Comcast Merger Holds Consequences For High-Speed Market

It seems a given that the investor love fest over Comcast’s Sunday announcement to acquire AT&T Broadband will
translate into government approval down the road, pending shareholder approval.

If only because Wall Street is on the ropes as a result of high-technology
companies that helped cause the Nasdaq and Dow to drop in the past 18
months, regulators are going to feel the heat from the Hill to give
broadband, and all the stocks involved, a boost. That means making AT&T
Broadband shareholders and investors happy.

AT&T, one of the largest telecommunications companies in the industry, has
been seeing a steadily dwindling stock price since its decision
last year to break up into four independent companies. AT&T Broadband
investors are likely considering Comcast the better alternative to the
uncertainty they would face on the open market as a trading stock, despite
the fact it owns the largest cable network in the U.S.

But is Comcast, to date one of the most successful cable operators in the
nation, up to the task of mending the high-tech community? Moreso, what
will the company’s actions mean to the hundreds of Internet service
providers (ISPs) who are looking to offer cable Internet access on
their own?

It’s a question of integration. Comcast, which has already gobbled up 11
smaller cable networks over the past year, is now going to have to make
like a snake and figuratively unhinge its operational jaws to fit in the
large morsel that is TCI and MediaOne. The addition of roughly 10 million
cable customers is sure to give the company indigestion the first several
years, despite the optimism of Comcast executives.

Stephan Burke, Comcast Cable president, said in a press conference Monday
the company has doubled in size over the past year, including
three-quarters of a million AT&T customers, and expects two years is a
conservative estimate to get integrated operations rolling.

“What we’ve found time after time is that (integration) is not an overnight
thing,” Burke said. “It requires a lot of discipline and a lot of people
working on the process. Some of the improvement has to do with revenues,
some with costs, some with just a different approach to the business.”

Comcast already has a good idea of the operations behind AT&T Broadband’s
cable holdings. Ironically enough, they are two properties Comcast lost to
AT&T in a bidding war more than two years ago. Comcast, which bowed out at
$48 billion for MediaOne in 1998, is trying to get AT&T Broadband, which includes
both TCI and MediaOne, for $58 billion in 2001.

Scott Cleland, an analyst at the Precursor Group, said it was only a matter
of time before a cable operator took over the reins of a company that
essentially only knows about long distance.

“Just bringing AT&T Broadband under more competent cable management and
separating it from the toxic AT&T long distance business would unlock
substantial value for AT&T shareholders,” Cleland said.

But what would a combined entity like Comcast and AT&T Broadband do to the
high-speed Internet access industry, an industry that’s become the hot spot
for the telecommunications sector?

For independent ISPs, it would mean there’s just another mega-corporation
for them to negotiate with from a disadvantaged position.

Comcast has struck agreements with Juno Online Services Inc., now part of
United Online as part of its acquisition by NetZero Inc., to test
independent ISP use on its cable network. Open access tests, which began
earlier this year, will not be completed until at least the end of the year.

But cable owners have been exceedingly reluctant to open up their cable
networks to the competition. Only last year did officials back down from
their assertion that it was “impossible” to share cable Internet access
with independent ISPs.

According to Daryl Schoolar, analyst for research firm Cahners Instat, a
merger between Comcast and AT&T Broadband would likely put the onus of
shared access in the lap of the Federal Communications Commission and
Federal Trade Commission, both of whom have experience in that department,
a la the America Online Inc./Time Warner Inc., merger approved
in January.

The merger was the culmination of more than a year spent by ISPs fighting
what they said, and the FCC ultimately agreed, were the
anti-competitive practices of Time Warner’s contract terms for
inclusion. Officials at the nation’s second-largest cable network were
forced to make concessions, opening the door to open access.

Schoolar expects the same if regulators are forced to rule on a
Comcast-AT&T Broadband merger.

“If the merger went through, I would be surprised if the FCC did not put
some stipulations on Comcast about opening the network to competing ISPs,”
Schoolar said.

ISPs aren’t so sure the transition would go as smoothly. Comcast’s desire
to appease all parties could get them in trouble down the road, what with a
three-pronged worry over open access, integration and the possible demise
of [email protected], its ISP front.

@Home is still having troubles getting its financial books in order. In
April, the ISP was forced to refocus its
energies after failing to get its online advertising division profitable.

Ronald Kushner, co-founder of Great Lakes Information Systems Inc., an
Internet service provider (ISP) based out of Macomb, MI, said the
integration could be a little trickier than Comcast officials are willing
to concede.

“I am sure as a condition of the merger, ISP’s will bash (Comcast) until
open and unfettered wholesale access is a part of their merger agreement,”
Kushner said. “(But) they will be screwed up for years with the
government, with ISP’s on their back, @Home possibly failing, and other
issues of integration.”

Could Comcast ask federal regulators for more time to integrate its
operations to provide open access? Would regulators let them get away with
it? The jury’s out, and it rightfully has ISPs concerned.

Burke told reporters Monday it would take at least two years, likely three
or more, to get Comcast and AT&T Broadband on the same page. Until that
time, [email protected], will be able to offer cable Internet services to
consumers. And since @Home will continue to sign up customers, the
company will be in no real hurry to integrate its networks and get open
access underway.

If regulators agree to the merger without making a concession to open
access, ISPs will be left in the dust. [email protected] already has 3.2 million
subscribers. A delay of a year or more could spell the end of competitive
Internet services before it even starts.

But given the stock market’s need for a winner, and a rallying point to
drive tech stocks up again, it’s going to be difficult for regulators to
play hardball to force concessions out of the cable merger. Until then,
all ISPs can do is hope that the regulations started with AOL Time Warner
prevail.

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