AT&T Telephony Affiliates Loom

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Potential cable-telephony affiliates for AT&T Corp.,
beyond Tele-Communications Inc., are starting to declare themselves.

Time Warner Inc. chairman and CEO Gerald Levin stopped
short of saying that a deal was close with AT&T. But he said he expects to work out a
"transaction" in the "near term," with a long-distance company that
would "recognize value in the use of our plant, our upgraded infrastructure, for the
delivery of residential telephony."

Also last week, William Bresnan, chairman of Bresnan
Communications -- an MSO mostly owned by TCI and planning a broader joint venture with TCI
-- said during a panel discussion at the Atlantic Cable Show in Baltimore that he expects
to sign a letter of intent soon to affiliate with AT&T, adding that he couldn't
give more details.

Some Wall Street analysts and cable executives believe that
AT&T and TCI want to trot out -- possibly at the Western Cable Show in Anaheim,
Calif., in December -- a number of telephony affiliates, both from within TCI's
existing affiliate circle and from outside of that camp.

One hopeful lineup, an analyst said, would include Bresnan
and Lenfest Communications Corp., which is 50 percent-owned by TCI, along with Time Warner
and Comcast Corp. Collectively, those four MSOs pass more than 28 million homes, while TCI
reaches an estimated 18 million.

Many cable operators have openly acknowledged holding
affiliate talks with AT&T, which, in turn, has confirmed wanting to have much more
broadband residential access than TCI and its affiliates can deliver on their own. Many of
those operators also said the terms have been a bit vague, so far.

TCI president and chief operating officer Leo J. Hindery
Jr. told reporters on a conference call in August that TCI and AT&T were "making
proposals" to affiliates that he hoped would lead to announced deals at around the
time when AT&T and TCI submit detailed merger plans to the Securities and Exchange
Commission.

At that time, Hindery said he thought that the SEC filing
would be made in mid-September. It had not been submitted as of late last week.

AT&T chairman C. Michael Armstrong said at a recent
Goldman Sachs & Co. investment conference that he believed that the SEC filing would
be made later this month, according to an analyst who attended that conference.

Time Warner officials said last week that a deal with an
LDC could be on a "wholesale" basis, or as a "partner." They would not
elaborate on the differences.

But analysts and cable executives said last week that they
believe that AT&T is pitching variations on a couple of options. One would be to form
a nearly 50-50 joint venture, in which AT&T and the operator would put up roughly
equal amounts of capital to introduce phone service, then share the revenue.

The other option would see AT&T putting up most of the
capital for phone introduction in places where the operator has already paid to upgrade
the plant sufficiently. In that scenario, the operator would get a much smaller share of
the revenue.

In either case, the service would be co-branded, the way
that high-speed-data service @Home Network is now sold by cable affiliates.

AT&T's ultimate local-loop play involves
Internet-protocol telephony, but that technology isn't quite ready to go yet. In the
meantime, its backing would go toward providing circuit-switched phone service, such as
what Cox Communications Inc. and MediaOne are rolling out. In other areas, AT&T is
examining wireless options.

As Levin noted last week, the cable plant can be used to
provide second or third lines in the home, which wouldn't require
"lifeline" backup powering, "and then to transition to IP telephony."

While Comcast, for one, seems to believe that it's
better to wait for IP telephony, Levin said last week that the economics are great for
either approach.

He added that since the upgraded plant had already been
paid for, any deal that helps to generate telephony revenue would mean "a substantial
return" for Time Warner.

Gerard Klauer Mattison Inc. cable analyst Alan Gould said
he thought that the looming telephony affiliation was the most interesting announcement by
Levin during his quarterly earnings briefing last week.

"I think that's very powerful for not only Time
Warner, but for the whole cable industry, especially if it becomes a payment," Gould
said: "It sounds like almost 90 percent of that would fall down to the bottom
line."

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