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Large MSOs May Be Hit Hard

Mar 13, 2006  •  Post A Comment

The $67 billion merger of AT&T and BellSouth is likely to have the most negative impact on large cable operators such as Time Warner Cable, Comcast and Charter Communications, all of which could see their fight with telcos for customers intensify against a much larger AT&T, analysts say.

Indeed, looking at the levels of exposure those three cable companies have to a bigger AT&T illustrates the point: According to an analysis by Credit Suisse, around 35 percent of Charter’s footprint overlaps with the new AT&T. Comcast’s exposure is around 17 percent. Time Warner’s is about 10 percent.

However, there is a silver lining for the cable industry. While the stiffer competition is seen as a significant negative for the sector, cable operators have some time to prepare. Many experts agree with AT&T’s prediction that an approval of the merger could be a year away. Additionally, at least in the months immediately following the closing of the deal, AT&T will be more focused on integrating the BellSouth operations than on doing battle with the cable industry.

What’s more, it is unclear whether expanding the market within which AT&T can deploy video was the motivator behind the acquisition.

Nevertheless, analysts say there is no denying that a fortified AT&T will change the competitive landscape for the cable sector. Here’s a closer look at what impact the merger could have on a few key areas and how they might react.



Consolidation

Some analysts believe that multiple system operators might react to a bigger AT&T by getting larger themselves. Indeed, if the deal goes through, AT&T would pass about 55 million homes, compared with 42 million at Comcast, the nation’s biggest cable operator. Analysts say that kind of size gap could be enough to compel some cable companies to get larger to more effectively compete with AT&T.

Time Warner Cable is generally viewed as the MSO most likely to grow through acquisition, with possible targets being Insight Communications and the oft-mentioned Cablevision Systems, according to UBS Securities analyst Aryeh Bourkoff.

Many analysts think it’s unlikely Comcast will make a big acquisition play, in part because of the uncertainty surrounding the 30 percent ownership cap that the Federal Communications Commission had imposed for cable subscribers, but which was struck down by a federal judge five years ago.

Meanwhile, Charter remains a question mark. While the company’s subscribers are the most vulnerable to a post-merger AT&T, the company’s debt load prevents it from making any significant acquisitions.



Pricing

AT&T has long been viewed by Wall Street as the most aggressive of the Regional Bell Operating Cos. in terms of its deployment of fiber-optic technology that can deliver video, voice and data services over super-fast telephone lines. It has also been a leader among the RBOCs in dropping high-speed data prices to lure customers away from cable’s broadband product.

BellSouth, by comparison, has had a less competitive posture and hasn’t lowered prices on its services to secure market share.

The general consensus among analysts is that once the deal goes through, the new AT&T will likely bring its competitive philosophy to what are now BellSouth markets. And the impact could be significant given the new AT&T will have even deeper pockets as a company that could generate more than $120 billion in annual revenue.



Franchise Licensing

How the cable industry responds remains an open question. While MSOs generally have resisted being baited into a price war with the telcos, questions remain as to whether they can hold firm to position against a much larger competitor. Cable industry advocates argue that if the merger is allowed to go through, it could weaken the telco industry’s position on video franchise licensing reform.

The telcos in recent months have had the wind at their backs on the matter of franchise reform, convincing legislators in several states and in Congress to take up the issue. At the state level Texas has already passed legislation allowing for statewide video franchises, and a similar bill awaits the governor’s signature in Indiana. Other states have similar bills working their way through the legislatures. Meanwhile, at the national level, legislation outlining a national video franchising plan is expected soon.

However, some are wondering whether the AT&T-BellSouth merger might derail some of those efforts as people question whether a bigger AT&T can be disadvantaged relative to the cable industry.