LEVIN DIALS LONG-DISTANCE Time Warner Eyes Deals for LDCs to Use Cable Pipe

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New York -- The time may finally be right forlong-distance carriers to lease capacity on cable networks without demanding more of thecable business.

At least that's what top executives at Time WarnerInc. -- with its Time Warner Cable being the biggest cable company that isn't mergingwith AT&T Corp. -- said last week Chairman and CEO Gerald Levin told reporters thathe's held talks with AT&T along those lines, and that he would welcome otherentreaties.

"It may be that the most sensible economic thing to dois to have somebody come in who wants to lease our facilities for the purposes ofdistributing residential telephony -- like a long-distance company," Levin said."That may very well be the right arrangement."

That arrangement would relieve Time Warner, whichdoesn't believe in pursuing residential telephony over cable, from the risk andexpense of signing up residential phone customers. And it would help Time Warner torealize the value that the residential phone business represents.

But Levin and Time Warner Cable chairman and CEO JosephCollins didn't spell out how issues like interconnecting networks or sharing revenueswould be worked out. They merely said that they have the best available connection tohomes in their service areas -- and the only one, except for the incumbent local phonecompanies, that's likely to be there for the next several years.

They also said they could simply forge ahead with upgradesthat are needed for the Road Runner cable-modem service anyway, adding data-movingcapabilities that could also be used to carry phone calls. In the meantime, Time Warnerdoesn't need to experiment with residential phone launches (beyond a 5,000-customerRochester, N.Y., trial) the way that MediaOne and Cox Communications Inc. are doing.

"We're building the infrastructure fortelecommunications," Levin said. "The fact that we're not expanding thedabbling in residential retail telephony is almost irrelevant to me."

Attempts to forge partnerships between LDCs and cablecompanies haven't worked out in the recent past.

Sprint Corp. tried it with Tele-Communications Inc.,Comcast Corp. and Cox in 1994. But big plans to upgrade cable systems for Sprint-brandedtelephony cratered over costs and control issues, and the partners ended up building awireless network instead.
"It didn't work because Sprint got greedy," Century Communications Corp.president Bernard Gallagher said.

AT&T tried to partner up with the big cable companies,too, before deciding that it couldn't cut a deal that made economic sense andagreeing to buy TCI outright. Top executives from TCI, Comcast, Cablevision Systems Corp.and MediaOne met with AT&T chairman C. Michael Armstrong in May, and participants atthat meeting said they ended up far apart.

"We probably got greedy," an executive from oneof the companies, who did not attend the meeting, said last week.

Collins and Levin were asked why it would be possible tocut a deal with AT&T now that couldn't get done in May. Collins' reply:"I think that eventually, our plant is going to be used to provide telephone bysomebody. If AT&T isn't able to make a deal with us, we have lots of otheroptions for people to make deals with. Somebody is going to use our plant to be in thetelephone business and to essentially be the competitor of the local RBOC [regional Belloperating company]."

Levin said he couldn't guarantee that any deal wouldget done.

"I'm just saying that's the kind ofenvironment that we now have -- things move very quickly in this business. And what washappening as recently as May doesn't necessarily apply in July," he added.

MediaOne chief financial officer Richard Post doesn'tthink that the cable companies got greedy with AT&T. His view was that AT&T sawthe potential for much more than carrying phone calls over the broadband pipe, and itdecided that the only way that it could tap those opportunities was to buy an MSOoutright.

"I'd characterize it as: We weren't willingto sell our networks, but we were certainly willing to share the economics," Postsaid.

Post and other cable executives said they felt thatAT&T -- which wants to affiliate with other MSOs to extend its eventual bundledoffering -- needs to come back to them if it really wants to be a nationwidefacilities-based carrier.

At the same time, AT&T's move could force thehands of other LDCs that want to bypass the RBOCs without having to simply resell theBells' local lines.

Lots of questions remain, though.

Legg Mason Wood Walker Inc. telecommunications analystScott Cleland said that in addition to the regulatory and economic issues, the engineeringaspects of leasing phone capacity on cable are no piece of cake.

"The level of complexity in allowing interconnectionto a cable plant is head-spinning," he said. "A cable plant is a party line --it's not an intelligent network. Trying to be a traffic cop with no ability to directtraffic is a nightmare."

Gallagher agreed that there were engineering challenges,but he said Century's cable system in San Juan, Puerto Rico, which also carries callsfor affiliate Centennial Cellular Corp., figured out how to do it. Gallagher saidhe's confident that the deals can be cut, too.

"I think that Mike Armstrong changed thelandscape," he said.

MCI Communications Corp. spokesman Jim Monroe said hewouldn't comment on which companies MCI might or might not be talking to for localaccess. At the Internet World conference in Chicago last week, Sprint chairman WilliamEsrey said the AT&T-TCI deal might help to open a broadband pathway to the home forSprint on terms similar to what the Bells are forced by law to offer for narrowbandaccess.

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