Merge Today, Purge Tomorrow


Comcast President Brian Roberts easily convinced federal regulators his $53 billion takeover of AT&T Broadband was a good idea. Proving it to shareholders will be a far more daunting task.

Cutting overhead is a start, and that start could come as soon as today (Nov. 18). After the merger closes this week, perhaps as early as today, 675 people headquartered at AT&T Broadband's Denver headquarters are expected to be let go immediately, with another 1,025 axed soon after. Further rounds of cuts among the 40,000 employees acquired from AT&T and the 20,000 in Comcast's cable division are coming too, predict industry analysts.

But fixing up AT&T's tired cable operation will demand more than slashing workers, and Comcast's president this week is expected to spell out plans for revamping AT&T's operations. Despite being the country's largest MSO, AT&T has lost 4% of its subs in the past year and eked out cash-flow margins half those of Comcast.

Adding distraction, if only a bit, Media Access Project and other public advocacy groups announced on the day regulators signed off on the merger that they would sue to block the approval in a federal appeals court in Washington. The case is given little chance of unraveling the deal.

"Bite size" upgrades

Roberts knows his payoff won't come overnight. He told analysts last summer that the company will upgrade AT&T's plant in system-by-system, "bite size chunks," with a focus on readying them for high-speed data service rather than the less promising cable-telephone focus pursued by AT&T.

Roberts predicted that the newly acquired systems—only 63% of which have been upgraded to accommodate high-speed, digital and more pay-per-view offerings—can make the "Herculean" jump from margins in the low 20s today to 35% in three years. After that, he says, the new systems will provide a "growth engine for the next 10 years."

How? The company now has regional clusters in eight of the country's 10 largest markets and 14 of the top 20, a footprint that makes Comcast much more attractive to national advertisers, long cable's weak spot. Improved service offerings such as video-on-demand will be margin drivers as well, he predicted.

Salomon SmithBarney cable analyst Niraj Gupta, however, says Roberts's plans to complete the bulk of the AT&T upgrade in three years, duplicating an earlier absorption of some AT&T systems, may be an overly optimistic prediction that can't be repeated on the much larger scale. "Integration of 12.8 million subscribers will be a substantially more challenging task," Gupta said last week. "We believe this is the single biggest risk to the company."

Compounding the risk to Roberts's growth plan is that digital cable, high-speed Internet and other margin-boosting consumer add-ons are more economically sensitive and less likely to fulfill expectations during a lengthy economic slump.

Federal regulators, however, don't want to be seen blocking any deal that can plausibly speed the broadband rollout. "The combination would likely result in benefits in terms of broadband buildout and delivery of advanced services to Americans everywhere," said Ken Ferree, FCC Media Bureau Chief.

As for any downside, the Comcast deal "would pose no substantial public interest harms—none," Ferree said.

Complaints about Comcast's potential for dominating regional sports networks and demands for cable Internet open-access requirements are not merger-specific, he said, and will be addressed in separate proceedings examining industry-wide conditions.

Goodbye TWE

Perhaps the biggest benefit in the FCC's eyes is a condition requiring Comcast to isolate AT&T Broadband's 28% stake in Time Warner Entertainment in a trust. Comcast will have five-and-a-half years to unwind the $10 billion investment. The partnership doesn't violate any existing FCC rules, but Comcast came in the door offering to segregate TWE's networks and systems from the merged company.

AT&T's ties to TWE, established when AT&T acquired MediaOne in 2002, have troubled the commission because it once pushed the company's audience tally beyond now-defunct ownership limits and it gave the country's largest cable company financial ties to some of the country's most important cable programming networks.

"This is the most significant public interest benefit of the transaction," said FCC Chairman Michael Powell. "The commission finally severs a complex relationship of intertwining programming and distribution assets that has plagued the commission for years."

Although broadband deployment was a primary factor in swaying the three-vote majority, Comcast doesn't face a rollout timetable or any requirement to open its high-speed Internet systems to other Internet service providers, though the company is cutting an agreement with AOL Time Warner to do so.

Ferree added that the deal is much different than the recently rejected EchoStar takeover of DirecTV. "Here you have two companies that do not compete in the same markets, do not serve the same subscribers," he said of the Comcast deal.

'Dangerous' liaison

Democratic Commissioner Michael Copps was the FCC's lone vote against the merger. "The sheer economic power created by this mega-combination, and the opportunities for abuse that would accompany it, outweigh the very limited public interest benefits that either the applicants or the majority find here," he said.

In filing suit, MAP is asking that the court expedite the appeal and combine it with a related suit filed Nov. 7. MAP Deputy Director Cheryl Leanza said the merger will "permit them to increase cable rates while decreasing diversity of program offerings."

The Consumers Union, which is joining in the suit, called the merger dangerous. "It is mind-boggling how federal officials have let the largest cable companies consolidate and thereby dictate the choices of cable channels and high-speed Internet services for consumers nationwide," said Gene Kimmelman, senior director for public policy and advocacy, for Consumers Union.

Virginia Democratic Congressman Rick Boucher, still smarting from regulators' decision three weeks earlier to block the EchoStar/DirecTV DBS merger, said he was "appalled" by the inconsistency. The promise of a quick broadband rollout in Comcast's large markets "rings disingenuous and hollow to rural America," where the DBS merger might have expanded broadband service in markets cable doesn't serve.