On the T/TWX conf call yesterday, Armstrong and Levin made it a point to emphasize several times that the deal EXCLUDED the RoadRunner service and was about telephony only. Not sure why. Any guesses?
The Wall Street Journal article I posted yesterday listed some of the complications of the deal and I'm guessing any inclusions or exclusions are related to how TW's Roadrunner and TCI's @Home services are ironed out. Once AT&T's deal with TCI is final, I suspect the issues will be easier to resolve.
From today's WSJ article:
For the near term, Mr. Armstrong indicated that AT&T won't be offering TCI's At Home Internet service in competition with Time Warner's Road Runner service. This may prove to be a vexing issue as the Internet continues to evolve.
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AT&T Steps Closer to Local Service
Through Accord With Time Warner
Agreement Would Provide AT&T With Access
To 12 Million Subscribers of Cable-TV Giant
By LESLIE CAULEY and REBECCA BLUMENSTEIN
Staff Reporters of THE WALL STREET JOURNAL
NEW YORK -- AT&T Corp. reached a long-sought agreement with Time Warner Inc. for access to the cable-TV giant's 12 million customers, part of a bid to offer local phone service nationwide.
Company Profile: AT&T
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AT&T Wins Phone-Card Contract With Wal-Mart (Feb. 1)
The pact, which still faces some hurdles, would give AT&T exclusive access to Time Warner's cable territories in 33 states. Time Warner's cable systems pass by 19 million households.
The agreement moves AT&T one step closer to offering local phone service independent of the Baby Bells, setting the stage for consumers to have a real choice of local phone providers.
AT&T indicated Monday that it may be able to slash prices for local phone services, additional lines and other services by up to 25% over rivals in some markets, including New York City. AT&T plans to do this by offering customers bundles of voice, data, cable and wireless services.
The Time Warner pact is aimed at helping AT&T sidestep the regional phone companies, which in most cases control the crucial "last mile" of telephone lines into homes and offices and have proven resourceful in forestalling competition.
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AT&T's New Partner
Key terms of the AT&T/Time Warner joint venture:
Ownership: 77.5% AT&T and 22.5% Time Warner
Control: Time Warner and AT&T will each get four seats on a board that governs the joint venture. A CEO and process for determining deadlock votes have yet to be selected.
Reach: Up to 50% of the nation's potential cable customers, including Time Warner, TCI and its affiliates, some of which still have to reach agreements with AT&T.
Terms: AT&T will pay a monthly fee for each cable customer who signs up for phone service, rising from $1.50 in the first year to $6.00 in the sixth year. AT&T guarantees signup rates of 25% in the sixth year.
Time Period: Time Warner gives AT&T 20-year exclusive use of its cable lines.
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AT&T, however, may face criticism from consumer groups, the Baby Bells and possibly regulators for signing an agreement that specifically bars other long-distance companies from offering phone service over the Time Warner cables. AT&T is already under fire for resisting attempts by some regulators to be more generous in opening up TCI's cable lines to Internet rivals.
"There are only two lines to the home, and AT&T seems to be locking one of them up," said Brian Adamik, a consultant with Yankee Group, based in Boston.
Ameritech's Criticism
Chicago-based Ameritech Corp. in a statement, called the Time Warner phone pact "another example of AT&T's continuing effort to dominate phone service in this country." Ameritech is in the process of being acquired by SBC Communications Inc., a fellow Baby Bell that previously acquired another Bell.
Last June, AT&T took its first step toward entering the local phone business by agreeing to acquire Tele-Communications Inc., one of the country's largest cable-television providers. With its new Time Warner pact, and expected agreements with TCI's affiliates, AT&T is on its way to reaching 50% of the nation's homes through their cable lines.
Negotiations between AT&T and Time Warner have been going on for months. Despite this, the two sides have yet to reach a definitive agreement. Both companies said they are hopeful of signing such a pact within 90 days.
Once they agree on final terms, Time Warner still needs approval from partner MediaOne Group, a big cable company based in Denver. MediaOne retains veto rights over Time Warner's cable systems.
According to several executives familiar with the matter, MediaOne, while open to an AT&T pact, continues to have some concerns about how the Time Warner agreement is shaping up. "To say [MediaOne] is supportive" of the new phone pact "would be an overstatement," said one executive. MediaOne's concerns include the types of services AT&T will be permitted to transmit over Time Warner lines, and other financial and corporate governance issues.
