Will the merging of telephone giant AT&T and communications company TCI lead to a coupling of communications services? Phil Ponce leads a discussion examining the possibilities.
PHIL PONCE: The latest proposed high-tech marriage brings together the nation's largest long distance company and the cable TV company with the most subscribers in the country.
MICHAEL ARMSTRONG, Chairman and CEO, AT&T: Today, John Malone and I are delighted to announce that next step, and that's, of course, the merger of AT&T and TCI. What are we doing? We're just combining the very best brand in the communications industry with the best broadband reach in the cable industry. And this is a big deal. This is a $48 billion transaction.
PHIL PONCE: TCI's chief, John Malone, explained what the big deal means to consumers.
JOHN MALONE, Chairman and CEO, TCI: I'm excited about this because the vision is really one of a ubiquitously deployed technology that allows the consumer not just choice in the traditional sense, i.e., pick up the phone and have an installer come out and change from A to B, but merely to sit in front of the TV set and self-provision. If you want an extra phone line, point and click. You want to watch the Dennis Rodman/Carl Malone wrestling match on Pay-Per-View cable, watch it free tonight compliments of AT&T, point and click and you're an AT&T long distance customer.
PHIL PONCE: A new AT&T subsidiary to be called AT&T Consumer Services will provide local and long distance telephone service, expanded cable TV, entertainment, and high-speed Internet access into the homes all using just one wire. AT&T, based in New York, is the world's largest provider of long distance and wireless services to more than 90 million customers.
SPOKESPERSON: Thank you very much for calling AT&T.
PHIL PONCE: With 128,000 employees, AT&T controls 60 percent of the long distance market and provides on-line services. AT&T was forced out of the local telephone service business when the government broke up the Bell System back in 1984. In recent years AT&T has been trying to find ways to get back in the local business. In the last three years the company has hit some tough times. First, it reported lower revenues in 1995 and announced massive layoffs. Then it went through a major restructuring and sold off its communications equipment and computer subsidiaries. Last year, AT&T made a major change at the top by bringing in Michael Armstrong as chairman and CEO. His job, to boost revenues and stock values.
In buying TCI what is AT&T getting for its $48 billion? Based in Denver, TCI provides a variety of cable services to more than 14 million customers nationwide. TCI cable customers get cable programming, interactive cable, and Pay-Per-View. TCI also owns Liberty Media, which has a stake in many different companies that provide programming, such as the Home Shopping Network, the Discovery Channel, and MacNeil/Lehrer Productions, which produces the NewsHour. Before the deal becomes final, it needs the blessing of AT&T and TCI stockholders, and that of the federal government.
PHIL PONCE: For more we're joined by Gene Kimmelman, Washington co-director of Consumers Union, publishers of Consumer Reports, and Berge Ayvazian, telecommunications analyst for the Yankee Group, a market analysis firm based in Boston. Gentlemen, welcome. Mr. Ayvazian, why did AT&T do this?
BERGE AYVAZIAN, Telecommunications Analyst: Well, in fact, the Yankee Group predicted AT&T's plan to align with cable companies back in January, when it announced the merger with Teleport Communications Group. At that time AT&T addressed the need to enter the local business communications services market through Teleport, through TCG, and, in fact, at that time, TCG was owned by the three largest cable TV companies, including TCI. TCG gave them access to business customers on high speed fiber optic networks directly into their buildings, and TCI's cable plant and their plans for high speed Internet service give AT&T access to over 20 million households through the broadband cable network.
PHIL PONCE: So would you say that the main engine driving this for AT&T is their desire to get into local competition at the residential level?
BERGE AYVAZIAN: Absolutely. The missing element in AT&T's strategy has been the residential local services market. And what TCI offers is not just the means to offer telephone service but, in fact, to integrate an offering that includes high speed Internet, cable, and entertainment, and interactive services, along with telephone on a brand new broadband platform that, as described by TCI Chairman John Malone, allows you to get all the synergies from each of the different service offerings.
