Merger Foes Question AT&T-Comcast-MSN Deal

WASHINGTON — While senators and their aides, witnesses with their lawyers and lieges in tow and the media wedged into a cramped hearing room on the second floor of the Senate Dirkson Office Building Tuesday for a subcommittee hearing on the proposed AT&T Broadband-Comcast Corp. merger, across the street in the spacious fifth floor meeting room of the Reserve Officers Association headquarters, consumer groups opposed to the merger pitched their case to a handful of reporters grazing on a free lunch.

The main item on the menu was Microsoft.

In 1997, the Redmond, Wash.-based software giant invested $1 billion in Comcast and in 1999 Microsoft sank another $5 billion in AT&T . When Comcast and AT&T were hammering out the details of their proposed $72 billion deal late last year, Microsoft’s considerable investment in both companies became a significant factor.

“Up until now, Microsoft has been unable to make significant inroads into the cable market, where it had hoped to sell interactive TV operating system software and provide Internet access through its MSN subsidiary,” said Jeffrey Chester, executive director of the Center for Digital Democracy. “But Microsoft’s $6 billion investment has paid off, as the proposed new cable company struggles to appease one of its largest investors and Wall Street. Given that the company will operate under considerable debt ($20 billion), Comcast leadership has agreed to a number of conditions set by Microsoft.”

Among the considerations given to Microsoft in an agreement filed with the Federal Communications Commission on Dec. 7, Comcast agreed to permit Microsoft entry into Comcast’s interactive television set-top box plans and AT&T granted the company a five-year promise that the merged cable company, which would be the nation’s largest with approximately 22 million subscribers, “will not discriminate against Microsoft with respect to high-speed Internet services.”

In return, Microsoft agreed not to “cash-out” its AT&T preferred securities and remain a supportive major stockholder. If the merger is approved, Microsoft will own approximately 115 million shares of the new AT&T Comcast Corp.

According to Chester, Microsoft will be offered a slot on any AT&T Comcast system when it provides access to any other Internet service provider (ISP). Microsoft even secured a promise from AT&T Comcast that it could not offer America Online, Inc., an ISP slot unless it could also provide Microsoft with one.

“No one can have a better deal than Microsoft,” said Edward J. Black, president and chief executive officer of the Computer & Communications Industry Association. “Anyone who wants to compete has been marginalized. We’re on the brink of a bad situation getting even worse.”

Potentially most profitable for Microsoft, however, is the set-top box agreement. During a three-year period, AT&T Comcast and Microsoft will “conduct a trial during 2002 of an interactive television platform, including set-top box middleware.” Under the arrangement, AT&T Comcast stipulated that if the “trial results meet agreed technical standards, the platform meets competitive requirements and a launch would meet Comcast Cable’s reasonable business objectives, Comcast Cable has agreed it will commercially launch the Microsoft platform to at least 25 percent of its newly installed middleware customer base.”

“At a time when we are looking for ways to advance competition in the cable and broadband industries, the merger of Comcast and AT&T would be a huge step backwards for consumers, for competition and the economy,” said Black. “Microsoft’s investment in the transaction also raises concerns about the anti-competitive impact of guarantees that Microsoft MSN and Microsoft set-top box technology were given as part of the deal.”

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