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Commentary | PERSPECTIVE ON TELECOMMUNICATIONS

Has AT&T Begun Its Last Chapter?

TCI chairman Malone gets rich; AT&T gets to triple its debt and take on TCI's yearly losses of $500 million.

June 28, 1998|A. MICHAEL NOLL | A. Michael Noll, a professor at the Annenberg School for Communication at the USC, studies and writes about the telecommunications industry

On Wednesday, AT&T, in effect, became a cable television company with the announcement of its acquisition of Tele-Communications Inc. This is a major change in AT&T's direction and a serious mistake that ultimately could lead to its demise.

As has become usual with these mega-mergers, the personalities of the two leaders played a key role in the corporate marriage, in this case AT&T's C. Michael Armstrong and TCI's John C. Malone.

It has been rumored for years that Malone was attempting to sell TCI at the highest possible price, if only he could find someone who would fall for his vision of a single broadband medium to the home--a coaxial cable that would deliver a host of services, including telephone, interactive data and 500-channel video. Four years ago, Malone almost snagged a victim--Bell Atlantic's chairman Raymond Smith--but at the last minute, reason prevailed and the deal fell apart, saving Bell Atlantic from a near-certain financial disaster.

In many ways, it could be argued that Malone bought AT&T. He certainly snookered them into the deal of the century. Malone personally becomes a billionaire and retains ownership and control of the profitable Liberty Media Group. AT&T, in return, has tripled its debt and taken on TCI's yearly losses of $500 million, at a price tag that works out to be well more than $3,000 per cable subscriber--perhaps the highest price ever paid for a cable company.

The deal was hatched last November in the very first month that Armstrong became chairman of AT&T, having left a similar post at Hughes Electronics Corp. How could Armstrong, in such a short time, have had the requisite knowledge of the technological, financial and policy aspects of the telecommunications business to avoid Malone's persuasive sales pitch? Had Armstrong acquired "Hollywood fever" during his years in Southern California and hence really wanted to take AT&T into the entertainment business?

But whatever the reasons, Armstrong has made a serious blunder at a time when AT&T is under vicious attack from its former Baby Bells along with a host of long distance competitors.

AT&T continues to show a lack of marketing ability. Last year, as just one example, it lost the long distance account for USC, and it continues to be unable to produce a single bill for residential customers with phones at two homes.

AT&T sold out to Malone to pursue an alternate way to reach its customers to provide telephone service, namely, the broadband medium of coaxial cable--the same medium that brings cable television service. The only problem with this dream of a single broadband telecommunication medium to the home is that it is decades old and the technology to do it cost-effectively is still not available. This is now known by a number of companies who chased this dream over the past few years and all failed, as AT&T is about to learn the hard way.

The price that AT&T has paid to acquire TCI is so outrageously high that cable rates will need to more than double to obtain an adequate return on the investment. The numbers look so bad for AT&T and so good for John Malone that one can only wonder whether it is really Malone and TCI that won and, in effect, acquired AT&T.

And thus the mighty AT&T that brought telephone service to the United States, along with a host of technological innovations, has entered its last chapter--a chapter that might end in a few years with its acquisition at a rock-bottom price by a competitor.

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