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From AJR,   July/August 1999  issue

Phone Giant Elbowing Into Cable   

AT&T could become the nationís cable colossus.

By Douglas Gomery
Douglas Gomery is the author of nine books on the economics and history of the media     

When President Clinton signed new telecommunications legislation in February 1996, it was envisioned that cable TV would become a world of many players. That doesn't appear to be happening. In May, steps were taken to consolidate many of the nation's cable systems into a single giant with a familiar name: AT&T.

The transformation actually began in March, when Comcast, the Philadelphia-based cable power, announced it was willing to spend nearly $50 billion to acquire MediaOne, an even larger cable company. With no con-trolling stockholder, MediaOne had become vulnerable: Not only was Comcast ready to buy, AT&T's Broadband division, the former TCI cable, also was expressing interest.

A month after Comcast's announcement, AT&T topped Comcast's bid, publicly announcing an offer of $56.4 billion in cash, stock and assumed debt. Comcast made noise that it might make a counteroffer, describing a potential partnership with Microsoft and America Online. But these media giants never came on board with Comcast. Instead they brokered their own deals.

Microsoft made a side deal to supply the new AT&T with digital set-top boxes through which a bundle of services could run. The nonexclusive deal called for an estimated 2.5 million to 5 million boxes. In exchange, Microsoft could get as much as $5 billion in AT&T securities.

AOL proposed a deal with DIRECTV to use that satellite-to-home service as a pipeline for its Internet service.

In the end, MediaOne accepted AT&T's bid, and the long-distance phone company is poised to become cable's dominant player in 18 of the top 20 media markets in the United States.

If stockholders bless the deal (as expected) and federal regulators do not challenge it, AT&T will be serving 27 percent of all cable customers, plus a third more through joint agreements with other cable companies.

The implications for the public are important and numerous. AT&T--which made the biggest unsolicited bid for any company in U.S. history--will now work to persuade subscribers to make the company their single service provider for cable and Internet access, and local and long-distance calls.

AT&T will pay dearly for this privilege--about $4,900 for each cable subscriber. That's about 50 percent more than the typical price per subscriber among recent cable company takeovers.

In less than a year, AT&T will grow from having no presence in cable television to amassing a concentration of power in mass media not seen since the late 1930s, when NBC and CBS controlled radio. It will provide cable access to more than 26 million households.

Comcast also benefited by not making a protracted fight of it. As part of the deal, AT&T will give Comcast 750,000 new cable subscribers and a "loser fee" of $1.5 billion. Its subscriber base climbs to 8 million and will include nearly all the cable customers from Philadelphia to Washington, D.C.

AT&T Chairman C. Michael Armstrong solidified his position as king of the telecommunications world. He avoided a costly, drawn-out bidding war for MediaOne by crafting a multifaceted agreement with both Comcast and Microsoft. And he promised AT&T will not sit still, continuing its quest to fashion deals to further dominate the cable, telephone and Internet worlds.

Armstrong predicts the 21st century will be a time of "bundled digital communications," which will usher in nothing short of a media business revolution. No longer will there be separate phone, long-distance, cable and Internet companies. He hopes his media colossus will satisfy these needs through one digital wire for one price.

Armstrong first must get the cable deal to work. Step No. 1: obtain stockholder and federal regulatory approval. Next: upgrade millions of wires.

Critics have already cried foul, saying this deal has placed too much power in the hands of a single company.

With this multipronged deal, AT&T says it would supply cable to 35 percent of U.S. homes. That figure could violate a Federal Communications Commission cap of 30 percent adopted in 1993--but never put into effect. The FCC stayed the rule's effective date after two companies challenged the limit. FCC officials say the commissioners are expected to vote on this cap by the end of the year.

AT&T also could have problems with rules that restrict ownership in other cable systems.

Expect lots of congressional hearings this summer and fall--and maybe some debate in the 2000 presidential campaign.