technology that places certain content at regional distribution centers to allow faster access by their customers. Excite@Home and Road Runner cache (a) the content most often accessed by customers as determined by mathematical algorithms, and (b) the content for which content providers have negotiated for preferred caching. Commenters raise concerns that the merged firm could use its control over the Excite@Home and Road Runner home pages and caching technology to discriminate against unaffiliated providers, both in terms of pricing and access to consumers. Commenters argue that the merged entity could use caching technology to slow down, limit or block consumers' access to unaffiliated broadband content. They also argue that, given Excite@Home and Road Runner's dominance in the provision of broadband Internet access, the merged firm could charge monopoly rents to content providers for the right to receive favorable caching on Excite@Home and Road Runner networks, or to be linked to the affiliated ISPs' home pages. 116. Broadband Internet Applications and Software. Several commenters, particularly GTE, argue that the Applicants will have both the incentive and the ability to implement proprietary network management and software protocols, designed to render software and content written for their systems incompatible with competing systems. Commenters argue that the merged entity will use the market power of Excite@Home and Road Runner to force applications developers to incorporate proprietary protocols into their software architecture so that new applications cannot work on competing broadband technologies such as DSL. 117. "Open/Forced Access." A number of commenters have urged us to address the perceived competitive harms by imposing an "open access" requirement. By "open access," commenters refer to a proposed requirement that cable operators allow independent, unaffiliated ISPs to interconnect with their proprietary cable networks for the purpose of offering broadband Internet access and services to consumers. Opponents to such a regulatory requirement refer to it as "forced access." 118. Proponents of "open/forced access" argue that the Applicants' offering of cable broadband transport bundled with their affiliated ISPs' Internet access service and content threatens to alter fundamentally the open nature of the Internet, replacing its open architecture with a closed model derived from the cable television industry. These parties believe that the merged entity will integrate vertically into related markets such as broadband Internet content, software, and equipment. They contend that the merged firm is likely to impose a proprietary architectural standard so as to favor affiliated product and service providers, foreclose effective competition among broadband Internet service providers, and undermine the incentive toward innovation in broadband content and applications. Several commenters also argue that AT&T should be subject to an "open/forced access" requirement as a matter of "regulatory parity," because ILECs offering DSL services are required by law to provide access to competing providers. 1. Findings. 119. We find it unnecessary to determine in this proceeding whether a distinct broadband Internet access market exists, notwithstanding the rigorous debate on the record between the Applicants and commenters on this issue of market definition. We agree with commenters that the proposed merger conceivably could undermine competition and diversity in the emerging broadband Internet arena, if customers did not have the ability to choose among viable, alternative broadband Internet access providers or ISPs. However, we find that those harms will be avoided if: (a) consumers can choose among various alternative broadband access providers, such as DSL, wireless, and satellite; or (b) unaffiliated ISPs are permitted access to the merged firm's cable network. As discussed below, we find that there is significant actual and potential competition from both alternative broadband providers and from unaffiliated ISPs that may gain access to the merged firm's cable systems. Moreover, we find that the Justice Department's proposed consent decree with AT&T, requiring it to divest its interest in Road Runner and to obtain prior approval from the Justice Department before entering into certain agreements with Time Warner and AOL, already has addressed the potential harms from a combination of Road Runner and Excite@Home. 120. Alternative Providers. With regard to choice among broadband access providers, there is evidence that ILECs, CLECs, and other competitive providers are aggressively rolling out alternative broadband technologies, notwithstanding cable's early lead in the nascent broadband area. ISPs lacking direct access to provide broadband services over cable systems are entering into alliances with alternative broadband providers, thereby accelerating the deployment of these technologies. Currently, those alternative technologies are attracting new subscribers at an exponential rate, and prices for these new services appear to be falling. In fact, DSL sales are currently growing at a more rapid rate than cable modem sales. Largely in response to cable modem rollout, the Bell Operating Companies ("BOCs") and GTE have launched major initiatives to accelerate their deployment of DSL. Similarly, the CLECs are aggressively deploying DSL technology. We expect that our recent "line-sharing" rule permitting competitive carriers to obtain access to the high-frequency portion of the local loop from the incumbent LECs will further spur the deployment of DSL broadband services. 121. Fixed wireless broadband technology also holds promise for the future. Presently, Teligent, Inc. and WinStar Communications, Inc. offer a variety of broadband services to small and medium-sized businesses in several metropolitan markets, and have plans to further deploy their services to several new markets throughout the country. In the upcoming months, several new fixed wireless systems plan to offer broadband access through either local multipoint distribution service (LMDS) or multichannel multipoint distribution service (MMDS) technologies. MCI and Sprint, for example, are acquiring struggling licensees and re-deploying their spectrum to provide broadband services. In general, although wireless technology is limited by slower upstream speed as compared to cable and DSL, analysts remain optimistic regarding wireless technology as a competitive broadband provider. 