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@Home, Road Runner in talks

The two firms discuss merging their high-speed Internet access services, uniting the cable industry in an effort to take on the Baby Bells.

@Home (ATHM) and Time Warner's Road Runner are holding talks about merging their high-speed Internet access services, a move that would unite the cable industry in an effort to take on the Baby Bells in this burgeoning market, company sources said.

If completed, the deal also could clear the way for long distance telephone companies to join the merged group, they added. Using their vast network, which ultimately will pass by more than 75 million homes, the long distance carriers could provide local phone service via cable--fulfilling a pressing goal.

The prospect of an @Home-Road Runner combination comes less than two months after Road Runner agreed to merge with US West Media Group's MediaOne Express, creating the nation's largest broadband online service, which eventually could reach 27 million homes.

In addition, the "urge to merge" is fueled by the need to build critical mass; only about 110,000 customers get Net access via cable despite rapid growth in the industry's infrastructure.

The February 2 issue of Broadcasting & Cable also is reporting that @Home and Road Runner are in "serious" discussions about merging. Both firms cautioned, however, that no deal is imminent and that talks could break down. Road Runner has talked with other companies, including cable operators and even America Online, about deals for expanding its service, according to executives.

"We have had conversations in the past with @Home, and these are ongoing," a Road Runner representative said. @Home also confirmed the talks.

Added another source familiar with the discussions: "Lately, things seem to have become more friendly, but there's still a long road ahead before a merger."

Some sticking points include how much control Tele-Communications Incorporated (TCI), @Home's controlling stockholder, is willing to cede to Time Warner in any such deal. Cable giants Cox Communications and Comcast also hold major stakes in @Home.

Moreover, @Home must cut US West Media Group into the deal because of US West's previously planned merger with Road Runner. MediaOne and Road Runner hope to work out details of their combination by March 31.

An arrangement combining all three broadband services makes sense, however, industry executives and analysts said.

For @Home, such an arrangement would let the company expand its "footprint" in the nascent fast Net market. The service has some 50,000 subscribers, compared with 45,000 for the combination of Road Runner and MediaOne Express. @Home also would get full access to content from Time Warner's media empire.

High-quality content is key to penetrating the mass market and competing with the likes of AOL, executives added. For many consumers, the high speed provided by the network is taken for granted, @Home has found.

For Road Runner, a merger would give the company access to @Home's private backbone for connecting users to the Internet at speeds of up to 10 mbps. Road Runner also would get access to some of @Home's features, such as streaming video and audio.

The deal would unite the cable industry's biggest companies in the battle against the telcos to provide high-speed Internet access, said Michael Harris, president of Kinetic Strategies, a consulting firm.

Despite its clout, Harris didn't think the alliance would be anticompetitive because the Baby Bells are rolling out high-speed Net access services of their own, such as DSL (digital subscriber lines). In one instance, however, US West Communications is rolling out DSL while its sister company, US West Media Group, could become part of the cable venture. Both are owned by US West, but the company proposes to split them into separate public companies by year's end.

Analysts also agreed the three-way venture could lure long distance telcos such as AT&T because it would offer a large network to provide local phone service.

Unconfirmed reports of a possible investment in @Home by AT&T have been circulating since December. In January, the two companies have become connected in a more roundabout way, through Teleport Communications Group. In January, AT&T agreed to buy Teleport for $11.3 billion. @Home is under a five-year strategic pact with Teleport to provide high-speed Net access to businesses.