‘Special Case’ Deal Is Unlikely to Lay the Groundwork for Copycats

AT&T;’s proposed acquisition of Tele-Communications Inc. signals brighter days ahead for the cable industry, but it won’t result in the string of copycat deals between telecom and cable companies that followed the failed TCI deal with Bell Atlantic four years ago, according to industry analysts.

“The TCI-AT&T; deal is an unusual case,” said Patti A. Reali, analyst at Dataquest, a San Jose-based market researcher. With only about 30% of its infrastructure upgraded for the Internet, compared with twice that level for Time Warner and Cox Communications, TCI “needed the cash to bring their systems up to snuff.”

AT&T; is also a special case because its strong brand recognition among consumers gives it an incentive to push aggressively into the business of offering local telephone services to residential homes.

By contrast, said Abhi Chaki, an analyst at New York-based market researcher Jupiter Communications, “Sprint and MCI are focusing on the business market.”

On the part of cable companies, Time Warner has expressed little interest in finding a telecom partner since its deal with US West soured, while Cox Communications has chosen to begin offering telephone services on its own in markets such as Orange and San Diego counties.

Indeed, though stock prices of cable companies surged following the AT&T-TCI; announcement, analysts said the high prices don’t reflect Wall Street expectations of more large merger deals.

“I don’t think we are expecting a lot of other [telecommunications companies] to buy up cable companies,” said Jessica Reif Cohen, an analyst at Merrill Lynch.

Cohen said AT&T;’s willingness to pay a significant premium for TCI underscores the key role cable companies are likely to play as the “gatekeeper” for Internet access and for alternative telephone access to the home, providing a potentially significant new source of revenue.

Jupiter estimates that 12% of all households will receive Internet access through their cable companies by 2002, generating $1.7 billion in revenue for the companies. Revenue from offering telephone, interactive video and Internet commerce “will all be added to the bill,” said Jupiter’s Chaki.

Analysts do expect more consolidation within the cable business in coming years because of the advantages to companies of amassing customers within given geographic areas. AT&T;, analysts said, could acquire other smaller cable companies in an effort to fill in areas not well-served by TCI.

But Mark Plakias, managing director at Strategic Telemedia, a New York-based market research firm, predicted AT&T; will more likely make partnerships with other cable companies to reach households not covered as a result of its TCI merger.

Already, AT&T;’s proposed acquisition of TCI would make it a close partner with many cable companies. For example, its $11.3-billion investment in Teleport in January made it a partner to Cox and Time Warner in offering telephone services to businesses.

As part of its TCI acquisition, AT&T; would receive a controlling interest in @Home and become equity partners with cable providers such as Cox Communications and Comcast in providing high-speed Internet access.