AT&T's decision to purchase Tele-Communications Inc. no doubt will add clout to the cable industry's efforts to drive HFC technology development, but it remains to be seen whether the deal becomes a force for cohesion or upheaval as the industry pursues deployment of advanced services. The two-sided nature of the potential impact the AT&T/TCI deal might have on the cable industry was largely lost in the initial press coverage and commentary surrounding the blockbuster announcement on June 24. Booming cable stocks and MSO-issued press releases lauding the deal's endorsement of the industry's hybrid fiber/coax agenda obscured a wave of uncertainty that swept through senior ranks as leaders pondered whether the new player on the block would turn out to be friend or foe.

"There's a lot to swallow here," noted one cable COO, asking not to be named. "Nobody knows what they're going to be proposing to the rest of us, or what the action points will be if we don't like the deal."

Underlying this wariness was the fact that AT&T CEO Michael Armstrong cast the TCI takeover as but a step, though a big one, toward achieving the overarching goal of making his company's services ubiquitously available in the local access marketplace. "We're committed to reaching 100 percent of U.S. households," Armstrong said in an interview. "To get to the other two-thirds of America, we'll be looking at investing in joint ventures and other types of affiliations, as well as use of our own facilities."

AT&T has come to a realization it must control the facilities, as opposed to being at the mercy of transport suppliers as a service reseller, Armstrong said.

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

Notwithstanding Armstrong's reference to having two-thirds of the country left to account for in future dealings, the proposed $48-billion deal, if consummated, would assure AT&T of access to only 16 percent of the nation's households, which is the 16 million passed by networks owned by TCI.

While AT&T and TCI executives repeatedly talked in terms of reaching 33 million households, or one-third of the country, through the deal, the additional 17 million they were counting comprise the homes passed by cable companies affiliated with TCI in cluster sharing arrangements where the majority owners of those clusters, not TCI, would make the decision of whether or not to affiliate with the new AT&T Consumer Services unit that TCI is to be folded into.

TCI COO Leo Hindery acknowledged that nothing was solid beyond the 16-million home base that his company brought to the deal. "There's not an agreement in place that would compel any affiliate to participate," Hindery said. Instead, he added, the new company's expectations of initial reach were founded on its belief that "what we're talking about is so compelling for operators as a whole, they'll find participation attractive whether they do so in a vendor/supplier relationship or other ways."

Hindery said he had received nothing but positive feedback in a round of calls to all the top cable leaders the night before the announcement. "They were just thrilled," he said. But widescale reticence on the part of these leaders attested more to uncertainty than to excitement. "We're just not going to speculate on what this means at this point, though clearly, the announcement is a ringing endorsement for cable's ability to deliver new services," said a senior executive at one MSO, speaking on background. However, this executive added, "If we're one of the affiliates 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."

"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 certainly haven't had any chance to talk about the terms of any involvement we might have."

MSOs generally expressed a willingness to look at AT&T's ideas. For example, Time Warner Cable was said to be "supportive" of the TCI/AT&T deal and "open to alliances." But it was hard to discern any feelings of urgency toward consummating deals among the top companies.

"Quite frankly, the BS machine is operating overtime when it comes to talking about all these wonderful services flooding through our networks," said another industry executive, again declining to be identified. "How we go about putting all these pieces together and making the vision a reality is something we'll be working through for some time to come."

From the inside

Further adding to industry wariness was a background of long-running discussions top leaders had had with Armstrong and his lieutenants over the past year, during which many executives on the cable side were unwilling to accept the terms AT&T offered for partnering in the delivery of voice and other telecommunications services over HFC data links. In fact, sources said, Armstrong's inability to sell industry leaders on his latest offer at the NCTA convention in early May was what led him to conclude that the only way to make a cable strategy work was from the inside as a major MSO.

Now cable operators must decide whether to cut the deal Armstrong puts on the table or face competition from the new AT&T Consumer unit as it moves to exploit other means of entry into non-affiliated markets. While AT&T's pursuit of fixed wireless access as an alternative to HFC in gaining facilities-based entry has been panned in many press accounts, executives at the June 24 announcement made clear this option is alive and well.

"These guys (AT&T) are working on a wireless local loop system that delivers high-speed data and four lines of IP telephony on an affordable basis," said TCI CEO John Malone, noting that AT&T has already obtained a license for the technology from the FCC. "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 the WLL strategy, 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."

While bandwidth over the WLL platform would not be sufficient to deliver the video component of the cable service package, it would put the new TCI in a position to break the long-standing de facto non-compete pact in cable with respect to delivering high-speed data services in those markets where cable operators might not want to play ball. Moreover, the 18-month development timeframe cited by Malone would not appear to be a liability in AT&T's strategy, because, by most accounts, that's how long it will take before packet telephony, the mode of entry endorsed by AT&T and many in cable, achieves performance parity with today's circuit-switched services.

DSL options

In addition, an unspoken but potentially appealing option for AT&T in the emerging integrated data services marketplace is the telco DSL (digital subscriber line) platform. While use of "unbundled" local loop under the new telecom regulations is not quite tantamount to full facilities ownership, it's a far cry from the resale paradigm that has been the point of AT&T's frustration in its local service efforts to date. The new regulatory regime affords new entrants the option of owning their own DSL facilities and co-locating them at telco central offices, thereby eliminating control of the telcos over the provisioning of data services.

This is precisely the opportunity cable data service provider @Home Network Inc. has seized on in moving to expand the reach of its @Work commercial services unit beyond its affiliated base of HFC networks. In early July, @Work became the first cable-backed entity to take advantage of this option in a deal calling for use of SDSL (symmetrical DSL) links to be supplied nationwide by start-up NorthPoint Communications Inc.

