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@Home partners put pressure on AT&T

Poor subscriber numbers have put AT&T in the hot seat with its @Home cable partners, and now the firm must get TCI in shape to maintain its clout in the Net-over-cable firm.

After inheriting cable Internet firm @Home Networks from Tele-Communications Incorporated, AT&T now must increase its subscriber base or risk losing some of its share in the high-profile Net service.

The situation stems from a subtle internal revolt by AT&T's junior cable partners in the @Home high-speed Internet service, made public by today's 8-K filing with federal regulators.

Despite having far more cable subscribers, TCI, recently acquired by AT&T, has lagged behind competitors in upgrading its network for cable Net services, and hasn't lived up to expectations in recruiting @Home subscribers.

Today's announcements mark the first tangible sign of dissatisfaction with the performance of TCI--now AT&T Broadband & Internet Services--and puts pressure on its new parent to make amends.

Changes in the relationship between the service's backers will give Cox Communications and Comcast, the two other largest shareholders in @Home, new veto power over AT&T, as long as the companies vote together on the board.

As a part of the new agreement, AT&T has agreed to raise its targets for subscriber growth, speeding the rollout of the Net service to TCI's coverage areas. If the company fails to meet these new targets--which are not public--the long distance company must give up some of its stake in @Home to its partners.

The board changes refocus attention on the state of AT&T's new cable television infrastructure, which is widely regarded as well below state-of-the-art in comparison to other cable companies' networks.

The concession, however minor, is a blow to AT&T, after paying $55 billion for TCI and its control of @Home. The long distance phone giant owns 40 percent of @Home's stock, and controls 70 percent of the voting power on the board.

"The filing says there are new goals and we intend to meet them," said AT&T spokeswoman Adele Ambrose. "We think these changes [to the board] are technical in nature, and don't affect our number of board seats, and none of which will have any real effect on AT&T's control."

But some observers say the changes are an admission that TCI has been hard-pressed to live up to its end of the @Home bargain, and that AT&T must now live with the fallout.

Caboose in control?
The former TCI had long trailed its junior @Home partners in signing up Net subscribers, a situation that has been "a source of some animosity," said cable analyst Michael Harris, president of Kinetic Strategies, a broadband market research firm.

"As the largest investor, there was the assumption that TCI would be the engine leading this train," Harris said. "But it has been the caboose, or arguably even another engine at the back slowing the whole train down."

At the end of 1998, TCI had signed up about 29,000 cable modem subscribers, Harris said. By contrast, Shaw Communications, a Canadian cable company about one-tenth the size of TCI, had contributed 71,000 subscribers to the @Home mix, he said.

Cox led the other major partners with 67,000 subscribers, and Comcast claimed 51,000, according to Kinetic research.

Last month, TCI said that only 26 percent of its cable infrastructure had been upgraded to support two-way transmissions--a prerequisite for cable telephony and high-speed cable Net access. That lags well behind others in the industry.

As a part of the new agreement with its partners in @Home, AT&T has "agreed to increase its subscriber acquisition goal for the next 12 months above its current goal for that period," according to the filing with the Securities and Exchange Commission.

AT&T has said it will pour close to $4 billion into network upgrades over the next two years to offer local telephony, high-speed Internet access, and other advanced digital services.

If the company cannot achieve its higher subscriber goals by next year, AT&T must give Cox a certain amount of stock in @Home, based on its subscriber numbers at the time, a Cox spokeswoman said.

But the other cable partners are only interested in having AT&T pull its own weight, she added.

"We want this to be viewed as an incentive. We really want AT&T to get out there in front of some customers," said Cox spokeswoman Ellen East. "We don't want that stock because if AT&T adds more customers it only increases the value of [@Home]."