AT&T buys TCI: Is a BT deal next?

By David Rohde
Network World,6/29/98

New York - Continuing to build network capacity through acquisition, AT&T last week announced it would purchase Tele-Communications, Inc. (TCI).

Additionally, rumors swirled that AT&T is seeking to acquire international capacity through a venture with British Telecommunications plc (BT).

[Armstrong/Malone pic] On the home front, AT&T last week signed a deal to buy cable TV market leader TCI for $48 billion in AT&T stock. The move is designed to let AT&T offer local telephony and Internet access services over cable lines - assuming it can convert those lines to handle two-way transmission of information.

On the international scene, numerous sources last week said AT&T is negotiating a possible deal with BT. AT&T is reportedly pushing BT to dedicate its international network assets to a new global-services joint venture.

A European source close to AT&T said that within 30 days the company will seek a deal to link its international assets to an AT&T/BT joint venture. Those international assets include AT&T's European network, AT&T-Unisource Communications Services, as well as the AT&T global confederation, WorldPartners Co.

"There are definitely such discussions going on," said Berge Ayvazian, senior vice president of The Yankee Group consulting firm in Boston. Also involved in the talks: Japan's predominant international carrier, Kokusai Denshin Denwa, according to another source.

Behind all the AT&T moves is a strategy of tight partnerships and strategic purchases with vendors of hardware, software and network services that began shortly after AT&T Chairman and CEO C. Michael Armstrong took office last November (NW, Jan. 19, page 1).

Once averse to outside interference or adopting outsiders' technologies, AT&T has in the last three months signed a bevy of partnership, licensing and acquisition agreements.

Most recently, AT&T concluded a deal with Hewlett-Packard Co. to provide HP's Smart Contact suite of computer-telephony software to AT&T's call center customers, adding to a spate of recent network, bandwidth and performance management deals.

But while vendors seem to love partnerships, users are not convinced partnerships solve everything. For example, HP Smart Contact customer George Steinhoff, large-group systems manager for Blue Cross of California, said joining HP's computer-telephony software with AT&T toll-free services wouldn't be enough to move him off his MCI Communications Corp. network-services contract.

"I would be looking for more of a discounting of the [price of my] phone calls as opposed to a bundling of all the services," Steinhoff said.

But AT&T officials say the company's strategy needs time to pay off, and the new AT&T partnerships are following a definite pattern. For example, the TCI acquisition propels AT&T into the local residential market, just as its January acquisition of competitive local exchange carrier Teleport Communications Group, Inc. put AT&T into the local business market.

The desire to control network assets rather than promote loose alliances, which are subject to finger pointing and excuse making, is an element common to both acquisitions, and the possible international network restructuring with BT. The residential market - once seen as the best market for resale of regional Bell operating companies' local lines - was the last to fall under this philosophy.

"I think for AT&T they had no choice," said Steve Sazegari, president of Tele.Mac, a Foster City, Calif., telecommunications consulting firm. "[AT&T] had tried every other avenue to solve the local loop problem, and they did not see any end of the tunnel trying to deal with the RBOCs."

The TCI acquisition carries a substantial risk because TCI is only about halfway through a project begun 18 months ago to convert its cable plant to two-way transmission for voice and Internet sessions.

But once the project is complete, residential customers will be able to self-provision permanent or temporary telephone lines, bump up or down the speed of their Internet access, or order products electronically over their TV sets, said John Malone, TCI's chairman and CEO. And even though the offers will be directed at the home market, "They will be so cheap that your employer will probably supply it to you," Malone added.

AT&T's strategy is in sharp contrast to those of MCI and Sprint Corp. in the effort to provide voice and data services over the same end-to-end network.

So far, MCI's efforts have been aimed exclusively at business users who have high-speed Synchronous Optical Network access directly from MCI or its merger partner, WorldCom, Inc.

Sprint, with its recently announced Integrated On-Demand Network, is aiming at both business and residential customers but will rely on fiber or dial-up digital subscriber lines leased from RBOCs rather than its own last-mile facilities.

Armstrong said he is insisting on owning the end-to-end facilities. "We have to control the access, not just a dialogue to get that access," Armstrong said in making the TCI acquisition announcement.

Oddly, the RBOCs may come out of the AT&T/TCI deal smiling. Several released statements saying that if the deal goes through, the Federal Communications Commission would have no reason left to deny the RBOCs entry into the long-distance market.

And the cable aspect of the deal may leave the RBOCs relieved that AT&T does not have ready-made telephony lines to compete with them locally.

"The Bells would rather compete against a cable TV-based local competitor [because] there is a perceived quality or reliability issue associated with cable TV," said Jeffrey Kagan, president of Kagan Telecom Associates, an Atlanta consulting firm.