Broadband boom leads the cable charge

The two companies have taken great pains to paint their merger as a broadband deal, rather than simply a marriage of cable television operators.

"Building the bundle that can marry together video, data and voice...is what it's all about," Comcast president Brian Roberts said in a meeting with analysts this morning.

The deal is only the latest in a string of mergers and alliances linking telephone companies, Internet access providers, content firms, and video-programming companies with cable-based broadband delivery systems.

Combined, the companies hold the No. 3 position in the cable market, trailing Time Warner Cable and AT&T, following its recent acquisition of No. 2 cable provider Tele-Communications Incorporated.

In addition to a strong multichannel video presence, however, the two companies are formulating telephone-over-cable plans and high-speed data strategies that could come together after the deal closes.

Each company is a key investor in either @Home Network or Road Runner, the leading cable Net access services. The combined company's decision to throw its support to one or the other service could have a significant impact on the future of high-speed Internet access, interactive television, and Internet Protocol-based telephony.

The companies say they are happy with the current split between the two services, at least pending the close of the multibillion-dollar deal.

"We are contractually obligated to @Home and very happy with that, and MediaOne is contractually obligated and happy with Road Runner," Roberts said. "We have to operate independently until closing anyway."

But analysts said it was unlikely that the new company would maintain support of two separate broadband operations after the deal closes, which is expected to happen later this year.

"If this is about consolidation, they need to put their weight behind one or the other," said Abhi Chaki, senior broadband analyst with Jupiter Communications.

High-speed cable questions
Comcast is one of the largest cable partners in AT&T-controlled @Home Network, while MediaOne owns about a 40 percent stake in Road Runner, a similar cable modem service.

"I would say it might make sense for the new corporate entity to side with Road Runner," Chaki said. "But a lot would depend on the momentum behind Road Runner."

Comcast's exclusive contract with @Home will expire in 2002, but Comcast could exercise a buyout option--something that is unlikely to happen, according to observers.

@Home and Road Runner are the nation's two largest broadband data services, claiming 331,000 and 180,000 subscribers respectively at the end of last year. MediaOne to date has about 100,000 cable Net subscribers. These users are expected to be folded into the Road Runner service over the next several months.

But Road Runner is still searching for a permanent chief executive and the Time Warner-MediaOne joint venture has yet to indicate a clear strategic plan for future growth.

A privately-held company, Road Runner's business has lagged behind the more more aggressive moves of @Home, Chaki noted. If this situation does not change soon, the new company may find it more attractive, as well as lucrative, to stick with the @Home service, despite having a smaller equity stake and less strategic control.

Today's deal also renews the possibility of a merger between the two cable Net access services, a deal that has been rumored for some time.

But despite the advantages, the regulatory environment may be working against such a pairing. While telephone companies' DSL and satellite services do provide competition in the broadband access market, federal regulators are keeping close watch to make sure the cable operators don't win a stranglehold on high-speed access.

"If Road Runner and @Home merge, they would control close to 90 percent of cable high-speed Net distribution," Chaki noted. "I think that would smack of anticompetitive issues."

Meanwhile, stock in @Home is trading at an all-time high today. @Home shares were more than 13 percent higher at 152 in midday trading. The stock has traded as high as 137.875 and as low as 23.5 in the past 52 weeks.

@Home declined to discuss the merger and Road Runner executives could not immediately be reached for comment.

Training for telephony
Comcast and MediaOne, in creating a broadband alliance, clearly have their collective eyes on a larger set of services, which includes cable telephony.

The deal apparently does not diminish the two companies' desire to strike another deal with AT&T to offer customers local telephone service. Comcast and MediaOne have been negotiating for several months with the long distance giant as part of a coalition that also includes Cox Communications.

"The concept of partnering with AT&T is something we're very interested in trying to make happen," Roberts told analysts this morning.

But the company does now have the scale to offer telephony services on its own, and wants to see a better deal than what was offered to Time Warner, Roberts added.

Analysts said the combined company's best telephony bet was through AT&T, however.

"We would expect them to do a deal with AT&T," said Mike Kupinski, an equity research analyst at investment bank AG Edwards. "I think the companies think they could do [telephony] on their own, but we believe an AT&T deal will still happen."

"AT&T's brand is a huge asset for the cable industry," Chaki said. "AT&T is now one of the largest players in cable, and cable is an extremely clubby industry."

Roberts' own comments sought to reassure AT&T about the effects of today's merger.

"AT&T just invested in the cable industry, and now have a similar economic agenda for part of their company," Roberts said. "This is a tremendous added value for the industry. We want to make this a win-win [situation] for them."

Meanwhile, the companies are going ahead with their own internal telephony plans. Comcast has not moved quickly into voice, but MediaOne already offers voice services in six markets, and is signing up about 700 customers a week. MediaOne had about 10,000 telephony customers at the end of last year.