Comcast, AT&T and ATHM

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By CoolMoose
July 20, 2001

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Thought I'd post my thoughts on the Comcast offer for AT&T Broadband.

When AT&T decided to gobble up TCI and M1, the model was clearly convergence. Offer cable TV, telephone, high speed Internet, all on one bill. Bypass the telephone companies (telcos) for the customer.

While I never really bought into that model, as a consumer I liked that someone was trying it. I live in Cox territory, and when they upgraded the cable plant here I immediately signed up for high speed Internet. I turned down the digital telephone offer, as I was skeptical about the service level on my phone.

My brother, who lived in the same town, immediately hopped on the digital telephone service, and let the high speed Internet pass him buy. For years he had been furious that a second line from the phone company cost more than the first, and the new digital telephone offer from COX promised a second phone line at half the cost of the first.

After about 6 months, we compared notes. His digital telephone service had been flawless. No outages, no static. Just as good as SBC's service, and a whole lot cheaper. My cable Internet service was blindingly fast, and after a quick demo, he signed up, and we got my dad to sign up too.

We salivated at buying ATHM stock, but could only afford a few shares at $95 per share.

So what is the point of all this? Well, there are several.

First, Comcast is looking to buy the AT&T Broadband subscribers. Why? Well, they see the cash cow and want it. They are simply adding to their herd of cattle. They first and foremost want to milk those cable TV customers. Secondarily, they see a possible revenue stream for Internet access. But don't fool yourself, Comcast wants the cable TV subs first. If they wanted AT&T Broadband for ATHM, they could just offer to buy ATHM from AT&T (or control thereof). It would be a heck of a lot cheaper to do it that way.

Comcast has no illusions about this industry. They see the following facts:

Customers only change trusted service providers when they see a much greater value proposition. Applied, this means that:

o People will only switch their phone service if the service is much better, or the price is much lower. Local phone service is about as good as anyone wants it. So the only competition is on price. So if you want to enter that business, understand that you aren't going to get local telco margins. Bottom Line: You ain't gonna get rich selling commodity phone service.

o In order to get people to dump their ISP, you'll need to show them something they can't get with their current provider; ATHM shows them blinding speed. Once a customer sees it, they want it. Comcast knows this, and so they see the Internet sector as attractive to them.

o Local telcos can be attacked from the cable companies, but the reverse is generally not true. Local telcos can't offer cable television services over copper, and so they don't have the infrastructure to compete on the cable TV end. They can and do offer competition on the Internet side.

o When you look at Satellite attacking the cable TV subscriber, you can use high speed Internet to thwart them. Everyone who wants cable Internet will sign up for digital cable too. If the customer isn't interested in Internet, then it's a fistfight.

So what does all this add up to? Well, to me it proves several things. First, Comcast has a good understanding of the long view. I don't really get why AT&T decided to undo what they had spent a fortune "doing" anyway. I understand that they are doing it to raise their stock price. Perhaps they saw the writing on the wall and understood that the whole of AT&T might get swallowed and broken up by an outside company if they didn't do it themselves. But they clearly have lost control of their own destiny. Comcast, on the other hand, understands the game. They are buying what they know, and they know how to turn a profit at it.

Second, ATHM is ancillary in all of this. Since Comcast first and foremost wants those cable subs, what happens with ATHM is less important. I find the discussions about "who owns the customer" very interesting. How open access will work is going to be the key. And on this score, I think Comcast "gets it." I think their thinking goes something like this: "If we buy AT&T Broadband and get ATHM as well, we can control what 'Open Access' looks like. We'll probably be able to put other ISPs on the line, but still 'own that sub'. We'll be so big, none of the ISPs will be able to object to that and still ride our line, and so we'll wrangle ownership of that sub. It's a nice fringe benefit of buying AT&T's cable TV herd."

So if this deal goes through, I would not expect to see ATHM be able to "own the sub" down the road when open access hits, nor will any of the other carriers. I do think that they can still share that sub and wholesale connections and make a decent profit. The only question will be if Comcast will let them. I still need to think about that one some more.