122. Satellite-delivered broadband services also may become viable broadband alternatives in the future, although they currently do not offer high-speed access in the upstream direction. The Spaceway network, expected to be operational in 2002, will utilize 16 satellites to provide "bandwidth-on-demand" the ability to transmit and receive voice, video and data at any time from any location at speeds of up to 6 Mbps. Teledesic plans to utilize 288 satellites in low earth orbit to provide two-way digital transmission of voice, data and video at low costs, regardless of location. The company is spending $9 billion on its "Internet- in-the-Sky" project, which will provide consumers with broadband Internet service beginning in 2003. In short, the next few years promise significant growth in competition from alternative broadband access providers. 123. Access by Unaffiliated ISPs. In addition to the foregoing industry developments, the Applicants have committed to open their cable modem platform to unaffiliated ISPs as soon as AT&T's exclusive contract with Excite@Home expires in June 2002 and MediaOne's exclusive contract with Road Runner expires in December 2001. On December 6, 1999, following meetings with other interested parties, AT&T and MindSpring (an unaffiliated, nationwide ISP) sent a joint letter to Commission Chairman William Kennard setting forth an agreement in principle pursuant to which AT&T committed to provide unaffiliated ISPs access to its cable systems following the expiration of its exclusive arrangement with Excite@Home in 2002. AT&T General Counsel Jim Cicconi has stated that the commitments made in the December 6, 1999 letter also will apply in MediaOne territories, such that Road Runner will no longer be the exclusive ISP for MediaOne cable subscribers following the expiration of MediaOne's exclusive contract with Road Runner. In that letter, AT&T stated its agreement to adhere to various principles of "openness" in order to offer its customers: · A choice of ISPs; · The ability to exercise the consumer's choice of ISP without having to pay twice for both that ISP and the cable-affiliated ISP; · A choice of Internet connections at different speeds, at reasonable and appropriate prices; · Direct access to all content available on the World Wide Web without any AT&T-imposed charge to the consumer for such content; · The continued ability to customize the customer's "start page" and other aspects of their Internet experience; and, · The functionality of the customer's chosen ISP comparable to that which such ISP has on competing broadband systems, subject to any technical constraints particular to and imposed on all ISPs using AT&T's cable system to deliver high-speed Internet access. 7. To achieve the foregoing objectives, AT&T and MediaOne have also agreed to negotiate, upon the expiration of their exclusive arrangements with Excite@Home and Road Runner, private contracts with multiple ISPs in order to offer those ISPs reasonably comparable access prices, the opportunity to market and bill consumers directly, and the opportunity to differentiate service offerings and to maintain brand recognition in all such offerings. In addition, AT&T has committed to allowing unaffiliated ISPs using its cable systems to obtain Internet backbone capacity from AT&T's own service, if they so choose. Finally, AT&T has committed to facilitating maximum access by its customers to any content of their choosing, including streaming video. We expect the Applicants to adhere to the foregoing commitments and therefore are hopeful that the merged firm and unaffiliated ISPs together will be able to resolve the technical and business issues associated with providing these ISPs direct access to the cable infrastructure to offer broadband services, without the imposition of a government-mandated model. 8. Justice Department Proposed Consent Decree. We also consider the impact of the proposed consent decree between the Justice Department and AT&T, which addresses the potential anti-competitive effects from a combination of the nation's two largest cable broadband ISPs, Road Runner and Excite@Home, under the merged entity's influence or control. The proposed consent decree requires the merged entity to divest its interest in Road Runner no later than December 31, 2001, and to exit the joint venture prior to that date if the other relevant owners of Road Runner agree to an earlier departure. In addition, the proposed consent decree requires the merged firm to obtain prior approval from the Justice Department before entering into certain types of agreements with Time Warner or with AOL, which has a pending merger agreement with Time Warner. That requirement, which would remain in place for two years after the merged firm exits Road Runner, would apply to any agreement that proposes joint provision of a residential broadband service or any agreement that would prevent either party from offering a residential broadband service to customers in any geographic region. It also would apply to agreements that would prevent the inclusion of any content in a cable modem service offered by either party, or that would prevent either party from providing preferential treatment to content provided by others. The proposed consent decree thus assures that Road Runner and Excite@Home will not coordinate their actions to the detriment of consumers. 