AT&T Has a Lot to Swallow in Conversion to Cable
KNIGHT-RIDDER / TRIBUNE BUSINESS NEWS - May 07, 1999 05:30
May 7 (Chicago Tribune/KRTBN)--The refreshing boldness with which AT&T Chairman C. Michael Armstrong has remade the staid old long distance company into the leading proponent of converging computers, TV and phones can't hide this fact: If his strategy fails, it will cripple AT&T, perhaps fatally.
Upgrading cable TV systems run by TeleCommunications Inc., which AT&T bought earlier this year, and those run by MediaOne Group, which AT&T now has arranged to buy, will cost billions. What's more, the technology to use those systems to deliver high-speed Internet and digital phone service has yet to be proven for large-scale commercial applications.
Software giant Microsoft Corp. desperately wants this kind of convergence in order to open new markets for its products and announced Thursday it would invest $5 billion in AT&T, presumably to move things along. That was welcome news to Ma Bell, which may require a lot more money and aid to make Armstrong's strategy work.
The market continued to reward Armstrong's vision Thursday, as AT&T's stock jumped $5.06, about 9 percent, to $61.88 while Microsoft slipped $1 to $78.13.
Eventually, though, AT&T's deal-making must be followed by execution.
"It was way easier to get these deals done than it will be to implement them," said Kenneth D. Anderson, president of Anderson Pacific Corp., a Chicago-base private investment firm specializing in telecommunications.
"It is one thing to send a good picture reliably downstream on a cable system, but when you make that a two-way system, the difficulties escalate geometrically. It's not twice as hard, but maybe four times," he said.
One thing some people may overlook is that before it was called MediaOne, the cable company AT&T is buying had been sold to another major phone company, U S West Corp. That Denver-based Bell later spun off MediaOne after abandoning plans to upgrade cable TV to carry telephony.
But even if AT&T can overcome technology hurdles to deliver high-speed Internet, TV and digital phone service over a single pipe, it could still stumble.
"The plain fact is that no one knows to what extent customers even want all these new services," said Andrew Lubetkin, a Winnetka-based telecommunications consultant. "After spending billions to bring these services to neighborhoods all over the country, there's no guarantee many people will buy."
Americans already spend four or five hours a day watching TV, Lubetkin said.
"The real shortage these days is time," he said. "Where will they find time to buy and use more services?"
However, Microsoft and AT&T both have major incentives to persuade customers to embrace interactive services, said Jeff Kagan, an Atlanta-based telecommunications consultant.
"Microsoft needs to get its software into set-top boxes in the home as well as desk-tops in the office, since that's where market growth will be," Kagan said. And AT&T needs to reach customers directly with its own connections instead of relying upon the local Bell companies that have a monopoly on phone lines to residential neighborhoods.
But the teaming of the nation's biggest phone company with the dominant software maker to upgrade cable television may play into the hands of local Bell companies. The Bells fear that if Armstrong's strategy works, they'll lose their monopoly grip and with it huge chunks of marketshare.
When Congress passed the new telecommunications law three years ago, politicians promised it would promote competition by getting cable TV operators, local phone companies and long distance carriers to enter each other's business. But instead, the new law spawned an orgy of industry consolidation with long distance companies and local Bells buying each other.
AT&T's move is precisely what policymakers had in mind three years ago, said Anne Bingaman, once the top antitrust lawyer for the Clinton administration and now in private practice in Washington.
"Using the cable to compete with the Bells is what the policymakers envisioned," she said.
But now the Bells are alleging that AT&T threatens to create a new monopoly over the nation's communications infrastructure, which misses the point, Bingaman said, although independent Internet providers like America Online are threatened by AT&T's stance promoting its own Internet service.
At the annual meeting of SBC Communication Inc. shareholders last week, Chairman Edward Whitacre Jr. said he will actively oppose AT&T's purchase of MediaOne.
This week a Bell-sponsored organization called Keep America Connected took out a large advertisement in the New York Times calling AT&T's MediaOne play a "dangerous and aggressive plan to dominate the way Americans communicate to an extent no force, institution, company or person has ever been allowed." The Bells are urging allies in Congress to investigate AT&T's deals.
"You can count on the Bells to continue to raise objections to any move AT&T makes to secure a beachhead in their franchise territory," said Robert Rosenberg, president of Insight Research Corp., a telecommunications consultancy based in Parsippany, NJ.
"AT&T and the Bells come from a common heritage that is predicated upon using lawyers and lobbyists to further their interests. The Bells will meet their match in the lobbying halls and courtrooms. AT&T will stand toe to toe with them in those venues."
Rosenberg noted that Armstrong emphasized AT&T's deal with Microsoft isn't exclusive; that the firm will make similar deals with other software vendors. Armstrong has also offered to negotiate with America Online to give it access to the new networks AT&T is creating.
"If Armstrong proves he is willing to keep his systems open, he will succeed in sheparding these deals through regulatory review," said Rosenberg. "But even then, this venture is very risky.
"The technology and marketing needed to make it work are totally unproven on this scale."
By Jon Van
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