In Re Applications of: ) CABLE SERVICE BUREAU )MM CS Docket No. 99-251 For AT&T-MediaOne Public ) Forum ) Pages: 1 through 246 Place: Washington, DC Date: February 4, 2000 Before the FEDERAL COMMUNICATIONS COMMISSION Washington, D. C. 20554 In Re Applications of: ) ) )MM CS Docket No. 99-251 CABLE SERVICE BUREAU ) AT&T-MediaOne Public Forum ) Commission Meeting Room The Portals 445 12th Street, S. W. Washington, D. C. 20554 Friday February 4, 2000 The parties met, pursuant to the notice of the Cable Service Bureau, at 9:05 a.m. BEFORE: Deborah Lathan Chief, Cable Services Bureau APPEARANCES: James W. Cicconi, General Counsel, AT&T Frank Eichler, Executive Vice President, MediaOne Group Priscilla Hill-Ardon, Senior Vice President, SBC Communicatios Inc. Andrew Jay Schwartman, President and CEO, Consumers Union Gregory C. Simon, OpenNet Coalition Diane Linderman, City of Richmond, VA Christopher Melcher, General Counsel, RMI.net Khalil Munir, Executive Director, TAP Francois Bar, Asst. Professor of Communications, Stanford University Gregory L. Rosston, Lecturer in Economics & Public Policy, Stanford University C O N T E N T S Hearing Began: 9:05 a.m. Hearing Ended: 4:05 p.m. Recess Began: 10:30 a.m. Recess Ended: 10:45 a.m. 2:40 p.m. 2:58 p.m. P R O C E E D I N G S (9:05 a.m.) JUDGE LATHAN: Good morning. Welcome to the FCC Cable Services Bureau's public forum on the application of AT&T and MediaOne to transfer licenses and authorizations in connection with their proposed merger. Before the Commission can approve this merger, it must determine whether AT&T and MediaOne have demonstrated that the merger would serve the public interest. The public interest analysis involves a balancing that -- a balancing on the process that weighs the potential public interest harms of the proposed transactions against the potential public interest benefits. As is the case for any merger under review at the FCC, the applicants bear the burden of proving that the proposed transaction on balance serves the public interest. We have invited panelists here today to provide information that will assist us in our analysis. And I want to thank all of the panelists for coming out, especially since there's a dusting of snow and I have learned what that means in Washington, and I'm from Chicago. So, I found it an amazing discovery. And so I'm looking forward to discussing some pretty important issues this morning. I want to apologize on behalf of Chairman Kennard. He cannot be with is right now, but he will join us this morning, and hopefully, will have some questions for you, as well. The applicants tell us that the proposed merger of AT&T and MediaOne is first and foremost about the promise of local telephone competition for residential customers. And we have some questions about that. Will the merger deliver on this promise? Will it bring the real choice in local telephone service to all Americans, how could this merger include AT&T's ability to deliver services it sought by acquiring TCI? These are some of the questions that I very much am interested in hearing answers to. Other questions also come to mind. Will the merger produce benefits in addition to local telephone competition? If so, what are they? How and when will they be achieved? Will they be available to all Americans? I know that our panelists will tell us also about some of the potential harms that this merger could produce. Do these potential harms outweigh the promised benefits? We would like also to know how the merger would affect consumer's choice of providers for broadband services. Will the merger narrow a consumer's access to diverse video programming and reduce the number of video competitors to AT&T? How will the merger affect the consumer's choice for high-speed internet services? In short, how will the merger affect the consumer's access to diverse selection of content and other information? I'd like to talk a little bit about the process that we're going to go through to try to get some answers to some of these questions. We have today two panels, and the first panel will run from this morning until noon. We will take a fifteen minute break. And each panelist will be given five minutes to give us a presentation of their choosing. We have a timekeeper and she will hold up a sign telling you when you have one minute remaining. Will the timekeeper -- here she is right here. Okay, one minute, the orange card. And after the orange card goes up, the pink card goes up. And after the pink card, we've got somebody with a hook, okay? After the five-minute presentations which we will do by each panelists, we will then have questions and answers from the bench here. I would now like to introduce some of our panelists who have been gracious enough to come here today. Representing AT&T, we have James Cicconi. He's General Counsel and Executive Vice President -- Executive Vice President, Law and Government Affairs. Representing MediaOne, we have Frank Eichler, the Executive Vice Present, Law and Public Policy and General Counsel and Secretary. Representing SBC Communications, Inc., Priscilla Hill-Ardoin, Senior Vice President - Federal Regulatory. Representing the Consumers Union, Andrew Jay Schwartzman, President and CEO. Representing the OpenNet Coalition, Mr. Gregory C. Simon. And we're going to begin with Mr. Cicconi. Thank you, Jim. MR. CICCONI: Thank you, Deborah. Good morning, my name is Jim Cicconi, I'm AT&T's General Counsel and Executive Vice President for Law and Government Affairs. I appreciate very much the opportunity you've given us today to discuss AT&T's merger with MediaOne and the benefits it will bring to American consumers. When Congress passed the Telecom Act in 1996, it sought to provide American consumers with choices in telecommunications services. Unfortunately, the plain fact today is that still over ninety-six percent of America's residential customers get local telephone service from their incumbent provider and have been denied the benefits of choice. AT&T is leading the effort to change that fact. AT&T is committed, a commitment, I might add, that is backed by many billions of dollars to providing residential customers with a choice of local telephone and broadband service. Our very business plan is to do so over cable facilities wherever possible. And we've made considerable progress toward that end. Since acquiring TCI, AT&T has spent over 2.7 billion dollars to upgrade its cable systems to provide telephony services, and we are well on track to having more than eighty-five percent of the TCI network upgraded by the end of the year. In 1999, market trials of telephony services were launched in the Bay area, Chicago, Pittsburgh, Dallas, Denver, Seattle, Salt Lake City and Portland. Today, AT&T's actually marketing and selling its telephony services in thirteen cities in California, Illinois, Texas and Colorado. Because of AT&T's capital and telephony expertise, we're able to accomplish this much faster than TCI could have done on its own. Customers in these cities are starting to see real benefits in the form of choice and lower prices. For example, AT&T in Fremont, California offers second and third telephone lines for only $5 a month. That's a significant discount off back Bell's second line rate of $10.69 a month. And because most of AT&T's customers order two lines or more to accommodate computers, fax machines and the ever-present teenager, this benefit is being widely sought and enjoyed. The pending merger between AT&T And MediaOne is yet another step in this effort. Together, MediaOne and AT&T will bring video, voice and data services to more communities more quickly and more cost-effectively than either one of us could do on our own. For its part, MediaOne is contributing to the merger the all important facilities to homes that AT&T could not duplicate without considerable expense, inefficiency and delay. MediaOne is also bringing to the deal considerable technical expertise in the delivery of phone services over cable and the technological upgrading of cable networks. AT&T will bring its brand name, resources, reputation and unparalleled experience that will insure that telephony deployment over MediaOne facilities is more certain, more imminent and more successful than if MediaOne had continued on its own. Surveys have shown that consumers are much more likely to purchase telephone services from a long distance provider than from their cable company. In fact, more than three times more likely. This reflects a very strong consumer preference for phone service with the highest levels of quality and reliability. Attributes with which AT&T has become synonymous. Thus, having MediaOne's facilities in AT&T's hands will insure that they realize their full competitive potential more quickly and more broadly than if MediaOne continues to operate independently. The combined resources of AT&T and MediaOne will also create an entity which will have both the size and scope necessary to truly compete with the incumbent local phone monopolies. We've seen clear indications in the market that they're taking us very seriously as a competitor. For example, in August, SBC announced that it would be offering discounted packages that bundled voice, internet and satellite TV services in Fremont, California and in Dallas, Texas. The selection of those markets is hardly a coincidence. Those are two markets in which AT&T is today aggressively pursuing facilities based broadband local entry strategy for residential customers. Similarly, the local monopolies have sped up the introduction of high-speed DSL services in an unquestionable and direct response to AT&T's roll out of high-speed cable modem internet services. By the end of 1999, the Bells and GTE expanded the reach of their DSL services to forty-six million homes. SBC alone is investing six billion dollars under its Prontal project to reach seventy-seven million customers, or eighty percent of its customer base, with DSL services by the end of 2002. I'm proud of AT&T's unparalleled commitment to building a competitive marketplace, particularly for the residential customer. We know that the FCC is similarly committed to fostering a robust competitive environment, and we urge you to approve this merger quickly. We've seen it in long distance and we've seen it in wireless, and we are now seeing it in areas where AT&T has launched its cable telephony services. We'll soon see it across the full range of telecom services if the Commission continues to support pro-competitive mergers like the one being discussed today. Thank you, and I look forward to answering your questions. JUDGE LATHAN: Okay. Okay. Our next speaker will be Mr. Eichler from MediaOne. MR. EICHLER: Good morning. My name is Frank Eichler, Executive Vice President for Law and Public Policy and General Counsel for MediaOne Group. Let me echo Jim's remarks and thank the Commission, again, for convening this panel also on a snowy morning, which I know is difficult for a lot of people. I'd like to show to you this morning why the merger of AT&T and MediaOne makes sense for consumers, for local phone competition and for the converging communications marketplace. By combining the skills, resources and footprint of AT&T and MediaOne, we will create an entity to offer consumers true choice in their local phone service. Let me start with a quick background of MediaOne. In 1992 we saw competition and convergence merging and concluded that the future of communications lay in transforming traditional one-way cable pipes into interactive high-width, band-width platforms. Thus, we began investing in cable's broadband future through partnerships, acquisitions, system trades, and, more significantly in 1995, in embarking on a massive seven billion dollar capital upgrade project to transform a one-way cable networks into two-way broadband networks. Today, the communications revolution, media solution vision is underway. The '96 Telcom Act accelerated the convergent race to the consumer. And by doing so, created a competitive environment where size matters. The marketplace reality facing MediaOne today is that we are just too small to compete in a move away, particularly with the incumbent local phone companies. When you only look at some of the announcements over the last year to witness this phenomenon. SBC is merged with Ameritech and now controls fifty-eight million access lines. Comes Sprint on the process of merging and will have a competitive broadband play, including a national wireless footprint. And most recently, AOL and Time Warner announced the largest merger in U. S. history. MediaOne simply cannot meet these competitive challenges on its own. Although we passed 8 1/2 million homes with a subscriber base of about five million customers, this represents just the ante in today's communications playing field. In every single one of our markets, we find ourselves dwarfed by the competition to local phone companies. Our largest market in New England is a great example. We serve 1.3 million customers. And on head to head competition with Bell Atlantic, which has at least ten times as many residential lines in that market alone. And the obstacles we face are further compounded by widespread consumer skepticism over cable companies' ability to provide telephone service. MediaOne has launched facilities based residential phone service in nine markets, with prices well below comparable services offered by the incumbent LEX. Yet our own penetration rate is less than three percent. Another way to put it, three out of every potential customers are signing up for service. The slow penetration is driven primarily by consumer reluctance to purchase basic telephone service from a company without a established reputation for providing reliable, life-long communications services. Our experience is confirmed that even a well-established and respected cable company faces a major hurdle in generating consumer confidence as a provider of telephone service. Enormous advantage enjoyed by the incumbent, LEX over all cable companies, including MediaOne, is both stark and undeniable. Even they don't consider MediaOne a competitive threat. In fact, Bell South actually raised its prices when we launched local phone service in Atlanta. Converse, AT&T has launched its broadband and local telephone service, SBC announced it would begin offering a competing video voice and data product. AT&T's established reputation and brand with some of the highest consumer confidence ratings in the industry, would dramatically improve and accelerate overall penetration rates in a way that MediaOne could never hope to achieve on its own. Moreover, AT&T has already has a sophisticated engineering expertise, customer care and infrastructure and communications experience needed to respond to large scale consumer demands. MediaOne brings to the merger state of the art broadband networks. By the end of the year, fifty-nine percent of our cable plant will be telephone ready and seventy-five percent will be high-speed data ready. We're among the first cable companies to acquire the skills and knowledge needed to deploy phone service over broadband. This experience will be invaluable to AT&T