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Commentary: A potential cable colossus

Gartner looks at the ramifications of a successful merger between AT&T Broadband and Time Warner Cable.

By Eric Paulak, Gartner Analyst

Shortly after AT&T spurned a hostile takeover bid for its broadband unit by Comcast, rumors started flying that it had discussed a merger of that unit with AOL Time Warner's cable division in the United States.

Besides creating the largest cable company in the world, the merger would accelerate the growth of cable modem services. Other cable merger deals would likely follow.

See news story:
AOL-AT&T combo has politics on its side
A combined AT&T Broadband and Time Warner Cable would be a colossus of nearly 29 million cable TV subscribers and almost 5 million cable modem subscribers. The combination would be several times larger than the nearest competitor, Comcast, which has 8.4 million cable TV subscribers.

On July 8, Comcast had announced an offer to purchase AT&T's cable business for stock worth $44.5 billion at the time of the announcement and the assumption of $13.5 billion in debt.

AT&T Broadband's service offerings are video, cable telephony, pay TV, high-speed cable Internet access and video on demand. Moreover, AT&T owns 23 percent of Excite@Home, a provider of cable broadband services, and holds a 74 percent voting stake in that troubled company.

One immediate reaction to the AOL rumor was strong opposition from Walt Disney. The entertainment group instantly called on regulators to oppose such a deal. Disney argued that if regulators want to approve it, then they should ensure that there will be a clear separation of the content business in the Time Warner stable and the transmission business in AT&T Broadband cable.

Disney probably did not have to be so quick to complain. Gartner believes that because of the dominance of a combined AT&T Broadband and Time Warner Cable, it is highly unlikely that U.S. regulators would allow such a merger to take place without very stringent conditions. The first and most important would likely be a full unbundling of the combined company's cable infrastructure.

The Department of Justice made such unbundling a condition for allowing the merger of AOL and Time Warner. Gartner expects any newly combined company--or a combination of Comcast, Cox or other cable operators with each other or with a media company--to have stringent and specific unbundling requirements similar to those requiring local-exchange carriers to unbundle their copper networks.

As a result, instead of just a few companies offering cable modem services, potentially dozens could offer the services in any given U.S. market. That situation would make it more possible for single vendors to provide better geographic coverage for high-speed remote access services, using cable modems, asymmetric digital subscriber line (ADSL) and possibly wireless solutions.

New consumer-oriented Internet service providers or content companies--such as Earthlink, Juno, USA Networks, Viacom and Walt Disney--could also gain an advantage by being able to deliver more of a nationwide high-speed access network.

Until a merger actually occurs, Gartner recommends that enterprises continue to use cable modem services with a high-degree of caution because the always-on services create a greater security threat for enterprises.

At the same time, and regardless of whether the merger materializes, enterprises with business-to-consumer strategies should continue using or investigating AOL's portal services or its iPlanet hosting service. With more than 33 million Internet customers and 12.7 cable TV customers, it still offers the best online access to the most consumers.

(For a related commentary on Comcast's bid for AT&T Broadband, see Gartner.com.)

Entire contents, Copyright ? 2001 Gartner, Inc. All rights reserved. The information contained herein represents Gartner's initial commentary and analysis and has been obtained from sources believed to be reliable. Positions taken are subject to change as more information becomes available and further analysis is undertaken. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of the information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof.