AT&T is going for the cable gusto

Counterbid for MediaOne may push Comcast aside.

By Denise Pappalardo, David Rohde and Sandra Gittlen
Network World Fusion, 04/23/99

New York - AT&T wants to be in your backyard. That's why the carrier is trying to buy MediaOne Group, a cable television service provider.

The telecommunications giant is putting $58 billion on the table to acquire MediaOne so it can expand its presence in local markets. This was the prime strategy behind AT&T's $48 billion acquisition of Tele-Communications, Inc. (TCI) earlier this year.

"AT&T cannot afford in the telephony business to simply be a regional player," says AT&T Chairman and CEO C. Michael Armstrong. "We must be a national player." MediaOne offers services in 11 markets, including Boston, Atlanta, Los Angeles, Chicago and Detroit.

AT&T clearly does not want to be dependant on incumbent local exchange carriers to bridge AT&T's long-distance customers to local networks around the country. AT&T has to be facilities-based, and it cannot resell competitors' services, Armstrong says. Owning digital, high-speed networks throughout the U.S. will let AT&T differentiate itself from other carriers.

While this deal will largely benefit residential users by offering more options when it comes to choosing a local service provider, business users could benefit from a one-stop-shop approach to service offerings especially when shopping for remote access services, says Fred McClimans, CEO of Current Analysis a Sterling, Va. consulting firm.

In addition to substantial local market presence, MediaOne has aggressively rolled out its 10M bit/sec cable modem Internet access service called MediaOne Interactive. Of MediaOne's 5 million customers, 84,000 subscribe to this service. This is a much higher concentration of broadband service customers than AT&T has right now through its TCI acquisition. Of AT&T Broadband's 10.7 million cable customers only 29,000 are using broadband services.

So while AT&T's goals are to be a force to be contended within the local market, it will be getting a big plus with MediaOne's high-speed Internet access service deployment. In fact, analysts believe that MediaOne and Comcast have the best two-way, hybrid fiber coax networks in the country.

That's why Comcast announced its plans to acquire MediaOne almost one month ago. MediaOne will not comment on AT&T's planned acquisition of its company, which is being called a hostile take over effort by some. In contrast, MediaOne and Comcast have already approved their deal. And when Comcast announced its acquisition plans, it said that Charles Lillis, CEO, president and chairman of MediaOne, would become president of the joint company. There has been no mention of specific MediaOne executives joining AT&T.

Armstrong's letter to MediaOne only stated that there would be a place on AT&T's board of directors for a MediaOne executive. But AT&T's bid for MediaOne does shows that Armstrong is not only willing to take on a financial risk, but also a political risk that analysts agree would never have been attempted by former AT&T CEO Robert Allen.

AT&T is currently girding for battle against Bell Atlantic's application for long-distance authority in New York. The crux of AT&T's argument is that local telecom markets are still not open, more than three years after enactment of the Telecommunications Act of 1996.

But AT&T's purchase of TCI and possible purchase of MediaOne appears to undercut that argument because together the two systems pass 26.5 million homes and would be used to compete against the regional Bell operating companies.

Bell Atlantic and other RBOCs are expected to tell the Federal Communications Commission that AT&T's moves into the local consumer market mean it's high time that RBOCs be allowed into the long-distance market. AT&T could face a marketing barrage from Bell Atlantic on long-distance voice and data services before it even has a chance to convert its cable systems to telephony and Internet applications.

"As AT&T's direct access to customers grows by leaps and bounds, it becomes harder and harder-indeed impossible-to say there is no local competition," says Robert Blau, BellSouth's vice president of federal regulatory affairs.

And the road ahead for regulatory approval of any MediaOne deal could be very long. Two senior members of the Senate antitrust committee indicated they're going to take a close look at this new deal if it goes through, even though AT&T already owns TCI following recent regulatory approval.

"If the [MediaOne] deal creates increased local telephone competition, that's good," said Sen. Michael DeWine (R-Ohio) and Sen. Herbert Kohl (D-Wis.), in a joint statement. "But in many ways it raises a whole host of tough questions regarding cable concentration. Lawmakers and regulators are going to take a serious look at this takeover attempt."

AT&T developing its local market strategy does create competition, says Daniel Briere, president of TeleChoice, a consulting firm in Boston. But it will take AT&T about two years before it offers local telephone service, so the FCC may still hold off giving Bell Atlantic the nod to offer long-distance services, he says.

Armstrong is bullish on getting voice to the masses. AT&T is eager to get voice service trials under way in all of its AT&T Broadband markets as quickly as possible, Armstrong says, pointing out that AT&T will use both IP telephony and traditional circuit-switched technology to support its new local voice services.

One likely area of examination: an FCC ruling that AT&T does not have to open the TCI network to competitors, including non-AT&T ISPs who want to use the TCI pipe to offer broadband services. If AT&T continues to buy cable companies so that it can advertise nationally and be confident of reaching most consumers, pressure will grow on the FCC to open all of AT&T's cable lines, just as RBOC last-mile facilities are supposed to be leased to RBOC competitors.