after the merger. Combining AT&T's unmatched brand, customer care and engineering expertise with MediaOne's sophisticated cable infrastructure, would jumpstart the market for competitive local phone service. A combined AT&T, MediaOne will be uniquely positioned to lead the charge and bring real choice to consumers faster and more effectively than either AT&T or MediaOne could do alone. Thank you for the opportunity to address you this morning and would be happy to answer any questions. JUDGE LATHAN: Thank you. And now we will hear from Priscilla Ardoin. MS. HILL-ARDOIN: Thank you very much. I'm pleased to be here and participate in this session. We're here today because this merger between AT&T and MediaOne is no garden variety merger. Through its acquisition, AT&T is positioning itself to dominate the cable industry through ownership interest and systems passing nearly sixty percent of the homes in this nation. This merger would put AT&T at the center of an extensive web of relationships that stands to form a TCI, MediaOne, Time Warner Entertainment and other major cable companies. Their web would extend to both video programming services and leading cable equipment manufacturers, as well as two major cable internet service providers. Furthermore, their ownership stake in Time Warner Entertainment puts them squarely in the middle of the merger between that company and AOL. Throughout the country, AT&T will own or control the cable pipe into consumer's television sets, much of the content being through the pipe and the high-speed internet services consumers use to surf the net. If this merger is approved, their grasp on the American consumer will be far reaching and unprecedented. Put, simply, AT&T has embarked on an aggressive strategy to dominate the way Americans communicate. If allowed to proceed, AT&T would end up serving sixty percent of the homes passed by the cable industry. It would control ninety-eight percent of the high-speed cable internet subscribers, and nearly eighty-five percent of the total internet -- of the total broadband market. AT&T would have interest in approximately sixty percent of the most popular cable programming and it would have substantial equity relationships with General Instrument, Microsoft and Leading Electronic Guide Services. This merger would bring together a varitable web of who's who of leading cable companies, programmers, broadband internet service providers, software companies and hardware providers. On its face, it shadows the Commission's cable cap rule limiting the number of subscribers a single provider can serve. On its face, AT&T's inconsistent demand for access to ILEC facilities, a demand made at the same time that AT&T has closed the door to its own second wire to the home. By any reasonable measure, this merger does not satisfy the Commission's standard for concluding that the public interest benefits outweigh the inherent and well-documented anti-competitive effects. More specifically, I'll take a few minutes to address the key topics identified for this forum. Those being public interest, video competitive effects and the broadband market effects. AT&T will say that we're here to block local phone service competition. Simply put, this merger is not about local phone service competition. It's about AT&T's attempt to dominate the cable and the web. SBC is in the cable business. SBC is in broadband. And we welcome competition in each of these markets, as well as the local phone market. As long as competitors are treated equally. Despite their repeated public professions, neither AT&T nor MediaOne has made specific, tangible, verifiable commitments to actually roll out local telephone service in any market. In marked contrast to commitments made by SBC during our recent merger with Ameritech, as well as those being considered for Bell Atlantic-GTE merger. AT&T and MediaOne have given no reason to support their claim that they will offer local phone service. In fact, in talking to Wall Street, the company's discussions about the merger have centered on leveraging their cable pipe into the house and to control over consumer's access to internet highways and internet content. More importantly, AT&T and MediaOne have not shown that but for the merger they would not have competed in the local telephone market. Which is the only purported benefit that they hold forth in this merger. Each is developed plans to provide cable telephony. AT&T has spent billions of dollars to acquire TCI and upgrade its systems. And MediaOne has already pursuing cable entry in local telephone. And doing so more aggressively and more successfully than AT&T. As a consequence, there is no new benefit to offset the serious deleterious effects of this merger before you. The Commission has adopted and recently revised rules to insure competition in the video marketplace. Those rules include a cap on the number of cable customers a single entity can serve. AT&T and MediaOne initially tried very creative interpretations of the rules to avoid the obvious reality that their merger shatters the ceiling. More recently, however, they have acknowledged a problem and they have belatedly asked for a waiver to let this merger proceed. The Commission for its part, should not embark down the path of cable cap gerrymandering. The cable cap was required by Congress and developed by the Commission to precisely prevent the kinds of problems raised by this merger by its very nature. The cap only applies to the very largest transactions. And if AT&T is allowed to circumvent the cap, then I ask you, what meaning, at all, is the cap? It's quite meaningless. AT&T has wasted untold resources and years of effort in supporting horizontal ownership limits. Finally, AT&T continues to support a regulatory -- time's up. Finally, AT&T continues to support a regulatory model seeking to assure that they will have competition to the ILEC's wire into the house. Simply put, I think when we look at what it is going to take to spark competition, we should consider not favoring any particular competitor over the other, but having equitable parity in order that this may occur. Thank you very much. JUDGE LATHAN: Thank you. Mr. Schwartzman. MR. SCHWARTZMAN: Thank you very much. Is this on? JUDGE LATHAN: Oh, we hear you. MR. SCHWARTZMAN: I'm glad. Although maybe you're not going to be so glad. I'm afraid I'm not going to be the warm and fuzzy Andy Schwartzman today. You've got the petulant, angry Andy Schwartzman here today, I'm afraid. There's a lot of things been said already that I have a lot to say about. And I'm sure we will have a chance to discuss these substantive things over the course of the morning. But I regret that I have to devote much of my time today to discussing procedural matters. But said factors were not being treated fairly, and I have no choice but to explain why. We've already had to take the Commission to court, challenge its unjustifiable handling of AT&T, giving it four additional months to come into compliance with rules of which it's been aware since 1993. And I'm instructed to tell you that we will aggressively seek judicial review of any decision approving the proposed AT&T-MediaOne transaction, conditionally or otherwise. First, there's a huge pink elephant that's about to walk into the parlor. And that is the proposed AOL-Time Warner merger. As you know, MediaOne and Time Warner are 50-50 partners in Road Runner, the number two cable internet service provider. AT&T owns some fifty-eight percent of Excite, the number one internet service provider. And we've been complaining that this combination will monopolize the market for delivery of internet services. It will inhibit free expression on the internet. The possibility that AOL, by far the largest internet service provider, will now share ownership of Road Runner, would give these companies even greater incentive to act in concert. Our position is that these applications need to be reviewed with an eye towards what the partners are doing in a 50-50 partnership. In fact, these mergers may well be mutually exclusive. And I call on the Commission to solicit comment on the impact of the AOL acquisition on the AT&T-MediaOne merger. You will not have a complete record unless you do. And if we have to take it to court, we will. Second, I want to ask the Commission to refer our October 7, 1999 complaint against AT&T to the Enforcement Bureau. It's painful for me to sit in front of the Cable Service Bureau staff and complain about the way this has been handled. But I have to. AT&T repeatedly violated the Commission's horizontal ownership reporting requirements. The very rules which it's seeking to have waived. And it has repeatedly failed to comply with them. The Bureau was aware of these violations and did nothing. The violations continue. Attachment B to my testimony is a violation which occurred just three weeks ago. Contact with staff tells me that no action is contemplated on this complaint. It's basic communications law. The Title 3 applications raising questions going to the character of the applicants have to be resolved before the Commission can make the requisite public interest determination. The Cable Service Bureau's handling of these complaints and handling of the repeated pattern of violations and the misrepresentation about those violations, its acquiescence is part of the case. You do not have the distance to consider these complaints. Perhaps that's why you put them in the deep freeze I ask that this be referred to the Enforcement Bureau for a fresh look. I also want to complain about the waiver of ex parte restricted class treatment of this case. There have been sixty-five meetings between AT&T, MediaOne and Commission staff. Typically, they're memorialized by one page letter. I've got quoted an example in my testimony. This is unprecedented. We complained about it, we got a letter back which I can only characterize as snide. The Federal Communications Bar Association advocated retention of restricted ex parte treatment for judicatory proceedings. The Commission, on the basis of that, decided to retain those rules, even though the proposed to go otherwise. It affirmed that just three months ago. Yet you've lifted the restricted treatment that the Federal Communications Bar Association advocated for this case. How they've used this extra freedom? They've used it by filing a waiver request on Page 30 of a forty-five page pleading the day before Christmas, two days before Christmas. The substance of this case is being discussed in secret. This is no way to treat the public. I've also complained about the web page which is an advertisement for AT&T's position. The Cable Service Bureau's web page has all of AT&T's pleadings and none of the objecting pleadings. After I complained this week, at least a link has been made to the ECFS system. Now, you have T1 lines. People with 28a modems -- have you tried downloading from ECFS with a 28a modem? I might add as a personal note, Mr. Cicconi's letter explaining his agreement with Mind Spring on open access is on that page. Oh, I've requested that my letter explaining my reservations about that agreement, be placed there. It hasn't been placed there, either. You're presenting one side of the story in a rushed come to judgment on this case. Wall Street expects it to be done by the end of March and it looks like the Commission staff has read the Wall Street Journal and decided that's what it has to do. We want you to slow down and give this record a full and complete look. We deserve nothing less. Intentions do not matter as much as appearance. I personally believe we're going to get a fair shake. Many of my clients don't. Even if our challenge will receive objective consideration, it doesn't change the fact that there's an appearance of unfairness and a pattern of unseemly favoritism towards AT&T. This undermines public respect for the integrity of the Commission's processes and needless lends comforts to the enemies of the FCC's public interest jurisdiction who now lead to seek to limit the FCC's merger authority. Thank you. JUDGE LATHAN: Thank you, Mr. Schwartzman. Mr. Simon, please. MR. SIMON: Thank you for inviting me on behalf of the OpenNet Coalition to be here today. The OpenNet Coalition is an organization of over nine hundred ISPs around the country. Ten of them are large companies, eight hundred ninety of them are not. But they all have a common goal, which is that consumers should have a choice of how they access the internet over high-speed cable networks. We believe that the Commission should implement a national policy of open access to cable broadband networks for three reasons. Number one, it is irrefutably the policy of the Telecommunications Act, the FCC and the Department of Justice that open networks are better than closed networks. Secondly, open networks benefit consumers by promoting investment in innovation, improving quality of service, lowering prices and stimulating competition in new applications in services. And, finally, the growth of the internet itself depends on a competitive environment in each technology upon which the internet rides. The history of telecommunications in the United States from the telegraph to the internet, shows the importance of open competitive networks. That is why in 1994, Vice President Gore laid out open access as one of our five principles for the National Information Infrastructure and for the Global Information Infrastructure. And, in fact, open access is the key to the success of the other principles of universal service, flexible regulation, private investment and competition. The Government has had an undeniably significant role in opening monopoly networks in our history. It is fashionable today, as Professor Lessick and Professor Lumbley wrote, to argue that innovation is assured that the Government simply stays out of the way. We believe this view is misguided. It ignores the history that gave the internet its birth and threatens to reproduce the calcified network design that characterized our communications network prior to the internet. The benefits of open access to society and the economy are best understood by comparing an open network to a closed one. In an open network, such as the internet has been, anyone can invest in innovative technologies, applications and service, with confidence that they can succeed or not based on their success with the consumer that they can reach through an open network. In a closed system when the owner controls access to the network, fewer people will invest in innovation because of the increased risk that they cannot gain access to the network or to significant numbers of customers. We have over six thousand ISPs in this country offering a range of services to a range of customers over several different kinds of networks. These ISPs are engines for innovation and they represent potential vertical competitors with cable owners. But the architecture proposed by AT&T-MediaOne for their broadband cable service threatens this vertical competition by bundling internet service with access and not permitting users to select another ISP. Now, closed networks also deny consumers the benefits of