Convergence: Round Two: AT&T/TCI combination could challenge telcos for local voice

Although still at least 18 months away, AT&T's possible entry into the local voice and high-speed data market could pose the biggest threat telcos have ever faced. Assuming the proposed $48 billion acquisition is approved by shareholders and regulators at the federal, state and local levels, AT&T will have direct access to 17 million homes through Tele-Communications Inc.'s cable plant and an additional 16 million through partnerships with other cable operators.

Under terms of the deal, AT&T will issue 0.7757 shares of AT&T common stock for each share of TCI Group series A stock, and 0.8533 shares of AT&T for each share of TCI Group series B stock. AT&T will combine its long-distance, wireless and Internet services units with TCI's cable, telecommunications and high-speed Internet businesses to create AT&T Consumer Services. The group will be headed by AT&T President John Zeglis as chairman and CEO and TCI President Leo Hindery as president and chief operating officer.

AT&T also will issue separate tracking stock to holders of TCI's programming unit, Liberty Media Group, which will be led by TCI Chairman and CEO John Malone.

As part of the acquisition, AT&T will gain a controlling interest in the @Home Network, which has affiliate agreements with TCI and several other cable companies, including Cox Communications.

"We have always intended to be in the local exchange opportunity. This gives us, with one transaction, the ability to pass 33 million homes," said C. Michael Armstrong, chairman and CEO of AT&T.

It's through @Home that AT&T could implement its voice strategy. Although details were sketchy, Hindery said that the combined company's entry into the local residential voice market likely will be based on Internet protocol (IP) technologies, not circuit-switched.

"If we were to choose something to do in the circuit-switched world, it would be very selective," said Hindery.

Following an IP-based plan, though, will require plenty of time and money for development. Currently, cable-based IP telephony technology is being spearheaded by a group within Cable Television Laboratories called Packet Cable. Several major technical issues also need attention, including form factor, powering and protocols. However, analysts generally agreed that a combination of AT&T and TCI will be a viable competitor in the local exchange market.

"The issue is the point in time," said Joseph Kraemer, head of A.T. Kearney's communications industry practice. "If you were to say now, the answer is probably no. But if you think that the deal doesn't close until 1999 and AT&T retrofits a good portion of the buildout TCI did, there's a very high probability that IP telephony would work in that time frame."

"This is a real threat," said Bill Bane, vice president and group head of Mercer Management. "When you think of AT&T's choices of getting into the local market, this was the most logical."

Bell regional holding companies used the acquisition to push for regulatory permission to get into the long-distance market. Immediately after the announcement, Ameritech, Bell Atlantic and U S West issued statements saying the deal only emphasizes the need for all carriers to compete in all markets.

Ironically, it was Bell Atlantic's failed merger with TCI that many industry watchers say set back the progress of local competition. However, this deal will be different because shareholder and regulatory approval will be much easier, according to Malone, who will become the biggest individual shareholder in AT&T after the deal.

"From an antitrust point of view, they're going to build a statue to Mike Armstrong in Washington when this goes through. This is the kind of competitive behavior they were hoping for," he said.