The Federal Communications Commission approved yesterday the joining of Comcast Corp. and AT&T; Broadband into the nation's largest cable television company - a deal with huge risks but also enormous potential as American living rooms may be transformed in the coming years by a smorgasbord of new entertainment technology.
High-definition digital television, video-on-demand and high-speed Internet services haven't captured consumers' fancy as quickly as industry officials and investors had hoped. But the $29.2 billion merger to create AT&T; Comcast might be among the seismic forces that could alter that.
"There's nothing standing in their way," said F. Drake Johnstone, an investment analyst with Davenport & Co. in Richmond, Va. "It's a cable company buying a cable company, and Comcast has been quite effective at buying under-performing cable companies and increasing the profits."
The new company's biggest challenges include upgrading AT&T;'s systems, which have been coughing up hundreds of customers to satellite TV. AT&T; Comcast must also reduce $30 billion of debt by selling its stakes in noncable companies such as Sprint Corp. and Time Warner Entertainment, analysts said.
The new company will have 27 million subscribers - 29 percent of all cable households in the United States, the FCC said.
Comcast is the dominant cable supplier in much of Maryland after acquiring other systems in recent years. A new basketball arena at the University of Maryland, College Park also just opened bearing the name of the company, which bought the naming rights for $25 million.
The FCC, which oversees telecommunications policy, voted 3-1 to approve with conditions the combination of AT&T; Corp.'s broadband unit, the largest cable operator, and Comcast, currently the nation's third-largest.
FCC approval is contingent on the new entity selling its 25 percent stake in Time Warner Entertainment LP within 5 1/2 years to lessen its grip on the delivery and content of programming. The FCC ordered AT&T; and Comcast to place their Time Warner Entertainment holdings into an irrevocable trust when the merger closes, and not to become involved in Time Warner's video programming while it sells its stake.
"This is the most significant public interest benefit of the transaction," FCC Chairman Michael K. Powell said in a brief statement. "The commission finally severs a complex relationship of intertwining programming and distribution assets that has plagued the commission for years.
"The benefits of this transaction are considerable, the potential harms negligible."
Not everyone agreed, including Commissioner Michael J. Copps, who voted against the merger. Consumer groups also repeated their fears of reduced public access and higher prices for consumers and advertisers.
"The sheer economic power created by this mega-combination, and the opportunities for abuse that would accompany it, outweigh the very limited public interest benefits that either the applicants or the majority find here," Copps said in a separate statement.
Consumers should indeed expect higher prices as a result of consolidation, said Todd D. Wiener, president of Innovista Research Inc. of Newton, Mass., an independent research firm. A recent survey by his company indicated that one-quarter of cable customers had a new cable supplier during the past year, because they switched companies or their company was acquired by another, while a larger proportion - two-thirds - reported that their rates had increased during the year.
Several consumer groups filed suit in federal court last month in an attempt to compel the FCC to further study the deal because of an announced business relationship for customers between AT&T; Comcast and subscribers of AOL Time Warner's America Online Internet service. The consumer groups contended that the arrangement shows the potential abuse of greater media concentration. Their challenge is pending before the District of Columbia Court of Appeals.
"Clearly, Mike Powell wanted to look the other way on this deal. AOL Time Warner and AT&T; Comcast are now joined at the hip and will have tremendous power to shape the cable and broadband markets," said Jeffrey Chester, director of the Center for Digital Democracy, a Washington-based, nonprofit consumer group.
The new company would have nearly twice as many customers as the second-largest cable company - AOL Time Warner Inc. But that competitor may become more formidable, too, if the parent company spins off Time Warner Cable next year.
The AT&T; Comcast deal was valued at $47 billion in stock plus assumption of about $25 billion in debt when it was announced 13 months ago, but has shrunk in value by about a third.
The companies announced last month that about 1,700 jobs will be cut at AT&T; Broadband's headquarters in Englewood, Colo. The new entity's headquarters will be in Philadelphia, Comcast's home.
Comcast's shares fell 70 cents yesterday to close at $23.30. AT&T;'s shares lost 39 cents, or 3 percent, to $13.47.