An AT&T-Comcast Deal Could Set Back Convergence in Telephone, Cable Industries
Tech Center
By JARED SANDBERG
Staff Reporter of THE WALL STREET JOURNAL
July 12, 2001
Remember the great idea of providing telephone service over cable-TV lines, a setup predicted to unleash price-slashing competition with the Baby Bells?
Put it on hold. AT&T Corp. has been the most aggressive proponent of such "cable telephony." But with a potential sale of its cable systems to Comcast Corp., AT&T's service could be an endangered species.
Comcast's Bid to Buy AT&T Broadband Puts the Roberts Family in the Limelight (July 10)
"How fast do you want to go with yesterday's technology?" Comcast's chief executive, Brian Roberts, asked Monday, referring to AT&T's foray. Comcast has offered $40.4 billion for AT&T's cable systems, a bid the phone giant says it is considering.
When AT&T made a $100 billion bet by buying cable systems over the past few years, fierce competition between the phone and cable industries seemed all but assured. Now, the possibility that AT&T's cable assets could be returned to the cable industry seems very real. It sends another signal that the two industries are opting to protect their own businesses rather than raid each other's, with the exception of supplying high-speed Internet access.
"The truth is, they have never come to blows," says Gary Arlen, president of Arlen Communications Inc., a Bethesda, Md., technology research company. "They size each other up, they dance around each other and they back up to their familiar corners."
The upshot for consumers: higher cable and local-phone fees "with no one in either market positioned to challenge or discipline them," predicts Gene Kimmelman, co-director of Consumers Union's Washington office.
Cable's lack of success in phone service is rivaled only by the failure of the phone industry to offer cable-style video services. Fearing the cable industry would raid its telephone turf, the Baby Bells throughout the 1990s poured hundreds of millions of dollars into Hollywood-style programming ventures and video services, some delivered through traditional cable lines, others by experimental phone or wireless networks. But most were later shuttered or sold.
SBC Communications Inc. has either closed or divested the video efforts started by the Bell phone companies it acquired, Pacific Telesis and Ameritech. Verizon Communications Inc. abandoned most of the pioneering video efforts of its predecessors, Bell Atlantic and GTE. "The cable business is best left to those who know what they are doing," SBC's chairman, Edward Whitacre, said earlier this year.
Behind each industry's retreat is the huge cost of entering the other's business. The so-called convergence of the nation's communications infrastructure -- the use of one pipe to deliver entertainment and communications -- was supposed to usher in cost efficiencies that could be a boon to consumers as well as the businesses behind them. Gigantic mergers -- including AT&T's purchase of cable powerhouse Tele-Communications -- were in part predicated on the cost efficiencies.
But "convergence was a great technology idea and a lousy investment idea," says Scott Cleland, chief executive of the Precursor Group, a Washington research firm. "It was an investment banker's dream and an investor's nightmare."
AT&T's cable telephony strategy gives Comcast executives the shivers. The phone giant wanted to quickly gain control of an electronic pipe into homes instead of relying on leased Bell lines. So AT&T invested as much as $5 billion to upgrade parts of its cable network with a traditional phone setup called circuit-switched technology. AT&T couldn't wait for a cheaper phone technology, still being perfected, that uses an Internet technique known as a packet network.
In the first year of service, each phone subscriber added to a cable network using circuit-switched technology costs the cable company $1,210, compared with $770 a subscriber on a packet-based system, according to Morgan Stanley.
Building a circuit-switched network requires AT&T to virtually reconstruct its cable system. The wire that runs from the street to the home has to be changed to be able to handle electrical power. So does the tap the cable attaches to. Special power supplies, which work in a power outage, have to be installed in various parts the network. And the cable system's buildings have to be able to withstand thunderstorms, hurricanes and earthquakes to provide the reliability phone customers expect.
That's why the cable industry -- with the exception of AT&T and Cox Communications Inc. -- has largely decided to wait for the lower-cost Internet-based phone services to mature. "We felt our capital was better spent on other emerging technologies," says an AOL Time Warner Inc. spokesman, referring to video on demand and high-speed Internet access.
Cox has pursued phone service aggressively and now sells primary lines to 300,000 of its cable customers in eight markets. It has prepared about 2.6 million homes to hook up to the service. Mark Major, Cox's treasurer, says that offering phone service on top of video is "the glue between us and the customer. It reduces our churn." But Cox says other services such as digital TV and high-speed Internet are its primary focus.
For some insight into how Comcast might handle AT&T's telephone service, one need look no further than Detroit. At the end of last year, Comcast acquired the AT&T cable system there, which had been offering customers local phone service using a circuit-switched network. Comcast says it has no plans to expand the service and is simply trying to get it to the break-even point. In the seven months it has owned the system, the company has added little more than 5,000 phone subscribers. Cox, by contrast, adds that many subscribers in less than two weeks.
Comcast executives say that if they acquire AT&T's cable systems, they won't expand the availability of phone service but will try to add to the more than 700,000 AT&T local phone customers in communities where the network has been retrofitted. The company has instead aggressively participated in improving voice service based on Internet technologies.
In a recent report, Morgan Stanley predicts that in 2010, five out of every 10 homes will take high-speed Internet service from a cable operator. But just two out of the five will use cable phone service. |
