The Wall Street Journal

March 7, 2006

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Battle Lines
For Cable Giants, AT&T Deal
Is One More Reason to Worry

Competition in Phone, TV
And Internet Intensifies;
Pressure From Washington
Shaving Prices to Keep Up
March 7, 2006; Page A1

The picture just got fuzzier for the cable-TV industry, a once-mighty monopoly now under assault by new technology and corporate mergers.

Even before AT&T Inc.'s planned $67 billion acquisition of BellSouth Corp. -- a deal that would create the world's biggest phone company -- cable companies were under growing pressure. Their stocks have steadily declined amid investor alarm at new competition from satellite and phone companies. The explosion of video on the Internet is conjuring up a future when a cable middleman may no longer be necessary. Regulators are pushing the industry on decency issues and pricing policies.

And cable's once-commanding lead in the sale of high-speed Internet connections has eroded as telephone companies have steeply discounted competing offers. Cable used to enjoy a two-thirds market share, but in the past year telephone companies have picked up more new customers than cable operators did.

Comcast Corp., the U.S.'s largest cable operator with more than 21 million subscribers, saw its stock fall 22% in 2005. While it has picked up a little bit of ground this year, it's still down 17% from the beginning of 2004. Mediacom Communications Corp., the No. 7 operator, is down 33% from the beginning of 2004. Charter Communications Inc., No. 4, is down 72%.

Now the AT&T megadeal could create the largest competitor yet for cable operators in the new race to sell packages of phone, TV and Internet services. Among phone companies, AT&T already had the most aggressive plans for pushing into the TV and broadband markets. Adding BellSouth's customers would lift AT&T's annual sales to $120 billion in 22 states, giving the company cash and scale to pursue its strategy nationwide. AT&T already is planning to streamline its operations. It announced yesterday plans to cut 10,000 jobs following its purchase of BellSouth.

The likely result for cable operators: more pressure to cut prices for high-speed Internet and slower growth of price increases for television. Cable companies also may have to increase capital spending to keep up with the new TV technology the phone companies are planning. In November, Comcast's stock fell 5% after it raised its estimated 2005 capital spending to $3.5 billion from an earlier prediction of $3.2 billion to $3.3 billion.

[Steve Burke]

Consolidation in the telephone industry could put pressure on cable operators to get bigger as well. Both Comcast and the cable unit of Time Warner Inc. are expected to bulk up later this year when they divide up the systems of Adelphia Communications Corp., which has been operating under bankruptcy protection. As part of that deal, Time Warner Cable will issue public stock, giving it a currency for future acquisitions.

Cable operators are hoping that, at least in the short term, a merger of AT&T and BellSouth would slow AT&T's launch of TV service. They point out that for months, if not years, management's attention will likely be focused on integrating the two companies.

Meanwhile, the cable companies aren't standing still. Comcast has greatly increased its video-on-demand offerings with ambitious plans to offer a library equivalent to 5,000 hours of movies, programs and other features by year's end. Large cable operators are also pushing into a wide range of other new technologies that will give them interactive commercials and many of the other features that AT&T is planning.

"There's not a thing that [phone companies] can offer that we can't offer to our customers as well," Steve Burke, Comcast's chief operating officer, said yesterday after the AT&T deal with BellSouth was announced.

WSJ's Dennis Berman discusses10 the impact of AT&T's $67 billion deal to buy BellSouth.
 Plus, WSJ's Almar Latour, Julie Ask of Jupiter Research and Om Malik of Business 2.011 discuss the possible effects of an AT&T-BellSouth merger on the telecoms sector.

The cable industry, like the phone business, has been in upheaval for years, as both try to jam more services through their pipelines into America's homes. While telephone companies have been planning to move into the TV business, cable operators have been racing to offer phone service. Late last year, a venture of Sprint Nextel Corp. and a consortium of cable operators including Comcast, Time Warner and Cox Communications Inc. announced plans to offer wireless phone service together.

The cable guys have notched some victories. While phone giants like AT&T and Verizon Communications Inc. have barely launched television service, cable companies already provide phone service to more than five million U.S. subscribers. The cable-phone business is expected to grow even more this year because Comcast is launching the service on a massive scale.

"Cable operators have been able to prove their ability to compete and adapt to a changing environment," says Michael Willner, chief executive of Insight Communications Co., the country's eighth-largest cable operator. "The cable market is oversold [by Wall Street] because of unwarranted fears."

Cable enjoyed an early lead in the race to sell high-speed Internet connections. By moving faster than phone companies with a more attractive and problem-free product, cable companies dominated the early business.

Aggressive Strategy

But about two years ago, phone companies embarked on an aggressive strategy to grab market share through steep price cuts. Last year was the first full year that telephone companies added more broadband subscribers than cable operators -- 5.2 million vs. 4.4 million -- according to Leichtman Research Group Inc. The market share of the top cable providers has been whittled down to about 57%, according to Leichtman.

