Comcast Battle With AT&T; Points to Diverging Paths

Few rivals in U.S. business could be more dissimilar in performance, philosophy or corporate culture than AT&T; Corp. and Comcast Corp., the two companies that are battling over AT&T;’s cable properties and their 13.5 million subscribers.

The conflict features as broad a spectrum of personalities as corporate America has to offer, from deal-making gunslingers to bean counters, from self-made billionaires to Boston Brahmins.

The two companies’ fortunes also have taken sharply divergent paths in recent years.

Investing in AT&T; has meant, in gambling parlance, “betting on the come”--sacrificing gains now in hopes that Chairman C. Michael Armstrong’s glittering vision of transforming AT&T; through cable would be realized in the not-too-distant future.

Comcast, on the other hand, hasn’t had an especially dramatic story to tell. Its strengths are modest but steady growth, stable family leadership and a sharp pencil on expenses.

And--oh, yes--Comcast’s stock price has quadrupled since 1996, while AT&T; during the same five years has provided an investment return of -1.5%.

Comcast now is flaunting these contrasts to AT&T;’s directors and shareholders with its unsolicited $44.5-billion offer Sunday for AT&T; Broadband, the nation’s largest cable company.

Philadelphia-based Comcast, founded in 1963 by Ralph Roberts and run ever since by him and his son, company President Brian L. Roberts, is well-known for its financial discipline.

The Robertses, industry analysts say, never saw a deal that they couldn’t walk away from. Two years ago, they left the table from what would have been the biggest deal in the company’s history, letting AT&T; win the bidding for Denver-based MediaOne Group.

AT&T;’s $56-billion offer topped Comcast’s offer by a stunning $8 billion. In an irony that has escaped no one in the industry, Comcast is now back at the table with a roughly similar offer--including the assumption of $13.5 billion in AT&T; debt--but for both the former Tele-Communications Inc. and MediaOne cable properties that make up AT&T; Broadband.

“It’s buy one, get one free day at AT&T;,” joked Brian Adamik, president of the Yankee Group consulting firm in Boston.

Even for a prize that would instantly vault Comcast into the No. 1 spot in cable, experts think the Robertses will resist the temptation to overpay.

By patiently shopping for cable properties that can be “clustered” regionally with their existing holdings, Comcast has created one of the most efficient and profitable cable systems in the country.

In fact, in a study last November for the industry magazine Broadcasting & Cable, analyst Richard Bilotti of Morgan Stanley Dean Witter & Co. concluded that Comcast was the top financial performer among the eight largest U.S. cable operators. And in last place? AT&T.;

For the first quarter of this year, AT&T; Broadband’s operating profit margin slipped to an anemic 16%--one-third of Comcast’s margin, analysts said.

The main problem, according to most observers, is that AT&T;, with the bureaucratic and rule-bound culture that came of its long history as a tightly regulated utility, simply couldn’t adapt to the lean and freewheeling style of the cable business.

“AT&T; seems to just keep writing memos to each other and not doing anything,” said Ajay Mehra, portfolio manager at Columbia Management Co., which holds more than 3 million AT&T; shares.

Greenwich, Conn., money manager Uri Landesman thinks AT&T;’s cable operations may be overstaffed. “I’ve been told they have 2 1/2 times as many people as they need on the cable side.”

AT&T; has said that investing in advanced cable services such as digital-cable TV, cable telephone and high-speed Internet access has curtailed profitability, but that margins are improving.

Another problem has been the flight of talent from AT&T;, both before and after Armstrong took over.

Veteran cable executive Leo J. Hindery Jr., for example, was able to generate 40%-plus margins when he ran TCI under John Malone, who sold the company to AT&T; in 1999. But only seven months after joining AT&T;, Hindery was ousted.

Hindery, who would not comment for this article, previously has told people that he found Armstrong meddlesome, despite his lack of cable experience.

Armstrong’s 1999 plan to sell space on AT&T;’s high-speed cable networks to certain Internet service providers was sharply at odds with the prevailing cable-industry position against such “open access.”

That move, among others, made it more difficult to get the cooperation of other cable systems that AT&T; needed to launch its planned national cable telephone service, which was supposed to be one of the main reasons why AT&T; wanted to own cable in the first place.

Armstrong’s supporters credit the charming former college football player with being among the first to place a significant bet on cable’s potential as a carrier of services that went far beyond television.

They also acknowledge that he faced the pressure of transforming AT&T; before its traditional core business--long-distance phone service--could be nibbled away by an ever-expanding array of competitors.

“AT&T; had its eyes further down the road than the others, but the timing was wrong,” said Jeff Kagan, a telecommunications analyst in Atlanta. “They started this strategy in the go-go ‘90s, when everybody thought people were going to want all of these things very quickly.”

It will never be known whether Armstrong’s vision for cable could have materialized had he been given the time. He is now in the fallback mode of restructuring to cut AT&T;’s debt and spinning off the cable and wireless units so that long-distance will again stand on its own.

