Interrupted signals

Broadband cable's role in the new AT&T more uncertain than ever

As if the future of the nation's largest cable network weren't muddy enough. Before last Wednesday, the big question surrounding AT&T's cable broadband division was how it would satisfy federal conditions imposed on its merger with MediaOne Group in June.

Would AT&T elect to divest Liberty Media, the property run by John Malone and covered by its own tracking stock? Would Chairman and CEO C. Michael Armstrong get the White House support he requested for overturning the FCC's method of attributing cable subscribers - and thus avoid having to sell systems serving 9.4 million customers? Would his mission to Capitol Hill be rewarded with federal pressure for a sale of AT&T's 25% stake in Time Warner Entertainment as a price for approving the America Online/Time Warner merger?

The plan to restructure AT&T by spinning off its broadband and wireless operations has put those questions in the shade, for now.

"In a sense, what happens to AT&T Broadband in this scheme reflects on everything AT&T has done almost since Mike Armstrong moved in [in 1997]," said Karla Hamer, an analyst for Tel-Data. "Cable was at the very heart of his original design for the company, and you could make the case that the slowness of the benefits of that cable plan contributed to investors' disappointment with AT&T. Cable helped put the company where it is today - in big debt - and compelled it to do something drastic to regain Wall Street's respect."

Armstrong's plan envisioned a facilities-based, end-to-end network delivering converged voice, video and data services to customers over the "second pipe" able to span the last mile - hybrid fiber/coax. Performing such an end run around the incumbent local exchange carriers promised to be a faster, cheaper way to deliver more bandwidth to the end user than waiting for voice competitors to unbundle their local loops.

One big question is the viability of the strategy to sell bundles of services over cable. Third quarter results for converged voice and video over AT&T cable showed strong growth. Cable telephony added 126,000 customers, compared with 86,000 in the second quarter, for a total base of 350,000 customers in 17 markets. High-speed data over cable added 197,000 subscribers in the third quarter, vs. 124,000 in the previous quarter, for a total of 888,000.

Chief Financial Officer Charles Noski said the cable phone results put AT&T "squarely on track" to reach its target of 550,000 to 600,000 takers by the end of the year.

But financial results for AT&T Broadband did not reflect those optimistic results, with cash flow up just 3% for the quarter and actually off 12.7% when the costs of new launches and the integration of acquisitions were included.

"AT&T is making steady progress toward its goal, but this investment climate is looking for fast, short-term achievement," said The Yankee Group analyst Brian Adamik.

The regulatory hangover from AT&T's cable purchases will not help clarify the division's future, either. Armstrong's legislative lobbying reportedly led Sen. Ted Stevens, R-Alaska, to propose changes to the FCC's attribution rules that would exclude partially owned operations from the total count. But Stevens, who chairs the Senate Appropriations Committee, has only one more chance to add his rider to a spending bill before Congress adjourns for the year.

FCC rules count any system in which an operator holds more than a 5% stake in that operator's customer total. By those figures, the MediaOne buy gave AT&T 42% of the paid video market - 12% more than permitted under the FCC ownership cap.

Armstrong and company have been lobbying for changes in the rule for more than a year, but recent appeals to lawmakers and to President Clinton have aroused new ire among public interest groups and regulators.

"I oppose [Sen. Stevens'] provision," FCC Chairman William E. Kennard said Thursday. "It undermines our processes. You can't just define attribution by ownership. You also have to define it by influence."

Gene Kimmelman, co-director of Consumers Union's Washington office, called the Stevens proposal "a blatant, one-company-special-interest giveaway for AT&T" that would allow AT&T indirect ownership of up to 50% of the paid video audience.

On top of such renewed public relations problems, AT&T executives have had to deny reports that its restructuring plan was the brainchild of John Malone, Liberty Media chairman and AT&T board member. One of AT&T's largest shareholders, Malone went public this summer with a proposal to issue a tracking stock for AT&T's long-distance business.

According to reports, Malone believes that spinning off AT&T Broadband in a tracking stock increases the likelihood that it will divest Liberty Media after March 2001, when it will cease to incur tax penalties for doing so.

On Thursday, Armstrong denied that Malone played a dominant role in the restructuring. "John Malone is a terrific board member, and he participated just like all of the other terrific board members - no more, no less," he said.

Hamer expressed doubts about Armstrong's statement. "Malone has his own agenda," Hamer said. "He thinks the cable operation can be run better than it is now, and he's not Mike Armstrong's biggest fan. That will blur the message that a spunoff [AT&T Broadband] will be run the same way, only better."