Comcast and AT&T: Two Winners in the MediaOne Contest

Advantages on every side, save that of MediaOne shareholders.
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Anyone who sees last night's surprise Comcast (CMCSA) - Get Report-AT&T (T) - Get Report deal in the MediaOne (UMG) contest as a loss for Brian Roberts' Comcast just doesn't get it. Not only does Roberts' family get to hold onto voting control of the company, and not only does Comcast get the $1.5 billion go-away-mad payoff it negotiated with MediaOne in the beginning -- a nice addition to anyone's balance sheet -- but it also gets some real bennies in the side deals with AT&T (which I am long).

Here's what, at first glance, I think the deal means for the players, and their investors, in this teltech-broadband megadeal.

The complications of the deal overall -- not every aspect of which has been explained by the new partners -- are considerable. But so are the advantages, on every side -- save, perhaps, for MediaOne shareholders: MediaOne opened down a couple of points this morning, at 75 1/2, as the promise of a big payday faded.

The most obvious gain for Comcast is the cable-system swap with AT&T. Managing geographically scattered cable networks is a pain, and uneconomical. By engaging in a "rationalization" exercise with T, swapping systems to produce regional continuity, Comcast winds up with about 2 million more subscribers, net -- and pays a pricey but increasingly typical $4,500 each, about $9 billion (mainly in new stock, apparently) -- and a more profitable system. A fair number of those new subscribers lie in the New York-Philly corridor, where Comcast is already strong, so economies of scale could be significant.

Less evident but at least as important is the "most favored nation" deal Comcast struck with AT&T to sell phone service over Comcast's cable systems. Without investing a dime, Comcast gets the additional dough from its revenue-sharing deal with AT&T on that phone service. Plus, AT&T promised Comcast to get that phone service up and running "on an expedited basis." Given T's present troubles with its other voice-over-cable commitments after the

TCI

buyout, I wonder just how truly "expedited" that offering can be. But the sooner the better, from Comcast's perspective.

Finally, in a less-heralded step, AT&T is buying the

Lenfest

family's cable systems (for about $2 billion more), also centered in and around Philadelphia, and is handing those over to Comcast to manage. Aggregating more and more customers is a key in the cable business to increase leverage with content suppliers, so Comcast will have an even stronger hand in negotiations with present cable-channel providers and newcomers seeking carriage with these managed (but still AT&T-owned) systems

For AT&T? The deals are unqualified wins. AT&T becomes in one fell swoop the nation's largest cable provider. It gains access to the entire Comcast cable network as a medium for its home telephone services. It cleans up problems with its plans to shuffle its

@Home

(ATHM) - Get Report

assets.

This has been an expensive week for AT&T CEO

Mike Armstrong

. Betting on the come, AT&T is gambling that it can assimilate huge acquisitions, roll out new and largely untested phone service over cable, peddle fast Net access, and more -- all at once, all across the country. Under Armstrong, AT&T has turned into a deal-making machine

par excellence

. But somebody's got an awful lot of work to do in the kitchen. And probably, soon enough, with federal regulators in Washington (keep reading).

Of perhaps even more importance longer-term is the possible deal between AT&T and

Microsoft

(MSFT) - Get Report

, reported in

The New York Times

this morning. Specifics are thin on the ground, but in general, Microsoft is supposed to be negotiating the exact share-price premium at which it will invest maybe $5 billion in AT&T -- a slice of Telephone that should give Microsoft an inside track on getting its much-dissed

Windows CE

onto the set-top boxes AT&T will soon be peddling to its cable customers.

This has been a long and frustrating fight for Microsoft, which sees set-top boxes as a crucial strategic market. Mixed results in earlier forays, such as $1 billion put into Comcast, have not stayed Microsoft's determination to buy its way into a market that will almost certainly be huge but which shows increasing promise of being nearly profitless.

An AT&T alliance would also give Microsoft some protection in terms of monitoring, and maybe fostering, the growth of the broadband-access market, seen by insiders at Microsoft as essential to the company's future directions for its applications software and its online businesses, such as CarPoint, Expedia, MSN Investor, HomeAdvisor, Gaming Zone and more. (If, as some seers predict, "applications renting" becomes commonplace in the broadband era -- a system under which we'd download and use fresh copies of our primary applications every time we need them, practical only with lean apps and especially a fast Net connection -- then Soft could also benefit from an intimate relationship with the nation's largest proprietor of broadband Net connections.)

Whether or not a Microsoft-AT&T deal jells, it's an audacious idea, yet another example of the scale of Armstrong's thinking, and of his fearless deal-making.

It'll be interesting today in the market, as those arbs who played this dangerous game jump out. And in Washington, too, I'll bet, as the

FCC

and the

Justice Department

start smacking their lips ... and sharpening their knives.

As

Andy Kessler

noted yesterday, AT&T's biggest risk in this deal-making circus may be to become so high-profile, and so powerful in the local-telephone-service market, that it all but forces Washington into re-regulating the company. That would be the ultimate irony: Armstrong builds a largely regulation-free powerhouse, only to have its very power lead to its re-regulation.

Ouch.

Jim Seymour is president of Seymour Group, an information-strategies consulting firm working with corporate clients in the U.S., Europe and Asia, and a longtime columnist for PC Magazine. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. At time of publication, Seymour was long AT&T, although positions can change at any time. Seymour does not write about companies that are consulting clients of Seymour Group, or have been in recent years. While Seymour cannot provide investment advice or recommendations, he invites your feedback at

jseymour@thestreet.com.