Is AT&T's CEO the Net's new puppetmaster?
By Peter D. Henig
Red Herring Online
January 22, 1999
redherring.com
Never underestimate Ma Bell.
That's the lesson the @Home Network (ATHM)-Excite (XCIT) merger and the AT&T (T) -TCI (TCOMA) proposed acquisition are quickly teaching investors.
More specifically, don't underestimate Michael Armstrong, AT&T's crafty CEO, who is suddenly playing the Godfather (as Zona Research has dubbed him) to some of the most significant and industry-redefining deals yet in the converging telecom-cable-Internet-media space.
BITES WHEN CORNERED
"Since data and voice are converging in terms of distribution networks, the telcos are being forced to confront a media business model to effectively compete with an Internet transportation model," says Bob Emery, COO of BancBoston Robertson Stephens, which acted as advisers to Excite in its deal with @Home.
Telcos are also being forced to slice and dice their businesses in some unique ways. The Wall Street Journal reported that AT&T is now in talks to spin out its WorldNet ISP service to @Home for $1 billion.
If accomplished, this would be yet another impressive strategic maneuver by Mr. Armstrong. It would get the money-losing service off its books and into the hands of @Home, a company that could channel any future earnings or revenues from WorldNet back to AT&T. Moreover, it would give Mr. Armstrong an even larger controlling interest in @Home in the future, further allowing him to twist the company in whichever way best suits AT&T's needs.
"WorldNet's always been a problem child organizationally for AT&T," says David Simons, managing director of Digital Video Investments. "It's a perfect move to put it under @Home's umbrella."
It's also a perfect move to sell a business, in this case an ISP business, at more than twice the going rate per subscriber. Mr. Simons notes that with a $1 billion price tag, AT&T stands to receive the equivalent of $1,000 per WorldNet customer. Quite the deal, considering that "ISPs in the real world are bought and sold in the range of $100 to $250 per subscriber," according to Mr. Simons. Even if all stock acquisitions theoretically offer premiums of 50 percent or more on the selling price, that still means Mr. Armstrong and AT&T are getting double what they would have from outside of their keiretsu.
"If you're asking was @Home willing to pay this price, bear in mind, @Home doesn't have a choice," says Mr. Simons.
Such is the power of Mr. Armstrong to shape the future of not only AT&T and its new triumvirate of cable/Internet holdings -- TCI, @Home, and Excite. The deals take a cattle prod to both the media and communications industries, letting them know that there's a new sheriff in town, and he means business.
"We believe the [@Home-Excite] deal will force competing communications and content providers swiftly into each other's arms, forming new online service provider keiretsu partnerships to rival AOL," concluded analysts from Zona Research.
WE DON'T NEED NO STINKING CONTENT
In fact, America Online (AOL) is suddenly on the hot seat, and it's Mr. Armstrong who has put it there.
AT&T, through TCI, has access and will find it relatively easy to buy content. But AOL, which has content coming out its ears, has yet to put a broadband strategy in place. And with the broadband access market shifting to cable -- at least, that's how it appears this week -- AOL has had to resort to lobbying Congress and the FCC to guarantee cable access.
Mr. Armstrong, being no dummy, is fully aware that TCI, along with Time Warner's cable operations, represents 70 percent of current cable access into America's homes.
"You didn't hear it from me, but I think you could see some kind of deal between AT&T and Time Warner," says a Red Herring source close to both companies.
Waaaait just one minute.
What happened to analysts' pairing Time Warner up with America Online? AOL desperately needs access to those fat cable pipes to go along with its new DSL deals with GTE (GTE), Bell Atlantic (BEL), and MCI WorldCom (WCOM) and its rumored foray into satellite access with a potential buyout of DirecTV.
"AT&T and Time-Warner smell blood," says Mr. Simons. "They have an opportunity to coöpt the broadband space via cable, DSL notwithstanding. ... In fact, tell me one thing Time-Warner gets from AOL if it does a deal with them."
Mr. Simons has a point. Besides cash, AOL offers content to burn. But Time-Warner, one of the world's largest media companies, doesn't necessarily need it. In fact, like AT&T, the thing it could use is more local access to homeowners itself. With margins on long-distance calls shrinking to zero, Mr. Armstrong needs to find new, high-margin revenue streams through the Plain Old Telephone Service (POTS).
"Armstrong doesn't buy TCI for Internet stuff, he buys it for the 100-year-old dial tone. ... And by the way, he can offer Internet stuff as well," says Mr. Simons.
And it's not just AT&T's game to play. NBC has just announced a deal with Snap.com, of which it owns a controlling interest, to offer broadband service through a host of RBOCs. MCI WorldCom is not only allied with AOL, but with OzEmail (OZEMY), Australia's largest ISP, as well. And Lycos (LCOS) is on the block, as much a target for communications companies as it is for media conglomerates.
"Make no mistake about it," say the analysts at Zona Research. "AT&T is trying to be the puppetmaster, pulling the strings it needs to buy the Web strategy it could not build."
BOO HOO, YAHOO?
And hey, where does Yahoo (YHOO) fit in? The number-one portal has already publicly intimated that its brand name and broad reach will be enough to carry it through. Mr. Armstrong may have changed that, as well.
"We expect the @Home/Excite deal will force more companies to pick up the consolidation pace before the musical chairs game stops," surmises Keith Benjamin, Internet analyst with BancBoston Robertson Stephens, in his weekly Web report. "This seems to put the most pressure on Yahoo! to consider larger acquisitions."
What it also does is strap Mr. Armstrong even more strongly into the driver's seat at the center of the new broadband convergence landscape, with a major content owner like Time Warner -- and its equally shrewd CEO, Gerald Levin -- running a close second.
|