technology. It would be the height of irony for the Commission to allow the cable internet market to remain a monopoly for internet access at the very moment that advances in cable technology are capable of promoting competition in access, unbundling of services, decentralization of programming control and providing abundant capacity where once there was scarcity. Yet, that is exactly what the cable industry is seeking. Now, in terms of the future of internet. As one analyst said, the beauty of the internet is that it is a universal language that links any type of device over any type of network to communicate any type of data. It is delink from the underlying technology. It is a language. But the cable industry is now trying to reverse thirty years of separating the language from the network by claiming that its infrastructure and the internet are one and the same. Some argue that competition in cable access does not matter because other broadband networks are available. And others argue that while open access is a good thing, requiring it is a bad thing. Well, how does it make sense that because there's competition in some parts of the internet market that we shouldn't have competition in all of the internet market? AT&T used to argue that it was a crime - and it was - for others to innovate and introduce new technologies into their network. Now, on the same vein, they argue that it's a shame if others were to innovate and introduce new technologies into their network. In reaching a national policy to foster the growth of the internet, this Commission must follow a principle. The internet's openness is that principle. And those who would abandon that principle by closing their networks or opening them only to a few, have a burden of persuading the rest of us while the internet's open past should not be prologue. Thank you. JUDGE LATHAN: Thank you. Thank all of you. This was some very interesting comments. I have a question of Mr. Cicconi. Both you Mr. Eichler argue that you have to be bigger in order to compete in telephony and that certain synergies, AT&T's brand name and MediaOne's expertise in the cable business, and these things combined will bring benefits to the American consumer. And the argument was made that you have to have size in order to be able to do this. My question is how big do you need to be, really, and how big is really too big? MR. CICCONI: Well, I think the key here is question about the ability to own facilities. As you all know and this Commission has fostered, the idea of ownership of facilities and facilities-based competition is probably the most viable sword. When one is attempting to compete against incumbent monopolies, other forms of competition have been found wanting. You're either depending on the incumbent's facilities, you're depending on their pricing or you have some other dependency which makes that ability to compete at least suspect. We're attempting to do so, as this Commission knows on a variety of levels. But I think the Telecom Act and the Commission have long since concluded the facilities-based competition is first and foremost the most desirable way to do it. What this merger does, is it allows us to get a level of facilities-based ownership to deliver that competition. From there, we feel it would be possible to move out and be able to conduct the type of penetration that telephony to deliver competitive local phone service across the country. In terms of the, what we bring to the MediaOne market, which I think the first part of your question there, I think as Frank pointed out in his statement, and I can certainly let him expand upon it from MediaOne's standpoint. But I think what we've seen from the marketing information from MediaOne's own experience, is that AT&T, both its brand name, its resources, its reputation as a telephone company and its focus as a communications company as opposed to a cable company, would allow quite faster penetration. I think our estimate, I believe we put this on the record with the Commission, is that we believe in their territory we could achieve a thirty percent penetration level within the first three to four years. And MediaOne's current estimates is that it could take them up ten years to achieve roughly half that penetration level. So, this would deliver competition more broadly and much more quickly than would otherwise be received. What that means in practical terms is that millions of Americans who don't now have a choice of local phone service would get a choice, and they'd get it faster and it would mean lower prices. JUDGE LATHAN: So, it is your position, then, that you two combining you would bring, you would deploy faster and that cost savings would be passed onto consumers because of the synergies that exist between the two companies and that going your separate ways, these benefits would not be realized? MR. CICCONI: Exactly. And I think that's clearly in the information we put on the record. And in addition, it's our experience in the deployment that we're putting forth today, as I said in my statement, we would offer -- JUDGE LATHAN: Okay. MR. CICCONI: -- competitive local phone service over our facilities in cities where we're deploying currently at cheaper rates, lower prices than the incumbent monopolies are putting out there. JUDGE LATHAN: Excuse me, but have you done any studies that, you know, would bear evidence or give any evidence as to how big a cable company would have to be in order to compete on the local telephone market? MR. CICCONI: I think we've put information on the record in terms of the market penetration that would be necessary in the importance of ownership of the facilities to be able to achieve that. I mean, we're cognizant of the ownership limits here, if that's what you're getting at. And we understand that there will be a limit beyond which we would not be able to go in terms of -- JUDGE LATHAN: So, to try to understand the basis of the conclusion that by the mere combination these synergies exist and, therefore, consumers are going to have more choice and better savings, versus if you went on your own because MediaOne was aggressively rolling out their local telephony prior to the proposed acquisition. And so we just wanted to be a bit more concrete, as opposed to, you know -- MR. CICCONI: Well, again, we've put on the record the synergies that would be achieved through the merger and those savings in the cost of deployment would, of course, affect the cost and delivery of the service. Secondly, we've put on the record that the penetration levels that we expect to achieve. And I think there's adequate, there's ample evidence on the record that we'd be able to penetrate these markets and provide more effective competition to monopolies much faster in the MediaOne regions. So, I think that information is clearly on the record today that we would be able to bring competition in telephony to these markets much faster than MediaOne could do on its own. JUDGE LATHAN: Ms. Ardoin raises the flip side. She argues that you're going to dominate the last mile to the house, to the home and the real purpose of the merger really is not local telephony, but to be able to dominate the American household in terms of the provision of voice video and data to the home. Could you respond to the accusations made by SBC, please? MR. CICCONI: Well, I think that first of all, it's not going to be possible with an acquisition that, at most, involves 8.5 million customers to achieve any level of dominance. Secondly, the ownership limits the Commission itself has put on the record would limit the ability to control cable. I think what this merger's really about is competing with companies like SBC, who in their regions today do have dominance. In fact, in their merger with Ameritech, they have monopoly position, local phone service in a third of the nation. Now, what's really going on here is SBC has a concern about competition. In fact, in the areas where AT&T is deploying its local phone services, SBC is rushed to get out there with a more attractive offer to compete against us. I heard Priscilla's statement about how they don't feel we're committed to it. They must feel we're committed to it or they wouldn't be going into the very territories we're piloting. And, in fact, that territory they're running ads criticizing the quality of our local phone service. So, if somebody didn't view this as a competitive threat, I don't think they'd be running full page ads in the territory criticizing our product. I'd also point out, again, that the benefits of this in terms of trace and lower prices are something that one couldn't expect any monopoly to appreciate because it would force them, of course, to compete where they don't now have to, and to lower their prices where they don't now have to. But that is the upshot of this merger, particularly in those territories where the monopolies have dominance to that. MR. JOHNSON: Can I try another version of this size question, which I think is always asked at these hearings. And Mr. Eichler sort of raised of this. You need to get bigger to compete with the other participants in the market who are getting bigger, which creates a dynamic for unending mergers and concentrations in the market. Is there a logical place to decide enough is enough, or is that dynamic inevitable? MR. CICCONI: I'll have to let Frank answer for what he says in his testimony. But in terms of the size there, obviously, this is not about size, per se, for AT&T. This is about acquiring the facilities to compete and provide a viable competition against incumbent monopolies. I would think that this Commission at some point, may decide that question. But if one looks at the Telecom Act and the record of that Act, it's very clear that the incentives in the Act, and, in fact, the incentives from the Commission, have been to encourage the cable companies and the acquisition of cable in order to provide competitive local telephone service. Today, three and half years after the Act was put in place, the local monopolies still dominate to the tune of ninety-six percent of local phone market. Ninety-six percent of Americans still don't have a choice in local phone service. So, I think what I'd say the point at which to answer that question about size is perhaps when the Commission concludes that there is sufficient competition at the local level to the incumbent monopolies and sufficient percentage of Americans actually have a choice in local phone service. Maybe that's the point at which to answer that question. JUDGE LATHAN: Yes, ma'am. MS. HILL-ARDOIN: MediaOne has indicated on the record and re-enforced today, its ability to be a facilities-based competitor. The argument that's being made here is simply one of having to have this size and scale. A question that I have some interest in is couldn't you get that same benefit by AT&T or MediaOne licensing with AT&T. What AT&T brings to the table, as has been described, is its formidable, and I might add as an industry participant, inviable brand recognition. Couldn't they achieve the same result by having MediaOne licensed from AT&T? And you have the technology, the capability, the expertise, the acumen that MediaOne has already demonstrated in the marketplace. And seems like they could still give us a run for our money. JUDGE LATHAN: I'll let Jim respond to that and then Andy I saw your hand go up. MR. CICCONI: Actually, I think since the point was about MediaOne's ability to do that -- JUDGE LATHAN: Oh, I'm sorry. MR. EICHLER: Sure, let me try. Part of the issue I think here is how fast do you want Telcom deployment and how fast do you want to go ahead and offer consumers choice. And would MediaOne go ahead and do that alone. I will tell you that based upon our current penetration levels, as Jim said, we were anticipating on our own, it would take us five to ten years to get to a fifteen percent level of penetration. When we had looked at some type of arrangement with AT&T, we concluded that if there was -- and this was prior to ComCast and/AT&T taking a look at us. We concluded that with their brand, with their service, with everything that they brought to the table, that that penetration could easily be doubled in a much shorter period of time. In essence, we felt that there could be probably thirty percent penetration of local competitive service within three to four years after we had some type of arrangement. Now, Priscilla brings up, you know, the concept well, let's talk about some type of licensing arrangement. As most of you probably know, joint venture details are very, very difficult to negotiate. Most joint ventures fail. And part of what you're talking about here is when and how long does it take to negotiate something with another company. When and how long does it take it then to go ahead and deploy. And part of what you're looking for is, as we were looking for, is how fast can we offer choice. One of the things that we as MediaOne take a look at every year, and have looked at, as well, is where we at with respect to Telcom penetration. I will tell you that our board looks at that on a regular basis. And I will also tell you that we're not -- we would not have continued spending hundreds of millions of dollars a year if we didn't get to certain levels of penetration. At least on a break-even basis. Offering choice, even if it's a lot of choice, offering Telcom service on a losing basis is not a good business decision. We wouldn't have done it. And, so, part of what we were looking at was what do we need to do in order to get to a certain level size, to get the scale, to get the brand, to get the services to go ahead and offer Telcom choice. Our brand we think is a very good brand. I will tell you we've been brand services and looked at it. And people rarely know who we are when it comes to telephone service. If you want to go ahead and market a telephone service, marketing as MediaOne telephone service doesn't work as well as marketing as SBC or PacTel or AT&T. And so it's easy to go ahead and have SBC say, sure, let them do it on their own because they're great. Making sure we don't get into the local phone service. JUDGE LATHAN: Okay. MR. EICHLER: In fact -- JUDGE LATHAN: Let me just ask one question, though, because in the record is stated -- I want to get -- you state that it's deeper penetration but you're not intending to expand your geographical scope. I mean, I want you to answer, but what we have in the record is you stated that it is not anticipated that the merger would accelerate the number of metropolitan areas covered by the roll out. Rather, the merger will enable AT&T and MediaOne to achieve faster and deeper penetration in each market. Is my understanding correct that you just are going to go faster and deeper in the markets that you're currently in and you don't expand -- you don't expect a greater geographical expansion of that? MR. EICHLER: I think what we're saying when you say faster in the markets that we're in, that means we're going to be basically, by the end of the year, we're going to have -- at the end of our, in our company alone, we'll have fifty-nine percent of our homes will be telephone ready. We're not