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AT&T: The house that Armstrong rebuilt

Chief executive C. Michael Armstrong is wasting no time trying to reshape the once-lumbering phone giant into a broadband superpower that acts in Internet time.

Just a year and half after taking the reins at AT&T, chief executive C. Michael Armstrong is wasting no time trying to reshape the once-lumbering phone giant into a broadband superpower that acts in Internet time.

Today's surprise $62 billion bid for cable company MediaOne is just the latest example of Armstrong's ambitions. In bidding for MediaOne, AT&T's chief has muscled his way into the middle of a proposed merger with Comcast, a cable contender that has received a $1 billion investment from Bill Gates' Microsoft.

The bid comes just a month after AT&T completed its $55 billion buyout of Tele-Communications Incorporated--a deal that will test the much-touted convergence of voice, video, and Internet services. Armstrong's appetite also has included a bold bid for America Online, which was rebuffed last June.

If today's bid for MediaOne is accepted, AT&T will become the nation's largest cable company. But cable television is simply a sidelight--the series of acquisitions and partnerships gives AT&T control of a network that Armstrong hopes to use to corner the market on consumer broadband services.

The strategy is fraught with risks--including regulatory hurdles--but Armstrong is willing to bet that $100 billion will buy him a one-stop-shop that can provide all of consumers' phone, data, and video needs.

Ambition to spare
AT&T's holy grail is a lucrative combination of high-speed Internet service, local and long distance telephone, along with whatever cable video services are available. With his progressive move into the cable market, Armstrong has now brought this goal within reach.

Armstrong came on board at AT&T in November 1997, inheriting a telephone behemoth that had been largely ineffective in expanding its traditional long distance market control to new technological fronts.

But as the "tentative" bid for AOL showed, Armstrong had the ambition and imagination to match the changing communications landscape that Ma Bell was facing.

Rebuffed on his first Internet foray, Armstrong quickly moved to bid on Tele-Communications Incorporated, the Denver-based cable TV company that also controlled @Home, the leading high-speed cable Internet service.

A follow-up deal with Time Warner Cable and several TCI affiliates gave the company the ability to reach about 40 percent of U.S. households though cable lines. A MediaOne acquisition would boost that figure close to 50 percent, according to an AT&T spokeswoman.

AT&T's interest in MediaOne also stems from the cable company's stake in high-speed Net access company Road Runner and its desire to advance its Internet holdings. AT&T now controls 71 percent of @Home and would also have a significant say in the operations of Road Runner, which MediaOne co-owns with Time Warner.

Questions whether Road Runner would remain an independent company arose after Comcast's bid for MediaOne. Despite protestations from AT&T executives in reaction to Road Runner-@Home merger rumors, those questions could return with AT&T involved.

@Home and Road Runner discussed a merger in the past and @Home executives appear to remain open to a deal, according to executives. Wall Street and financial analysts, however, seem to think a deal is likely.

But Microsoft could have a say in the matter. The software giant invested $1 billion in Comcast last year and the company is a 10 percent stakeholder in Road Runner, but it seems clear that Gates' goal goes far beyond profits.

Uncharted waters
If Armstrong has brought his old-school telephone company into the frenzied pace of Internet time, he also has taken on many of the uncharted risks of new media companies.

The TCI acquisition alone made a $56 billion dent in AT&T's coffers. The company is now spending close to $5 billion to upgrade TCI's cable infrastructure so that it can handle broadband Internet and telephone services.

The bid for MediaOne--which would also put AT&T on the line for significant upgrade costs--would raise the price tag for its all-in-one broadband venture to well over $100 billion.

The revenue stream from the venture is still far from sure, however. Cable telephony, while well accepted in other countries such as the United Kingdom, is still largely an untested market in the United States.

And while Wall Street has fallen in love with high-speed Net provider @Home, the service has fewer than 500,000 subscribers, and has yet to turn a profit.

Still, Armstrong is betting the future of his company on broadband.

"Ever since the Telecommunications Act of 1996 was passed, Americans have been waiting for someone to run another wire to their homes to give them a choice in local phone service and deliver the advanced services they expect in a competitive market,'' Armstrong said in a statement accompanying today's bid.

"Our earlier acquisition of Tele-Communications Incorporated and now our proposal for MediaOne Group should leave no doubt that we are serious about doing just that," he said.

Antitrust questions
But even if Microsoft declines to step in to boost Comcast's bid for MediaOne, there is still another force that could eventually stand in the way of AT&T's broadband ambitions.

The proposed cable empire may draw the scrutiny of federal antitrust regulators.

"They will have quite a footprint. So much of a footprint that the FCC might raise an eyebrow," said Bruce Leichtman, a cable industry analyst at The Yankee Group.

Leichtman said the FCC would prefer that no single cable operator control more than 30 percent of the homes in nation. But if it does acquire MediaOne, AT&T would exceed that threshold, he said.

The Internet portion of Armstrong's plan still could be threatened if policymakers bend to demands by AOL, other Internet service providers, and consumer groups to open up cable networks for use by all ISPs, not just affiliated companies like @Home.

Armstrong has said that if federal regulators require the company to open up their cable networks, AT&T would pull back from the investments needed to modernize the cable infrastructure.

To date, the FCC has declined to rule on the issue of cable open access, but has said it would keep a close eye on the issue in the future.

Critics painted today's bid as new reason to give AT&T's cable holding close scrutiny.

"This is nothing less than a blatant attempt by AT&T to rebuild its monopoly--and to do it on the backs of American consumers," said Mark Roellig, vice-president for public policy for US West, one of the leading critics of AT&T's cable efforts.

"What's worse, AT&T is attempting to lock in a monopoly over the Internet by combining a stranglehold on local cable lines with a dominant control of the national Internet backbone," Roellig added.