The Net Phone Tv Cable Monster

AT&T grabs for an all-in-one pipeline into millions of homes

You'd think he was running a hot Internet startup, not big old AT&T. Just six weeks after completing the $54 billion acquisition of cable giant Tele-Communications Inc., AT&T CEO C. Michael Armstrong on Apr. 22 announced an audacious $54 billion bid for MediaOne Group, trumping an earlier offer for the 5-million subscriber cable operator by Comcast Corp. If he pulls it off, Armstrong will make AT&T the biggest player in cable, with systems reaching no less than 60% of U.S. cable households--if you count all TCI's and MediaOne's wholly owned systems and various partnerships.

And Armstrong isn't fazed by the prospect of a counterbid by Comcast--even if the Philadelphia-based cable operator manages to enlist mighty backers like Microsoft Corp., or America Online Inc. to boost its standing $48 billion offer for MediaOne. "Since this is of such value to us," Armstrong says, "I'm not prepared to do anything but win."

WIRELESS, TOO. Why? Because the MediaOne deal is more than simply the next step in AT&T's strategy to offer local phone service via cable. The back-to-back cable deals would transform AT&T into a digital leviathan with high-speed "broadband" pipes into millions of homes over which to offer bundles of voice, video, and Internet services. With MediaOne, AT&T would have the leading Net-over-cable services: At Home, which it controls, and Road Runner, in which MediaOne is the co-controlling shareholder. And, just to make the bundle complete, AT&T can throw its wireless service in, too.

Nobody else even comes close in terms of being able to deliver the long-prophesied convergence of telecom, media, and Internet access. That alone virtually guarantees a flurry of dealmaking as everyone from Microsoft to the Baby Bells to AOL tries to keep up. "You don't have clearly defined lines anymore--everyone's in competition with everyone to become the living-room brand of the future," says Francis O. McInerney, principal of communications consultant North River Ventures Inc. in New York. "All of a sudden, AT&T has become a real contender for living-room dominance.

The Baby Bells are already crying foul--pointing out that they still have to jump through regulatory hoops to compete with AT&T in its core long-distance business. "I think it's grossly unfair," says Edward E. Whitacre Jr., CEO of SBC Communications Inc. "They're just running around gobbling up companies. We are being held to a terrible double standard." Baby Bell executives fear that if AT&T--or somebody else--can offer their customers a bundle of communications and media services first, they'll never win those ratepayers back. "If the Bells wait until AT&T is punching them in the nose," warns Atlanta-based independent telecommunications analyst Jeffrey Kagan, "they are going to be losing a lot of market share."

To get to where AT&T is headed, the Bells will have to come up with video service and accelerate the rollout of broadband technology for high-speed Internet access over phone lines. One likely shortcut, say Wall Street and industry analysts: team up with direct satellite operators. This could come about either through acquisitions or alliances. Bell Atlantic--which backed out of a merger deal with TCI in 1994--already offers DirecTV in some cities. "I would bet that you are going to see Bell operating companies buy EchoStar and DirecTV," says one top media exec.

AT&T's long-distance rivals also have to make some strategic adjustments. Sprint, for instance, has been gearing up a broadband strategy with multiple options. Its customers can connect via ADSL, which allows high-speed connections over copper wire. And recently it bought two "wireless" cable systems that can reach 18 million households via radio waves in such markets as Chicago and Denver. Wireless cable could also support broadband services.

For the rest of the cable industry, the immediate result of AT&T's deals may be more consolidation. For example, if Comcast can't or won't beat the AT&T bid, cable execs say it's likely to seek another merger, perhaps with Cox Communications Inc. Similarly, billionaire Paul Allen, who has spent $6 billion buying up cable systems, is said to be considering backing a MediaOne bid.

The wild cards are Microsoft and AOL. Microsoft has a $1 billion stake in Comcast, and a source close to the cable company confirms that both the software giant and AOL are considering backing a counteroffer for MediaOne. Neither company nor Comcast would comment on a possible MediaOne bidding alliance. But AOL CEO Stephen M. Case said in the company's Apr. 27 earnings announcement: "We want to embrace every broadband technology, certainly including cable."

FCC'S DREAM? Even before AT&T made its play for MediaOne, though, AOL and other Internet companies were raising concerns at the Federal Communications Commission about creating a level playing field in broadband. They want the FCC to ensure equal access to cable customers, rather than letting AT&T give At Home or Road Runner an edge.

But the agency has not granted that request. Nor is it voicing concern yet over AT&T's new cable prowess. It may figure that competitors will respond by building new broadband capabilities that will benefit consumers. "The goal is to get the infrastructure deployed as quickly as we can," says FCC Chairman William E. Kennard. Indeed, former FCC Chairman Reed Hundt hails the AT&T/MediaOne deal as exactly what the 1996 Telecommunications Act called for. "AT&T is putting its money where the government has asked the bets be placed," says Hundt, now a McKinsey & Co. consultant.

Even if the Feds give the deal a thumbs up and no counteroffers materialize, there are still obstacles to AT&T's deal. For one, Armstrong's shareholders may question his huge bet on an unproven strategy of selling local phone service over cable. Also unclear is how the deal will affect the media world's shifting, often conflicting alliances.

On that score, Time Warner Inc. may welcome the AT&T deal. MediaOne owns 25% of a Time Warner subsidiary that houses much of its cable holdings, and the two companies also co-control Road Runner. While Time Warner officials say they are not taking sides in the battle, Time Warner recently drew closer to AT&T by agreeing to offer AT&T's phone service over its cable lines. But media observers say that if Time Warner threatens to back a new Comcast bid, it could benefit both from unwinding the MediaOne partnership and extracting better terms from AT&T.

Already, closing the Time Warner/AT&T local phone deal has taken longer than expected. Although the companies deny it, analysts are speculating that the difficulty of defining which services AT&T can offer and which would remain solely Time Warner's has led to the delay. Striking similar deals with cable operators "has been harder than they thought," says a top executive at another cable operator.

Indeed, AT&T had put similar talks with Comcast, MediaOne, and Cox on hold earlier this year, until it worked out the Time Warner deal as amended. Armstrong says it was a combination of the difficulty in securing deals with other operators and the help of cable pioneer and dissident MediaOne shareholder Amos B. Hostetter Jr. that led to AT&T's unsolicited bid.

Another risk of Armstrong's offensive strategy: He could end up alienating other cable companies that he wants to use to sell phone service. Says Armstrong: "If you don't control the asset, I don't know how you control the destiny." Everyone from Comcast to Microsoft to AOL is wondering the same thing.

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