In composite trading on the New York Stock Exchange Monday, AT&T shares rose $2.8125 to $93.5625, while Time Warner shares slipped 18.75 cents to $62.3125.
Watershed Agreement
AT&T and Time Warner officials described the 20-year pact as a watershed that will speed the convergence of the cable and telecommunications industries.
"There was only one true partnership that we wanted, and that was with AT&T," said Gerald M. Levin, Time Warner's chief executive officer. He said the deal could ultimately help increase demand for cable services nationwide by enticing consumers who want good deals on their phone and cable service. An estimated 65% of the country subscribes to cable.
C. Michael Armstrong, AT&T's chairman, noted that Monday's agreement was only possible now that AT&T is on the verge of becoming a cable company with its purchase of TCI. The acquisition is expected to be approved by AT&T and TCI shareholders later this month.
The Time Warner pact "is a marriage of the best brand in the communications industry with the most advanced broadband network in the country," said Mr. Armstrong. There has been mounting pressure on Mr. Armstrong to complete the Time Warner negotiations.
It remains to be seen how smoothly Time Warner and AT&T will collaborate. Cable-telephone marriages haven't historically worked out well. The two industries have profoundly different cultures, and often clash over style and strategy. Moreover, sending phone calls over cable lines turned out to be more technically challenging and costly than first thought.
But some observers now say the underlying cable and telephone technologies will mesh neatly. "I think the technology is going to work," said Frank Governali, an analyst with Credit Suisse First Boston. The success of the joint venture, he added, "will come down to how the companies market their services."
Costly Move for AT&T?
The new pact comes at what could be a stiff price for AT&T. Under terms of the deal, Time Warner will assume virtually no risk in adding local phone service to its bundle of video and data offerings. Moreover, with four out of eight seats on the board that will govern the joint venture, Time Warner will essentially retain broad control over what types of services AT&T will get to pipe in over Time Warner's cable lines.
Time Warner will own a 22.5% stake in the joint venture compared with AT&T's 77.5%. The companies plan to test local phone service in two markets this year, and begin offering it nationally in 2000. This mirrors AT&T's plans to roll out phone services with TCI.
For the near term, Mr. Armstrong indicated that AT&T won't be offering TCI's At Home Internet service in competition with Time Warner's Road Runner service. This may prove to be a vexing issue as the Internet continues to evolve.
AT&T is liable for payments to Time Warner whether or not customers materialize. Payments rise from $1.50 to $6 a customer per month over the next six years. AT&T set a minimum goal of signing up 25% of Time Warner's customers by 2005, when the fees will amount to $360 million annually. AT&T said much of the cost would be recouped in anticipated savings on fees AT&T now pays to the Bells for connecting long-distance calls. In addition, AT&T will spend at least $2 billion to equip homes to carry telephone calls over cable lines. Under the venture, which AT&T says won't dilute its earnings, Time Warner will pay to upgrade its own cable lines.
AT&T's Revenue Goals
AT&T said the revenue it is anticipating from the deal will amount to $4 billion annually after the third year. A portion of that revenue will be shared with Time Warner after the fifth year. In addition, AT&T will also invest $600 million to provide power upgrades, necessary for continuous local phone service in case of power outages, to Time Warner's cable lines. Mr. Armstrong described the 25% goal of signing up Time Warner customers as conservative.
AT&T hopes to use the landmark Time Warner pact as a model for forming alliances with other cable companies. Mr. Armstrong indicated Monday that the terms AT&T is giving Time Warner will be the most favorable in the industry, a nod to Time Warner's big subscriber base and attractive markets.
But other cable companies apparently have other ideas. According to executives familiar with the matter, Cox Communications Inc., Comcast Corp. and MediaOne are currently negotiating jointly with AT&T for a volume deal that would leave the trio with terms that are potentially more generous. Together, the cable networks of the three companies pass more than 20 million subscribers.
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Earlier articles:
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February 1, 1999
Dow Jones Newswires
AT&T, Time Warner Form Cable Relationship
Dow Jones Newswires
NEW YORK -- AT&T Corp. (T) formed a strategic relationship with Time Warner Inc. (TWX) that will include a venture to offer AT&T-branded cable telephony services to residential and small business customers over Time Warner's existing cable television systems in 33 states.
In a press release Monday, the companies said they expect to pilot the service in one or two cities by the end of 1999 and to begin broader commercial operations in 2000.
The companies also agreed to jointly market communications services and to develop other broadband communications services, such as video telephony.
