AT&TS CALL WAITING Malone Promises Telco Deals, But MSOs Balk

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AT&T Corp.'s attempts to lure the rest of the cableindustry into its local-telephony web are hitting some bumps.

On the eve of the Western Show, where Tele-CommunicationsInc. has a history of breaking big news, its chairman and CEO, John Malone, was hintingabout affiliation agreements between other MSOs and AT&T for telephony.

But at press time last Wednesday, a complicated web ofissues appeared to be blocking AT&T's early attempts to get close to other MSOs beyondTCI.

For starters, it appeared that several MSOs, including TimeWarner Cable and MediaOne, were reluctant to join in.

A primary sticking point was those MSOs' reluctance to giveup control over any jointly owned telephone businesses.

"It's not the money part, per se; it's the control,which, of course, affects the financial aspects of the deal," said an executive fromthe TCI-AT&T camp who is close to the bargaining. "There's some real pokerplaying going on."

On the other side of the poker table, MSO executives saidthat while the terms that were proposed were not acceptable, they weren't preposterous,either.

At issue is "the usual list that one encounters whendealing with AT&T," one MediaOne executive said, speaking on background. "Itstarts with how much capital AT&T puts up. Then, there's the question of the split.And don't forget control."

Plus, the executive added, AT&T's technicalspecifications for delivering lifeline-telephone service are more stringent than what mostMSOs consider necessary. "In a word, 'gold-plated,'" the MediaOne official said.

Still, there has been progress, at least on the Time Warnerside, judging from the level of technical detail now under discussion. A Time Warnerexecutive, who also requested anonymity, said resolution of control issues is now at thelevel of "who controls the bits."

In part, this involves establishing the "demarcationpoint" at which AT&T hands off telephone traffic to the cable operator. In modernhybrid fiber-coaxial plant, the old axiom of "after the headend to the house"doesn't necessarily work, he noted.

DEALS THIS WEEK?

Malone, in recent comments to reporters in Denver, saidannouncements could be expected "in the near future" regarding "affiliationarrangements between telephone and cable."

But any such announcement at this week's Western Showseemed unlikely to include a deal with MediaOne or Cox Communications Inc., sources said.Time Warner is a still a possibility, but a distant one, they added.

More likely is an announcement involving one or morecompanies from a lineup of close TCI allies, such as Cablevision Systems Corp., BresnanCommunications and The Lenfest Group, sources with knowledge of the matter said. ComcastCorp. -- a major stakeholder in @Home Network, along with TCI and Cox -- was anotherpossibility.

But even among the more likely partners, the situationremained unsettled at press time last week, mostly because any agreements would have tosquare with those negotiated with the holdouts, these sources said.

"We haven't seen a contract," the CEO of one ofthe likely affiliated companies said.

Another issue was fear: MSO sources said they simply don'twant to get caught in any proposed regulatory conditions that would force cable operatorsto open their networks to other providers as a condition of doing business with AT&T.

That issue -- which was raised by America Online Inc. andsome Baby Bells two weeks ago -- drew a warning from Malone. His message: Even a prolongeddiscussion at the Federal Communications Commission could kill the merger.

Malone said clearing up the matter in advance, in order togive everyone a better understanding of what they were getting into with AT&T, was notan appealing option.

"I don't think that they could do a decent job ofcoming up with the wording at the commission in the time frame during which we expect toact on this," he said.

ARMSTRONG'S THREAT

Frustration over AT&T's inability to come to terms withsome major players was evident in AT&T chairman C. Michael Armstrong's recent warningthat cable companies not signing on with AT&T would face competition from the newAT&T Consumer Services Co.

"It's not something that you say if things are comingtogether," one Wall Street analyst noted, speaking on background.

The wireless technology that Armstrong is also consideringto extend AT&T's reach in voice and high-speed data, if not video, "definitelyworks," an official close to the negotiations on the cable side said.

With AT&T threatening to break the long-standingnoncompete tradition in cable, some observers expect nonaffiliating MSOs to explorealternative interexchange-carrier affiliations as part of the bargaining process.

"It could still go in so many differentdirections," said Lauren Fine, an analyst with Merrill Lynch & Co. "MSOs arereally trying not to lock themselves into anything yet, although it looks like the linesare being drawn."

A Time Warner executive strongly hinted that the MSO isalso in discussions with other long-distance carriers, including MCI WorldCom, SprintCorp. and Denver-based Qwest Communications International Inc.

Sprint and MCI officials insisted that no negotiations wereunder way, although Sprint does intend to talk with cable operators next year, a spokesmansaid.

Several MSO sources noted that Qwest has established thecarrying capacity and technological know-how to exploit connectivity with local broadbandoutlets, and that it has "bandwidth to burn," as one executive put it. But Qwestrepresentatives refused to answer questions about any interest that they might have incable affiliations.

OTHER MODELS

Not everyone agreed that a counteralliance among MSOsoutside of the AT&T fold was necessary. Bear Stearns & Co. analyst Oren Cohen, forexample, noted that Cox and MediaOne were having no trouble launching voice services ontheir own, without long-distance affiliations.

"If there's another bidder out there, and AT&Treally wants these affiliations, it boils down to the economics and what type of dealAT&T can afford to cut," Cohen said. "The best deal may not be on the tableyet."

James Chiddix, Time Warner Cable's chief technical officer,said the MSO is likely to partner with a telephone company if it wants to expand into thevoice business on a large scale beyond its current operating base in Rochester, N.Y.

"It's a business that we might be interested in, ifdiscussions with various telephone companies produce a workable model," Chiddix said.

But Chiddix made it clear that should Time Warner strike adeal with AT&T, it would want to "wall off" the voice segment of thebusiness from the high-speed-data side. That's in contrast to the integrated voice-over-IP(Internet protocol) approach that AT&T envisions for TCI, where the high-speed-datachannels carrying @Home services carry voice traffic, as well.

Malone said existing telephony plays endorsed by non-TCIoperators made no difference to AT&T, technically.

"Whether they do IP telephony or whether they doswitched-circuit, that's sort of irrelevant," Malone said. "But it all has to beintegrated technologically, or it won't work."

Nonetheless, he added, "I'd prefer integrating thedata streams and routing them, rather than switching them."

Malone noted that with data integration, "Telephonycould be very cheap. Presumably, the voice-telephony traffic could be a tiny componentwithin the @Home data stream and on the @Home data network."

To accomplish such efficiencies over data beyond the @Homeclusters would minimally require contractual agreements with other data providers such asRoad Runner, Malone suggested.

"You have to have consistent routing; all of theinfrastructure has to be consistent," he said.

So far, efforts to achieve this level of integration --with agreement on how bit streams are managed, prioritized and paid for -- have not gottenvery far, despite the existence of a task force, under Time Warner Cable CEO Joe Collins'guidance, dedicated to creating such an integrated national cable-data backbone.

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