PHIL PONCE: Mr. Ayvazian, speaking in plain terms, how does it work physically, where one has a cable coming to their house for cable TV programs and then how would that translate into local phone service, where you can just pick up the phone and make a local call?
BERGE AYVAZIAN: Up till now competition in the residential telephone market relied on reselling the services of a local telephone company. Using a broadband cable network, AT&T can allow the telephone instruments in your house, the wiring in your house to be plugged into a common unit that would offer cable, Internet, and telephone service, a wall box in your house that would allow you to connect to the broadband network and have your existing telephones work on that network. One other aspect of it, which is a bit unique, is that they'll likely soon be using Internet telephony, i.e., telephone service over the data channels on that broadband network, much like Internet telephony that's being trialed here in Boston by AT&T.
PHIL PONCE: And you've been using this term "broadband." Real quickly, what is broadband?
BERGE AYVAZIAN: Well, as an alternative to the copper network operated by telephone companies, which is narrow band, cable companies have a broadband width, a wide spectrum of transmission capability that offers video Internet and telephone service on one wire.
PHIL PONCE: Some people have described it as a difference between a road and an expressway. Is that an apt comparison?
BERGE AYVAZIAN: Yes, but it's an expressway that comes right into your house, and, in fact, you don't have to go through any on ramps. You're there.
PHIL PONCE: Mr. Kimmelman, sounds like a good deal for consumers. Is it?
GENE KIMMELMAN, Consumers Union: Well, we're hopeful that it will be. The problem is this highway, this broadband network, has never been effectively used for local telephone service. TCI has made promises in the past, hasn't delivered . Other companies have, and so it is potentially a tremendous benefit if AT&T can put enough capital resources into this to make this highway capable of doing two-way voice transmission, not just a one-way picture, like a television picture, which is what cable is excellent at, but an ability to converse, to talk back and forth. That, the cable network has never been able to do effectively.
The danger for consumers, on the other hand, though, is that with cable being less regulated and fully deregulated next year, rates are going through the roof; they're going up four or five times the rate of inflation, and we're fearful that AT&T may just be purchasing a new profit center with rising cable revenues and rates, rather than fully aggressively bringing that cable wire into the telephone world and offering consumers two wires that have every service on them, competitively more choice, more availability.
PHIL PONCE: Do you agree that what's driving this is AT&T's desire to get into the local market, and how do you respond to their argument that this will mean more competition, lower phone rates?
GENE KIMMELMAN: I think AT&T probably has no alternative at this point. Unfortunately, we've had massive convergence, local telephone monopolies merging with local telephone monopolies, SBC-Pacific Telesis, Bell Atlantic with NYNEX. We have huge mega regional monopolies in the phone business. AT&T wasn't able to crack one of those monopolies. When they join together, it's even that much harder.
So we're on this convergence path that has led to consolidation, and the hope is that we will have enough players left not just in the country but in each market to compete against each other. The danger is they will be regionally dominant firms who can drive up prices and reduce choice in their own home base sort of like fortress hubs in the airline industry. PHIL PONCE: Mr. Ayvazian, do you see a danger there?
BERGE AYVAZIAN: Well, I think there are concerns from the consumer's standpoint and certainly some public interest issues Gene is raising are well stated. On the other hand, I think AT&T's intent is clear. First of all, both TCI and AT&T are national companies. They don't have a regional hub, as Gene is suggesting. They are widely disbursed. They have over 30 million customers spread out nationwide. Second, their objective is to compete with the local telephone monopolies and to create a viable competitor which can deal with the mergers between the Bell companies.
And third I think the integration of the three services is a value added that is only now being explored--the ability to integrate Web-based content, television content, and telephony services into a single package with interactivity, with the ability to order on-line, with Internet over the-with telephone service over the Internet, not just the traditional switch telephone network we have today. So I think there's a tremendous opportunity for AT&T to go much further than just reselling the local telephone networks, which was envisioned in the Telecommunications Act.
