AT&T May Want Content Now

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The merger between America Online Inc. and Time Warner inc.
may establish a powerhouse in Internet and content services, but it could also create
major headaches for the No. 2 cable operator, AT&T Corp.

AT&T officially said the AOL-Time Warner merger
"validates its broadband strategy." But the merger also affects two key
components of that strategy -- telephony agreements with MSOs, particularly Time Warner
Cable; and AT&T's pending purchase of MediaOne Group Inc. and related stakes in
Time Warner Cable systems, content assets and broadband data-over-cable service Road
Runner.

Most analysts feel that AOL's purchase of Time Warner
could hasten a telephony agreement between the two cable companies. But just how that
arrangement will work out is anybody's guess.

Time Warner reached a tentative telephony agreement with
AT&T last February. That deal was put on hold after AT&T agreed to purchase
MediaOne. Since then, regulatory issues -- mainly the Federal Communications
Commission's cable-attribution rules -- have put negotiations on hold.

And although AT&T hopes to have an agreement in place
shortly after it closes the MediaOne deal, it looks as if those talks will be pushed back
until after the AOL-Time Warner closing, which is expected by the end of the year.

Time Warner spokesman Josh Pekarsky said the AOL merger
should have no impact on negotiations surrounding the Time Warner Entertainment
partnership. "We're still moving forward with the negotiations," he said.
"We're not going to speculate on what may be."

Most analysts believe an agreement can be reached, possibly
taking the form of AT&T providing AOL with access to its broadband network in exchange
for a greater interest in the TWE partnership or a telephony agreement.

But perhaps the biggest problem centers around TWE and its
largely complex structure. When AT&T takes control of MediaOne, it automatically
receives a 25 percent stake in the company, which includes content assets like Home Box
Office and the Warner Bros. film studios.

Earlier, it was expected that AT&T would give Time
Warner control of the content assets in exchange for a greater stake in the cable systems.
However, with AOL now in the picture, giving up the cable assets -- and their access to
broadband services -- seems less likely.

AT&T also stands to become the second-largest
shareholder in Road Runner through its stake in the TWE partnership. But that could
present regulatory problems, as well. Given AT&T's 58 percent voting stake in
another big data-over-cable service -- Excite@Home Corp. -- AT&T could face regulatory
pressure to divest one or the other.

Several sources have also said Excite@Home and Road Runner
restarted merger talks before the Time Warner-AOL merger was announced. But in light of
the AOL deal, the future of those discussions is in doubt.

There has also been speculation that AT&T, which
insists that it is strictly a distribution company, may have to rethink that strategy in
light of the AOL deal.

AT&T chairman C. Michael Armstrong has repeatedly
stressed that AT&T was interested mainly in distribution, and not content. But some
MSO insiders believe the AOL deal practically forces AT&T to at least look further
into content.

"Mike Armstrong has been very adamant about not
wanting content as part of his portfolio," an MSO source said. "But this
transaction has got to cause Armstrong to review that premise. From purely a business
perspective, it makes sense, because now, there is a player that is bigger than he
is."

However, at least one analyst believes AT&T will stick
to the distribution course.

"People are saying, 'Is AT&T going to get
content-driven all of a sudden?'" Credit Lyonnais Securities analyst Richard
Read said. "They've proven that they are going to go out and spend a lot of
money if necessary, but do they want to use their own stock, which is widely considered to
be undervalued, as currency? I don't think there is anything that says everybody has
to go do a bunch of deals."

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