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Joshua Cho
After months of battling over issues of control and technology, AT&T Corp. and Time Warner Inc. last week announced a long-expected joint venture agreement to offer local telephony, leaving both cable and regional telephone players wondering where and when the next shoe will drop.
AT&T chairman and CEO C. Michael Armstrong made it clear last week that he wants to woo more cable operators. But some industry analysts believe that the operators most likely to fit into Ma Bell's local telephony strategy - Cablevision Systems Corp., Cox Communications and Comcast Corp. - are likely to be a difficult sell.
Issues of control and technology were key stumbling blocks to the Time Warner deal, particularly the issue of control. Under the agreement announced Feb. 1, AT&T will own 77.5% of the cable-telephony joint venture, with Time Warner holding the rest. Armstrong's camp will pony up expenses for the venture as well as an anticipated $300 million in upgrade costs.
Ma Bell also will handle costs of wiring each house, to the tune of $300-$500 per home. Combined with existing deals to acquire Tele-Communications Inc. and partnerships with Bresnan Communications, InterMedia Partners, Insight Communications and Falcon Cable - among others - AT&T now can reach about 40% of U.S. homes, still short of its goal of 60%-65% of U.S. homes.
"Deductive logic gets you to the conclusion that, yes, indeed, we are in discussions with other cable companies," said AT&T chairman and CEO Mike Armstrong said last week.
"We'll continue to make investments in whatever it takes to complete that equation," Armstrong noted. "If you include affiliates that we haven't yet made a deal with, we're getting up to 50%," Armstrong noted.
Easier said than done, especially among Cablevision, Comcast and Cox, who have system clusters that lend themselves to providing local telephony.
"You look at the cities where telephone number portability has been completed by local exchange carriers, then look at cities for cable franchises, do a demographic analysis and off your computer screen pops the answer: the top metropolitan areas in America," said Gartner Group VP Ken McGee.
But Cablevision, for one, already has launched some local telephony service and even though it is 37% owned by TCI, company executives are exhibiting only mild interest in signing on with AT&T. Comcast, sources said, is seeking to include a sale of some off-balance sheet items in any telephony deal it signs.
Meanwhile other telephone companies such as Sprint, MCI and Qwest Communications are lurking around the cable industry, hinting that they too may seek MSO affiliation agreements.
AT&T knows it will have to be flexible. "One of the variables is the percentage interest," said TCI president Leo Hindery, who will oversee the joint venture in his upcoming role as head of AT&T's cable operations.
"We expect that between the Time Warner number (22.5%) and roughly 49%, each partner in the cable industry that elects to join with us in this endeavor will sort of pick his or her percentage interest . . . The economics in the middle are negotiated around the percentage chosen. It's sort of a little bit of a menu thing going on there."
As an example, Hindery took the TW joint venture and said that AT&T would pay a $15 monthly per subscriber fee, a penetration guarantee of 25% over time, revenue sharing and finally, "embedded" in the percentage interest, sharing in the capital of the venture.
"What's common is the approach and task. What's unique is the mix of those four or five items per MSO," Hindery concluded.
One MSO that remains a big question mark is MediaOne Group, which is owned by Baby Bell U S West. Road Runner, the high-speed Internet access company that MediaOne partly owns with Time Warner, will compete directly with AT&T-TCI's Corp. unless some sort of agreement is reached.
Interestingly, the AT&T-TW joint venture can't go through without MediaOne's approval, thanks to that company's 25.51% interest in Time Warner Entertainment. AT&T already has accused U S West of trying to derail cable franchise transfers connected with the AT&T-TCI merger.
Time Warner will spent about $1.5 billion to upgrade its cable lines with more than 80% to be revamped by the end of this year, said Time Warner CEO Gerald Levin.
Armstrong said that pilot services will be offered this year in two cities with full blown commercial roll-out expected in 2000. The companies also said they would work together to develop other broadband services, such as video telephony and telephone conferencing.
Bell Atlantic Corp. issued this statement: "We urge regulators to take a close look at AT&T's approach and open long distance markets to real competition now."
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