just going to continue marketing in only the nine homes that we're in. The nine markets that we're in. As markets become telephone ready, we start marketing those. There's a continuation of rolling those out. I think what we're talking about is on a combined basis and when you're together, you roll out deeper into those markets. When you're building a market out, you're building -- for instance, in Atlanta, we're going to continue to build out Atlanta. When Atlanta, different areas of Atlanta, we're going to continue marketing telephony service in Atlanta. All over that. As we build other markets to be telephone ready, we will market to those areas. MR. CICCONI: If I might, I think that -- JUDGE LATHAN: I think -- MR. CICCONI: I think the point about -- may I just try to -- JUDGE LATHAN: Follow up on this? MR. CICCONI: Answer to this question here because I think your point about going beyond the MediaOne markets I think is important here. Clearly we intend to build out in the MediaOne markets. The question of going beyond those markets really means going beyond the MediaOne geography there. And, obviously, that's something that's limited by cable ownership. Our ability to own more cable. I think it is important to recognize that AT&T is committed, is committed to this Commission. It intends to provide telephone competition everywhere it can by whatever means it can. Obviously ownership of facilities and delivery over cable systems is we feel, the most efficient, cost-effective, fastest way to do it. At the same time where we do not own cable, we've committed publicly that we're going to provide, find other means of delivering that competition. We've just announced and launched a major initiative to deliver telephone competition locally over fixed wireless systems. This is specifically designed for those types of areas where we do not own cable. So, we're going to be coming in there. And I think the commitment of AT&T as a telephone company with sixty million customers currently with a long-distance base, to protect there. You certainly have adequate indications, and we have every incentive to enter those markets. And in terms of cable concentration, which I keep hearing from SBC here in the testimony, I dare say that SBC isn't a cable company. When they've done their acquisitions, they've actually divested themselves of cable locally. They're really, I think, not interested in cable concentration so much as they are competition from cable. And I think what's going on here is that they have a concern about that being delivered over cable. That the type of ads here that they're running in Pacific Bell territory currently in California, is specifically designed simply to prevent customers from switching to a pilot offering. They seem so threatened by a pilot project that's going on currently in Fremont, taking customers from them, that they're running full-page ads being very critical of our service, I might add, indicating to me that they have quite a bit of fear of competition from cable even when it's in its formative stages. When we get this accelerated and scaling with lower prices for second lines that are half the level they currently offer, of course they have a concern about competition from that source, which is why they would attempt to stifle it through opposition to this merger. MR. JOHNSON: I can't honestly see that ad. Could you describe what -- MR. CICCONI: Well, it's a criticism, actually, of the original way we rolled out the system. But it says if you're considering switching your local phone service to AT&T, you should know the drill. And, of course, it makes a point of criticism within certain of the initial installations. We're actually having to install a battery pack for power back-ups that, as you all know, moved beyond that to line powering and it, of course, made it a considerable investment to do that. But when we were actually in the early stages in Fremont of doing battery back up, they ran a series of ads criticizing that and criticizing, in fact, the quality of our service. And, obviously, we feel the criticisms are unwarranted and they're certainly out of date by now. But I think the mere fact that they would actually to go to the time and expense of running ads to combat a pilot project in Fremont, California, is indicative that they take this seriously, and well they should. MR. SCHWARTZMAN: These guys from Texas really know how to filibuster and divert. Mr. Cicconi's just spent five minutes trying to divert you from the question that wasn't answered, talking about newspaper ads having nothing to do with the question. I got five points, I think I can make them real fast. JUDGE LATHAN: Okay. MR. SCHWARTZMAN: Number one, every major cable network is a joint venture. DOX is a joint venture, CSPAN is a joint venture, CableLids is a joint venture. The cable industry is built on joint ventures. AT&T has done telephone marketing deals and reseal deals for years. And Mr. Eichler tells you it's easier to do a multi-billion dollar transaction which busts the 1992 Cable Act than it is to enter into a marketing agreement. Number two. It does bust the 1992 Cable Act. If Congress wants to amend the 1992 Cable Act to let this transaction go through, then they can go ahead and do it. But they're asking you to waive it. Number three. You don't need to have AT&T buy MediaOne to do this deployment. Paul Allen can write a check. Brian Roberts was standing there. He didn't have a check, he had a VISA card, but he was ready to do it, too. You don't need somebody to bust the cable cap in order to bring deep pockets in to deploy video and to do so very aggressively. I certainly agree that national branding through an agreement, having AT&T national advertising on the Super Bowl and stuff would be terrific way for the cable industry to collaborate and do marketing, but they don't have to own the systems to do it. Number four. Let's talk about deployment. As I understand it, there's about ten thousand AT&T residential telephony customers on the former TCI cable plant one year after the merger. Now, I'd like to tell you what the record shows about the promises that were made to this Commission when it approved the merger on the basis that it was going to accelerate the deployment of residential telephony. All of that, of course, is under protective order. I urge you to go back, I think Bill remembers what those numbers are, and take a look at promise versus performance. They're standing here making the same promises. They haven't come close to saying what they were going to do. And if AT&T wants to get the protective order lifted so everybody can see what those promises were, I invite Mr. Cicconi to do that. Finally, you're being tough, but you're not being tough enough. In the October 1999 third report and order on cable horizontal ownership, I want you to ask Mr. Cicconi whether he accepts this as binding precedent. Commission said, cable operators have presented no credible evidence that a larger size is necessary for the deployment of advanced technologies or telephony. Moreover, we note the possibility of cooperative arrangements among operators to offer coordinated telephony services through their cable systems so that a cable operator does not necessarily need to grow in absolute size beyond the limit in order to participate in the offering of a national telephony service. That's the Commission's established policy. Let's ask Mr. Cicconi how he comports this merger with that. JUDGE LATHAN: Thank you, Mr. Schwartzman. Yes, Mr. Cicconi? MR. CICCONI: Well, the short answer is we're going to comply with the limit, Andy, and we've indicated on the record we intend to do that. We indicated when we filed this merger we intended to do that. So, I think it really is a moot question. We're going to comply with the limit, period. JUDGE LATHAN: I'd like to ask a question about the compliance and the request for an eighteen month waiver. And the question is both for Mr. Schwartzman, actually, and for Ms. Ardoin. And the question is that as you know AT&T has requested an eighteen month waiver to come into compliance with Commission's horizontal ownership rules. And let's just assume for the sake of argument that that waiver were granted. And I say for the sake of argument make that assumption. Do you have any concerns about the proposed measures that AT&T has offered us to protect against video harms? Are you familiar with their proposal in that regard? MS. ARDOIN: I am. JUDGE LATHAN: And if you have concerns, I'd like to hear what your concerns are. MS. ARDOIN: I think the, if I'm referring correctly to the video harms to which you're speaking, the fact that they're insulation criteria and is programmed based. AT&T owns not just a little bit of Liberty. AT&T owns one hundred percent of Liberty. Liberty, under this proposed merger agreement, will sell to another entity. I think that is outside of what the Commission contemplated, I think it is contrary to the rules. And the fact that AT&T wants to dismiss it as -- JUDGE LATHAN: It's a request for a temporary waiver, so my question goes to they've offered up some safeguards during the eighteen month period. Do you find those safeguards acceptable? MS. ARDOIN: I do not find those safeguards acceptable. I don't think that they provide -- while the insulation -- I'm sorry, while the safeguards are there, I don't think that they provide the kind of certainty that influence will not result to the harm of other competitors in the marketplace. I think it gives them a disadvantage. AT&T has known for a while what the Commission's rules were. And to come in at this hour and say, well, in case you still think your rules are right, in the alternative, we'd like to have this eighteen month waiver, I think takes advantage of the situation and abrogates the public interest. MS. TRUONG: May I impose that AT&T briefly summarize your proposal for an eighteen month waiver so that we can have a more grounded discussion? MS. SCHWARTZMAN: Ms. Truong, I was asked to address that question. JUDGE LATHAN: We just ask -- we get clarification, then they know what you're addressing. That's the only reason. MR. SCHWARTZMAN: In the interest of time, we have Attachment D to my testimony today, is a thirteen page statement discussing the very question you asked. Pages 8 and 9, in particular, go to the question you asked. The short answer is you want us to believe that John Malone has never met Michael Armstrong. It decries credulity. Why do they need eighteen months in addition? Originally, the Commission said you have sixty days and we mean it. Then the Commission said we'll give you 180 days. They want eighteen months past that 180 days to violate the 1992 Cable Act. And the Commission just adopted an order and attribution rules, including broadcast cable attribution this past August. We quote from the eloquent statement of the chairman, from the other commissioners saying enough of this waiver stuff. We're not going to do regulation by waiver anymore. We're going to adopt rules, we're going to adopt reasonable limits and we're going to stick to them. Now, you adopted rules, you adopted reasonable limits. You did much more. You went from 60 days to 180 days and now they want eighteen months more. It's just not justified. It's not justified on the record and it's not justified by the fact that they just don't need to buy these systems. Poor Allen will buy it, poor Allen will deploy the telephony; Brian Roberts will buy it, Brian Roberts will deploy the telephony. JUDGE LATHAN: Mr. Cicconi, would you comment on the waiver issue, please? And, first, clarify what your proposal is with respect to the safeguards. MR. CICCONI: Certainly. First of all, it's not eighteen months beyond the 180 days that the Commission has already discussed. It's eighteen months from closure of the transaction that we have requested. And I think the Commission itself has already acknowledged that it would have some issues there in the fairness dictated, giving companies a period of time in which to comply. And it is already allotted six months in that period. So, obviously, the six months would be part of the eighteen we had asked for in those circumstances. But it would be eighteen from the closure. I think that the rationale for the request is fairly simple. First of all, I think we can cite some significant overall benefits to this transaction that would argue for a waiver. And that is, obviously as we discussed earlier, telephony competition that would be provided to millions of Americans who currently don't have a choice, among other benefits we've put on the record. Secondly, I think in terms of safeguards, I think the Commission in its ownership rule, new ownership rule, laid out as its primary concern, concern about the influence in video programming involvement, material involvement in video programming. And on that core issue, AT&T is very clear and I think the record is very clear, that we have absolutely no material involvement in the programming decisions within the TWE partnership. And that really is the core issue. So, I think that the Commission, even during waiver period on the core issue about which it was concerned in its rule, has that protection. This is really about a sub-issue. It is a factor. And that is the sale of programming to TWE. Now, keep in mind that, again, we're not able to influence and do not have influence or involvement in the programming decisions in TWE. This is really about whether there is any sort of influence inferred within that partnership from the sale of programming entities in which AT&T has an interest, however attenuated. And that is really the issue or the factor around which AT&T feels it's fair to ask for an eighteen month waiver. In order to come into compliance there with that requirement AT&T may have to divest certain assets or interests. This Commission in the past has recognized that where divestitures may be entailed to comply with certain requirements the Commission has put in place, it is granted such waivers. I think four or five have been granted in the last five years. And those waivers have ranged from eighteen to twenty months. So, there's ample precedent on the record. And these have involved RBOC's and other entities. They've involved cable broadcast cross ownership, and things of that nature. So, we're asking for eighteen months within which to make that decision and to effectuate that type of divestiture if it proves necessary. We feel it's also a matter of fairness because the rule itself was put in place after the merger was filed. The merger was filed with this Commission in early July. I believe the rule was actually put in place the end of October. And, of course, the interpretations that have come forth about the influence that the Commission staff is concerned about through the sale of programming to TWE, is really a development that followed the enactment of the rule in October, as that has become clarified in the course of our discussions. So, it really is, again, we feel a matter of fairness since the rule was adopted subsequent to the merger filing. MR. JOHNSON: Could you just describe a little bit what's going on during this