Cable: An end run for AT&T?

Rumors are swirling on Wall Street that AT&T and the cable television unit of Time Warner, one of the largest cable operators in the nation, are close to a deal in which AT&T would provide local phone service over Time Warner's broadband cable wires.

Ma Bell, looking to offer local phone service, will need all the regional partners it can get if it intends to reach customers nationwide. And adding cable partnerships such as the one rumored to be in the works with Time Warner would be wise in that it would help to save the company from paying access fees to the Baby Bells. It also would give AT&T an inside track on profitable new digital services being promised by cable companies.

An AT&T spokesman declined to comment specifically on possible negotiations with Time Warner. But the company has indicted it will continue to explore opportunities in several communications markets.

"We've said we're not finished yet in wireless, Internet, or cable," said AT&T spokesman Burke Stinson.

The local loop
Cable companies have emerged as vital players in the telecommunications revolution due to their advanced regional networks. Not only do cable networks pass more than nine out of ten homes and many business, but the combination of fiber optics and coaxial cable were designed to carry video, and are capable of handling huge volumes of data traffic including Internet, videoconferencing, and digital voice.

AT&T's proposed $48 billion acquisition of cable giant Tele-Communications Incorporated was widely viewed as a way for AT&T to circumvent its offspring, the Regional Bell Operating Companies, and gain an unregulated avenue into providing local telephone service. The TCI deal, pending regulatory approval, is expected to close by mid-1999.

Despite TCI's size, however, the company still only has access to roughly one-third of U.S. homes and businesses. So even if the rumored talks between AT&T and Time Warner do not come to fruition, many analysts expect Ma Bell to look elsewhere for cable partnerships.

"AT&T has said it wants to have alliances with cable partners all over the place," said Steve Koppman, an industry analyst with Dataquest. "It wants to offer voice services, so that would mean at least having marketing alliances with a number of operators."

Mel Marten, a telecommunications analyst at brokerage firm Edward Jones, said: "The TCI deal is a huge first step, but it isn't their answer on a national basis."

Regulations prevent local phone companies from offering long distance services or competing out of their regions until they open their own regions to competition. But that process has been slow, drawing criticism from lawmakers and some in the industry.

"The main concept behind the [1996 Telecommunications Act] was to introduce competition into the local telephone market," AT&T's Stinson said. "That remains a thicket of monopolists. A way through that thicket is cable into people's homes, which provides broadband voice, data, and local and long distance capabilities."

Some analysts said AT&T is hedging its bets by playing in the cable industry.

"There's a divergence of opinion on whether cable or copper wires will dominate," said Philip Wohl, a telecommunications analyst with S&P Equity Group. "If anyone's going to win, it's going to be AT&T. There's no other company using both. So it's not an unwise move in my opinion."

Wohl added: "It's definitely a way around the Baby Bells...[AT&T] is going to try as many ways as possible to wear them down."

Axing access charges
In addition to providing local phone service, partnerships with cable operators would allow AT&T to connect long distance calls over hybrid fiber coaxial cable networks rather than traditional copper phone lines. In and of itself, the technology is not important for standard voice traffic, but bypassing the Baby Bells would save AT&T a bundle on access charges, the fees long distance companies pay to local telephone companies for completing a call over their regional networks--commonly known as the "last mile" to the home.

Last year, AT&T paid $16 billion in access charges to local phone companies. "It's by far our biggest expense," said AT&T spokesman Jim McGann.

Even if partnerships with cable operators do not completely eliminate access charges, AT&T contends the fees could be much lower. McGann speculated it only costs about half a cent per minute to connect calls rather than the two or three cents local phone companies charge now.

"This is definitely AT&T's way to go around the Baby Bells, avoid paying the connection fees, and probably provide more services," Marten said.

Cable deals such as the TCI merger--and the rumored Time Warner cable talks--could give AT&T a doorway to higher profit margin services such as fast Internet access-over-cable, telecommuting services for businesses, and video-on-demand.

Many analysts foresee the average cost of a voice phone call falling rapidly as new telecommunications carriers scramble to build more efficient nationwide networks.

That means companies such as AT&T will need to find other, more lucrative sources of revenue such as videoconferencing or corporate data services such as virtual private networks to avoid shrinking profits.

AT&T's $5 billion acquisition of IBM's Global Network this week is an example of how the company plans to diversify its revenue streams.

"Their goal is to provide a complete communications package," Marten said. "That includes local and long distance service, Internet access, cable television, and wireless."

The IBM deal, perhaps coupled with speculation about Time Warner Cable, has helped boost AT&T shares.

The stock is up slightly again today after hitting a new high yesterday, a sign that investors like what they see in AT&T's strategy.