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AT&T, AOL mulling marketing alliance?

AT&T and America Online reportedly are in talks that could have the phone giant supplant Tel-Save as the exclusive long-distance marketer on AOL.

Shares of tanked more than 12 percent this morning after reports that AT&T and America Online are in talks for AT&T to supplant Tel-Save to market its services on AOL.

Citing people close to the discussions, USA Today reported that under such an agreement consumers could sign up for AT&T phone service and pay their AT&T bills over AOL, which has more than 15 million subscribers.

An agreement probably could not take effect until July 2000, USA Today said, because AOL's marketing agreement with, a long distance reseller, is exclusive until June 2000.

Tel-Save responded quickly to the speculation today, saying that AOL would have to pay Tel-Save a penalty for ending the agreement early. The company also said it has secured the privilege of having the premier marketing channels available through AOL until the end of 2002.

"If AOL wanted to cut these marketing channels at the end of 2002, the earliest period they could, they would have to make substantial payment to," said Tel-Save Chief Executive Gabe Battista in a statement. "The earliest any company could sign an exclusive contract with AOL for long distance would be 2003."

Tel-Save tumbled 10.27 percent or nearly one point to 8.19. The stock has traded as high as 27.75 and as low as 4.72 during the past 52 weeks. sells long distance service over AOL for 9 cents a minute.

A deal between AT&T and AOL could be announced, however, well before July 2000, USA Today said, adding that AOL is looking for an up-front payment of about $500 million which it would use to fund network construction.

AOL is also talking to other long-distance carriers, USA Today said. Those include Sprint and MCI WorldCom. However, AT&T appears most serious.

But Battista said that although "there is a provision in the contract that would allow others to sell long distance along with [starting in July 2000]," AOL would have to be "willing to give up substantial guaranteed payments."

AOL recently bought a $55 million equity stake in Tel-Save, bringing its total equity to over 6.8 million shares or 11 percent.

"We believe they did so because of our strong successful relationship to AOL," said Battista.

Reuters contributed to this report.