eighteen month period? I presume the way it's phrased, you don't immediately set off to achieve compliance with the rules because there's a period of waiting for THE decision and then there's a split in the road involving certain IRS rulings. Could you describe -- I mean, is it eighteen -- your own process starts later in the eighteen month period? MR. CICCONI: No, Bill, I think -- I mean, we understand what the rule is. We understand that interpretation the Commission has put on it. We're asking for that period of time within which to make the decisions, some of which are difficult, some of which may involve tax interpretations and tax issues, things of this nature. As well as effectuating those decisions. They're a multitude of options. And, obviously, I'm not prepared to go into those in the course of this proceeding. But they're a multitude of options raised that we feel we could come into compliance. We're determined to do so, but we're not going to wait on that process until THE decision comes down. Obviously if THE decision comes down, it could impact the rule itself, but we're not certainly asking for that period of time within which to wait for THE decision. We're going to proceed from the point of closing to try to analyze that decision, make those decisions and, frankly, consult with the Commission about how to do that. But we are determined to do it. We indicated when we filed the merger in July that we would comply with whatever rule the Commission put in place. And we intend to do that. We're simply asking for a period of time beyond six months that the Commission has already acknowledged. So, I think the Commission, by stating that, that there would at least be six months following the decision to begin enforcing the rule, that there is a fairness issue here within which companies should be given time to come into compliance. And obviously that issue is compounded when a merger like this is taking place. MR. JOHNSON: I guess what I'm getting at is how much of the time is occupied with making the decision what to do and how much is occupied with achieving the result of that decision. MR. CICCONI: I can't begin to quantify that for you right now, Bill, because obviously the answer to that would depend on the options that we conclude are most viable and how easy or difficult they might be to effectuate. Some might involve fact issues, others might not. JUDGE LATHAN: Assuming for the sake of argument that a waiver were granted, and also assume that for whatever reason you were not able to come into compliance after eighteen months, what should the Commission do if after eighteen months you are not in compliance? What should, if any, the enforcement action of the Commission be? MR. CICCONI: Deborah, we've said we'd be in compliance and we will, period. JUDGE LATHAN: Mr. Schwartzman? MR. SCHWARTZMAN: Here's the choice. We want certainty. We want to deploy broadbands. You should let somebody else buy MediaOne or you can let AT&T buy MediaOne. At that point, eighteen months commences with stay lanxes of tax lawyers, Wall Street analysts, meetings - can we do it this way, can we do it that way, how about this one, how about that one. And then as you hypothesize it, quite possible at the end of eighteen months they might not quite make it. And then what does the Commission have to do? If you want certainty, if you want broadband deployment, don't approve this merger which busts the law and requires a waiver. I would note, also, that the concern that Mr. Cicconi has 'cause there's something new here, is that the Commission liberalized the rules in October, and they're not liberal enough. Until October, they couldn't even begin to try this kind of maneuver and it's not good enough. They want to go further. Why undertake all of this? The hypotheticals you're asking prove the point. You're opening up a Pandora's box in order to accommodate a company that just comes in here and says we'd like to do it and you immediately say, oh, yeah, well, all right, we'll think about it. Well, don't think about it. It's violating the law. Say no and let's move on. JUDGE LATHAN: Thank you, Mr. Schwartzman. MR. CICCONI: Could I just respond to the point about the liberalization? 'Cause I think that creates a false impression, at least from our standpoint. I think in some respects it can be argued that the Commission may have liberalized the original rule. In other respects, it clearly does not. We felt that the original transaction would have qualified and we could have qualified it to the Commission's satisfaction under the insulated limited partnership exception. That was eliminated under the new rule. So that, itself, is not a change that I would view as a liberalization. In fact, it's complicated. And, secondly, the market factors that Andy pointed out and the complications there I think are an indication of how difficult such a decision, particularly if it involves a sale of assets for several interests, could become. And I think fairness dictates, again, that particularly since rules adopted following the July filing of this merger, that we be given some time to comply. Lastly, again, precedent. This Commission has looked at situations like this in the past, particularly in the last four or five years. And when it is involved divestitures of this nature in order to come into compliance, the Commission has given eighteen to twenty month waivers to other parties when they've come in here. So, this is not in any way, shape or form an unusual request. In fact, it's very much in keeping with precedents that the Commission has acknowledged. THE: Mr. Cicconi, can you clarify what you meant when you said that the October '99 rulemaking eliminated the insulated limited partnership exemption, or otherwise tightened the ownership rules? MR. CICCONI: We felt that under the original rule, the definition of insulated limited partnership would be one that we could come into compliance with. That definition was changed. I think we've indicated on the record that the rulemaking itself some concerns about certain of these issues. The fact is that change is something that would not allow us that avenue under the true partnership. This becomes much more now an issue involving the material involvement in video programming, and that really becomes the operative standard there. And, again, the sub-issue that being the sale of programming to TWE. So the core issue for us during the eighteen month period is not compliance with any of the other standards in the rule. The core issue now for us becomes the issue of the sale of programming from other interests that AT&T has an involvement in, even if it's attenuated to the TWE partnership. And that is really the core issue, the single factor that we would be seeking to address within that eighteen month period. Because it calls into question our involvement in these other entities that, again, however attenuated they may be, they're selling programming to the TWE partnership. And that is something that we feel will require some thought. And we have a number of different options. And during that period of time, we would have to make some decisions. Probably have to divest some of those interests in order to come into compliance with the interpretation of that rule by the Commission. MR. JOHNSON: Could I try one, one just question? Maybe we should have started earlier with this, but what do you see the real role of these rules playing in this analysis? In light of the fact that the rules are not enforced? And, particularly, Mr. Schwartzman, I know you'd like the rules to be in effect, but is it appropriate to make judgments based on rules that aren't in place? Or should we make judgments as if there were no rules and proceed on that basis? MR. SCHWARTZMAN: Well, your question may be one of relative short duration. I think there's a pretty good chance that the Commission at a Court of Appeals is going to issue forth before the Commission can get to it. Especially if the Commission heeds my request to solicit comment on the effect of AT&T, the AOL-Time Warner merger on this transaction. Because as I said, I believe they are mutually exclusive and we intend to press that aggressively. You have to develop a record on that. So, the first level I'm not sure there's a problem. At the second level, even -- look, the Commission did not need the 1992 Cable Act to impose horizontal hardship limits. It did them under the authority of the public interest standard. It still has public interest authority. If the Commission has conducted a rule making and found that thirty percent is the appropriate limit, it would be arbitrary and capricious not to use that as a principle, the loadstar for determining what is in the public interest. Which is the determination the Commission still has to make. If they want to make it as an applied challenge to that in court afterwards, fine. But I think the Commission has no choice but to apply that limit. It's forcefully and vigorously defended. The legitimacy and the soundness of the decision-making process and finding that thirty percent is the right number. I don't see how it cannot. MR. JOHNSON: -- lend them to us which is that they will comply with the rules if the rules exist. JUDGE LATHAN: And to trust them that they'll do that. MR. JOHNSON: Well, that's another issue. I mean, I'm sort of getting at the more structural problem if how can we -- it's sort of a hypothetical merely if we're using the rules which may disappear, wouldn't it make more sense to ignore the rules and come up with an answer which would exist regardless of the rules? MR. SCHWARTZMAN: How can you ignore your own rules? MR. JOHNSON: Because they're stayed. MR. SCHWARTZMAN: You're staying them. First of all, you're flipping back and forth. And when the stay gets lifted and we're trying to help you out in that regards. But, second, it's the basic reference. If you didn't have the '92 Act, you'd be making the same determinations. I just don't see how you can say we can pay no attention to it. MR. JOHNSON: Well, that's why I guess shouldn't we just be making the basic determination? MR. SCHWARTZMAN: But the basic determinate is going to start with you conducted this huge proceeding. You've told THE of Appeals that this was the right answer. This is, this is the sweep spot where competition becomes problematic. MR. JOHNSON: Well, presumably -- MR. SCHWARTZMAN: Would be arbitrary and capricious if a different number. MR. JOHNSON: We would come to the same conclusion if the analysis was the same. MR. SCHWARTZMAN: You sure would, especially since you'd be writing them all. MR. JOHNSON: The decision wouldn't be based on a -- decision wouldn't based on rule, it would be based on a specific analysis, which would then endure regardless of the rules. MR. SCHWARTZMAN: Well, certainly the specific analysis has that always taken into account the overall video market. I don't see how it's going to come out differently. Thirty percent is either going to be too high or too low. MR. JOHNSON: Could you respond, Mr. Cicconi? MR. CICCONI: Well, I -- believe me, I recognize the conundrum. I think we're operating under the assumption that there will be a valid rule in place. That we're not submitting this request, nor are we operating with the Commission in this area on any sort of assumption about THE case. I think that's certainly something we all recognize that's out there, it's something that could affect what's going on, could affect the Commission's rule. But I think we have to operate on assumptions. The assumption we're operating on at AT&T is that the current rule the Commission adopted and put in place in October is the one that we would be asked to come into compliance with. And we're asking for an eighteen month period from the point of closing within which to do so, Obviously if a court decision comes down that affects the rule in some way, the Commission first and foremost will have to figure out how to address that. And, of course, we'd work with you to do so. Whatever rule is in place, AT&T will come into compliance with. We said that on day one of the merger. Again, we're in a not dissimilar situation in July when we filed the merger. The old rule, now superseded, has been under suspension for I guess four or five years at that point. Or had been stayed for four or five years. We were on notice that the Commission intended to put a new rule in place at the time. We didn't really know what it would say. The Commission didn't know what it would say. But we indicated at the time we filed whatever it said, we would come into compliance. MS. HILL-ARDOIN: It was before, actually, the AT&T proposed merger was announced that the Commission warned, and I'm quoting, interested parties, including in particular parties that are now entering into business arrangements that would violate the rules, but for the existence of the stay, should be well aware of the existence of the rules. And, thus, have a full opportunity to be prepared to comply with them. Perhaps now it might be held that this eighteen month waiver is that full opportunity to comply with them. And in explaining why the waiver would be justified, Mr. Cicconi went back to what was going to be happening and focused on the benefit that were going to be delivered as a result of this merger. And he spoke about telephony competition. His commitment as he has stated here to telephony competition, and I'll quote as best I can with my shorthand, that AT&T intends to provide telephone competition everywhere it can by whatever means it can. That's the commitment. It is not specific. I would like to see the Enforcement Bureau have a run at whether or not they have competed in telephone competition everywhere they could by whatever means they could. MR. CICCONI: Can I respond to that? Because first of all, we are out there competing today. I think the ads I've held up here are a little dose of reality here. And SBC comes in and says one thing, competition isn't occurring, AT&T isn't delivering. The fact is we are delivering it out there and they're running ads to counter it out there. If it wasn't in existence, they wouldn't be doing so. Secondly, I think it's more than a little disingenuous for a company that during the Telcom Act in 1996 assured the Congress and this Commission of its intention to be unleashed to compete everywhere against every other RBOC. Three years later we're still waiting. In order to get their Pac Bell merger approved, they made, they gave assurances to this Commission and to the California Commission about their commitment to compete outside the region. Again, this Commission has seen absolutely nothing from them on that. And to the point where in order to get approval of the Ameritech merger, they were held to account on that. Finally, for SBC which has yet to demonstrate after three or four years of promises any desire to compete anywhere in anybody else's territory, I'd like to see the SBC marketing ads in other RBOC territory looking to compete and providing local phone service. We aren't seeing any of that. Again, after four years of promises. So, I think it's more of a little disingenuous for people that we're actually seeking in the