"Our optimum transport medium is HFC," said Eric van Miltenburg, director of business operations for @Work. "But, while @Home has more than a dozen affiliates on the consumer side, we only have three on the commercial services side." He cited New York, Boston, Washington, D.C. and Los Angeles as cities, among many others not named, where SDSL will make widescale commercial access possible for @Work. "We don't have an opportunity to leverage HFC in these areas," he said.

NorthPoint, now operating in the Bay Area and Los Angeles with plans to launch in seven to 10 more Tier One markets before the year is out, also offers @Work reach it lacks in its affiliation with Teleport Communications Group, the nation's largest competitive local exchange carrier which is soon to become a unit of AT&T.

"We're using TCG largely to deliver services over traditional T-1 and fractional T-3 connections, but, as TCG's management has acknowledged, TCG hasn't had a sharp DSL focus, and so doesn't give us the reach we need to get to the smaller businesses," van Miltenburg noted. While the plans to purchase access transport over NorthPoint's SDSL facilities were formulated prior to announcement of AT&T's agreement to acquire TCI, @Work worked closely with TCG and "gave them a heads up" on the move, he added.

Like HFC, DSL connections open a means of delivering packetized voice services, which is something @Work is likely to do along with most other high-speed data suppliers sometime over the next two years or so, said Don Hutchison, senior vice president and general manager of @Work. NorthPoint President and CEO Michael Malaga noted that by optimizing its regional network architecture for delivery of IP (Internet Protocol) services, the company has made its facilities "IP voice ready," leaving it up to @Work and other data service providers to decide when they'll get into the voice services business.

Officials stressed the deal, which includes a small equity stake in the San Francisco-based startup, was undertaken not to compete with cable but to give @Work the broad-based access it needs to the business community. Nonetheless, with cable companies of every description moving to target businesses with high-speed data capabilities, there was little reason to doubt that @Work would find itself competing with non-affiliated cable companies for commercial accounts as NorthPoint deploys its SDSL facilities across the country.

In this sense, @Home, in which AT&T will be the largest shareholder with a 39 percent stake if the TCI deal goes through, offers a glimpse at the new dynamics that might prevail in the aftermath of the acquisition. @Home, now holding affiliate agreements with MSOs representing 50 percent of homes passed in North America, could become a major force in AT&T's efforts to bring cable partners into its IP telephony fold, or it could become a threat to those companies who choose not to extend the affiliation in this direction.

One bellwether as to future directions might be the outcome of ongoing discussions between @Home and the other leading cable data entity, the Road Runner joint venture between Time Warner and MediaOne Group. Hindery said he would like to see merger discussions renewed, which were called off in the spring in favor of simply pursuing technical integration. "I'd strongly encourage (such a merger)," he said. "I just haven't had time to pursue it."


However it is done, tight integration of cable's backbone networks and regional data centers has been a high-profile goal of industry strategists since last summer, when the Cable Television Laboratories executive board created a task force to achieve the goal under the leadership of Time Warner Cable CEO Joseph Collins. Such linkage, going beyond simple packet exchanges or "peering," would ensure compatibility across multiple protocol layers, affecting how services are provisioned, managed and billed, as well as the way traffic is handled.

Interests on the Road Runner side did not react warmly to Hindery's enthusiasm for a full merger. An executive close to the Time Warner/MediaOne Road Runner affiliation suggested a deal, if feasible at all, would be hard wrought and certainly no easier to achieve than it was when the earlier talks were terminated.

"Obviously, there would have to be a lot of heavy lifting to get a deal done at this point," the official said, noting that Road Runner has gained significant strength in the wake of $212.5-million investments from Microsoft Corp. and Compaq Computer Corp. "Leo should have learned by now that the worst thing you can do is talk about dealmaking in public before there's an agreement."

But data network integration, whether by merger or affiliation, now appears to represent the industry's best shot at preventing a splintering into competing forces on the all-important data side of the business, where network support for IP telephony represents an opening into a vast range of advanced services over the broadband platform. With @Work moving into Road Runner territory via NorthPoint's DSL facilities, it's hard to imagine Road Runner strategists will confine themselves to their affiliated HFC markets as pursuit of advanced service opportunities becomes top priority, unless there's an integration agreement between the two forces that sets de facto boundaries on each others' turfs.

"Time Warner is a content company, which gives us a somewhat different perspective on where the opportunities lie than might be the case for a more facilities-based service company like AT&T," said a Time Warner executive, speaking on background. "We're very happy with the position we're in."

Telco alliances

With Armstrong affirming intentions to proceed with deployment of other facilities-based strategies in markets where it doesn't have cable access, cable companies not willing to cut a deal may well go looking for their own big telco alliances, said Merrill Lynch First Vice President Jessica Reif Cohen in a report issued after the AT&T/TCI announcement.

"Rapid consolidation is a likely outcome over the next year or so as MSOs will seek to dramatically increase their scale in hopes of attracting a major suitor," Cohen said. Some MSOs, such as MediaOne, are already large enough to attract such players, she added.

Armstrong and Malone readily attested to feeling such urgencies in agreeing to do their deal.

"Time was closing in on us," Armstrong said, in reference to his company's need to achieve broadband facilities-based access to the local marketplace.

"It was clear that, to implement (TCI's full service) strategy, we were going to need a powerful company to help us do this," said Malone.

A comparable sense of urgency was hard to discern in the taciturn to non-existent comments of MSO executives outside the AT&T/TCI camp. But it could quickly prove to be catching.