What has Comcast gotten into?

As AT&T deal nears approval, Roberts faces daunting task of fixing a mess
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Compared with the tortured EchoStar/DirecTV deal, Comcast's planned takeover of AT&T Broadband has breezed through the gauntlet of regulators who need to approve the deal. That's OK. Comcast President Brian Roberts will face a big enough struggle after he completes the deal, because the AT&T systems are pretty much a mess.

Comcast is expected to clear antitrust and FCC scrutiny as early as this week, with Comcast executives predicting that they can complete the $53 billion takeover by mid November.

Now comes the hard part: running AT&T's cable systems. Comcast knew that they were in bad shape. That was the allure, because Roberts and his executives believe that they can run the properties better than AT&T can. Because Comcast's July 2001 bid for AT&T was hostile, though, Roberts didn't get a good inside look into AT&T's operation until relatively recently.

It's not a pretty picture. Comcast Cable President Steve Burke has privately complained that AT&T has been rebuilding systems too slowly (just 63% of its systems have been upgraded vs. 59% a year ago). The cable division was pouring more capital into the cable-telephone service even though key areas, such as San Francisco, don't yet have high-speed data service fully available.

AT&T has lost 4% of its basic subscribers in the past year. Cash-flow margins remain a stubbornly low 21%, half of what Comcast achieves in its own systems.

Integrating the properties, many of them leftovers from the TCI era, will be tougher than Comcast initially expected. "Nobody's ever run the TCI systems well," Salomon Smith Barney analyst Stevyn Schutzman noted.

"Cash flow will be job one," Roberts said last week, recalling his pledge to have positive cash flow by the end of 2004. "We will focus on video, not telephone, and we will move quickly to rebuild the rest of AT&T in two years." Then he must reverse the basic-subscriber slide and, finally, repackage digital-cable packages, which are currently not very profitable.

Complicating government approval of the merger is a fight over AT&T's confidential ISP-carriage deal with AOL. Public-advocacy groups are battling to make AT&T submit the carriage contract for FCC review, They speculate that the terms will limit competing ISPs' access to Comcast's high-speed network and perhaps pose enough harm to competition to tip regulators' opinion against the merger, which, if approved, would make Comcast/AT&T the nation's largest MSO.

The FCC's approval, once expected to be imminent, may be postponed by the dispute. FCC Chairman Michael Powell is believed reluctant to order the submission. His fellow Republican Commissioners Kevin Martin and Kathleen Abernathy are considered sympathetic but not necessarily ready to insist that the contract be reviewed. Democrat Michael Copps was out of town late last week and hadn't reviewed the latest developments.

AT&T attorneys have refused to reveal details and said in a filing last week that submitting the contract for review by the agency and public advocates "would jeopardize the confidentiality of proprietary commercial agreements."

That generated an angry protest from Andrew Schwartzman, president of Media Access Project, one of the groups demanding a chance for a look-see. "It is beneath Brian Roberts to question the integrity of the commission's career and professional staff and the attorneys who practice before the FCC," he said.

Even if the FCC orders a review, it's unlikely the merger will be postponed more than a week or two. In the meantime, the Justice Department also is expected to approve the deal soon.

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