market today to compete against to lecture us about providing competition when they've so badly failed to meet any of the commitments they made previously. MR. KENNARD: Actually, I think it's wonderful to hear SBC welcoming new telephony competitors in the marketplace. I've never seen that before. MS. HILL-ARDOIN: We are indeed doing that. We are not shrinking from competition. However, we do have some concerns that might taken up about how competitors enter the market, the rules by which they have to live and this whole issue of disparate regulation. But we, in fact, do welcome regulation. I enjoyed -- I'm sorry, competition. I enjoyed that jaunt down memory lane, but when we talk about mergers, rather than going back to the '96 Act I think with reference to SBC, we can focus rather recently on our merger with Ameritech. And I can tell you that this Commission did not approve a merger in which we committed to compete everywhere we could and whatever means we could. Our commitment to competition is specific, it is verifiable, it is enforceable and it is being aggressively executed. And probably if I didn't have a bad back, I could have hauled those conditions in here. JUDGE LATHAN: Andy. MR. SCHWARTZMAN: I'd like to observe that this is the third time, by my count, that you've asked Mr. Cicconi a question about AT&T and he's given you an answer about SBC. This is about SBC. Now, if he wants to talk about -- THE: You mean AT&T. MR. SCHWARTZMAN: If he wants to talk about -- thank you. If he wants to talk about commitments, first as I've already pointed out, there's ten thousand residential telephony customers in TCI and you know what the promises were made. That merger's a year old. Second, when they talk about we'll come into compliance, just trust us, I'm pointing out to you that we filed a complaint alleging repeated violations of the reporting requirements involving these very rules. And misrepresentations about it. And as I got Attachment D in here, just three weeks ago, they filed another, consummated another transaction without submitting the required certification. And that complaint filed on October 7th sits in your bureau. Mr. Chairman, I've asked that that be referred to the Enforcement Bureau because it's supposed to be firm, fast and flexible and we're not getting firm, fast and flexible on this. JUDGE LATHAN: Mr. Simon. MR. SIMON: Yes, I wanted to interrupt the conundrum about cable ownership just to make a point. In the Cable Bureau's broadband report, Ms. Lathan had the parable of several people feeling the different parts of the elephant. MS. HILL-ARDOIN: The blind men they were. MR. SIMON: The blind men. Let me back up and look at the whole elephant just for a minute. And I want to -- well, I'll hold that. Mr. Cicconi says that he needs to join the cable monopoly club because he needs to fight the incumbent Bell monopoly club. Now, he then says that acquiring facilities to compete with incumbent monopolists is critical. And before he changes that hat, and indeed his entire suit, I want to embrace him because that is what we have been saying. That unless internet service companies in this country are able to acquire through open access the facilities to provide broadband internet access, how are they going to compete with the incumbent cable monopoly? So, when we're talking about the battle for local phones and the battle regarding the cable ownership, horizontal limits, keep in mind that during the eighteen month waiver, that is a sub-set of the two and a half year period that Mr. Armstrong says he intends to maintain his monopoly on internet access over his cable system. In internet time, that's about eight years. That will discourage investment by untold thousands of people in innovative internet applications that would never see the light of day in that network. JUDGE LATHAN: Okay. I think on that note, I'd like to take a break. And when we come back, we are going to talk about video, potential harms, programmers and broadband. And so let's just take a ten-minute break, and thank you so much for the spirited conversation this morning. (Whereupon, a brief recess was taken.) JUDGE LATHAN: Okay, we're back in session. Please take your seats. We have only about an hour and fifteen minutes left, and so I want to make certain we're able to move to the other issues, such as the broadband issues and the video issues. But, first, Quyen Truong would just, she has just one or two wrap-up questions with respect to the benefits of the merger and then we will move on. Quyen. MS. TRUONG: AT&T and MediaOne have submitted independent deployment plans showing how each company would provide local telephony and other new services in their respective areas absent the merger. But we obviously have not seen anything on your plans for deployment once a merger was to go through. And I would like to hear from Ms. Ardoin, as well, on your perspective of trying to develop that kind of post-merger plan since SBC in seeking its approval for its merger with Ameritech, did have plans showing how the merger could accelerate the deployment of new services. Could AT&T and MediaOne discuss for us what impediments there may be to your developing those post-merger plans and how we can evaluate the extent to which the merger would accelerate deployment absent a comparison of the post-merger plans with the plan for deployment if there was no merger. MR. CICCONI: I'm not sure how much I'm able to help you on that, but I'll at least try. There are some impediments on us, as I understand it, in terms of joint planning at this point. I think that's been one of the main issues in terms of being able to submit any sort of joint plan to you about how we would deploy going forward once we closed the merger. I think that's probably the primary answer to your question. I don't know if Frank can -- MR. EICHLER: I agree. MS. TRUONG: Ms. Ardoin, can you address how SBC was able to provide post-merger plans? Were you doing it independently or based on cooperation with Ameritech? How was that done? MS. HILL-ARDOIN: Some limited cooperation with Ameritech, however, there were certain prohibitions against joint planning at the time. And I have to say that that does have a real impact on the ability to analyze the situation you're going into, to make commitments and to get very specific plans about what you will do. However, we were committed to broad-based competition. We were committed to spurring competition in the local competition market and the local service market and entering into long-distance. And lots of long, sleepless nights, lots of operations, people focusing on the details is what it took. It's not impossible. MS. TRUONG: Okay. Going to the other part of what you have submitted from AT&T and MediaOne, your studies of the synergies estimated from the merger, including both dollar saved and the increase in market penetration from the merger, are based on the explicit assumption that the merger will accelerate the deployment of new services, especially in MediaOne's regions. Will you be submitting evidence to show that that assumption is correct? For example, the assumption that the merger will cause MediaOne's market penetration to be thirty percent by the year 2004, as versus sixteen percent absent a merger. Especially when we consider that, according to your own representative, MediaOne's market penetration is actually higher than AT&T's in areas where each have provided local telephony so far. MR. CICCONI: I'm not aware of that information. I'll let Frank speak to the MediaOne projections. But we did put into the record a projection, market projection that we would achieve thirty percent penetration by 2004 within MediaOne markets, which I think MediaOne is also indicated is quite a bit faster, I think up to three times faster than they would be able to achieve the same levels. In terms of the synergies that would be possible on lower cost, I believe all that is in the record. I realize that since July there's been thousands of pages that have gone in there and there's quite a bit that's been put on the record. And investment banker's information may be particularly indecipherable, but I think it's roughly about a billion dollars in savings and about five hundred million dollar impact in EgodDod that was put on the record, if memory serves me. But we'd be happy to point out those portions of the record. Obviously those lower costs would be benefit to the merger that would help drive deployment at a faster pace, too. MR. EICHLER: With respect to penetration, I think it's important to recognize that we started marketing telephone service a lot earlier than AT&T. We started in Atlanta three years ago. I think that was our first launch of competitive telephone service. And so we have been rolling out as markets become, basically they're built out and they become telephone ready, that's when we start to market them. And, remember, we're still in the process of building those systems out. We still have a couple billion dollars to spend in the next year and a half or two years to get the rest of our markets even capable of marketing for telephone. I think by the end of this year, we anticipate under our current plan, that the MediaOne systems are going to be approximately fifty-nine or sixty percent marketable for telephone services. Only seventy-five percent marketable for high-speed data. So, we still have about a year and a half left to get them all up and ready before we can even start marketing. You have to do the build-up first. MS. HILL-ARDOIN: I might add one of the things that causes you to have to think very carefully about what you're going to do on a post-merger basis is when the Commission requires those plans to be very specific. So, I think we're energized by that, put a lot more energy into it. And when you have to make particular investment commitments, when you have to talk about the number of markets that you're going to be in by a particular time, causes you to have to get down into the details that are being referred to here. But without that, I think the process has no definite end. The benefit has no time that it is assured to come into the market. And there are no consequences for that public benefit not being delivered. So, I think post-merger planning is something that the Commission should continue to be concerned about and appropriately incent parties to think as deliberately as is required to, to make those commitments. JUDGE LATHAN: Thank you very much. Anything else, Quyen? Mr. Cicconi, in your filings you state that it is crucial -- in fact, imperative that AT&T be allowed to keep TWE. That the merger would not be effective unless AT&T was able to keep its interest in TWE. Would you please explain that? And by that, I mean Time Warner Entertainment, excuse me. MR. CICCONI: Time Warner Entertainment partnership. Well, obviously, it's a major portion of the interest that MediaOne holds. And the partnership agreement itself is extremely complicated. And I'm not sure even if one wanted to get out of it how possible that is. But I think the larger point is that this is an essential component of MediaOne, that interest. And we feel it does represent not just an investment, but by becoming a partner with Time Warner, we hope that it provides certainly a better incentive for Time Warner to take seriously local telephony. To date, this has really not occurred at the residential level in their territories. And we're obviously hoping through that partnership to have some impact on that type of approach. AT&T being a telephone company, being a communications company with its primary motivation being to deliver those telephone services, has, obviously, every incentive to further those ends with the partnership. So, clearly we feel that that interest is one that could be used to further the cause of local telephony deployment. THE: But it's our understanding, and please correct me if I'm wrong, but it's our understanding that MediaOne does not have any governance or management rights in TWE. If that is correct, then how would this help you further your local telephony interest with Time Warner? MR. CICCONI: We have -- obviously the investment interest itself, being the partner in TWE would have, obviously, some effect in terms of aligning the interests of the parties there. So I think that's one part of the answer. MS. TRUONG: You've announced, I think previously, that prior to Time Warner's announcement of a planned merger with AOL that you expect to finish a joint venture agreement with Time Warner within the next few months. And you've also indicated that you've reached an agreement to provide phone service over ComCast cable systems. In addition, we would also hear about how there is at least a tentative agreement between MediaOne and AT&T to share switches in a box in Atlanta. Now, given all of those existing and potential agreements, why is it necessary for AT&T to have an ownership stake in the Time Warner Entertainment Partnership and to own MediaOne in order to provide phone services instead of going through these types of arrangements? MR. CICCONI: Well, I think you said it yourself; the potential agreements. We have not been able to conclude any of them. We did announce, for example, the intention to conclude a joint venture with Time Warner quite a bit ago, I think about a year ago. And we have not, to date, been able to conclude such a joint venture. We haven't been able to with other cable companies, as well. And I think there's a couple reasons for that. But, obviously, one conclusion that can be drawn is that ownership of the underlying facilities obviates the need to conclude such agreements. They are complicated to conclude. It is difficult to bring the interests of the parties into alignment. The interest of the different parties in delivering telephony can be very different. We've run into issues in terms of the term, in terms of pricing, in terms of actually who controls the underlying facilities, who delivers what services, the extent of those services. Whether, for example, those services will be voice only. For a long period of time. Or whether they could include developments of video telephony when they came across. None of these issues have actually been as soluble as we had initially hoped. We do believe that the demonstration, particularly in the MediaOne territories, but also in the TCI territories, of the power of AT&T's brand, of its investment commitment in terms of those penetration levels and the revenue that can be derived from that, will help spur some interest in joint ventures. But I think it's the cart before the horse. I think it's very easy to conclude that there may be an alternative there in terms of joint ventures, but we simply haven't been able to effectuate that. And we have tried. We do believe, very clearly, that the acquisition of MediaOne is something that simply poses no impediments to delivering those services. We're going to get them done. Just as we are in the TCI territories. So, I think the acquisition of MediaOne actually will help us in terms of being able to bring about subsequent joint venture arrangements with cable companies that we haven't been