NEW-LOOK AT&T COMES CALLING Pushes Ahead With Digital, Wireless Phone Plans

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New York -- AT&T Broadband & Internet Servicespresident Leo J. Hindery Jr. continued to emphasize the former Tele-Communications Inc.'ssuccess at recruiting digital-cable customers as "the primer for the launch of othernew services" -- high-speed data and cable telephony.

But at the same time, AT&T Corp. indicated that it wasmoving ahead with its plan to make wireless connections to local phone customers in areaswhere AT&T can't buy or align with cable operators.

Both Hindery and his boss, AT&T chairman and CEO C.Michael Armstrong, were here last week to speak at the Merrill Lynch & Co.Telecommunications CEO Conference.

For his part, Armstrong declared that AT&T would takeits fixed-wireless-telephony initiative, dubbed "Project Angel," to"several-thousand customers" in a market test later this year.

Although Armstrong would not give any details regarding thecompany's fixed-wireless plans, he said that if the market test is successful, the servicewould expand to "selected cities, for scale."

Armstrong added that fixed wireless would give AT&T aviable option in areas where it cannot reach telephony deals with the incumbent cablecompanies.

"With Project Angel, if we can't reach a reasonabledeal with a cable company, now we have an alternative," Armstrong said.

Some analysts believe that AT&T is using acarrot-and-stick approach with cable operators that are balking at signingtelephony-affiliation deals. Armstrong has said that AT&T will compete against cableoperators under those conditions. He and Hindery want to make AT&T-branded local phoneand high-speed-data service available to two-thirds of the country.

AT&T has only just begun testing a telephone-over-cableoffering in 250 homes in Fremont, Calif. Broadband Internet-protocol-based telephonyprobably won't be offered until early next year.

But Hindery said he was confident that IP-phone servicewould penetrate 25 percent to 30 percent of homes passed by cable within five years oflaunch in a given market. And he later told analysts that he thought that AT&T couldtypically hit that target within three years of launch.

Hindery has struck deals for telephony joint ventures withfive operators that were closely aligned with TCI, while Armstrong and Time Warner Inc.chairman and CEO Gerald Levin have agreed on general terms for a telephony venture thatwould pass 20 million homes.

Hindery also said he expected to come to definitive termson the Time Warner telephony deal before its deadline at the end of April.

The potential sticking point there remains MediaOne GroupInc., which owns about 25 percent of the Time Warner Entertainment partnership that, inturn, holds most Time Warner Cable systems.

Hindery was asked at the conference whether MediaOne wouldapprove the deal. At first, he said he wouldn't comment, but he later said he thought that"it would be irresponsible for [MediaOne] not to assent as a passive shareholder in[TWE]."

MediaOne spokesman Steve Lang said MediaOne executives,including chairman Charles Lillis, are keeping an open mind about the telephone deal, butthey have not yet seen the fine print. He disputed Hindery's description of MediaOne's"passive" role, saying, "I think that it's obvious on its face that passiveshareholders don't have the responsibility of approving business relationships like that,and we do."

On the high-speed-data front, TCI had just 29,000 pro forma@Home Network customers at the end of 1998, but AT&T's goal is to teach 150,000 to175,000 by Dec. 31. The penetration goal for that service is 15 percent to 20 percentwithin five years of launch.

AT&T didn't pay $55 billion in stock, cash and assumeddebt just to buy TCI's core cable business: It is more interested in signing up localphone customers, retaining long-distance customers and adding high-speed-data-servicesubscribers than it is in squeezing double-digit cash-flow increases from its 10 millionbasic-cable subscribers.

But the results for TCI's core cable business, which werereleased last week, were modest at best -- other than its industry-leading 939,000 digitalcable subscribers.

On a pro forma basis, adjusting for closed or pendingsystem deals, TCI's cable revenue rose 5.3 percent in 1998, to $4.8 billion from $4.6billion in 1997. Operating cash flow rose 2.5 percent, to $2.07 billion.

Revenue growth was affected by TCI's relatively low 3.9percent average rate increase, and cash flow was crimped by higher "launch anddevelopment" costs, mostly for digital cable.

TCI's cable operations ended 1998 with 10.7 million proforma subscribers, with internal growth of about 1.7 percent.

But TCI's Dec. 31 digital-cable-subscriber count of 939,000in systems that AT&T will continue to own and operate represents digital-cablepenetration of 10 percent. The service rollout gained momentum later in the year, so theannualized digital-penetration rate is 12 percent, as demand is rising, Hindery said.

AT&T wants to end 1999 with 1.8 million digitalsubscribers, rising to between 2.8 million and 3 million at the end of 2000, Hindery said.The company is confident that digital cable will penetrate 80 percent of its cable base byearly 2003, or as many as 10 million customer homes.

In Denver, where TCI of Colorado started actively marketingdigital cable in early 1998, there were 70,940 new digital viewers on the books at the endof last month, or 16 percent of the MSO's 452,000 Denver-area subscribers.

Last month, TCI of Colorado signed up 8,500 new digitalcustomers, which presented a predictable problem.

"Our biggest challenge has been getting enough trainedtechnicians on the road to meet the demand," TCI spokesman Matt Fleury said.

As he has in the past, Hindery said the big unknown is howwell all of the labor hours of service installations will go.

To help, he said, AT&T is talking to "three of thelargest project-management companies in the world -- people out of the aerospace andtechnology industries -- that will help us to get it done." AT&T is also activelyseeking self-installation technologies, he added.

AT&T's goal is to boost basic-cable penetration to 65percent to 70 percent from TCI's current level of 60 percent, Hindery said, and to getdigital cable into 80 percent of those homes. If cable customers already haveadvanced-digital boxes, it can shave a lot off the cost of adding IP-based cable-phoneservice.

Hindery was asked why the company's data-penetration targetwas so much lower than its IP-telephony goal. He said AT&T will offer a range of slowor medium-speed data-access services, such as those for reading e-mail on the TV screen.

And "high-end" @Home service, like the current$40-per-month service, probably won't be for the "low-end Web surfer," he added.

Joe Estrella contributed to this report.

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