9. Given the nascent condition of the broadband industry and the foregoing promises of competition, we find it premature to conclude that the proposed merger poses a sufficient threat to competition and diversity in the provision of broadband Internet services, content, applications, or architecture to justify denial of the merger or the imposition of conditions to supplement the Justice Department's proposed consent decree. We find that the proposed consent decree adequately addresses commenters' concern that a combination of Excite@Home and Road Runner would have both the ability and the incentive to discriminate against unaffiliated content providers and/or to leverage proprietary software protocols to favor networks owned by or affiliated with the merged entity. Although some possibility of harm may remain, we find that there is an equal or greater probability that growing competition from alternative access providers and unaffiliated ISPs will prevent such perceived harms. The evidence of growing competition from both alternative broadband providers and unaffiliated ISPs gaining access to cable and other broadband networks indicates that any action taken by the merged firm to disfavor unaffiliated broadband content and applications providers is likely to threaten the networks' ability to attract and retain customers. In light of industry trends toward both horizontal and vertical integration, however, we will monitor industry developments closely through our ongoing examination of the deployment of advanced services pursuant to Section 706 of the 1996 Act and the Cable Services Bureau's monitoring of cable operators' provision of broadband services in particular. We are committed to reviewing our policies if competition does not grow as expected. 10. We agree with commenters that the imposition of proprietary architecture and protocols for broadband Internet applications would pose a serious threat to the openness, diversity, and innovation of the Internet and the development of competition in the provision of broadband services. There is little doubt that over the next few years, as more and more customers purchase broadband Internet connections, the development of Internet applications and content specific to broadband will accelerate rapidly. It is important that, to the extent possible, those broadband applications and content have the ability to interface with the full range of competing broadband technologies. 11. In our monitoring of broadband developments, we have seen no evidence of cable operators imposing proprietary protocols. According to the Applicants, "both AT&T and MediaOne have used open standards in their broadband systems." The Applicants argue that, as "nascent" service providers in an Internet arena still dominated by established narrowband providers, they have "neither the incentive nor the ability to change course and impose proprietary standards in the future." Commenters have provided no evidence to the contrary. Given the increasingly rapid deployment of alternative broadband technologies, we cannot conclude that the merged firm will have sufficient bargaining power in this emerging field to give it the incentive and the ability to establish proprietary interfaces for new broadband software applications. If the merged entity imposes proprietary protocols, providers of applications and content tailored to those protocols will be forced to forego alternative broadband outlets such as DSL. Were the merged firm to attempt such a strategy, it is more likely than not that software developers could find adequate outlets in alternative broadband providers to discipline the merged firm's anti-competitive action. 12. We also decline to impose an "open/forced access" requirement on the merged firm's cable systems as a condition of this merger based on arguments regarding alleged disparate regulatory treatment of cable operators and telephone companies offering broadband Internet access. As we noted in our Amicus Brief to the U.S. Court of Appeals for the Ninth Circuit, the Commission has not determined whether Internet access via cable system facilities should be classified as a "cable service" subject to Title VI of the Act, or as a "telecommunications" or "information service" subject to Title II. There may well come a time when it will be necessary and useful from a policy perspective for the Commission to make these legal determinations. However, those legal determinations would have industry-wide application, as well as legal and practical implications that extend far beyond the contours of this particular merger. Our review of this merger does not provide an appropriate forum for a determination of the legal status of cable broadband Internet access services. 13. We find insufficient evidence to support the imposition of an "open/forced access" requirement on the merged entity at this time, given the potential for competition from alternative broadband providers and the potential for unaffiliated ISPs to gain direct access to provide broadband services over the cable infrastructure. We remain concerned, however, that the recent trend toward both horizontal and vertical consolidation in the broadband services industry has the potential to threaten the openness, competition, and innovation of the Internet and the diversity of media voices that are available to Americans. 14. Therefore, although we decline to impose "open/forced" access on the Applicants as a condition of the proposed merger, we will continue to aggressively monitor broadband developments and the steps taken by the merged entity to provide unaffiliated ISPs with direct access to its cable systems. We are cognizant of the merged firm's incentives and ability to use its control of the Excite@Home home page and "caching" technology to negotiate exclusive content agreements in order to disadvantage alternative broadband providers. We will review our "hands-off" policy if competition fails to grow as expected, especially if we find signs of the following possible market failures: (a) if competition from alternative broadband providers (such as DSL, satellite, and wireless) does not develop as anticipated; (b) if the merged firm fails to fulfill expeditiously its commitment to open its systems to unaffiliated ISPs, either by limiting access to a few large ISPs, through pricing or other contractual terms, or by utilizing technology that would make an open access regime difficult or costly to implement; or (c) if the merged firm successfully enters into exclusive agreements with broadband Internet content or applications providers so as to disadvantage competing broadband providers. A. Local Exchange and Exchange Access Service 15. In this section, we consider the merger's potential public interest harms with respect to the provision of local exchange and exchange access service (i.e., local telephone service). The proposed merger would not violate any provision of the Communications Ac