AT&T's $11.3 billion merger with Teleport Communications Group advances the long-distance giant's goal of establishing a major presence in the local business-calling market. It also brings AT&T closer to the three cable-industry heavyweights who are Teleport's majority owners.
As part of the transaction announced Thursday, Tele-Communications Inc., Cox Communications and Comcast will exchange their interest in Teleport for AT&T shares. Consequently, the three cable giants will collectively own 10 percent of AT&T.
New AT&T chief executive C. Michael Armstrong played it coy when asked if the deal represents the beginning of a new strategic relationship between his company and the cable guys.
"Somebody's pretty strategic to me when they own 10 percent of our company," Armstrong said. He acknowledged that he has had meetings with his cable counterparts on other subjects, but he declined to provide details. "This transaction stands on its own," he said.
But there are good reasons to wonder whether AT&T plans to get even cozier with one or more cable companies.
Foremost among them is AT&T's still gaping hole in its strategy to offer local service to residential customers as well as to businesses.
Like other so-called competitive local exchange carriers (or CLECs), such as MFS Communications and Brooks Fiber Properties (both of which were bought last year by WorldCom), Teleport has built its fiber-optic networks in urban areas to serve high-margin business customers. Thus they have no existing resources that AT&T can use to reach households in smaller towns and neighborhoods.
Armstrong insists AT&T is committed to reaching those customers. Reports coming out of AT&T indicate that Armstrong believes "ATT should physically touch 50 percent of their customer base within two years, and 80 percent to 90 percent within five years," says Michael Mahoney, manager of the GT Global Telecommunications Fund.
BLOCKED FROM REACHING OUT
Right now the only customers that AT&T has direct contact with are subscribers to AT&T Wireless. AT&T can only "touch" its long-distance customers through the local carriers (primarily the Baby Bells) that it relies on to complete all of its long-distance calls. To change that, AT&T must either build or, more likely, buy wires into its customers' homes.
One way to do that, many analysts say, is by joining forces with a cable company. Cable networks today pass nearly all of America's households. If that network is upgraded so it can handle two-way communications, AT&T conceivably could use it to provide local phone service -- and end its reliance on the Baby Bells.
Indeed, rumors have been swirling for months that AT&T will make a significant investment in TCI to advance that goal. Ted Henderson, who follows TCI for Janco Partners in Denver, says "TCI is going to be the most receptive [to AT&T] because they're the ones that need the upgrades the most." Other cable companies like MediaOne and Cox, which already have made headway in getting their networks ready for two-way communications and have phone-service ambitions of their own, have less to gain from a partnership with AT&T, Henderson says.
Armstrong did say Thursday that AT&T is examining "all of the options in the market ... to reach both business and consumer customers," and that cable is a "consideration."
Still, even with a major investment, it would take several years to get a majority of TCI's cable plant phone-ready. Thus, many analysts predict AT&T will opt instead for additional purchases of CLECs, including perhaps wireless-carrier Winstar or ICG Communications. A blockbuster purchase of a mainstream local carrier is also still widely rumored, with GTE the leading candidate.
CLOSER RELATIONSHIP
Even if a major AT&T-cable alliance does not come to pass, GT Global's Mahoney says the Teleport deal "will bring AT&T and the cable companies closer together."
The most likely scenario, in Mahoney's mind, is a range of smaller joint ventures in such areas as high-speed Internet access, particularly through the cable-backed @Home service, and resale of long-distance service.
Still, the book may not yet be closed on Teleport. "There is a possibility of someone else trying to get in on the Teleport side," says Tom Jenkins, a consultant with TeleChoice in Oklahoma City.
Sprint would be the most likely candidate to enter the bidding, Jenkins says, because the No. 3 long-distance carrier so far has made few moves of its own to enter the local calling market.
AT&T and Teleport officials gave strong assurances Thursday that theirs is a done deal. But as WorldCom demonstrated by swooping in and toppling British Telecom's planned purchase of MCI, telecom deals these days are anything but predictable.