| BUSINESSWEEK ONLINE : MAY 17, 1999 ISSUE | ||||||||
| ||||||||
 | ||||||||
| NEWS: ANALYSIS & COMMENTARY
AT&T: What Victory Means It can now offer 60 million homes phone, cable, or Net access The truce between AT&T Corp. and Comcast Corp. in their bidding war for MediaOne Group started with a phone call on the afternoon of Sunday, May 2. Leo J. Hindery, former president of Tele-Communications Inc. and now the top AT&T cable exec, dialed up Comcast CEO Brian Roberts. Hindery, who has known Roberts for 14 years, says he had no doubt that he would get through: ''He carries the cell phone into the bathroom.'' Sure enough, Roberts was at home with his family. The previous evening, MediaOne's board had agreed to accept the AT&T bid, but Comcast still had until May 6 to counter. Hindery suggested that he and Roberts meet in New York to work out a compromise. The peace came quickly--and largely on AT&T's terms. The meeting convened Monday at 7 a.m. in the midtown Manhattan offices of Wachtell Lipton Rosen & Katz, AT&T's outside counsel. By 1 p.m., Hindery and Roberts had a tentative deal, which was finalized late Tuesday. Comcast would drop out, and AT&T would proceed with its $58 billion acquisition of MediaOne. ''We concluded that it was not going to be viable for us to put in a superior proposal,'' says Roberts. Comcast did negotiate some face-saving spoils. The Philadelphia-based cable company will get 750,000 cable subscribers from AT&T immediately and an option to gain an additional 1.25 million in the future, boosting it to No. 3 in the industry rankings. Comcast also is guaranteed preferential terms when it negotiates to resell AT&T-branded telephone service to its subscribers. In the end, it wasn't much of a war. But the peace will have a sweeping impact on every aspect of the communications market. The MediaOne deal, on top of AT&T's recent acquisition of TCI, gives the phone giant a new infrastructure to deliver all sorts of digital services. It will own cable networks reaching 25 million U.S. homes. Add that to AT&T's affiliates and partnerships, and the company will have the potential to reach 60 million households. By 2000, AT&T plans to start delivering a bundle of digital services including cable TV, local phone service, and Internet access. ''The whole purpose of AT&T's strategy is to deliver this new digital world,'' says AT&T CEO C. Michael Armstrong. The most immediate effect will be vigorous competition in local-phone markets that have long been monopolies under the control of the Baby Bells and GTE (GTE). Already, AT&T is testing phone service over a cable network in Fremont, Calif., and plans to begin commercial service there in June. With cable, Armstrong says AT&T will be able to offer customers second and third phone lines for just $4-to-$6 a month, vs. the $17 that local-phone companies typically charge. ''The very simple theory is that the more you buy from AT&T, the less it's going to cost you,'' says Armstrong. What's more, by offering connections to the Net over cable modems that are 20 times as fast as traditional modems, AT&T will turbocharge the rollout of broadband connections to the home. Even now, predicts industry consultant Yankee Group, broadband access is expected to jump from 450,000 homes in 1998, to 7 million in 2002. With AT&T planning to offer cable-modem service in at least 80% of the markets it owns by the end of next year, the Baby Bells will be forced to react. ''This is an alarm bell for the local-phone companies,'' says Mark Bruneau, president of the business strategy group at Renaissance Worldwide. ''If they don't respond, this could be the beginning of the end of their franchise.'' The bottom line is that AT&T's move will force a complete overhaul of how services are sold in the communications industry. As the company bundles local, long distance, wireless, Internet access, and cable TV together, other telecom companies will have to assemble similar offerings. ''Of course, it presents a threat,'' says Edward E. Whitacre Jr., chairman of SBC Communications Inc. ''They're going to a lot more houses than we are.'' The MediaOne deal caps a remarkable transformation of AT&T since Armstrong became CEO 18 months ago. Through a series of acquisitions, cost cutting, and new alliances, the company has gone from a digital-age casualty to a leader. ''Mike Armstrong is making the biggest, boldest, gutsiest moves in AT&T's history,'' says industry analyst Jeffrey Kagan. ''He's going for broke.'' Armstrong won't run out of cash any time soon. As of May 5, he was negotiating a deal with Microsoft (MSFT) under which the software giant would pay $5 billion for preferred stock and warrants that are convertible