AT&T said the Time Warner venture, together with AT&T's merger with Tele-Communications and its agreements with five TCI affiliates, enables AT&T to reach more than 40% of U.S. households over the next four to five years.
AT&T will own 77.5% of the venture and Time Warner will own 22.5%.
AT&T will fund the venture's negative cash flow. However, AT&T expects the venture to have a positive cash flow and earnings after three full years of operations.
AT&T also expects the venture to have annual revenues of $4 billion in the same time period.
AT&T posted $53.22 billion in revenues in the year ended Dec. 31, 1998. Time Warner had $13.29 billion in revenues in the year ended Dec. 31, 1997.
The companies said the venture will acquire the exclusive rights to offer residential and small business telephony services over Time Warner's cable systems for 20 years.
In return, the venture will make a payment of $15 to Time Warner per home passed as systems are upgraded.
The payment, which will be made to Time Warner in two installments, is expected to total about $300 million.
The venture will also pay a monthly fee of $1.50 a telephony subscriber, scaling up to $6 a month over a six-year period, with guaranteed minimum penetration levels.
AT&T said it expects that "even in the later years of the agreement, the monthly fee is far below the best rate offered by incumbent local telephone companies for leasing the wires between their switching centers and people's homes."
In addition, the cable dedicated to communications can support multiple lines into each home.
The companies said Leo Hindery, president of Tele-Communications, will head the AT&T/Time Warner venture. Hindery will head AT&T's cable service operations once the AT&T/TCI merger is complete.
Time Warner Cable will remain responsible for upgrading its cable systems to support two-way communications. It expects the upgrades to be 85%-completed by the end of the year and to be finished by the end of 2000.
AT&T will be responsible for the venture's capial expenditures, including the cost of powering the system and, as customers sign up for the service, the cost of adding communications equipment to cable nodes and in people's homes.
AT&T expects the costs of adding equipment to homes to eventually range from $300 to $500 a home, depending on whether or not the customer already subscribes to Time Warner's video service.
AT&T and Time Warner also plan to establish several market "laboratories" in 1999 to develop and test a range of broadband communications services, such as video telephony. The companies will work together in the development and deployment of these applications.
The companies expect to finalize their agreement within 90 days and to close their venture in the second half of the year.
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Dow Jones Newswires
AT&T/Time Warner Venture Holds Guarantee For Time Warner
Dow Jones Newswires
By Shawn Young
NEW YORK (Dow Jones)--The joint venture agreement between AT&T Corp. (T) and Time Warner Inc. (TWX) includes guaranteed monthly payments by the phone giant to the cable company, the companies said Monday.
AT&T, which also is buying cable giant Tele-Communications Inc. (TCOMA), will sell combined local, long-distance, Internet and cable service over cable wires. The Time Warner deal nearly doubles the number of homes AT&T can reach via cable to about 43 million, with additional deals in the works.
In addition to about $600 million AT&T will put into the Time Warner venture, and the $300 to $500 it will pay to hook up customers who take the service, AT&T will pay Time Warner a monthly fee for each customer who signs up for its phone service.
AT&T is guaranteeing Time Warner that by six years into the venture it will pay monthly fees for 25% of the customers eligible for the venture's phone service whether they sign up or not, company officials said.
The monthly fees will be $1.50 per phone customer at first and will go up to $6 over a six-year period.
Company officials said the guarantee is based on conservative estimates of the popularity of the service, which will provide multiple phone lines and related services like voice mail along with an array of other services at discounts to current rates.
AT&T Chairman and Chief Executive C. Michael Armstrong said the company has easily signed up large numbers of customers in market segments such as in-region long-distance, where it competes with the regional Bell companies.
The joint venture will report to Tele-Communications President Leo Hindery, who will become head of AT&T's cable service operations once the merger between those companies is complete.
Hindery said the guarantee does not seem risky.
Hindery said it is likely that the deals AT&T strikes with other cable companies are also likely to include some guarantees, although the particulars may differ.
AT&T is widely believed to be working on deals with other cable providers that will allow it to reach 60% of the homes in the U.S. Among the other cable companies are Cox Communications Inc. (COX), MediaOne Group Inc. (UMG) Comcast Corp. (CMCSA) and Cablevision System Corp. (CVC).
If the venture doesn't attract at least 25% of the eligible customers, or about 5 million households, "the whole thing is going to fall apart anyway," said Time Warner Inc. President Richard D. Parsons.
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