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AT&T in talks with Time Warner

The companies are reportedly discussing a partnership that would aid the telco giant's efforts to sidestep the regional Bell's local chokehold.

Time Warner and AT&T are reportedly discussing a partnership that would aid the telecom giant's efforts to sidestep the regional Bells' chokehold on the local phone market.

AT&T chairman and CEO Michael Armstrong is appearing before the Federal Communications Commission this afternoon in hopes of winning approval of a bid merge with cable giant Tele-Communications Incorporated, according to the Wall Street Journal. The proposed deal would give the telco giant access to Time Warner's vast network of cable systems.

Long distance telephone carriers increasingly are realizing that the best way to wrest control of the "last mile" of bandwidth from local Bells is through cable lines, analysts said.

"Alliances with cable operators is a great strategy," said Jeffrey Pittsburg, a partner at investment bank Goldis-Pittsburg Institutional Services. "Since local phone companies aren't giving them access, they can compete with them through cable lines."

Pittsburg noted that a deal could free AT&T from the cost and hassle of laying down cable lines, but, more importantly, could pave the way for the company to compete with local Bells.

He added that a deal with Time Warner would allow AT&T to extend its reach into different markets than it could access by teaming up with TCI. Indeed, a deal with between Time Warner and AT&T would give each company what they have been lacking.

"Time Warner knows that AT&T's brand name and expertise would be beneficial to them," said Eric Melloul, an analyst at equity research firm Argus Research. "[Time Warner] knows that AT&T could manage their assets much better than they could when it comes to telephony."

With its 12 million cable subscribers, Time Warner would nearly double the number of customers to which AT&T could sell its services. On the flip side, AT&T would provide Time Warner with an opportunity to enter the telephone business.

"AT&T is interested aligning itself with other cable companies to extend its market reach in telephony at the local level," said AT&T spokeswoman Pat Stortz.

Another AT&T spokesman was quick to insist that, at this time, any talk about which cable company--other than TCI--AT&T will align itself with is "just rumors and speculation."

But at a recent trade show, Armstrong said he planned to cut deals with other cable partners to try to extend the company's reach into 60 percent of U.S. homes, the Journal reported. Some in the telco industry think that promise may now be putting increasing pressure on the CEO to complete the Time Warner deal.

"[An AT&T-Time Warner deal] makes sense for both companies," said Argus's Melloul. "The only issue that could really prevent the deal is determining the financial terms."

Negotiations between the two companies center on the amount of money each will invest in order to make the cable system phone-ready, and how they would divide the spoils, according to the Journal.

Whatever financial terms ultimately are decided, both companies stand to gain significant operational and revenue benefits, analysts said.

"Once you enter the home with the set-top box, you can provide additional services, which helps lower the marginal costs," Melloul said. "The more you can sell to a customer with the same set-up, the better."

Other players who are moving into the cable market include billionaire investor Paul Allen, who this summer moved to buy Charter Communications, the nation's tenth-largest cable operator, for $4.5 billion. A few months before that purchase, Allen bought Marcus Cable, another top-ten cable operator, for $2.77 billion. Microsoft cofounder and CEO Bill Gates also has made cable investments.

Such purchases are a concrete sign of support for high-speed Internet service through cable lines, as well as of the convergence of computers and television in general.

Time Warner also is in early talks with online giant America Online to forge a deal that could result in AOL using Time Warner's cable system for speedy Web access, the Journal reported.

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