Merger Could Drive a New Round of Consolidation

Industry experts predict that Comcast Corp.’s $52-billion acquisition of AT&T; Corp.’s cable business will drive another round of consolidation as both cable providers and programmers look for negotiating leverage that size and scale bring.

The proposed AT&T; Comcast Corp. would reach 22 million households--more than one-fifth of the nation’s homes--and become double the size of the next-largest cable operator, AOL Time Warner Inc..

Analysts say that will give the new company unparalleled clout with advertisers, programmers, software suppliers such as Microsoft Corp. and service providers such as America Online looking for high-speed access to consumers. Cable wires are considered the preferred future pathway into U.S. households for delivering television, Internet and telephone services.

“For the first time since AOL Time Warner, there is a cable operator with a footprint large enough to drive content, advertising and technology standards on the scale of broadcasters,” said David Limp, chief strategy officer of Liberate Technologies, a software supplier to the cable industry.

Smaller cable operators could face pressure to catch up. Certainly, AOL and Cox Communications Inc.--the losing bidders for AT&T;’s cable operation--are seen by Wall Street as ready buyers.

Wall Street continues to be rife with speculation that AT&T; Comcast would go after Walt Disney Co. next, eager to have the same strength in content and distribution as AOL Time Warner.

One favorite scenario within the cable industry is for AOL to buy Cablevision Systems Corp., tightening its stronghold on the New York-Long Island market. AOL Time Warner then would have close to 16 million subscribers. Another possibility has the three mid-sized companies--Cox, Charter Communications Inc. and Adelphia Communications--merging to create the second-ranked behemoth, with more than 18 million subscribers.

Such consolidation would put 90% of the nation’s cable subscribers into the hands of three companies. It also would fulfill cable mogul Ted Turner’s prediction in November that within a year there would be only two or three cable operators left.

“This is a major shift in the tectonic plates of the industry,” said Amos Hostetter, a cable pioneer and AT&T; board member. “Who will line up with whom? It’s too early to tell.”

Cable stocks were mostly lower in Thursday’s trading, but the shares have largely been spectacular performers since 1997, as Wall Street has warmed to broadband.

Charter shares eased 7 cents to $14.82 and Adelphia lost 97 cents to $27.34, both on Nasdaq on Thursday. Cablevision lost 37 cents to $44 on the New York Stock Exchange. AOL Time Warner fell 25 cents to $32.78 on the NYSE.

With the power to single-handedly launch new channels and services, AT&T; Comcast could shift the balance of power out of the hands of programmers such as Disney’s ESPN. Local cable operators have blamed an escalation in consumer rates on increased fees they pay to carry ESPN and other cable networks.

“The biggest impact of this deal is the pressure it puts on programmers,” said Blair Levin, an analyst at Legg Mason and former chief of staff at the Federal Communications Commission.

Ownership Caps Benefit to Programmers

“The programmers have been the real beneficiaries of federal ownership caps that are now going away. All of these recent media deals are a recognition that the government isn’t going to protect companies from bigger guys or prevent them from getting bigger themselves,” Levin said.

Levin and others say AT&T; Comcast, with cable systems in 17 of the nation’s top 20 markets, will be able to dictate rates paid to carry ABC, NBC, CBS, Fox and their sister cable channels rather than vice versa. Programmers have had the leverage because operators fear incurring the wrath of customers for dropping a major channel.

Moreover, AT&T; Comcast would have a major role in determining which new channels survive.

AT&T; Comcast also would have the scale needed to compete with broadcast networks for national advertisers. Cable operators have sold mostly regional advertising on their local systems, unable to compete for national ads because until recently few have dominated single cities.

Levin says Comcast’s deal also will renew the race among media giants to expand in both content and distribution to gain leverage against one another. “We’re moving into a world where companies say, ‘I’ll carry yours if you carry mine,’ and the little guys, the independents, are alone in having to pay” to get their programs or channels on the air.

Cable industry executives predict that AT&T; Comcast itself will shrink slightly. The company probably would sell off some systems and a 25% stake in a partnership with AOL Time Warner to pay off the $20 billion in debt it is assuming in the deal. For instance, the company could sell off systems in Los Angeles, where AT&T; Broadband is a large player but by no means dominant.

Paul Allen, the computer billionaire who controls Charter Communications, has expressed interest in a bigger position in the Los Angeles market.

Yet some industry executives see Allen as a seller rather than a buyer in this brave new consolidated world. Allen entered the cable business only three years ago, about the same time as AT&T;, with a “wired world” vision of delivering information and entertainment to people anytime anywhere.

But sources close to Allen say he might be satisfied selling if the buyer agrees to carry on its cable systems certain channels and interactive services he is developing through his Vulcan Ventures fund.

Small Players Seen as Consolidation Targets

Few big cable deals are likely to occur, however, until the last of the industry pioneers decide to sell. Cablevision and Adelphia, the smallest of the industry’s seven dominant operators, are widely viewed as the first targets of further consolidation.

Yet neither Charles Dolan, Cablevision’s 73-year-old founder, nor John Rigas, Adelphia’s 75-year-old patriarch, have been eager to sell. And the conventional wisdom is that both companies are likely to pass into the hands of their heirs, who then would sell.

Sources close to the AT&T; negotiations say AOL’s commitment to buying up more cable also is uncertain. They say AOL Time Warner showed no real passion to win the AT&T; bid.

“While old-line Time Warner cable executives wanted to go for it, AOL said no, seeing no need for more wires,” one source said.