able to conclude to this point. But they are extremely difficult arrangements to work out, we found. MR. SIMON: Can I make a comment on that before Andrew does? We hear a lot about market forces, and yet, Mr. Cicconi from one of the largest companies in the world, just said that because they have trouble working out a deal with cable companies they had to go buy them. How in the world do you expect Peria 51, ISP in New Mexico under market forces, to negotiate its way onto a cable network if AT&T is justifying this merger because it's too frustrating to negotiate a joint venture agreement with other cable telephony providers? Market forces have their limit. If AT&T has to buy into the cable monopoly because it can't negotiate an agreement, how do you expect your local ISP to negotiate an agreement unless they have a right of non-discriminatory access? JUDGE LATHAN: Mr. Cicconi, we can't wait for your answer. MR. CICCONI: Well, I think it's an interesting way to shoehorn open access into this session. JUDGE LATHAN: That's my job. MR. CICCONI: And you do it well. Frankly, I think it's a fair question, and I think the answer is very clear that we've made a commitment to do so. We've made that commitment in writing to this Commission with a fair degree of specificity. We're under, we're in the process of negotiations with ISPs right now, large and small ISPs, and we hope and expect to be able to conclude agreements with them. We have indicated publicly, as I think a particular sign of our intentions on this, that we do not intend to extend current exclusivity arrangements. We will provide a choice of ISPs on this system. That is clearly our intention and we're seeking to carry that out now. We're also in the process on our fixed wireless systems where we don't have any exclusive contracts, of conducting those negotiations for media carriage. We are looking to provide that choice, not just to be responsive to the consumer desires, or frankly, even Greg's desires, but from a business standpoint we've concluded this is also good for AT&T and its shareholders. If our customers want a choice of ISPs on our platform, we feel it is in our business interest to deliver that. If they don't get it from us, they'll go somewhere else. And we want them on our system. Let's keep in mind, too, that we're trying to attract people to our platform for the provision of telephony services against an entrenched monopoly that has upwards of ninety percent market share. We've concluded that if we in any way are restricting consumer choice on that platform, that we would be doing something that's extremely counter-productive. So, I think the short answer to Greg's desire, to OpenNet's desire for us to deliver a choice of ISPs to our customers, is, yes, we intend to do that. We have heard you and that's what we're going to do. JUDGE LATHAN: We will turn to -- we're going to return to the open access issue, but I want to finish up some TWE questions, Time Warner Entertainment questions, and we will come back to this issue. And, Mr. Simon, I'm going to actually ask you a question that doesn't deal with the access issue, and I'd also like Mr. Cicconi to answer this question. In your view, if AT&T insulates TWE under the new attribution rules, would the merger have an adverse impact on independent programmers and smaller purchasers of programming? And I'd like for you to specifically answer questions such as would independent and start-up programmers be able to survive if AT&T does not carry their programming? Would AT&T's competitors in the video distribution market, overbuilders, wireless, cable operators, DBX, et cetera, would they able to obtain desirable programming to offer their viewers if AT&T enters into exclusive contracts? And let me stop with those components. Could you just address those issues for me, please, starting with Mr. Simon and then Mr. Cicconi. MR. SIMON: To begin with, the question regarding whether AT&T will have dominance in the programming world, affects investment in people who are going to be creating programming to compete with existing cable video programs and existing methods of delivery of cable video programming. I am no expert on attribution rules, I'm no expert on program carriage economics, but I can tell you this. The internet provides the best opportunity for new companies and new investors to provide competition to existing cable video programming over high-speed broadband networks. And it is no accident that wherever cable monopolies have the chance, they block streaming video that could compete with regular video. Whatever technical arguments exist today will not exist tomorrow. But if the owner of the network continues to have a chokehold in the access point, why would people invest in putting internet video into a system in which sixty percent of the homes can't get it? They get cable service from people who control internet service providers over the network. So, whether or not AT&T has an attributable interest in Time Warner Entertainment, if they continue to monopolize access to the network and not allow cable technology to carry new types of video programming, people will not invest if millions of households won't be able to see their product. Or they'll be forced to go to less effective technologies or technologies that are farther down the road. Now, when you talk about can the overbuilders obtain programming. Well, you know, it's been a long battle to get the Commission to make certain that competitors to cable could obtain programming in the first place. And if anybody here thinks that cable does not have a dominant position today in video programming and that they leverage that position to keep people in line on other issues, then ask yourself why are there no media giant companies as members of the OpenNet Coalition. They have an interest in providing their programming to consumers. Right now, cable video programmers have a chokehold on new shows coming onto cable channels. So, when we talk about whether there's going to be a problem with a monopoly network in the video market, I tell you that there is a problem today with cable monopolists in the video programming network. This will not make it any easier. JUDGE LATHAN: Thank you, Mr. Simon. Mr. Cicconi and then Mr. Schwartzman. MR. CICCONI: I think Greg's statement is simply unsupported by any facts. There aren't any records that I'm aware of, and certainly unsupported by anything that's ever been filed with this Commission. The fact is that there is no chokehold today. If anything, the ability of cable to have any influence in this area is becoming more limited by the day. DBS is certainly coming in like gangbusters. They have a growth rate now that's doubled what cables it is in terms of deployment. So, there's absolutely no chokehold in terms of distribution. And, in fact, as cable goes digital, you have a hundred stations going to a thousand stations. Content itself is going to be even more in demand than it is today. I'm unaware of anything that is on the record at this proceeding from any programmers indicating any sort of fear about any sort of chokehold. I'm also unaware of any sort of complaints at this Commission from programmers indicating that cable, in general, is exercising any sort of chokehold or somehow denying them access. In fact, I think what we see occurring today is that programming is proliferating and programmers are able to, in fact, exercise some degree of market power of their own. You have about two hundred and eighty programmers out there today, I believe. And what you're seeing in the marketplace is that popular programming, and ESPN is certainly one example I can cite, but there are many, many others are able to demonstrate who has the power in this relationship simply by the fact that they can raise prices at will and sustain it. And the cable companies are forced to pay it in order to be able to carry their content. This is what's happened with ESPN. Frankly, it's what happened to us in our territories with the Chicago Bulls. And, unfortunately, those costs have an affect on cable rates. But it's the programming that is actually in demand today. This is not a capacity issue. Law of supply and demand is actually working here and the programmers, frankly, are the ones that seem to be having the best of it in terms of that relationship today. I'd also add this. That I certainly don't think that Michael Eisener or Sumner Redstone or Rupert Murdoch are sitting there in any sort of fear of any sort of cable chokehold. Far from it. They seem to be doing quite well, thank you, in being able to exercise a high degree of control over their perimeter. They seem to have absolutely no difficulties in not only getting their programming on, but sustaining that programming. I think as far as the independent programmers, all you have to do is flick on any local cable network anywhere in the country, or DVS, and you'll find that the programming from independent producers is very much in evidence. In fact, a high degree of local programming is also in evidence. JUDGE LATHAN: Andy? MR. SCHWARTZMAN: Yeah, I know Mr. Cicconi is new to this part of the game and he's not really familiar with a lot of the jurisprudence, a lot of the history. As far as I know, there is material on the record complaining with those kinds of things. And I think Seren Communications -- JUDGE LATHAN: They'll be in this afternoon. MR. SCHWARTZMAN: -- has filed stuff. So, I encourage Mr. Cicconi to stick around. I also encourage you to read Section 19 of the 1992 Cable Act and the, as Bill Johnson will assure you, voluminous issuances that the Cable Services Bureau on program access complaints. They're filed every day, people are complaining. Maybe they don't win, but there's a lot of people out there who sure think that there's chokeholds. I'm not going to regale everybody with the quotes that come out. Every now and then a CEO forgets that they're not sitting around at the closed doors at the MCTA and they're at a convention and they speak truth that I'll be gosh darned if I'm going to let them get onto my cable, spend fifty billion dollars on it, then everybody says, oh, he didn't mean it. The video streaming issue is important and it's prospective. You don't know how the technology is going to work out, I don't know how the technology's going to work out. We do know that everybody's cross purposing and cross branding and trying to find multiple platforms and all sorts of interactivity. And what this reminds me of is PrimeStar. If you combine Excited Home and MediaOne Road Runner, forget about AOL. But if you really want to bring in AOL, you're creating exactly the circumstance, a cable industry distribution channel on another medium used to leverage the other. This is a high-tech PrimeStar that you're facing on the video side. Why let it happen? MR. CICCONI: Can I just -- the one company Andy mentioned here, Seren, is not a programmer. And in his entire response, I didn't, frankly, hear the name of one programmer that's having any difficulty with access to the cable systems. Including our systems. Seren is not a programmer. MR. SCHWARTZMAN: Classic Sports Cable. There's case, after case, after case, after case, Jim. MR. JOHNSON: It's sort of a generic question which comes up in this and other proceedings is which is increasing faster, program supply or channel capacity. I think we have heard both answers in various proceedings. MR. CICCONI: I think that -- it's a very difficult question. Obviously it's something that's involving a prediction of technology and the ability of the market to respond. But it seems to me, frankly, channel capacity is not only increasing exponentially, but is about to go even beyond that as it goes digital. And I think if this Commission's record and proceedings don't find any evidence of any sort of programming access difficulties today that they found actionable, then certainly as we move to the greatly increased capacity of digital cable with a thousand stations instead of a hundred and twenty, that, frankly, my belief is that, and I think my company's belief, is that we're going to be crying for content, frankly. MR. JOHNSON: Does that include digital must- carry signals? MS. HILL-ARDOIN: Is that -- MR. JOHNSON: Yes. MS. HILL-ARDOIN: Ms. Lathan, a short reply to your question about whether or not overbuilders could obtain programming. As an overbuilder, I'd say certainly we can obtain programming, but at significant cost, and therefore, a high interest area. Our experience has been that we pay roughly two months of our cable revenue to secure programming on an annual basis. That's upwards of fifteen percent, and that's a significant concern. And an ability of overbuilders to make this business and manage it as a going concern will certainly go to managing the program cost and being able to acquire programming at a cost that would be, let's just say, the same as would be available under this proposed merger. MR. CICCONI: I think, by the way, though, that point with respect, Priscilla, makes the argument that programmers are not in any way disadvantaged here. This is about programming. If your programming costs are that high, it certainly indicates that the programmers are able to extract that kind of cost from you and indicate your desire to carry their programming. It doesn't indicate, in fact, any ability on the part of either of our systems to block that programming. So, I think it does make the point that the weight in the relationship, frankly, shifted pretty dramatically toward the programmers and away from the distributors. MS. HILL-ARDOIN: I think it certainly demonstrates that if you're going to compete in the cable business you can't do it without programming. So, paying that cost comes along with the territory. And it is something that is going to have to see a lot of significant downward pressure. MR. SIMON: Mr. Johnson, I think the question the bureau should ask itself is how many new programs are coming on that are not affiliated with the cable owner. That's the test. ESPN is not the problem. It's the next new channel, the next history channel that wants to get on that's not affiliated with the cable owner. So, ask yourself how many truly independent programs do we see joining the cable networks. JUDGE LATHAN: That was precisely the question I asked. I asked for independent and start-up programmers be able to survive, and I guess I would like to hear more. MR. CICCONI: The overwhelming majority of the programming carried on our systems today, has absolutely no affiliation with our cable company. And that would be the case following this merger, as well. I just -- I don't see the relevance of that point. It seems to presuppose some sort of ownership stake here that is non-existent. There's no evidence of it in the record. Fact is that these systems are open to all manner of programming today. The programmers are certainly not complaining about it. They have not complained in this proceeding. There's nothing on the record indicating any sort of concern from any programmer about access to the system. And, in fact, all you have to do is flip through the channels or look, in fact, in TV Guide today and