States OK Cablevision on Telephony

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Cablevision Lightpath, the telephone subsidiary of
Woodbury, N.Y.-based MSO Cablevision Systems Corp., received approval last week for
interconnection agreements with Bell Atlantic Corp. to offer telephone service in three
states, opening the door to a possible alliance with AT&T Corp.

Lightpath will offer service in Connecticut, Massachusetts
and New Jersey through its own switched network. The interconnection agreements only
assure that Cablevision's telephone customers will be able to place calls to people
outside of its service area.

But those agreements were a key piece of the puzzle in
Lightpath's telephony strategy -- it already has a similar agreement in New York
state. And with that important step behind it, Cablevision can now concentrate on bringing
service to its more than 3 million subscribers.

Lightpath has been offering telephony on a limited basis in
Long Island, N.Y., to about 1,000 business customers and 1,000 residential customers.
However, the company has taken a low-key marketing stance regarding residential service,
opting to get the word out via direct mail and door-to-door solicitation.

But that strategy could change, given recent announcements
by AT&T that it is actively seeking cable partners for local and long-distance service
in areas where its future cable-TV subsidiary -- Tele-Communications Inc. -- does not have
franchises.

Cablevision also has existing relationships with both
AT&T and TCI: It is involved in voice-over-cable trials with the long-distance
provider at AT&T's headquarters in Basking Ridge, N.J. And TCI already owns a 36
percent interest in Cablevision -- a stake that will be transferred to AT&T once its
$48 billion merger with TCI is completed next year.

"Given that AT&T is going to end up owning 36
percent of Cablevision, there is a fairly good chance of an affiliation," said Oren
Cohen, an analyst with Bear Stearns & Co. Inc. in New York.

Cohen added that an AT&T affiliation would be
especially helpful in going after the residential market.

Aside from the cachet that its brand name would bring,
AT&T also could help to ease the financial burden of rolling out residential service.

AT&T announced last week that it would purchase up to
$900 million of equipment over three years from Antec Corp. and a partner. Some analysts
said the cost of network-termination equipment alone -- which is needed for
Internet-protocol-telephony applications -- could be several hundred million dollars over
a period of years.

If AT&T decides to enlist Cablevision as an affiliate,
the long-distance company could be a source for at least some of those funds. And Cohen
believes that AT&T's interest in Cablevision could evolve from an affiliation to
an outright acquisition of the MSO.

"Everyone knows that [Cablevision] has a great
cluster, a nice concentrated business," Cohen said. "It makes a lot of sense to
pursue the telephony side, but it takes a lot of capital. They've got an instant
partner in AT&T. Why not pursue that avenue if you're Cablevision?"

Eileen Connolly, a spokeswoman for AT&T, declined to
comment, saying that the company is in a self-imposed "quiet period" regarding
its pending acquisition of TCI.

Charles Schueler, a spokesman for Cablevision, would not
speculate on any future agreements with AT&T.

Cablevision plans to begin offering telephony in the three
states "as soon as possible," Schueler said. Cablevision would initially offer
service to business customers, expanding into the residential market in the future.

"That has been the model," Schueler said.
"We have done well in Long Island -- about 1,000 business customers who are
high-volume users, and 30,000 access lines."

Although Cablevision has had some success with telephony,
it has been much quieter about it then its colleagues have.

For example, Englewood, Colo.-based MSO MediaOne has rolled
out its telephone service amid much hoopla in Atlanta; Los Angeles; Jacksonville and
Pompano, Fla.; and the Boston suburbs. Cox Communications Inc. is offering telephone
service to subscribers in Phoenix; San Diego and Orange County, Calif.; Hartford, Conn.;
Omaha, Neb.; and Hampton Roads, Va. And Comcast Corp. offers telephony in West Palm Beach
and Fort Lauderdale, Fla., and in Baltimore.

On the residential side, Lightpath has about 15 percent
penetration in 11,000 homes in Long Island. The company plans to pass 50,000 homes with
telephony service by the end of the year.

And Cablevision has been very aggressive in pricing its
telephony service, offering calling packages that are 10 percent to 70 percent cheaper
than those of Bell Atlantic. The company also offers discounts to customers who buy cable
and Internet services.

According to the company's most recent financial
filings, business telephony has positive cash flow, and it is expected to generate about
$52 million in revenue this year.

And that's just in Long Island: Cablevision has
franchises in other densely populated areas -- including northern New Jersey, Boston and
Cleveland -- that could prove profitable

Those larger markets would be key to AT&T's
telephony strategy, which is based on obtaining direct connections to customers, mainly
through cable plant. It has been speculated that in areas where AT&T cannot secure
agreements with the incumbent cable systems, it will provide telephony via wireless and IP
technology.

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