MSOs Upbeat but Wary of AT&T Deal

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Despite the cable industry's and stock market's
general euphoria over the AT&T-TCI deal, top MSO executives expressed a bit of
wariness over the long-term implications of the merger.

With rare exception, usually in the form of prepared press
statements, industry leaders declined to discuss the implications of the deal on their own
companies, either on or off the record.

The mood contrasted vividly with Tele-Communications Inc.
and AT&T Corp. officials' assertions that, as TCI chairman and CEO John Malone
put it, the AT&T affiliation represents a means to achieving long-term goals,
"not only for us, but for the entire cable industry."

"We're just not going to speculate on what this
means at this point, although clearly, the announcement is a ringing endorsement for
cable's ability to deliver new services," said a senior executive at one MSO,
who did not want to be quoted.

But, the executive added, "if we're one of the
affiliates that TCI and AT&T are counting as part of their footprint in areas where
we're partnered with TCI, they are way ahead of themselves."

In truth, the 33 percent share of U.S. households
comprising the widely touted footprint of the new AT&T Consumer Services Co. includes
16 million households that are under control of other MSOs that TCI has partnered with
during its round of cost-shedding cluster deals that it concluded over the past year or
so.

"We like what we see so far," said an executive
at another top 10 MSO that holds the decision-making power in one of those cluster
markets. "But we were as surprised by this deal as everyone else, and we certainly
haven't had any chance to talk about the terms of any involvement that we might
have."

"There's not an agreement in place that would
compel any affiliate to participate," said TCI president and chief operating officer
Leo J. Hindery Jr., who will hold those posts at the new AT&T Consumer Services.

The new company's claims of initial market reach are
founded on its belief that "what we're talking about is so compelling for
operators as a whole that they'll find participation attractive, whether they do so
in a vendor/supplier relationship, or in other ways," Hindery said.

NEW COMPETITION?

But regardless of the merits of the deal that the new
AT&T puts on the table, there is something about this proposition that is altogether
different from the various ventures that Malone and his colleagues have put forward in the
past -- whether for MSO participation in TCI's Headend in the Sky digital-cable
service, the Sprint PCS personal-communications services venture, the @Home Network
high-speed data-business or something else.

This time, there's an underlying message from TCI that
other MSOs that decide not to take the deal can expect to face competition -- despite
cable's unspoken noncompete pact -- if not directly in traditional cable TV, then in
everything else associated with advanced voice and data applications.

AT&T chairman and CEO C. Michael Armstrong made it
clear that the new company is determined to be in virtually every market in the United
States, with or without a local cable partner.

"We're committed to reaching 100 percent of U.S.
households," Armstrong said in an interview. "To get to the other two-thirds of
the country, we'll be looking at investing in joint ventures and other types of
affiliations, as well as at the use of our own facilities."

The key to success is to be in control of facilities, as
opposed to being at the mercy of suppliers that lease access links, Armstrong said.

"You have to control the architecture if you're
going to control the interface protocols and the standards that you want to use in
delivering service features, and if you're going to have control over costs," he
added.

WIRELESS STRATEGY

An important option outside of cable is AT&T's
wireless-access strategy, Malone noted.

"These guys [AT&T] are working on a
wireless-local-loop system that delivers high speed data and four lines of IP
[Internet-protocol] telephony on an affordable basis," he said, adding that AT&T
has already obtained a license for the technology from the Federal Communications
Commission. "They're probably 18 months away from being able to use this
technology to take care of markets where they don't have access by cable."

Armstrong acknowledged that AT&T's wideband WLL
system, which has undergone one round of testing in Chicago, is a key to the
company's local-access strategy.

"WLL will be part of it," he said.
"We'll begin market trials next year and start rolling it out the following
year."

One facet of the AT&T play that clearly represents
broader market reach for the new enterprise is the affiliation agreements that @Home has
in place with TCI and other MSOs, including another six of the top 10. But how these
agreements translate into support for delivering an AT&T-spearheaded local phone
service remains to be seen.

HURDLES TO

AT&T'S VISION

In fact, the complexities of the technical alliances and
implementations required to achieve the integrated-services vision described by Malone
stand out as one of the primary unknowns of the deal.

Not only will MSOs have to decide whether they want to
affiliate or compete with the new AT&T Consumer Services, but they'll also have
to sort through the technical issues surrounding the seamless integration of networks that
must be accomplished to support delivery of such services.

Malone described a "point-and-click" environment
(which Hindery termed "whole-house"), where a terminal with processing power
"north of 300 megahertz" would wrap packetized voice communications and
high-speed Web-site access into the TV-service window.

Since last summer, the industry, through a task force led
by Time Warner Cable CEO Joseph Collins, has been trying -- so far without success -- to
reach agreement on integration of the disparate high-speed-data architectures that would
make universal access to such broadband services a reality.

Earlier attempts to merge @Home with Road Runner -- the
newly merged data operations of Time Warner and MediaOne -- were called off, but Hindery
expressed a strong interest in seeing such a deal consummated.

"I'd strongly encourage [such a deal]," he
said. "I just haven't had time to pursue it."

An executive close to Road Runner, however, suggested that
a deal, if it was feasible at all, would be hard-wrought.

"Obviously, there would have to be a lot of heavy
lifting to get a deal done at this point," the official said, citing the growing
power of the Road Runner venture, with Microsoft Corp. and Compaq Computer Corp. having
signed on as new stakeholders.

"Leo should have learned by now that the worst thing
that you can do is to talk about dealmaking in public before there's an
agreement," the MSO executive added.

Such views suggested that AT&T's move to make its
33 percent cable footprint a reality won't be a slam dunk, let alone its efforts to
enfold the rest of the industry in its 100 percent-coverage strategy.

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