Telephone Temptress Reels In Comcast
George Mannes
12/20/01 - 01:32 PM EST
It's sort of like John Malone, but without John Malone.
The deal to merge
AT&T's (T Quote - Cramer on T - Stock Picks) cable television subsidiary with
Comcast (CMCSK Quote - Cramer on CMCSK - Stock Picks) creates a communications behemoth in the homes of more than 20% of all domestic TV-owning households and nearly a third of those subscribing to cable.
Considering its substantial heft, the proposed
AT&T Comcast should realize big savings on programming. But the company is also excited by the prospects of moving AT&T's telephone-over-cable service onto Comcast systems, giving it a growth engine unparalleled in the industry. Comcast shareholders seemed leery of the deal Thurdsay, sending the stock down 6% by midday to $35.66. AT&T shares rose nearly 9% to $18.25.
Big Fish
To the benefit of its shareholders -- but to the detriment of programmers and other vendors in the cable and communications industries -- AT&T Comcast would be a powerful gatekeeper on a scale unrealized since the late 1980s. Back then, John Malone's Tele-Communications Inc. flexed its muscles by extracting favorable pricing terms and equity stakes in return for access to its dominant share of cable TV subscribers in the U.S.
Comcast President Brian Roberts, slated to become CEO of AT&T Comcast, perhaps carries a less fearsome reputation than Malone did at TCI, when his legendary hard-nosed negotiations earned him the unendearing reporter-repeated label of the Darth Vader of cable television. (Malone, who sold TCI to AT&T, is now chairman of
Liberty Media , a cable programmer that is assembling cable TV system assets in Europe and elsewhere.)
But there's no doubt that AT&T Comcast will take advantage of its newfound heft. Assuming the merger closes as planned a year from now, the 14 million-plus subscriber AT&T Broadband, already the largest cable TV operator in the U.S., would combine with third-largest operator Comcast to have more than 22 million subscribers, leaving second-place
AOL Time Warner (AOL Quote - Cramer on AOL - Stock Picks) in the dust with under 13 million subscribers.
Few Players at the Table:
The Nation's Biggest Cable Operators |
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| Sources: National Cable & Telecommunications Association, Nielsen Media Research, Paul Kagan Associates |
In a meeting with analysts Wednesday, executives made it clear that they expected AT&T Comcast's size to deepen discounts on programming, boosting annual earnings before interest, taxes, depreciation and amortization -- a common media industry-financial performance yardstick -- by as much as $450 million. That's nearly 10% of the $4.6 billion in EBITDA (on $18 billion in revenue) that the companies would show in a pro forma combination for 2001.
But programming costs for cable TV would be only part of the equation, because AT&T Comcast also will be continuing, over the next few years, major initiatives in high-speed Internet service, telephone service over cable and interactive television -- making AT&T Comcast a gatekeeper in those areas, too. While a combination offers new opportunity for hardware vendors -- Comcast, which has held back on cable telephony development, likely will take the AT&T-led plunge following the merger's completion -- it also gives AT&T Comcast greater leverage with vendors supplying software, hardware and services for these ventures.
Big Birds
As another indicator of the deal's payoff, executives say that within five years, they expect that migrating AT&T Broadband's telephone service onto Comcast's systems will reap up to $800 million in incremental annual EBITDA. AT&T, which says its cable-telephone business will reach break-even in the first quarter of next year, envisions that the incremental capital cost of adding a new cable telephony customer will drop from more than $700 this year to less than $600 by 2005.
Yet another area in which scale will matter for AT&T Comcast, the companies say, is the advertising business. Roberts pointed out that the new company would have a major presence in eight of the top 10 TV markets in the U.S., giving the company a viewer reach comparable to that of the station groups owned and operated by the major television networks -- and giving AT&T Comcast opportunities for national advertiser sales previously unthinkable in the cable business.
Of course, this market power and these synergies may play well on Wall Street, but not necessarily among regulators in Washington. Already, a public interest media group, the Center for Digital Democracy, issued a press release Thursday protesting the deal, saying it "threatens to undermine competition and diversity in both the cable TV programming field and the emerging interactive broadband marketplace," and adding, "the potential power of such a new combination must be fought both in Washington, D.C., and throughout the country."
