Armstrong Issues Warning to MSOs

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AT&T Corp. CEO C. Michael Armstrong signaled last week
that he is prepared to play hardball with MSOs that balk at teaming up with his firm after
it takes over Tele-Communications Inc.

In remarks to a reporter from TheWall Street
Journal
, confirmed by a company spokesman, Armstrong said AT&T's new
consumer-services company, which will operate what is now TCI, intends to compete with any
cable company that does not partner with the firm in the delivery of telecommunications
services.

"Any [cable] company that chooses to do phone service
on their own, we, by definition, will have to compete against them," Armstrong said.

Some analysts interpreted Armstrong's comments as a
sign of frustration that cable companies weren't readily agreeing to AT&T's
proposed venture deals, which reportedly involved a 51-49 split of profits in
AT&T's favor from the sale of AT&T-branded telecommunications services.

"It's not the sort of thing that you'd say
if everything was going well," one analyst said. "There might be some
frustration setting in, given how important a large cable footprint is to justifying the
TCI acquisition to shareholders."

Although the point has been widely ignored, Armstrong and
other AT&T executives have made it clear from the day when they announced the TCI deal
in June that they would use other means to access households if they couldn't gain
access via cable.

These would include fixed wireless and a combination of
fiber and ADSL (asymmetrical digital subscriber line) in urban areas over networks
controlled by the newly acquired Teleport Communications Group.

But the idea that Armstrong would so bluntly state his case
in the midst of negotiations with cable companies was widely seen as a signal that
AT&T wants more cable access than it has been able to obtain at the bargaining table.

"I'd assume that his comments are directed at the
MediaOnes and Coxes [Cox Communications Inc.] of the world, which appear to be going on
their own, rather than joining forces with AT&T," Bear Stearns & Co. analyst
Oren Cohen said.

Sources continued to report last week that AT&T and
Time Warner Cable were close to striking a deal. It was also widely assumed that
Cablevision Systems Corp. -- which is 37 percent-owned by TCI -- as well as other
companies closely affiliated with TCI would come into the partnership, including Bresnan
Communications, which has already signaled that it is on board.

MediaOne is not averse to doing a deal with AT&T, but
so far, it hasn't seen anything that says such a deal is in the best interests of its
shareholders, said an official, speaking on background.

"We've been talking to AT&T for at least two
years, and we still are," the MediaOne official said. "But we don't feel
any pressure to partner with them or with any other long-distance company."

Cox, with the largest base of telephone subscribers in
cable, has also shown little interest in the AT&T proposition, sources said. A Cox
spokesman termed Armstrong's remark "an interesting comment," but he
declined to discuss the matter further.

MediaOne -- which has a say over Time Warner's moves
in cable as a result of its 25 percent stake in Time Warner Entertainment -- is also
partnered with Time Warner in the Road Runner venture. That high-speed-data company has
yet to name a top executive team, despite earlier indications that one would be in place
by the end of September.

Because AT&T's ultimate strategy is to integrate
data and voice services over the Internet-protocol platform, the ideal arrangement in any
deal with Time Warner would also include a partnership between @Home Network -- which will
be under AT&T's control -- and Road Runner.

But while TCI president and chief operating officer Leo J.
Hindery Jr. stated in June that he hoped to restart merger talks that had broken down
between @Home and Road Runner, there were no signs that a deal was in the offing. Sources
said the holdup in naming a Road Runner executive team had nothing to do with any
dealmaking with @Home.

Cohen, like many observers, downplayed the extent to which
AT&T could be a threat to cable over its fixed wireless system, given the fact that
the technology, which has yet to be deployed commercially, does not afford the bandwidth
over AT&T's existing wireless spectrum to deliver a full slate of voice, video
and data services.

But an AT&T official, who asked not to named, made it
clear that AT&T is as committed to ultimately offering a full package of consumer
services in its noncable markets as it is to doing so in markets served by TCI and other
future cable partners.

"We'll take advantage of existing [wireless and
ADSL] hookups to get access as fast as we can," the official said. "But our
primary goal is to get access to our customers over facilities that will allow us to
provide the broadest array of services possible."

AT&T Wireless spokesman Ken Woo added that while the
first iteration of the new fixed-wireless system, which has undergone testing in the
Chicago area, would carry only voice and high-speed-data services, the company was working
on compression techniques that would accommodate the delivery of video services, as well.

"That's something that would come after the first
iteration, where our focus is on providing an alternative to the existing phone service
and supplying high-speed data," he said.

Woo said the company was satisfied that it could meet its
long-range consumer-service goals using existing cellular and PCS (personal-communications
services) spectrum, and it would not pursue the acquisition of additional spectrum to
boost its capacity.

It remained to be seen whether, as an alternative to doing
business with AT&T, some cable players might turn to other LDCs for support in
telecommunications.

Sprint Corp. CEO William Esry this past summer stressed his
company's interest in securing partnerships with cable as part of its plan to
introduce broadband services in the business and consumer markets starting next year, but
there were no signs of serious dealmaking on this front.

A Sprint spokesman declined to comment on the status of
cable negotiations.

One LDC clearly not in the cable hunt is MCI WorldCom,
which, a spokesman said, was focused on securing access to consumers via other means.

"We have the switches in place in 100 markets, so
we're well-positioned to go after the consumer market without using cable," the
spokesman said.

Cohen dismissed the notion that cable entities choosing not
to deal with AT&T might feel pressed to affiliate with other carriers.

"The only incentive that I can see for talking with
Sprint is to pit one carrier against the other in the interest of getting a better
deal," he said. "But AT&T seems to be in the best position to offer an
attractive proposal, given its ability to leverage the economies of using the technology
that it's acquiring with TCI."

Whether that leverage will be strengthened by the threat
that AT&T poses to the long-standing, but unspoken, noncompete pact that has fueled
cable's cooperative development of new technologies and services remains to be seen.
But Armstrong's comment made it clear that one way or the other, AT&T's
presence is certain to effect big changes in the way that the cable industry operates.

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