SBC-AT&T Merger Bugs Cable

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Washington— In a strategic shift, the cable industry isn’t going to remain silent in connection with SBC Communications Inc.’s plan to acquire AT&T for $16 billion, mostly in stock.

For years, the National Cable & Telecommunications Association has stayed out of mergers in a public way, although individual cable companies were free to break with the trade association. But immediately after the SBC-AT&T deal was announced, NCTA president Robert Sachs signaled that the cable industry’s chief voice in Washington, D.C., no longer had merger laryngitis.

'ANTITRUST CONCERNS’

“The proposed combination of the largest and second largest telephone providers in SBC’s 13-state region raises obvious antitrust concerns that regulatory authorities will have to scrutinize carefully,” Sachs said in a statement.

Sachs’s statement struck one analyst as somewhat peculiar because here was cable speaking out about a $16-billion deal at the same moment Time Warner Inc. and Comcast Corp. were plotting to acquire Adelphia Communications Corp. for $17 billion — a bigger deal, at least in dollar terms.

“What’s different about this is that cable is normally silent on these things. Generally, cable has viewed that those in glass houses shouldn’t throw stones,” said Scott Cleland, a telecommunications analyst with Precursor in Washington D.C.

Some press accounts emphasized the symbolic importance of the deal — Ma Bell absorbed by one of the offspring born of its historic 1984 breakup.

Cable, on the other hand, is focused on the competitive threat posed by an SBC-AT&T combination, both in video and voice markets. SBC has announced plans to spend $4 billion to make fiber upgrades and offer what it calls IP video to 18 million homes by 2007.

NO FRANCHISE, PLEASE

To cable’s consternation, SBC wants to provide video unfettered by traditional cable regulations, such as requirements to obtain a local franchise, pay franchise fees, provide mandatory carriage to local TV stations and allocate capacity to public-access channels.

“I think the SBC-AT&T merger, going before the [Justice Department], the FCC and half the states in the U.S, provides an appetizing gauntlet for cable and localities to hammer SBC’s no-video-franchise position,” Cleland said.

In a speech last December, Sachs said SBC’s intent to offer video without complying with franchising requirements would allow the telco to deploy facilities selectively in an attempt to cherry-pick wealthy enclaves.

Saying SBC documents given to Wall Street analysts backed him up, Sachs said SBC wanted to engage in “redlining” — something federal law prohibits cable companies from doing to ensure that low-income communities are not ignored.

Cleland said he expects the SBC-AT&T merger to be approved, but not before a long battle with federal and state regulators.

Analysts at Legg Mason Wood Walker Inc. did not see a downside to the merger for cable. They argued that SBC appears to be buying AT&T to solidify dominance in the business or enterprise market — perhaps an indication that SBC thinks cable’s hold on residential consumers is too powerful to pierce.

“We believe an SBC-AT&T transaction is a positive signal for the cable operators,” Legg Mason wrote last Monday. “Cable operators could benefit from potential distractions as SBC and potentially Verizon [become] more focused on the enterprise space.”

VoIP INTERFERENCE

SBC’s ability to frustrate cable’s entry into the voice-over-Internet protocol (VoIP) market is another concern, a cable-industry source said.

SBC and other Bells, for example, have been less than cooperative in reaching interconnection agreements in recent years, the source said.

In recent months, a new issue has surfaced: number portability. Bright House Networks, Comcast and Time Warner have each complained to the Federal Communications Commission that Verizon Communications Inc. is impeding local phone competition by bundling the sale of local phone and digital subscriber line services.

In many markets, Verizon won’t sell DSL unless the customer also signs up for Verizon local phone service.

The MSOs said that when a Verizon customer wants to drop local phone service to go with a new company, the customer is required to drop DSL service at the same time.

The MSOs claimed Verizon won’t transfer the customer’s phone number to the new provider until the customer drops both voice and DSL. Although the MSOs said that the bundling wasn’t illegal, they said Verizon’s refusal to port numbers until the bundle was dropped violated FCC number-portability rules.

Cable MSOs have said consumers are not always willing to drop both services just to change local phone providers. An SBC-AT&T combination could magnify the problem cable is having with Verizon, a cable source said.

SHARE PROBLEM

Jessica Zufulo, a telcom analyst with Medley Global Advisors, said cable sees an impact on its VoIP product from the SBC-AT&T merger.

“Cable would be concerned how this merger would create a market share problem for them in the VoIP space,” Zufulo said. “They are probably keeping a low profile, but there is no doubt they are watching this entire play and how it’s shaking out.”

Critics that need evidence to support VoIP-related merger conditions don’t have to look beyond filings that AT&T has made at the FCC about SBC and the other Bells.

“The Bell practice of requiring customers who purchase DSL to also purchase a [local phone] line will hamper customers who wish to use DSL and competitive VoIP services without maintaining a [local phone] line,” AT&T in an FCC filing last May.

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