AT&T's corporate implosion-in which Ma Bell announced Oct. 25 that it would spin off its broadband division-will have lasting effects on the cable industry.
Turn back the clock three years and imagine Tele-Communications Inc.'s John Malone and Leo Hindery buying MediaOne Group Inc., spinning some systems off to Comcast Corp.'s Brian Roberts, then fast-forward to October 2000. Presto, you have a reconstituted and largely rebuilt TCI.
Almost. A lot of water has gone under the bridge in the last few years. AT&T Broadband will never be the old TCI, even though it will look more like the rest of the cable industry, and that has most MSO presidents and industry leaders smiling.
The spin-off has broad financial, marketing, technology and public policy ramifications that will take years to fully sort out.
First, AT&T Broadband will eventually be a stand-alone financial entity. That is both a blessing and a curse.
The blessing is that AT&T Broadband can make financial and marketing decisions that are in a cable company's best interest. How many corporate MSO marketing managers want to begin strategy sessions worrying about saving another division's long-distance business or improving a wireless division's penetration?
AT&T Broadband can get back to the business or selling plain-old cable and all of its logical, attendant spin-off services: digital, video-on-demand, modems and yes, even telephony.
It took three years for AT&T Broadband to deploy digital set-tops and gain critical financial mass by adding $15 to $20 in revenue per month, per subscriber, from 25 percent of its subscriber base. It will take the same three to perhaps five years to generate $25 to $40 in monthly revenue from cable modems and $10 to $15 per sub per month from VOD and interactive TV from 25 percent of its subscriber base.
Despite the capital expense in deploying circuit-switched telephony, there's no reason for AT&T to turn back. The more cable telephony subscribers the MSO has in hand before it switches to IP, the better off it is.
Also, there's no reason to curb cable-modem deployment, especially since AT&T Broadband will own a controlling stake in Excite@Home Corp. and its local cable plant has already been upgraded for data carriage.
The one financial caveat is the amount of debt AT&T Broadband will shoulder. AT&T Corp. executives suggested that the spun-off business and broadband divisions would bear much of the company's overall $55 billion in debt. However, in an appearance on CNBC's
Squawk Box, AT&T Corp. chairman C. Michael Armstrong insisted the cable unit's cash flow is hearty enough to handle the debt load it will carry.
That balancing act is easier said than done, since AT&T Broadband's rebuilds have eaten up a decent portion of AT&T Corp.'s capital-expenditures budget over the past two years. Too much debt placed on AT&T Broadband could hobble its ability to deploy new services.
Yet, if AT&T Broadband cuts back on any deployment or development of new services, it won't generate the revenue needed to pay down its debt.
AT&T Broadband's control of Excite@Home Corp. raises some interesting issues. Excite@Home's departing CEO, George Bell, positions the data-over-cable service as a back-haul provider in an open-access world and a content player built around Excite's portal and broadband-specific fare.
AT&T Corp. didn't have much enthusiasm for Excite@Home's content business. AT&T Broadband could be feel differently. In the years ahead, AT&T Broadband president Dan Somers (or whoever might succeed him) could have more lunches with Malone than with Armstrong.
Perhaps AT&T Broadband fortifies the Excite@Home side of the business to ensure great modem deployment or sells the portal to Liberty Media Group for content for its growing wireless, digital-subscriber-line and satellite platforms.
Excite@Home also represents the most sophisticated data-transmission platform inside AT&T Broadband to handle multiple ISPs in an open-access world.
The MSO is launching a Boulder, Colo., ISP test this fall with an eye to full-scale, market-wide, open-access deployment in Boston late next year. That will serve as the company's open-access model in 2002 and beyond. It only makes sense for Excite@Home to handle those needs in-house.
Another question concerns Excite@Home's backbone. Much of its capacity is owned by AT&T Broadband and could presumably be folded back into the business and long-distance divisions. It's unclear if it makes sense for AT&T Corp. to own the "national" part of Excite@Home's platform and leave AT&T Broadband with the local and some parts of the regional platform.
After all, most of the traffic now on AT&T Corp.'s national backbone comes from those long-distance and business divisions. Perhaps Excite@Home, as an AT&T Broadband entity, will lease the capacity it needs.
The split-up could put AT&T Broadband's plan to cut local cable telephony deals with other MSOs way on the back burner. Those are not business negotiations that will take priority now, except in the case of the soon-to-merge America Online Inc. and Time Warner Inc., and could put less strain on AT&T Broadband's relationships with cable operators.
The recent experience of Lucent Technologies could be a leading indicator. That former AT&T Corp. unit said sales dropped because one major customer bought far less equipment this year. That customer was AT&T.
Even when business families separate and promise to buy from their brothers and sisters, time has a way of breaking those ties.
AT&T Broadband also has been walking down a more independent multi-vendor path. Expect that to continue. Long a General Instrument Corp.-Motorola Broadband Communications Sector shop, the MSO signed digital set-top deals with Philips Consumer Electronics Co. and Pace Micro Technology plc this summer. And, of course, AT&T Broadband has been distancing itself from Microsoft, having signed a deal with Liberate Technologies for its interactive set-tops.
Which raises another issue: In which company will Microsoft own a major stake-AT&T Corp. or AT&T Broadband? The software giant would likely want the Broadband division, where the value lies in putting Microsoft products into set-tops.
In Washington, National Cable Television Association CEO Robert Sachs is breathing an audible sigh of relief, knowing that AT&T Broadband has re-emerged as a "cable" company without the baggage of its parent. No more blindsiding over open access or worrying that a company's higher corporate image would supercede the good of cable's rank-and-file.
Cable still has plenty of "cowboy" in its genes and neither AT&T-nor AOL, for that matter-can completely suppress it.
Now that AT&T will largely be back in the cable fold, it will leave AOL-Time Warner as the largest, multi-agenda entity trudging through cable's forest. The language it agrees to on open access will affect all MSOs, because it will serve as the baseline for any business discussions on open access. To the extent that The Walt Disney Co. can define interactive-TV access, which is yet to be a profitable business, MSOs will have to begrudgingly follow the company's lead.
On the flip side, AOL-Time Warner may show the way for AT&T and other MSOs to make money with e-commerce and various interactive TV and Internet applications, which put some smiles back on the faces of some on Wall Street.
So is this a repudiation of Michael Armstrong's one-stop-shop vision? Not necessarily. History may show he overpaid for cable properties, but that won't be known until a few years from now, when penetration results for digital video, phone and data are all in.
Armstrong could only move the old TCI into the broadband world so quickly, and, as we now know, that wasn't fast enough for Wall Street.