Whether Armstrong can accomplish this mission depends in large part on whether Comcast can persuade AT&T; shareholders to reject the proposed spinoff of AT&T; Broadband, which would put even more pressure on the board to negotiate an outright sale.

Further complicating matters is the tangled history of the key players.

Malone could bear a grudge toward Brian Roberts, who several years ago tried to launch a surprise bid for TCI. But Malone, a supreme pragmatist, could well throw his support behind a sale to Comcast if it looks like it will enhance the value of his AT&T; stock.

A less obtrusive but equally influential voice will be that of cable pioneer Amos Hostetter, a patrician Bostonian whose AT&T; stake, acquired in the MediaOne sale, ranks right behind that of Malone, who is AT&T;’s largest individual shareholder. Like Malone, who resigned from AT&T;’s board Tuesday, Hostetter has lost more than $1 billion in paper value of his shares during the last year.

Whereas Malone might overcome any lingering antipathy to Brian Roberts, Hostetter is said to have been affronted by the way that the Robertses have used “supervoting shares” to control 86% of Comcast despite owning only 2% of the stock.

That issue led Hostetter to oppose Comcast’s bid for MediaOne two years ago and is presumed to still be a stumbling block. Hostetter did not return a telephone call for comment.

*

Times staff writers Sallie Hofmeister and Elizabeth Douglass contributed to this report.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

AT&T; Cable and Comcast: A Study in Contrasts

The unsolicited $44.5-billion bid for AT&T; Corp.’s broadband cable television unit by Comcast Corp. is the latest development in the dismantling of the communications giant, whose history dates to the invention of the telephone itself.

1877: Bell Telephone Co. is formed by telephone inventor Alexander Graham Bell and two other men to utilize the invention.

1885: American Telephone & Telegraph Co. is incorporated as a subsidiary of American Bell and is chartered to build and operate the original long-distance telephone network.

1963: American Cable Systems, later Comcast, is founded by Ralph J. Roberts, Daniel Aaron and Julian A. Brodsky with the purchase of a 1,200-subscriber cable system in Tupelo, Miss.

1969: American Cable is renamed Comcast and incorporated in Pennsylvania.

1972: Comcast’s first public stock is offered, trading on Nasdaq.

1974: The U.S. government files an antitrust suit against AT&T; to break up the Bell system.

1982: AT&T; agrees to divest itself of 22 regional companies, and in 1984 the companies are converted into seven regional phone companies, which become known as Baby Bells.

Jan. 1, 1984: A new post-Bell system AT&T; emerges. It now has $34 billion in assets, compared with $149.5 billion on Dec. 31.

1986: Comcast doubles in size to 1.2 million cable customers with the purchase of 26% of Group W Cable.

1994: Comcast acquires Maclean Hunter’s U.S. cable operations to become the third-largest cable operator with about 3.3 million customers.

1997: Microsoft invests $1 billion in Comcast.

November 1997: C. Michael Armstrong becomes chief executive of AT&T; and describes a focus on providing voice, data and video services. Armstrong will end up spending more than $100 billion to acquire cable television companies and assemble a one-stop shop for communications and entertainment services.

1999: Comcast and cable company MediaOne announce a merger agreement, but Comcast later loses out to AT&T; in a bidding war.

2000: AT&T;’s stock begins to crumble as investors, seeing no payoff from Armstrong’s changes, grow impatient. Comcast gains customers in cable system swaps with Adelphia and AT&T.;

October 2000: Armstrong announces plans to restructure AT&T; into three parts with four separate stocks: AT&T; Broadband, AT&T; Wireless, AT&T; Business and AT&T; Consumer.

July 8: Comcast, the No. 3 U.S. cable company, makes an unsolicited bid for AT&T; Broadband, the country’s largest cable provider, for $44.5 billion in stock and the assumption of $13.5 billion in debt. If successful, it would create the largest cable company, with 22 million subscribers. AT&T; says it has no plans to sell its broadband cable unit and says informal talks with Comcast did not include a concrete proposal or agreement on valuation.

July 9: AT&T; splits off AT&T; Wireless into a separate company.

*

Researched by NONA YATES/Los Angeles Times

Sources: Comcast.com, Times files, Reuters

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

AT&T; and Comcast: A Study in Contrasts

Comcast, which has launched an unsolicited bid to buy AT&T;’s cable TV business, has been a story of steady growth in the cable and electronic retailing businesses since the mid-1990s, while AT&T; has struggled with a huge empire of long-distance, telecom, wireless, cable and other units.

AT&T; revenue (In billions)

2000: $65.98 billion

AT&T; income from continuing operations(In billions)

2000: $4.67 billion

Comcast revenue (In billions)

2000: $8.22 billion

Comcast operating cash flow (In billions)

2000: $2.47 billion

Comcast 2000 revenue by business segment

Cable TV: 51.5%

Commerce (electronic retailing, mainly via QVC: 42.0%

Programming: 6.0%

Other units: 0.5%

Sources: AT&T;, Comcast