AT&T Broadband and Insight Communications Co.
Inc. have agreed to use Insight's cable plant in the Midwest to offer phone service.
The deal was expected largely because AT&T Broadband
has 50-50 joint-venture agreements with Insight for systems in Indiana and Kentucky.
Insight also reached a tentative agreement with AT&T
Corp. in December 1998 to make its cable plant available to the phone company for an
AT&T-branded any-distance telephony service.
Other AT&T telephony affiliations -- including the
centerpiece one with Time Warner Cable -- have hit potholes between tentative agreements
and final deals.
But Insight chief operating officer Kim Kelly said this
letter of intent is heavily detailed, and she expects to get a switched-telephony trial
going in the fourth quarter, followed soon after by a commercial launch.
Phone service "is an important part of our bundled
strategy," she said in an interview.
The 10-year agreement calls for AT&T to give Insight
monthly payments for such services as billing and line maintenance and incremental
payments for such tasks as installing the necessary equipment, she said.
Insight will do most of the marketing. "We have the
connectivity to the customer," she added.
Insight plans to bundle telephony with its video and data
offerings and to offer customers the option of having all of their services on one bill.
"We expect to have one bill out there when we deliver the product," Kelly said.
Although Insight had reached a joint-venture deal with
AT&T in 1998 concerning telephony, she said, this deal is different in that it
eliminates any unnecessary duplication and provides significantly better returns.
"When we took the company public nine months ago, we
were looking at revenue per subscriber of something like $60 [per month]," she added.
"However, the margin off that revenue was 40 percent. We get to the same place on the
bottom line -- on average, revenue per subscriber will be $40 -- but the margin is closer
to 70 percent because we effectively split the business. On top of that, we have reduced
our capital exposure by half, which was important to us."
Kelly added that the venture should be cash-flow-positive
by the second year of operation.
AT&T will be responsible for the switch to the headend
host digital terminal, while Insight will be responsible from the terminal to the
customer, she said. Insight will share revenue above certain specified penetration
targets, she added. Capital costs -- about $550 million over 10 years -- will be split
Kelly said Insight might end up being the first affiliate
to offer AT&T-branded local and long-distance phone service over its cable plant.
"I think we're furthest along," she added.
Bank of America Securities analyst Doug Shapiro said this
deal is a lot simpler than the earlier joint-venture agreement.
"I always thought the JV structure was extremely
unwieldy," he said. "Here, you don't have that. AT&T is acting
primarily as a transport provider -- a CLEC [competitive local-exchange carrier] with a
In a conference call with analysts, Kelly said Insight
expects two-line telephony penetration of about 30 percent of Insight's homes passed
-- currently more than 1.6 million homes in Illinois, Ohio, Indiana and Kentucky.
Shapiro said 30 percent penetration is achievable,
especially given the success of other cable operators that have deployed telephony on
For example, he added, Cox Communications Inc. is getting
penetration rates in the 40 percent range in Omaha, Neb., after about two years of
offering telephony there. And MediaOne Group Inc. and RCN Corp. have reached 20 percent
telephony penetration in selected markets in as little as six months.
But Shapiro was unsure if the Insight deal would serve as a
model for other telephony agreements with other cable operators, mainly because of the
previous relationship between the two companies. AT&T owns about 40 percent of
"The question that naturally comes up is: Was this a
deal [AT&T] was willing to cut because it already owns 40 percent of the economics, or
is it a deal they will give to everybody?" Shapiro said. "If the analysis
Insight is presenting is correct, I don't know why anyone wouldn't do