Comcast/AT&T: Broadband Is Cheap

Jul 23 2001

When AT&T said last October it was splitting into four units, a lot of people in the cable industry started salivating: The nation's biggest operator, AT&T Broadband, was going to be spun off. Thanks to Ma Bell's bungling, it might go for a song.

Brian Roberts, president of No. 3 cable company Comcast, was the first to bid. "AT&T said it was going to split into four parts. To me, that meant that cable is no longer strategic to AT&T," says Roberts, who then approached AT&T with "a better way." But once AT&T's board cut off negotiations, he went public with his case.

While Comcast and other operators have seen their stock rise and margins improve, AT&T has been in a slump - due in part to the failure of its cable strategy. That's why Comcast can offer more than $40 billion, and assume $13.5 billion in debt, for assets AT&T bought for $100 billion.

How did AT&T ruin its cable business? In 1997, executives figured getting into cable would let AT&T offer phone service, digital TV and Internet access. It was all about convergence. Since AT&T acquired cable companies TCI and MediaOne, though, cash flow margins have fallen to the lowest in the industry. "AT&T destroyed value in its cable business by associating a strong cable business with a toxic phone business," says Scott Cleland, principal analyst for the Precursor Group.

Comcast has been inundating analysts and media outlets with PowerPoint slides to prove it can solve AT&T's problems. "There's an obvious $500 million a year they lose being in local phone business that we would cut," notes Roberts.

Still, it's not clear whether Comcast can squeeze much more out of AT&T cable. "Very few of [Comcast's cities] are tough, top-tier markets," says Ford Cavallari, an analyst with telecom consultancy Adventis. "It does not necessarily follow that because Comcast has good margins in its cities that it can get the same margins in AT&T's cities."

AT&T Broadband has some significant challenges. The question is whether AT&T will take them on or Comcast will be the one to do it.