Under the terms of today's deal, Time Warner and AT&T will form a joint venture that will offer telephone service to households served by Time Warner cable. AT&T will own 77.5 percent of the new company, and will pay Time Warner about $300 million for exclusive rights to offer phone service though the cable network.
AT&T will also pick up some of the costs of upgrading the cable network to handle phone traffic, amounting to a one-time cost of about $600 million, the company said. The venture will likely have negative cash flow in its early years, but executives expect revenue to climb to $4 billion by the end of three years.
The move strengthens AT&T's bid to compete with the local phone companies on their own turf, giving it access to between 40 percent and 50 percent of homes in the United States. Already, its pending $61 billion merger with cable giant Tele-Communications Incorporated will give AT&T access to about a third of U.S. homes.
"Time Warner is very important strategically," said Robert Wilkes, an analyst at Brown Brothers Harriman. "This gets the two biggest cable companies on board."
Time Warner's network reaches 20 million homes, with 12.6 million customers currently subscribing to the company's cable TV services.
The deal also gives both companies a leg up toward offering other advanced services, such as video telephony, executives said.
"We plan to give consumers in Time Warner cable territories more than a choice in local service--as important as that is," said AT&T president John D. Zeglis, in a statement. "We're going to combine the information-carrying capacity of cable with our own networking expertise to give families an easy-to-use suite of 'any distance' communications services."
The new joint venture will begin telephony trials in one or two markets this year, with a broader rollout in 2000, executives said.
This schedule complements AT&T's plans for TCI, which will engage in telephony trials in about 10 markets this year, with larger rollouts scheduled for next year.
Both cable systems currently use traditional circuit-switched telephony, but will begin upgrading to Internet Protocol (IP)-based services in 2000. This will allow the companies to offer more advanced services, and integrate voice and Internet products more efficiently.
AT&T will keep the exclusive rights to the cable phone service for the next 20 years, in return for an initial $300 million fee and a monthly fee of $1.50 per phone subscriber. This fee will increase to $6 by the end of six years--still less that what Baby Bells charge for leasing local phone networks, according to AT&T executives.
Executives of the joint venture will report to TCI president Leo Hindery, who will manage all of AT&T's cable telephony operations once the TCI merger is complete. The joint venture is expected to be operational by the middle of 1999.
Bloomberg contributed to this report.