[NYT] AT&T Conjures Up Its Vision for Cable, but Can it Deliver?

I Find Karma (adam@cs.caltech.edu)
Sun, 9 May 1999 12:46:43 -0700 (PDT)

At first I thought AT&T buying TCI and now MediaOne was a brilliant
move, but now I'm not so sure. There are some formidable challenges
ahead if Ma Bell ever hopes these acquisitions to be profitable...


> ...It will probably take years for most people, even those in AT&T's
> cable markets, to see tangible results of the company's ambitions.

Which illustrates the point that "AT&T Personal Network" may very well
be strictly a marketing triumph and *not* a technology coup.

I've run across widespread confusion by media journalists as to whether
the emergence of newer arrivals to broadband -- Qwest, IXC, Williams,
Frontier, Global Crossing, Level3 -- present a challenge to the former
triumverate of AT&T, MCI Worldcom, and Sprint.

Is it that demand for broadband will continue to rise to meet the
ever-expanding supply -- in which case, controlling the cable pipes into
one's home seems like a bad move because the costs to improve the
infrastructure are so high?

Or is it that the ever-expanding broadband supply, coupled with
technology improvements in laser, fiber, satellite transmission, and
software, will produce a tremendous bandwidth glut, in which there
simply isn't enough traffic to fill all of these pipes, and in the grab
for market share there'll be a ruinous price war?

Either way, sneaking into the home through the cable lines doesn't seem
as appealing to me as it once did. Why *are* Bill Gates, Paul Allen,
Warren Buffett, Craig McCaw, and Michael Armstrong spending money on
broadband infrastructure? Is this a public good that they figure
*someone* has to ante up the bucks for -- and they're plotting their
next moves *given* a world of cheap bandwidth? Or is there a way to
profit off the coming bandwidth glut, and I'm just not seeing it?

> ...But even once a cable system has been adapted to send and receive
> data, voice and television signals, it is still not ready for the
> digital future. To offer high-speed Internet service, huge investments
> must be made in high-speed Internet switches that can route millions,
> even billions of bits of digital information every second. Even more
> daunting is the prospect of offering telephone service.

The costs of ramping up the infrastructure may be tremendous to AT&T.
Clearly the market has bought into AT&T's "vision" -- bidding up the
market cap of AT&T to over $200 billion while punishing AOL's market
cap to roughly half its size, presumably for the *lack* of broadband
strategy. Before the MediaOne deal was announced, by market cap alone
AOL was a bigger company than AT&T -- and that was just a month ago.

It's also interesting to think how far-reaching the AT&T empire goes.
Without even considering the recent Microsoft deal... AT&T owns at least
two-thirds (maybe more? hard to tell) of @Home, which itself is merging
with Excite. Thanks to the TCI deal, AT&T owns Liberty Media -- and I
don't think I'll ever fully grasp how ownership in the cable industry
works except that it puts AT&T in roughly the same category as a
News Corp or a Time Warner. And John Malone's latest take-under was
Liberty Media's acquisition of TCI Music by transferring some of
Liberty's assets to TCI Music in exchange for 94% of the shares. You
want to see a messed up stock chart, look at the chart for TCI Music's
tracking stock, TUNE, before and after the Malone deal was announced
in April:


> ...To match the reliability of standard phone service using cable
> systems requires big investments of money and ingenuity in complicated
> power generation systems....All of these technical challenges are just
> to offer phone service using conventional telephone technology, known as
> circuit switching, albeit over cable wires. To offer phone service over
> cable lines using Internet technology is even more complicated. In fact,
> the technology to do so reliably does not even exist yet. Armstrong said
> that he does not anticipate using Internet phone systems until 2001.

And @Home doesn't plan to break even until 2002. What will be
interesting to watch is whether our observation that money has attention
deficit will derail AT&T's plans simply because no one in this day and
age has the patience to wait out an investment 2-3 years.

> ...The upshot for AT&T is that all of the billions of dollars and
> millions of hours it will spend on the obvious technical challenges may
> pale beside the time, effort and money it will spend revamping its
> organization and deploying the anonymous "back office" computer systems
> that are the backbone of any modern business.

Michael Armstrong is taking a stab at reinventing AT&T, and I gotta
admire his willingness to try. But I'm not sure how good his chances
for success are.

As long as the broadband technologies remain sustaining technologies,
then through some combination of marketing and momentum AT&T will
probably secure a place on top. But if a truly disruptive technology
comes along and undermines the profit motivate before AT&T is able to
ramp up to speed... well, then all this effort of theirs could very well
be tantamount to flushing billions of dollars down the toilet.


No. There is another.
-- Yoda