AT&T co-opts broadband cable opposition

Industry wonders whether telecom giant is shafting DSL, other integrated-access projects.

By David Rohde AND JOHN FONTANA
Network World Fusion, 05/07/99

NEW YORK - AT&T's broadband cable dream grew even bigger this week, as the carrier's chairman, C. Michael Armstrong, worked some deft maneuvers to shove aside potential bidders for cable TV player MediaOne.

The moves - which converted potential enemies Comcast and Microsoft into allies of AT&T in its $58 billion MediaOne bid - has prompted not only awe for Armstrong's deal-making, but also concern that AT&T could be distracted from developing other broadband technologies for which enterprise network users are clamoring.

Comcast last week withdrew its $50 billion bid for MediaOne, clearing the path for AT&T to pursue MediaOne unopposed. And Microsoft, which sees a huge opportunity for its Windows CE operating system with potentially millions of broadband cable residential users, decided the best way to get there was through AT&T rather than by buying its own cable company.

But analysts say they are getting nervous that AT&T - which already owns the former Tele-Communications, Inc. (TCI) cable systems - isn't paying enough attention to other so-called "last-mile" technologies that are further along the voice/data convergence ramp than cable. Most cable system operators are rushing to convert their existing coaxial-cable systems to a hybrid of fiber optics and coaxial cable, but the switching equipment required for two-way telephony and Internet over cable is largely unproven.

"We still favor [digital subscriber line] because of the security and guaranteed bandwidth," says Lisa Pierce, a telecom analyst with Giga Information Group. "Although there's possible contention in DSL, it isn't shared across 500 homes the way hybrid fiber/ coax is."

Pierce credits MCI WorldCom and Sprint with making bolder DSL moves than AT&T. AT&T only announced DSL trials late last month. And AT&T's Integrated Network Connection (INC), a service for business sites that concentrates multiple compressed voice and data streams over an ATM premises device attached to a T-1 access line, isn't moving very fast, she says.

AT&T officials confirmed to Network World last week that INC beta trials will now extend beyond the originally announced first half of the year into the third quarter. "And AT&Tis not going to make a huge marketing push on INC until at least next year," Pierce says.

Behind last week's moves were some parochial cable-industry concerns. Comcast agreed to forfeit its MediaOne bid as long as AT&T gave it some former TCI properties adjacent to existing Comcast systems - a concept cable officials call clustering, which is considered desirable for regional marketing. That demand cost Armstrong some prize properties, including the former TCI system in Washington, D.C.

For his part, Armstrong says giving up two million subscribers to Comcast would help assuage regulators who must approve the deal.

Analysts say that's just a measure of political insurance because Federal Communications Commission Chairman William Kennard has already extolled the combination of AT&T and cable properties as a good deal for residential customers.

"AT&T has convinced the FCC that its acquisition of more and more cable com-panies is the last and best hope for meaningful residential local competition in the U.S.," says Alan Pearce, president of Information Age Economics, a Washington, D.C., consulting firm.

America Online and some state ISP trade associations are likely to oppose the MediaOne deal as they did the TCI deal. But the nation's largest ISP association - the Commercial Internet Exchange (CIX) - says it's unlikely to fight. CIX members are far more concerned about getting access to DSL-conditioned regional Bell operating company access lines than AT&T's cable moves, says CIX President Barbara Dooley.

As part of those moves, AT&T will increase the already 5 million digital set-top boxes they have agreed to deploy with Microsoft's Windows CE-based operating system by between 2.5 million and 5 million. The boxes will be used to deliver video, data and Internet telephony to consumers' TV sets.

The deal, which is not exclusive, would give Microsoft roughly 70% of AT&T's cable customers. The two will deploy the technology in three "showcase" cities in order to prove the concept and demonstrate interoperability between Microsoft's and other technology, most notably Java, which AT&T has also licensed from Sun.

Although partnerships of this magnitude have failed to generate results in the past, most notably Microsoft-MCI's and Lotus-AT&T's deals to host e-mail, Dwight Davis, an analyst with Summit Strategy, says this deal is different. "It's a newer and less proven technology, but one that telcos and cable companies have a vested interest in seeing succeed," he says.

And while the initial focus is on the consumer, enterprise users may see spin-offs.

"This is not a pure CE set-top box deal by any means," Davis says. "Clearly, part of the Microsoft strategy is to form this relationship with a big carrier that may become an application service provider. Microsoft will be well positioned to supply hosted applications and the infrastructure [the applications] sit on."