FOOL PLATE SPECIAL
Seeing the troubles facing competitive local exchange carriers (CLECs) brings AT&T's cable spending spree into perspective. Buy buying up cable assets, AT&T bought its way into a third of American homes for a hefty price, but avoided the hassle of dealing with access to the Baby Bell's infrastructure. Only time will tell if the strategy will pay off.
 |
|
|||||||
|
||||||||
|
||||||||
By
When AT&T (NYSE: T) culminated its $100 billion-plus spending spree for cable companies with a bid for TCI, I thought the $3,000 per customer deal was nuts: It would take years to recoup the acquisition price, not to mention that only a quarter of TCI's cable network is configured for two-way transmission -- a prerequisite for high-speed Internet and cable telephony access. I didn't doubt AT&T's strategy, necessarily, but the price it paid for access to those cable lines. The company, after all, already had access to the home through good old-fashioned copper wire. Sure, it was somebody else's copper wire, but it was access nonetheless. And talk of digital subscriber line (DSL) service, which offers Internet access at speeds similar to cable access over phone lines, was on the upswing. So why not use the network in hand? Because reselling capacity on the competition's lines is a nightmare, and that is precisely what AT&T wanted to avoid with its acquisition of cable companies. Its cable purchases gave it access to the home without having to deal with its possessive children: Despite the Telecommunications Act of 1996, which supposedly opened up the last-mile connections to American homes, the Baby Bells -- or incumbent local exchange carriers (ILECs) -- have made it "extremely difficult for competitors to interconnect with their networks," according to the Association for Local Telecommunications Services (ALTS). AT&T CEO C. Michael Armstrong anticipated these troubles, paying through the nose to circumvent them. Competitive local exchange carriers (CLECs) are learning this lesson the expensive way, as they deal with franchise fees and onerous regulations, and it still remains to be seen if they can turn a profit. (For more on these businesses, visit our Telecom & Networking InDepth page.) AT&T, meanwhile, is slowly using the cash flow from his newly acquired cable assets to pay down debt and upgrade the network for two-way transmission. Sure, long-distance revenue is disappearing faster than Krispy Kreme (NYSE: KKD) donuts at a law enforcement convention, but AT&T has an operational network in place that is spitting off cash flow in the billions -- something any CLEC would kill for. CLECs, according to the ALTS, control 8.3% of the local telecom markets with $39 billion in combined revenue. Unfortunately, they have spent more than $56 billion in new infrastructure to get that revenue. It is expensive to build communications networks. In fact, that is why AT&T was set up as a monopoly in the first place. In exchange for no competition, Ma Bell had to provide service to everyone. Perhaps Armstrong learned something from AT&T's past about how expensive it is to build a telecommunications network, and decided to buy rather than build. While ALTS notes that CLECs hold only 8% of local cable access lines, TCI's access rights opened up 33 million -- or one-third of U.S. -- households. Now that I've got a handle on why AT&T wanted to become the largest cable operator in the country, I'm not so sure I understand why Armstrong is dismantling the company. Todd Lebor is glad George Lucas decided to release Star Wars: The Phantom Menace on DVD. At the time of publication, he did not own shares of any of the companies mentioned above. Todd's holdings can be found online, along with the Fool's complete disclosure policy.
RSS Headlines
Fool UK
