AT&T merger may not equal savings

AT&T's goal is to provide local phone service though TCI's cable network, in direct competition with the Baby Bells. But analysts caution that the consumer benefits of the merger may not come about as quickly as the company has stated--and might not translate into lower rates at all.

The two companies give only general estimates for when TCI's facilities will be upgraded to handle new services. AT&T has said it will launch consumer trials in ten U.S. cities by the end of the year, co-marketing video, voice, and Internet services over TCI's cable.

AT&T hopes to have "most of the rest" of TCI's service areas upgraded to handle telephone and high-speed Net service by the end of 2000. But this schedule, as well as what kind of rates and packages consumers will be offered, will depend on what the company discovers in its ten test markets.

"We've got to go through with the market trials. We have to assess what the customers want," said Pat Stoltz, an AT&T spokeswoman.

The company has already said its plan is to package as many services together for consumers as possible, in hopes of becoming a one-stop shopping center for telecommunications services.

The TCI acquisition--along with new agreements struck with Time Warner and a handful of smaller cable operators--will allow it to add local phone service and high-speed Internet connections to its existing stable of long distance and wireless services.

AT&T is committed to these kind of package deals, so much so that it scaled back advertising for stand-alone long distance services last quarter, according to company executives. Its first package deal, dubbed the "Personal Network," allows consumers to pick buffet-style from long distance, wireless, and dial-up Internet services, for a single bundled price.

But analysts say this kind of deal doesn't necessarily translate into simple bills or lower rates on local phone service.

"Probably what you're going to get early on is a lot of complicated packages," said Scott Cleland, a telecommunications analyst with the Legg Mason Precursor Group. "It will probably be a lot like the long distance marketing plans of old, where nobody really knew what the base rate was."

Telephone companies' ability to cut residential rates is limited, since most consumers are already paying well under what it actually costs to provide service. The Baby Bell companies pick up this slack--which can average close to $11 of subsidy on a $19 monthly phone bill, according to Cleland--by charging businesses more, and by selling advanced services like Caller ID and double phone lines well above cost.

It's not yet clear, analysts say, that the cost of cable-based telephone services will be low enough to allow AT&T to undercut Baby Bell residential phone prices, without making up the difference somewhere else--either by selling new data and cable services, or by hiking traditional cable rates.

Consumer groups have warned that there is no mechanism to keep the long distance company from hiking prices for cable TV--in which it will still have a monopoly in its service areas--to cross-subsidize a low-cost local phone service.

But the bundling will play into what surveys have found is a growing consumer demand for streamlining communications services into a single bill. "That's a pretty strong competitive offer at any price," said Daniel Ernst, director of competitive telephony research at the Strategis Group.

Waiting for the phone to ring
The company's two-year time frame for reaching the bulk of its new consumers appears optimistic, however.

"They will be able to address a percentage of those markets under that time frame," Ernst said. "They will not have all those houses in all those areas."

AT&T consumers might even find themselves getting local service from cable outlets other than TCI first, some analysts said.

"Consumers will probably get benefit out of the joint venture with Time Warner faster than from TCI," said Cleland. "The TCI plant hasn't been upgraded in years. It's in among the worst condition in the industry."

Meanwhile, Baby Bells are doing their best to persuade regulators to allow them into the long distance markets. Once they get this approval--which is expected to begin happening late this year in New York, and filter slowly to other states--the local phone companies will be able to offer similar sets of packages to their consumers.

But since the packages will offer different services, such as cable Internet versus high-speed digital subscriber line (DSL) Internet access, or the cable TV option, the competition will never be direct.

This will help lessen the pressure to lower consumers' local calling rates, analysts said. Other services will likely continue to subsidize local residential calls, but the rates probably will not fall further.

"Nobody wants to change that [subsidy system]," Cleland said. "It's the sweetened deal of the past that nobody knows how to get rid of."

AT&T's merger with TCI was approved by the Federal Communications Commission and both companies' shareholders yesterday. Company officials say the deal should close by the end of the first quarter.