you can see the evidence of that on any cable system in America, not just ours. MS. TRUONG: Focusing on the issue of affiliation, AT&T has argued that we should not attribute Liberty to AT&T in considering AT&T's horizontal reach in the digital market and in considering the mergerous impact on the video programming market because AT&T does not influence Liberty. I'd like to hear from Ms. Ardoin, Mr. Schwartzman and Mr. Simon as to whether you agree with that position with AT&T. To what extent -- and if not, to what extent you think AT&T has influence over Liberty, and vice versa. And apart from the issue of influence, are there other concerns that we should look at here in assessing the impact on the video market. MR. SCHWARTZMAN: Well, we addressed that in our witness submissions and I am -- the way everybody is afraid is the case I could run on that one for a very long time. I'll touch on one or two points. First of all, AT&T and Liberty are tied together entirely its tracking stock. Mark Cooper, Consumer Affairs of America, likes to talk about the yo-yo. They spin it off in the tracking stock and then when the regulators turn around and go the other way, they pull it back in. And Liberty and TCI have done that three times at last count. John Malone serves on the board of AT&T, and his responsibility is to the shareholders of Liberty Media. AT&T's control of one hundred percent of the ownership of Liberty Media means that everybody involved in the exercise knows that if the one company succeeds, the other company is better off, and vice versa. You don't need to have explicit communication for programmers to sit there and say, well, let me see. If I pick this programmer who's got no affiliation to this company, somebody might not like it. And I might not do well in my company if they don't like it and my company might not do as well. Or if I take the safe one, I don't have to call them up and tell them I'm going to do it or ask them whether I should it. I'm going to be safe. You can't possibly chart it, you cannot possibly put monitors in, you can't possibly deal with the myriad ways that relationships in this kind of situation go back and forth. The simple fact is that they own each other. And the Commission has recognized it and have adopted rules. And have adopted very specific rules about degree of insulation that it was going to require, which we don't like. And that's not good enough, they want more. Chairman said the time has come to start administering by rule and not by waiver. And what they're saying is pay no attention to all those rules you adopted, we'll be good, you know, it doesn't really matter. They're really asking you to ignore all the proceedings you've conducted and tolerate structures that are tailor made for devious conduct. MS. HILL-ARDOIN: I echo a number of those sentiments. I find it inconceivable that there could be any version of insulation, barring the rule that the Commission has put in place. AT&T may take the position that effectively, even though it owns a hundred percent of Liberty, that it's not their company, that they have no influence or control over it, I would tend to disagree with that. But more importantly, the FCC and the Department of Justice have disagreed with it. MR. SIMON: As a personal matter, I wouldn't dispute anybody who said they don't have influence over John Malone. But it is ironic that earlier, Mr. Cicconi said that in an arm's length relationship with Time Warner because of their joint ownership through MediaOne, that they would be able to align their interests with regard to rolling out local telephony. And, yet, all of a sudden we're asked to believe that they won't align their interests when it comes to programming and video services. One could ask the question why do you spend so much money to buy companies you then say you have no influence over and you're not going to have any cooperation with. My concern is this. The distribution point mentioned earlier allows AT&T to adversely effect the roll out of other types of video distribution over the internet. And we know that in the open internet networks, there is considerable investment in broadband video. That won't happen in the cable network if people can get access to provide video programming on the cable network in competition with the cable video programs. Why would we allow the owner of this network to control the next level of competition on the underlying transport facility? AT&T is made it clear in the past year that they consider internet video competitive with cable video. That's why they have said, and as Mr. Schwartzman says, their more candid moments, that the streaming video limit is because they don't want people getting their video over the internet. They want them to pay for it through the cable video property. The cross-ownership also affects electronic programming guides that will influence video programming and programming success. You have the issue of set top box control with relationship with Microsoft. We are building here a house of interconnection that will take years to unravel when you decide it's a problem. If you allow it to go forward in its present state. If we're concerned about new methods of distribution, why would we allow the legacy owner of a network to prevent the new distributors from being on that network? We fought this before with program access, we fought it with monopoly control of set top boxes and remote controls. Why wouldn't we fight it here? MS. TRUONG: Mr. Cicconi, I'm sure you'd like to respond. MR. CICCONI: Well, first of all, I thought the question was about Liberty and not about every other conceivable interest that AT&T has currently. I'm unaware of anything that exists that somehow allows Liberty to have any sort of role in the underlying transport, or even in the internet or video streaming, or anything of that nature. With respect to Priscilla on the point about the FCC and the DOJ having somehow objected to the structure of Liberty in its relationship with AT&T. With respect, that's simply not true. In fact, the Department of Justice and the FCC approved the TCI transaction with full knowledge of that arrangement. And, in fact, when they signed off, it effectively signed off on that. I think the sole issue here with Liberty relates to the underlying sale of programming by Liberty to TWE. Now, keep in mind, the larger issue here and the larger concern that the Commission had about whether AT&T has a material involvement in video programming decisions at TWE, we feel is taken care of on the record and hopefully to the Commission's satisfaction. There simply is none. The question is about this once removed issue of the sale of programming from Liberty to TWE. And, of course, that is an issue that we would seek to address through one means or another during the waiver period. But in terms of Liberty itself, I think there's a number of misconceptions, most of which have been laid out here yet again by the panel. The fact is there's structural separation between these companies, as I think by now everyone is well aware of. This has probably been one of the most publicly discussed arrangements, given the merger that helped put it in place. The economics of these companies are entirely separate. We do not have an economic interest in TWE. In effect, we never -- excuse me, not TWE, Liberty. In effect, we never really purchased the Liberty portion of it. And, thus, don't have an economic interest. If Liberty succeeds today, it brings economic value to the shareholders of Liberty, not to me, not to the shareholders of AT&T. If we do well, it doesn't effect them, either. Lastly, during this waiver period we pointed out that in addition to the overall safeguard that the Commission has with regard to our lack of any material involvement in programming decisions by TWE, we've also indicated a number of other safeguards AT&T would be willing to put in place with regard to Liberty. That includes replacing the current AT&T directors on Liberty board with independent directors that would be submitted to the FCC so there could be oversight. We have also indicated a willingness to agree to an auditor, an independent auditor picked by the FCC, that would every six months be able to report on compliance in terms of any involvement or influence through any of these entities. Obviously, we would take steps to insulate against any AT&T employee or person having any sort of involvement or interest in any programming decisions by Liberty, et cetera. I think most of that is on the record today. So, again, they're ample safeguards we feel out there that we have offered up to deal with the sole issue of Liberty sale of programming to TWE. Keeping in mind that the core issue here, the core concern that the FCC had in its ownership rules was about our material involvement, or lack thereof, in video programming decisions by TWE. Again, we have none. MR. JOHNSON: If I could have just one more question on the TWE situation, you pledged not to have any direct involvement or indirect involvement in the sale of programming to TWE through the various programming entities you have an interest in. But I gather you would have influence on the general policies of these companies. And I would presume that probably the largest buyer of the content of these companies would be TWE. Would that not be having an influence on the buying decisions of TWE? MR. CICCONI: The largest purchaser of what, for instance? MR. JOHNSON: Just to take an example, you're acquiring programming interest through MediaOne. You're, I guess, pledging not to participate with those companies in decisions that involve sales to TWE directly, but you would continue to participate with those companies in general programming decisions. And those general programming decisions would apply to TWE, which is a very large buyer of programming, one of the largest buyers of this content. MR. CICCONI: Again, the core issue is involvement in the decision making at TWE. I may have misunderstood you, Bill, but I thought there were two questions there and the first one was about the involvement in other activities beyond programming. MR. JOHNSON: No, I'm just focusing on programming. MR. CICCONI: Okay. Because I think that the Commission's specifically narrowed down, as you know, in its rule the concern about material involvement to programming and not the previous statement about media-related activities. So it just is about programming. And I think the fact is we feel that at the TWE level, we are fully insulated against any material involvement in their decision making. In terms of the sale by other entities of programming to TWE, whether it's from Liberty or from some other entity, we feel that we can provide adequate protections, most of which we laid out on the record. But, obviously, we're open to discussing any other degree of insulation the Commission feels may be desirable in that. Again, this is a factor here. It doesn't go to the core issue of whether or not we have involvement in those decisions at TWE. Simply goes to the mere fact of some programming being sold to TWE or TWE's purchase of some programming by entities which AT&T may have some interest in, however attenuated it may be. MR. JOHNSON: That's what I'm trying to get at. If you participate in the generic decision about programming and the largest purchaser of that programming is TWE, aren't you participating in the programming decisions of TWE? MR. CICCONI: I think that one can take attenuated and turn it into something even far more distant here. I think - again, I think we have to focus on the core issue in the rule, you know, that was laid out by this Commission, as material involvement in programming decisions at TWE. Again, we have none. The Commission has interpreted that to also infer a concern about the sale of programming to TWE by other entities with which AT&T has an interest. We have taken and offered to take steps to insulate ourselves from those decisions, as well. But I think -- Bill, I think to take the additional step and say one has to effectively insulate oneself from their operations in general, beyond the fact of sale of programming to TWE, takes it a lot farther than at least my understanding of the Commission's own interpretation. Again, keeping in mind that this, itself, is an inference the Commission staff has drawn from the rule itself. We don't believe it is actually in the words of the rule. We accept the interpretation that the Commission and the staff have put on this, that it also entails a need to insulate from the sale of programming to TWE, not just involvement, material involvement in programming decisions by TWE. But I think to then take it one or two steps beyond that would, I think, probably be protecting against something that simply is not in any way possible in terms of any influence at the TWE end. But this is all got to go back to TWE in the end, and somehow I would suppose have some sort of, some sort of kabuki-like influence on their decision making when we weren't, in fact, exercising any directly. I mean, we've at least been willing to accept the Commission's interpretation that the mere sale of programming by an entity like Liberty, or even an attenuated entity like Rainbow, that we somehow need to insulate even though we're not at the decision making end in TWE. I think if you look, by the way, at Time Warner's decision making within that partnership - and maybe Frank could speak to this - that, in fact, that supposition itself is open to question. Their decision making is very much in their own interest there and certainly isn't designed in any way to somehow serve our interest. JUDGE LATHAN: Okay, we really have to move on. I want to move to the area of broadband. That way, Greg, you get to answer directly. As you know, a recent -- well, this past summer, I believe it was, AT&T entered into a voluntary agreement with Mind Spring dealing with the issue of access to its cable pipes. And in that agreement in a letter dated December 6th, actually to the chairman, they proposed that they would open up their networks after the expiration of the exclusivity agreement that binds Excited Home. My question to AT&T and then for comment by Mr. Simon is how does AT&T propose to voluntarily open its cable networks to competing ISPs? What does open actually mean? That's the first part of the question. The second part is how many ISPs will you allow onto your system? And then the third part is in terms of pricing, will large ISPs and smaller ISPs be offered similar pricing? And then I would like Mr. Simon to comment on Mr. Cicconi's response. MR. CICCONI: Well, you're referring to the Mind Spring letter, and I think a number of these issues are addressed in the letter, Deborah, but let me try to be more clearer. We have indicated that we are going to provide a choice of ISPs on the system. I think your question of what does open mean, I think OpenNet itself, from its inception, defined open access is the process of providing consumers a choice in ISPs. AT&T is committed to do this on its systems as soon as the current contract expires. And, in fact, has gone one step beyond on its other broadband systems, most pa