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AT&T sets sights on more cable deals

The long distance company's end run around the Baby Bells for local phone service is nearly complete with its recent cable deal with Time Warner.

With the Time Warner cable deal giving it access to nearly half the households in the United States, AT&T's end-run around the Baby Bells for local phone service is close to complete.

The long distance company is doing its best to create an end-to-end network that allows it to avoid expensive access fees charged by local phone networks. Today's Time Warner deal boosts AT&T's potential local phone reach to about 42 million homes, up from the 33 million it expects to grab through its pending merger with cable giant Tele-Communications Incorporated.

But few expect AT&T's spending spree to finish with Time Warner. The long distance company may consider deals with several other large cable operators, such as MediaOne Group, Cox, and Comcast, that could quickly bring its penetration rate even higher.

"AT&T is a nationwide provider," said Yankee Group analyst Boyd Peterson. "They're trying to overcome what is a very regionally based market in local phone service. Breadth is very important to them."

AT&T CEO C. Michael Armstrong is doing little to quell speculation that his company is looking to expand its cable reach.

"I can say that AT&T will do everything it can to get to 60 percent to 65 percent broadband connectivity to homes," Armstrong said in an interview with CNBC today. He added that he did not want to speculate on specific deals.

Expanding the communications web
The series of cable joint ventures still marks only a part of AT&T's quickly evolving communications empire, which is growing by leaps and bounds as Armstrong moves to lock up the market for consumer broadband services.

Following the completion of the TCI Cable nation chart merger, AT&T will gain control of the company's cable TV access services, and inherit control of high-speed cable Internet company @Home. This will also give it control of Internet directory company Excite, which agreed to merge with @Home last month.

AT&T still maintains its own WorldNet ISP service, but is reportedly considering merging it with @Home to consolidate all of its Internet services under one brand.

The combined companies will finally bring AT&T into the ranks of the top Internet players, a spot it has been striving for unsuccessfully for years.

But AT&T's ambitions aim above and beyond Net supremacy. It plans to create a complete communications service that covers every customer need--from Net access to cable TV to wireless phone services.

The introduction last week of AT&T's Personal Network voice plan was the first step in the company's push to offer package deals, which should increase as merged companies and joint ventures are incorporated into the company's fold. The Personal Network incorporates wireless and long distance phone service into one consumer package, with the addition of Internet access promised at a later date.

New deals soon?
Analysts said that many of these smaller cable firms have been waiting to see what kind of deal Time Warner would strike with AT&T, before entering talks themselves.

"This is not a big surprise. It was certainly part of the plan," said Bruce Leichtman, director of media and entertainment strategies for The Yankee Group. "The long-term plan was to become the de facto brand for the cable industry."

But to reach Armstrong's figure of nearly two-thirds national coverage, AT&T will have to strike deals with the next four cable providers, Leichtman said.

The most natural next targets are Cox, which has about 3.8 million subscribers, and the MediaOne Group, with about 5 million subscribers. But both of these companies are already aggressively working on voice telephony, which could make deals with AT&T a little more tricky.

"At this point they [Cox and MediaOne] prefer to have the control," Leichtman said. "The bar has been set by Time Warner. Now they know what they can get if they go outside."

But ultimately, the remaining cable operators do not have as much incentive as AT&T to move quickly to voice service, analysts said.

"Phone really is the third priority of the cable operators behind video and high-speed Internet," Leichtman said. "They are saying, 'We don't need to control this asset.'"