Telephone companies also currently enjoy a clear edge in the wireless business. A merger of AT&T and BellSouth would strengthen AT&T's hand in wireless because the companies are co-owners of Cingular Wireless. With a single owner, Cingular will be freed up from the conflicts that occur when a company has to serve two masters.

[Weak Signals]

Meanwhile, the cable industry's wireless venture with Sprint is facing delays. When it was announced late last year, executives predicted that the service would be launched in the first half of 2006; now, they are saying it will be in the second half of the year. A spokeswoman for the venture, Melinda Tiemeyer, pointed out that the venture involves numerous companies and requires "a lot of different areas coming together" like marketing, retail and the actual product.

Satellite continues to pose a formidable threat, with Rupert Murdoch's DirecTV Group Inc. planning to offer more than 150 national high-definition channels by 2007, as well as 1,500 local high-definition channels, surpassing what most cable companies can currently offer. Satellite operators have more than 27 million subscribers, compared with about 66 million cable customers.

Many investors saw a powerful signal when Comcast made its unsuccessful bid to buy Walt Disney Co. in 2004. The message they read: Comcast believed that TV distribution wasn't enough to sustain its growth, and it needed more TV content. While Comcast executives have vehemently denied this, the company's stock has mostly stayed well below $33.93 price it hit the day before it announced the Disney bid. Comcast's shares were down 11 cents at $27.06 in 4 p.m. trading yesterday on the Nasdaq Stock Market.

Before AT&T announced its plans to buy BellSouth, the phone giant said it planned to offer its own television service to 18 million homes by the first half of 2008. AT&T also is planning to beef up its alliance with satellite-TV operator EchoStar Communications Corp. by offering consumers a service, named HomeZone, that combines satellite TV with movies, programs and other on-demand content off the Internet.

It is still unclear whether AT&T will be able to execute its TV plans. So far, it is offering its TV service only in San Antonio and some experts are skeptical that the company will be able to move ahead with a broad rollout later this year. AT&T and EchoStar already are months behind in their plans to launch HomeZone.

Starting in the 1970s and 1980s, cable operators shook up the television industry by offering better reception and racier fare than the traditional networks, which are beholden to federal decency standards because their signals travel over government-granted airwaves. The cable industry also benefited from local monopolies, painstakingly negotiated one market at a time across the country.

But in the converging worlds of telecommunications and media, cable's competitors increasingly are the better-connected telephone giants, which have maneuvered through the federal legislative and regulatory landscape for decades.

Since taking over a year ago from Michael Powell, FCC Chairman Kevin Martin has ordered several major reviews of the cable business. The commission recently issued a report suggesting consumers would have lower cable bills if cable operators offered channels using an "a la carte" lineup -- selling individual channels rather than a prepackaged bundle. It is also examining whether to cap the cable giants' ability to extend their reach through mergers. FCC action on either of those issues would require congressional action.

An effort to force the cable giants to meet the same decency requirements as broadcasters has failed so far in Congress. But in response, the cable companies have offered new family-friendly packages of programming. The new packages haven't been well-received in Washington because they don't include ESPN or other popular channels. FCC Chairman Martin has continued to keep up pressure on the industry.

Meanwhile, as soon as this week, key House lawmakers could release a draft of a bill that would help clear the way for the Bells to get into the cable-television business. Essentially, the bill is expected to establish national video franchises. That would allow the phone companies to avoid having to seek permission from local governments to offer video service in their communities.

Separately, Arizona Republican Sen. John McCain is planning to introduce a cable "a la carte" bill this month. That legislation may not get very far, but Mr. McCain's presidential aspirations could easily result in the proposal ending up as at least part of any potential campaign platform.

Fighting Back

In the cities where phone giants have invaded cable's turf, cable companies are fighting back with aggressive pricing packages. Cablevision Systems Corp., facing competition in the New York region from Verizon, is offering new customers the first year of phone, cable and high-speed Internet service for about $90 a month. Insight Communications introduced a similar package about a year ago and is still evaluating what to charge customers once their initial discount period burns off. "We're packaging aggressively and getting more customers for it," Mr. Willner says.

In Keller, Texas, the first city where Verizon offered TV service, the local cable operator, Charter Communications, dropped the price of a package of TV and broadband services to $50 a month from $100 for the first year. Verizon recently announced that 23% of the Keller market is now taking its TV service, which charges $39.95 for 180 channels, $34.95 if the subscriber also takes Verizon's broadband service. A Charter spokeswoman said its special offer, which recently was increased by $10 a month, was partly a response to satellite competition.

Cable companies also have come out with new ways to hold on to customers who are about to switch providers. Time Warner Cable typically charges $39.95 a month for its broadband service for subscribers who also take its TV service. If customers call to disconnect their broadband, they're offered a slower service for $29.95 a month.

Time Warner doesn't generally advertise the lower priced service, says Mark Harrad, a company spokesman. "It's a save tactic," he says.

--Anne Marie Squeo contributed to this article.

Write to Peter Grant at peter.grant@wsj.com12 and Amy Schatz at Amy.Schatz@wsj.com13

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