Birth of a Broadband Powerhouse

Players jockeying for position in the lucrative broadband market got a jolt on Wednesday with the announcement that AT&T has agreed to merge its cable-television and broadband unit with Comcast to form a new powerhouse company.

Although it was well known that AT&T was looking to shed its cable business--both Comcast and AOL Time Warner made unsuccessful bids for the unit earlier this year--the merging of the number-one and number-three U.S. cable companies creates a formidable industry player.

The combined company, which will be called AT&T Comcast, is expected to boast 22 million subscribers, giving it direct access to one-fifth of the U.S. market.

Although the $72 billion deal still needs to be approved by both companies' shareholders as well as regulatory authorities, it is not expected to encounter any obstacles, allowing the company to take form late next year. The boards of both companies have approved the deal.

Broadband Broadens

The new company is expected to have a big impact on the burgeoning broadband market, which is due to grow from 9 percent of U.S. households in 2000 to 41 percent in 2006, according to figures from Jupiter Media Metrix.

"Broadband is what the future is all about. AT&T didn't get into the cable business to be a cable company; they got into it to create a platform to launch digital services, including broadband," says Jeff Kagan, an independent telecommunication industry analyst.

While the deal returns AT&T to its core business of telephony, AT&T Comcast will be well positioned to be the leading player in the broadband market.

"From a broadband perspective, AT&T Comcast will be the single largest last-mile broadband provider, combining AT&T's 1.4 million customers with Comcast's 792,000," says Jupiter broadband analyst Joe Laszlo.

However, SBC Communications, with its 1.2 million subscribers, will be breathing down AT&T Comcast's neck, Laszlo adds.

Still, the analyst says it is difficult to talk about frontrunners in a market that is focused on territories, with few national providers.

Intense Rivalry

That is where the AT&T and Comcast merger highlights another fierce rivalry, between Microsoft and AOL TW, both of which are jockeying to dominate the U.S. Internet market. Although AOL TW lost its bid for AT&T's cable unit earlier this year, it will still have a minor role in the new company via AT&T's 25.5 percent stake in AOL TW's Time Warner Entertainment, which is being rolled into AT&T Comcast.

Microsoft will also have a piece of the pie, given that it backed AT&T with $5 billion in subsidiary trust convertible preferred securities that it has agreed to convert into 115 million shares of the new company.

AOLTW and Microsoft are "violently friendly competitors," Kagan says.

However, Laszlo predicts that of the two rivals, Microsoft is most likely to win access to AT&T Comcast customers through its MSN Internet service. This is because the software titan will have a more high-profile stake in the new company, and is not as strong a network competitor.

"Companies get scared of other companies owning their customers ... and I think AT&T Comcast would be more likely to cede their customers to MSN, which seems like a safer partner," Laszlo says.

Microsoft's motive for backing AT&T was clear, however.

"Microsoft wants to have their foot in the door of every possible threat," Kagan says.

And while the creation of AT&T Comcast would announce a new era in the broadband and Internet market, it is also expected to affect digital services such as voice over Internet Protocol, video, and data services.

Under the approaching footsteps of this new cable and broadband giant, the industry landscape is expected to shift, analysts say. To compete, industry players may have to broaden their reach as well.

"This may trigger a string of other mergers and acquisitions in 2002," says Kagan, "from companies in cable and wireless to even local and long-distance telephone service providers."