July 22, 1999
AT&T Buys Into the Broadband Battle
by Louis Corrigan (TMFSeymor)
Email this to a Friend
Format for Printing
Kings of Cable
2. Time Warner
4. Charter Communications
4. Cox Communications (tied)
5. Adelphia Communications
These acquisitions have made AT&T the new king of cable -- surely one of the major surprises of 1999. The company will now control networks that reach perhaps 26 million customers, or a quarter of U.S. households. Through partnerships, it will be able to reach a total of 60 million homes. Just as important, AT&T's moves have solidified the notion that cable may play a central role in the future of the Internet and the broad multimedia telecommunications industrial complex.
The Internet's growing popularity as a medium for commerce and interactivity has finally made cable sexy just three years after it was declared moribund. That's because cable is one of the two main wires going into American homes that can transmit and receive audio, video, and other forms of rich media at high speeds. In the digital era, such fat pipes can serve multiple roles. Cable is now about "broadband," not just getting more TV channels. It will be used increasingly for high-speed Internet access and for cheaper local and long-distance calls. And those are only the more obvious possibilities.
Yet, upgrading cable systems to handle all of these services will cost some big bucks. Because some media and telecommunications players are better positioned to reap synergistic benefits from cable, consolidation has been sweeping the industry in recent months. For example, AT&T has gotten into cable partly to bypass the Baby Bells, which control the local telephone loop and thus get a disproportionate share of the loot on long-distance calls. It's also preparing itself for increased competition. Bell Atlantic (NYSE: BEL), for example, will soon start offering long-distance service. AT&T isn't just buying cable assets; it's also working on a deal with the new #2 cable operator Time Warner (NYSE: TWX). Other deals would allow AT&T to offer local telephone via cable throughout the country, even on cable systems AT&T doesn't own.
Ma Bell's moves have captured the headlines, but it's hardly been the only company doing deals. Between April of 1988 and March of 1999, billionaire investor Paul Allen (co-founder of Microsoft) acquired Marcus Cable, Charter Communications, InterMedia Partners, and Helicon Cable to build a serious presence in the industry. In May alone, Allen inked deals with Avalon Cable, Falcon Cable, and Fanch Communications that together added 1.8 million subscribers to the Charter empire. In late June, Allen paid $2.1 billion in cash and stock and assumed $1 billion in debt to buy Bresnan Communications and its 690,000 customers. These deals bolt Allen's Charter Communications into the fourth spot among cable operators with about 6.2 million subscribers.
Other major cable operators have been equally aggressive. Though Comcast lost the MediaOne prize, it walked away with up to two million subscribers as part of a peace pact with AT&T. That leaves it at number three on the cable hit parade with eight million subs. Adelphia Communications (Nasdaq: ADLAC), now tied for the fifth spot with five million customers, has agreed to acquire FrontierVision Partners, Century Communications, and Harron Communications in the past six months. Meanwhile, even the less acquisitive Cox Communications (NYSE: COX) spent $5.4 billion in May to pick up TCA Cable (Nasdaq: TCAT) and Media General (Nasdaq: MEGA), adding 1.1 million new customers to tie for the fifth largest cable operator. (And it recently announced plans to take half a million subs off AT&T's hands, pushing it to the 5.5 million mark.)
Cable assets have now been priced at a premium. Not too long ago, cable companies were valued at about $3,000 per subscriber. No longer. Adelphia paid $3,600 per customer for Century and $3,900 per head for Harron. To avoid a bidding war, AT&T paid a premium $4,600 per subscriber for MediaOne. Though the prices have been rising, they vary depending on the degree to which the systems have been upgraded for digital content. For example, Cox paid $4,115 per head for TCA, where about 45% of the system is Internet-ready. Charter paid $3,600 per sub for Falcon, whose system needs upgrading, but $4,000 per customer for Fanch, where the "plant" is in better shape.
These major cable system operators continue to scoop up remaining players and to shuffle assets among themselves to gather together large clusters of subscribers. Each will follow AT&T's aggressive move into the digital world, offering local telephone service and Internet access, possibly in cooperation with Ma Bell. The goal of AT&T and the others will be to put themselves in position to claim new revenue streams, thus spreading out initially higher but ultimately pretty fixed costs and thus boost both profits and profit margins. Consumers will benefit not just from the convenience of one-stop shopping but from lower prices. For instance, Armstrong has said additional phone lines will cost as little as $4, a fourth of what the Bells charge. The more services you buy from AT&T, the better deal you'll get.
However, high-speed Internet access remains the potential killer app since most Netizens would love more speed. Cable modems hook up to a personal computer via a standard Ethernet connection and allow consumers to access the Internet over a cable company's upgraded two-way, hybrid fiber coaxial (HFC) lines at peak transmission speeds of two to five megabits per second, or roughly 100 times faster than standard 56K dial-up modems. In theory, cable modems are at least twice as fast as the digital subscriber line (DSL) connections marketed by the Bells, which transmit data at speeds between 128K and 1.5 megabits per second. (In practice, cable lines will slow somewhat with increasing traffic.)
The leader in broadband-over-cable services is Excite@Home (Nasdaq: ATHM), a company that developed through partnerships with most of the major U.S. and Canadian cable companies. It's now controlled by AT&T, which also will control @Home's top rival, Road Runner, after the MediaOne merger is completed. @Home offers cable operators a relatively easy way to tap into Internet revenue streams. The company links a cable company's system to @Home's high-speed Internet backbone; it also provides customer service and billing. Even more important, @Home has developed a national brand built around its growing presence as the portal for a rich-media, broadband experience of the Internet. Its recent acquisition of Internet portal Excite (formerly Nasdaq: XCIT) has solidified its consumer-oriented interface and increased its content partnerships, important elements in allowing @Home to compete effectively with America Online (NYSE: AOL).
Excite@Home has relationships with some 18 cable companies, giving it potential access to over 58.7 million homes, including exclusive access to more than half the households in the U.S. and Canada. Upgraded two-way cable now passes some 17 million of these homes, and Excite@Home says over half the homes passed by its partners should be cable modem ready by the end of 2002. The company had 620,000 subscribers at the end of June, having nearly doubled the total from year-end 1998. It should easily reach its 1999 target of one million customers.
The major question at the moment is whether the Open Net alliance of America Online and other Internet service providers (ISPs) will be successful in forcing AT&T and other cable operators to lease access to its pipes under the same terms offered @Home. A judge in Portland recently ruled that cities could require cable operators to offer such "open access." However, AT&T is fighting the decision, and the Federal Communications Commission may change the rules in AT&T's favor if the appeal fails.
AT&T should ultimately conclude that it is in its financial interest to deal with AOL, in part because such a pact could derail the DSL challenge. But all the recent hoopla reinforces the fact that AT&T -- and cable -- has suddenly become the center of attention.
-- Talk About AT&T
-- AOL vs. Excite@Home Duel -- 6/23/99
-- AT&T, Comcast Sign Deal -- 5/5/99
-- AT&T Woos MediaOne -- 4/23/99
Next -- Pharmaceutical Unrest