PHIL PONCE: Mr. Ayvazian talked about the different options that consumers might have. Is there anything to indicate that consumers want these options?
GENE KIMMELMAN: It's unclear. What is clear is consumers get really annoyed when they can't get a service call answer, there's only one provider, the cable company doesn't come, their rates go skyrocketing up, they have nowhere else to turn, other than buy a satellite dish, which costs three or four times as much money. Consumers want choice; they want options; but they also want simplicity. So there's true appeal to this one stop shopping model, if there's more than one company that offers it, and if AT&T can truly deliver on the promise of making that cable wire capable of competing with a local telephone wire.
What we intend to do is ask public officials to make them carry through. We've had promise after promise from these industries, these companies, of what they hope to do, what they intend to do, all well intentioned. The danger here is the rates are going up, particularly cable, consumers are getting hit now, and they're only-for the future. We think it's time for the government to step in and make them deliver, make some of these promises enforceable in law, subject to penalty, if they don't come through.
PHIL PONCE: Mr. Ayvazian, do you agree that the government should take that kind of a role?
BERGE AYVAZIAN: Well, I think the government does have a role. When Bell Atlantic and NYNEX merged the New York State Public Service Commission was able to step in and impose restrictions on Bell Atlantic that, in fact, enforced the Telecom Act and forced them to become competitive in the local market. I think similarly we can see an opportunity to take this deal and impose requirements on AT&T to fully live up to the promise that this deal has. I think at the same time AT&T has a lot to gain by executing properly and making this the fully competitive offer that it promises to be.
PHIL PONCE: Mr. Ayvazian, what do you think is driving these mergers? One almost senses that there's a fear on the part of different companies that people's dance cards are filling up somehow.
BERGE AYVAZIAN: Well, there's no doubt that overall there's a consolidation fever taking place. In fact, if you look at what's happened most recently with Sprint, there seem to be wagons circling around them by the Bell Companies to bring them into their fold. MCI's already becoming part of WorldCom.
Clearly there's a tremendous force to create mega competitors and multifaceted competitors that can bring together this full portfolio of services. What I think makes this unique is that we have a cross-over merger between a cable company and a long distance company, and through it we're going to create a local competitor in the residential market, which really doesn't exist today.
PHIL PONCE: Do you think that's what makes this deal unique from the others you described?
GENE KIMMELMAN: Absolutely. The new law, the Telecom Act promised us cross-industry competition, breaking open barriers to entry, companies crossing into new fields. We haven't had any of it. We've had local phone companies merge with local, long distance with long distance, cable companies with cable companies. This is the first effort to break the barrier, so it's truly welcome in that regard. However, it comes already after two and a half years of massive consolidation of existing monopolies, and we're just skeptical that AT&T can't really deliver on the promise, but we know they have these cable resources now with TCI where they can jack up rates and squeeze more revenue from consumers. We want to make sure that this is not done on the back of or at the expense of consumers. We hope their promises can be fulfilled, but we need public oversight, because the promises so far have just not been delivered on.
PHIL PONCE: Mr. Kimmelman, in the short time we have left, not every merger that's been proposed has gone through. What do you think the chances are for this one?
GENE KIMMELMAN: I think this is going to get careful scrutiny. These are enormous companies. I think the problems are much more in the communications field, anti-trust, and I think there are a lot of questions to answer about cable rates, diversity, and really bringing competition in the local telephone market. I think AT&T has some tough questions to answer. The faster they come forward and will make commitments, the faster this deal could go through.
PHIL PONCE: Mr. Ayvazian, quickly, what do you think the prospects are for approval?
BERGE AYVAZIAN: Well, I think AT&T will get the approval it's looking for. I think they'll have to give back, though, some major commitments. The issue is AT&T as cable operator, will it operate differently than cable operators have been up till now, which is that the minute they're given regulatory freedom, they raise rates? I think AT&T will have to bring a new tradition, where value and convergence is delivered, without having to go and raise rates.
PHIL PONCE: Gentlemen, thank you both very much.