MSOs: Devils in the Details

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The long-awaited deal between AT&T Corp. and Time Warner Inc. to provide local telephone service over Time Warner Cable's network has many cable operators taking a wait-and-see attitude.

Meanwhile, the former Baby Bells said they are prepared to take on the new local-telephony juggernaut.

And although the transaction is widely expected to be the model for future deals with other MSOs, not every cable operator was quick to jump on the bandwagon.

"We're certainly interested in talking with AT&T about a telephony partnership, but the devil is in the details," said Jerald L. Kent, president and CEO of Charter Communications. "We think that there is a value to the AT&T brand name, and we are interested in sitting down and discussing this with them."

Kent added that Charter would form a telephony arrangement with the long-distance giant only if the terms "were favorable and make sense from a strategic standpoint."

Ellen East, a spokeswoman for Cox Communications Inc., echoed Kent's sentiments.

Cox has been aggressive with its telephony rollout, and it has nearly 30,000 telephone customers in five markets. East said any agreement with AT&T would have to enhance shareholder value, be a full-service offering and be a high-quality service.

But the AT&T/Time Warner deal is not without its concerns. Kent said potential problems could arise if AT&T reserves the right to use excess capacity on its partners' network for other services, like video. Forcing cable partners to accept AT&T's local and long-distance packages also could potentially hurt a deal.

"There is some concern there," Kent added.

Being forced to provide AT&T long distance also could pose a conflict for Cox, which recently signed on MCI WorldCom as the long-distance backbone provider for its telephony network.

Fred Nichols, president of TCA Cable TV Inc., also believes that the AT&T/Time Warner agreement will be good for the industry. However, he said, his company has not yet decided what its telephony strategy will be.

TCA -- which has about 870,000 subscribers in systems in Arkansas, Louisiana and Texas, and which is partially owned by TCI -- has been in discussions with AT&T. Nichols declined to discuss the status of those talks.

Nevertheless, TCA is spending about $50 million per year over the next three years on upgrading its plant to 750-megahertz, two-way, and it expects to be 90 percent completed by the year 2001. Although the company is not offering telephony yet, Nichols said, TCA does see telephone service as a lucrative market.

"If you look at the explosion in information services, most of that revenue has gone to the telephone companies," Nichols said. "Fax lines, additional lines for Internet service -- all of these things are in the pockets of the telephone companies."

But the telcos are not being complacent. Most believe that the real battle is going to be fought over broadband services -- an area in which they believe they have an advantage.

The telcos argued that although cable modems are in more homes and tout higher speeds, they are based on shared-bandwidth technology, meaning that the more people use the service, the slower it gets.

Granted, telco high-speed-data offerings have had their problems, as well. Telcos' current service, ADSL (asymmetrical digital subscriber line), is plagued by distance constraints -- customers have to be within 18,000 feet of a central office to receive service -- as well as by high prices and a general lack of availability.

But the telephone companies are beginning to see the light.

\u0007 U S West plans to roll out a sophisticated fiber optic network in Phoenix later this year, based on VDSL (very high-data-rate DSL) technology.

VDSL involves running fiber to a neighborhood node and copper wire from the node to the individual home. The service will provide voice, data rates between 12.9 megabits per second and 50 mbps, 120 cable channels and 40 music channels.

\u0007 Atlanta-based Baby Bell BellSouth Corp. will unleash its "Integrated Fiber Network" to 200,000 homes in Atlanta and Miami this year. Using a node and coaxial-cable architecture, IFN provides high-speed data, voice and video to customers, without the distance constraints of ADSL.

\u0007 SBC Communications Inc., which has begun an aggressive ADSL rollout, will offer local telephone service in Boston, Seattle and Miami

\u0007 Bell Atlantic Corp. formed an alliance with America Online Inc. to provide ADSL to more than 5 million AOL members at lower prices.

Ray Albers, vice president of network architecture for Bell Atlantic, said that although the regional Bell operating companies' ADSL strategy is not a direct response to AT&T's cable alliances, it has quickened deployment strategies.

"It certainly is pushing us to accelerate our ADSL plans," Albers said. "We certainly recognize that bandwidth demand is never going to stop."

Moreover, the telcos seemed primed to finally enter the lucrative long-distance market.

Federal Communications Commission officials said they were optimistic that a Baby Bell would win approval to enter those markets based on moves by AT&T and MCI.

"I think that we are very close," the FCC source said. "I didn't say `in,' but very close."

No Baby Bell long-distance-entry petitions are pending before the agency. Bells first need to comply with a 14-point competitive checklist and win approval from state and federal regulators.

An important hurdle that Bells have to clear, FCC sources said, concerns the performance of their computer equipment that switches consumers that sign up for a competitor's service.

FCC sources said state regulators in Texas, Georgia and New York are leading in terms of their oversight of these computer-performance standards.

"It's really the [computer] stuff that's going to carry the day," an FCC source said.

One FCC official said the first application that the commission approves will become the template that the other Bells can use -- a development that will remove any mystery surrounding the entry process.

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