AT&T gives, but gains more

The company has risked much in its bid to dominate the cable telephone market, coming close to alienating critical cable partners and regulators who still could squash the company's ambitions.

But so far, AT&T has co-opted some of its most dangerous critics, convincing a growing number of the big cable companies that working together is more valuable than standing in the way of Ma Bell.

In closing the bidding war over MediaOne yesterday, AT&T agreed to split up cable assets with rival Comcast in such a way that still allows Comcast to grow by 2 million subscribers. But in the process, AT&T gained more ground in its cable telephony drive than had it simply bought MediaOne outright.

"They pulled off a very, very good deal," said Boyd Peterson, a telecommunications analyst with the Yankee Group. "I am very impressed by the maneuvering of [AT&T CEO Michael] Armstrong to put this in a light where there is not a clear loser."

The company is also playing the competition card. It has cast itself as the only player large enough to bring true competition to local phone markets, satisfying regulators' chief policy goal. This helps insulate the company from concerns that it now controls too much of the cable market, analysts say.

Comcast initially set out to buy MediaOne in March, in a deal that would have created another cable powerhouse with nearly 10 million pay TV subscribers.

But AT&T countered with a larger offer. The cable company held talks with technology titans Microsoft and America Online to come up with a way to outdo AT&T, but the discussions produced no new bid.

Instead, AT&T put together its own new offer that gave every player a piece of the cable they wanted--and furthered Armstrong's cable telephony goals much more than originally anticipated, analysts said.

"It's a win-win-win. AT&T got what it wanted, Comcast didn't lose, and the MediaOne shareholders are a big winner. The stock has taken off," said Bruce Leichtman, a cable industry analyst for market research firm The Yankee Group.

What AT&T wanted was the ability to use MediaOne's and Comcast's cable wires for local telephone service. The No. 3 and No. 4 cable companies help complete Ma Bell's end run around the Baby Bells, and the billions of dollars it pays annually to connect long distance calls over the Bells' local networks.

But AT&T was successful in helping boost Comcast's size--something Comcast wanted with its own MediaOne offer--even while unloading the management of many cable television customers.

"Comcast did not get rooked in the deal here," sad Leichtman. "They're also getting subscribers. They're going to be even bigger in that whole Philly, New Jersey, on down to Baltimore area."

But AT&T was more than happy to let those subscribers go, as long as it retained the right to market "any distance" telephone service over the cable wires, analysts said. Indeed, AT&T will relinquish management control of Lenfest Communications, a cable operator which it wholly acquired yesterday, to Comcast as part of the deal. The move underscores the point that AT&T's top priority is gaining access to the broadband wires, not providing video television service.

"Video programming is a revenue-generating placeholder for other services AT&T wants to provide," Leichtman said.

Threading the Washington needle
On the other side of the equation are policymakers who have the ability to stop AT&T's cable expansion with one critical decision. But here too, AT&T is offering a carrot-and-stick set of deal-sweeteners that many analysts believe will satisfy regulators' concerns.

The company's MediaOne bid has already raised eyebrows in Washington, where a pair of influential senators announced they would hold a hearing on the merger in early June.

"While this deal will likely increase AT&T's ability to provide competitive local phone service to residential customers--which we certainly support--the jury is still out on how it will affect the cable/video market," said Sen. Mike DeWine (R-Ohio) and Sen. Herb Kohl (D-Wisconsin), who lead the Senate's antitrust subcommittee, in a statement today.

"We need to closely examine all competitive aspects of this proposal to ensure competition is preserved and customers are protected," the senators added.

But analysts note that the communications market--and most specifically the local telephone market--is likely play a larger role in policymakers' scrutiny than is cable TV.

If AT&T's various cable mergers and partnerships go through, it will become the largest nationwide provider competing with the Baby Bells' in local residential markets. Creating local competition has been policymakers' chief goal since 1996, and AT&T's move toward this goal will likely mollify regulators' concerns about the merger, analysts said.

"The regulatory side doesn't look like it will be a problem," said Strategis Group analyst Peter Jarich.

Some analysts said the growing cable concentration may be a positive thing for realizing local telephone competition, since the Bells' market and historic monopoly power will be difficult for anybody but a large competitor like AT&T to overcome.

"Local competition requires not just a string of small local competitors, but someone with strong market power," said the Yankee Group's Peterson. "You need to have a strong competitor."

By selling some of the cable assets back to Comcast, and allowing Comcast to manage other of its video operations, AT&T also has signaled that it does not intend to dominate the traditional cable market, analysts noted.

"The position they're taking is that they're open to cooperation, and that they're not trying to be the dominant video partner," Peterson said. "That removes part of the threatening aspect of their acquisitions."

Nevertheless, the acquisitions still will take considerable time to be approved. In addition to the upcoming Senate hearing, both the Department of Justice and the Federal Communications Commission will scrutinize the deals for antitrust and other public interest concerns.

Armstrong said today he would work with regulators' concerns, and would comply with whatever new rules about cable ownership come out of the process.

"Whatever those new rules are, we will comply with them and will work with the FCC to review them," he said today in an interview on CNBC.