With a deal, AT&T remakes landscape

12/21/01

BY ELLEN SIMON
STAR-LEDGER STAFF

AT&T Corp. made one of the biggest mistakes in business history 17 years ago, when it chose to keep its long-distance business in the breakup of its century-old telephone monopoly. Since then, local phone companies spun out of Ma Bell's nest have grown rich while AT&T has withered.

Yesterday, Ma Bell stood up and told the world she was ready to beat the Baby Bells at their own game.

Not only will AT&T Broadband's stunning $72 billion merger with Comcast Corp. create the world's largest cable company, but executives of both companies think the new AT&T Comcast can carry enough local phone calls to rival Baby Bells such as Verizon Communications and SBC Communications -- enough to undo AT&T's mistake.

In response to news of the merger, AT&T's long-suffering stock closed up $1.05, or 6.25 percent, at $17.85 a share yesterday.

The merger of the two behemoths -- AT&T was the No. 1 cable company and Comcast was the No. 3 -- creates a powerhouse with 22 million subscribers.

It gives AT&T Comcast, with the backing of Microsoft Corp., the financial might to take on the likes of Verizon and AOL Time Warner, the world's largest media company. It means AT&T Comcast will have extraordinary leverage with programmers that will affect the television shows, films and sports you watch.

And it could mean a cheaper phone bill.

"The real competition will now be between the cable companies and the local telephone companies," said Robert Saunders, a policy analyst with the Eastern Management Group in Bedminster.

Phone calls may seem like simple things, but two things can happen when you pick up the phone -- you can dial local or long distance. In 1984, AT&T decided the money was in long distance, not foreseeing how competition would level the business as consumers chased lower rates from carrier to carrier.

Meanwhile, those once-lowly local calls turned into cash cows. The companies that carried them, including Verizon, SBC and BellSouth, became near-monopolies themselves because they controlled the poles and wires carrying calls into homes.

The Baby Bells charged competitors big bucks for using those wires and poles. As a result, few companies bothered to compete, and the Baby Bells and AT&T began a long regulatory fight.

AT&T eventually saw long distance as a waning business. So it went on a $100 billion buying binge, securing a cable network as a back door into homes, allowing it to carry local calls without paying its offspring one cent.

That is how executives from AT&T and Comcast Corp. found themselves in a Midtown Manhattan Hilton conference room yesterday, showing off their new media giant.

AT&T Chairman and Chief Executive C. Michael Armstrong forged the cable strategy, shepherded the merger and plans to leave AT&T to join the resulting company. In that time, he has taken a pounding from AT&T employees, investors and the media.

Wearing a dark suit and a stiff smile, he sounded at times like a peevish high-school English teacher. But he spoke with relish about competing against the Baby Bells.

"AT&T didn't get into cable to do broadcast," said the executive, who will leave the long-distance business behind when he becomes chairman of AT&T Comcast.

"It could well be a turning point," said Robert Atkinson, director of policy research at Columbia University's Institute for Tele- Information. "It will mean significant competition for the local telephone companies."

AT&T Comcast will have another weapon. It can wrap local calling, cable TV and Internet service in one package that customers can pay for with one bill, said Josh Bernoff, principal analyst with Forrester Research in Boston.

This "bundling" strategy means a customer who once relied on AT&T for long distance, Verizon for local calling, Comcast for cable TV and a local video store for the latest movies will soon be able to get it all in one place, if that's what the customer wants.

AT&T currently has 1 million local phone subscribers, but that's just a crumb of the local-phone pie. "There is no greater revenue opportunity than the $100 billion local phone business," said Brian Roberts, president of Comcast.

The company said it would begin offering local service when the deal, which is subject to federal and shareholder approval, closes in 2003.

The new company will be headquartered in Philadelphia, and that will be the most likely place for the new local service to debut. Under the company's plans, second and third lines will be especially cheap, said Nicholas Economides, an economics professor at New York University's Sloan School of Business.

The merger is unlikely to face regulatory hurdles, experts said.

In the continuing battle with the Baby Bells, though, San Antonio-based SBC didn't wait long to fire the first salvo.

The announcement "is an urgent reminder of the need to establish clear, consistent and fair rules for all competitors in the broadband market," SBC stated yesterday.

Stay tuned for the next round.

Star-Ledger reporters Tom Johnson and Jeff May contributed to this report.