into a roughly 2.6% stake. The cash will help AT&T (T) pay for the development of the cable networks that it's acquiring. It won't, says Armstrong, be applied to another major acquisition now--although he is continuing to negotiate with other cable companies to provide local-phone service over their networks. Why would Microsoft, which like America Online (AOL) had considered backing Comcast, seek the deal? It wants to get a boost in its effort to make its Windows ce operating system the software for the set-top boxes that AT&T will use for broadband service. AT&T would not comment on the negotiations, but Armstrong emphasized that any deal cut with a supplier would not be exclusive. The MediaOne acquisition still faces hurdles. In particular, regulators are concerned that AT&T is amassing too much control over the cable networks and over broadband access to U.S. homes. A source at the Federal Communications Commission says that the agency has told AT&T that it has reservations about MediaOne (UMG). Although he declined to comment specifically on the AT&T acquisition, FCC Chairman William E. Kennard says: ''I'm concerned about the aggregation of market power.'' Here's why. With the MediaOne purchase, AT&T gets more than a massive bump up in cable-market share; it also will get a 25% stake in Time Warner Entertainment (TWX) and a co-controlling stake in Road Runner, which provides high-speed Net access over cable. With AT&T and Time Warner's interests aligned, they might make it difficult for channels owned by rivals to get on their system. Road Runner presents another potential problem. Now, Road Runner competes with At Home (ATHM), which AT&T controls and which also provides Internet access over cable. If AT&T has controlling stakes in both of them, the two services may exact tougher terms from cable companies. What's more, they could exert control over how content is presented to customers. For example, AT&T could give a high profile to the Excite Web portal that At Home bought earlier this year. ''AT&T seems to be preparing to corner the personal-communications market again,'' says W.J. ''Billy'' Tauzin (R-La.), chairman of the House Telecommunications Subcommittee. AOL is among the companies that are lobbying to force AT&T to provide equal access to all Internet services over cable. In the end, AT&T may have to arrange a truce in Washington to complete the acquisition. The most likely option is to sell off some of MediaOne's properties, and it may have to open up broadband connections to other companies. That means AOL could buy Net connections from AT&T at wholesale prices and resell them to customers. AT&T declined to speculate on what kind of regulatory requirements might apply to its deal, but it says it's open to compromise. ''We'll work with the FCC and comply with whatever's decided,'' says Armstrong. Although the loss of MediaOne is a blow to Roberts' ambitions, he won't walk away empty-handed. The 2 million new customers may give Comcast the heft to survive in a consolidating industry. More important, Comcast eventually will have a more concentrated clustering of operations in the lucrative Washington-to-New Jersey corridor. ''They are going to get great clustering in markets that matter,'' says Bear Stearns analyst Raymond L. Katz. And Comcast (CMCSA) could seek more deals. Analysts predict possible linkups with other operators such as Cablevision (CVC) or Cox (COX). For his part, Roberts says that the pressure to get big quickly has diminished. He also points out that, through the deal with AT&T, Comcast now gets a telephony agreement that no rival can match. ''AT&T in telephony is as good as it gets,'' says Roberts. In the end, what the MediaOne deal represents is a new era of detente among the big cable players. While a counterbid from Comcast with Microsoft or AOL backing would have split the cable industry into two camps, the truce results in a less fractious cable industry. ''We're happy with the outcome,'' says Time Warner chairman and CEO Gerald M. Levin. As the cable moguls and AT&T prepare to invade the local phone markets with a flashy array of whizzy new services, rest assured that Ed Whitacre and other Baby Bell executives are not. By Peter Elstrom in New York, with Richard Siklos in New York, Roger Crockett in Chicago, Catherine Yang in Washington, and Amy Barrett in Philadelphia _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
|  |
 | |
RELATED ITEMS AT&T: What Victory Means TABLE: The AT&T Deal for MediaOne PHOTO: C. Michael Armstrong The Man Behind AT&T's Coup TABLE: The Hostetter Saga ``AOL Has to Do Something Quickly'' TABLE: How AOL Plans to Fight Back INTERACT E-Mail to Business Week Online | |||
