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Those Bell Mergers Are Giving Cable Companies Even More to Worry About
By Ken Belson and Geraldine Fabrikant
New York Times
Monday, March 13, 2006

In the chess game between the cable companies and their nemeses, the Bell phone companies, the Bells may be gaining ground.  Phone mergers including AT&T's recent proposal to take over BellSouth could give the Bells more power to cut prices, move faster into television and expand their advantage in the wireless market.

Sheer size also helps the Bells throw their weight around in Washington.  Last week, lawmakers began drafting a bill to make it easier for the Bell companies to acquire local television franchises, a move that would help speed up their push to sell TV programming over high-speed lines around the country.

"The playing field is being leveled, and it's Comcast's mountain that is getting leveled more than AT&T's," said Leo Hindery Jr., a former cable executive and a partner at the private equity firm InterMedia Partners.  "The cable guys are boxed in, and I don't think there's a Hail Mary pass."

The AT&T-BellSouth deal, which is likely to take at least a year to be approved, will significantly alter the competitive landscape for the fragmented cable industry, if not immediately then certainly over the next few years as the Bells offer more and cheaper video and Internet services.

For Comcast, the nation's largest cable company, and other cable providers, the longer term presents some difficult business choices for countering the Bells' strategies.

AT&T and Verizon are both spending billions of dollars to build out fiber optic networks to deliver TV programming to rival the cable providers' offerings.

If Congress approves the proposed national franchise legislation, they could offer those services in hundreds of cities years ahead of schedule.

BellSouth, which has not yet announced any plans to offer TV programming, is expected to adopt AT&T's television strategy in the nine Southern states where it operates.

That could force cable providers in those states to drop their prices, which Charter Communications did last year in Texas when Verizon introduced its new television service in some parts of that state.

"The cable companies are now going to face off against a stronger, bigger competitor with a stated strategy of doing television, and I don't see that as a positive," said Richard S. Greenfield, a cable and media analyst at Pali Research.

The Bells may also expand their promotional deals for D.S.L. broadband connections, which are in many cases half the price of cable broadband.  That move could force cable companies to drop prices even on higher-speed Internet connections.  (Many of the cheaper D.S.L. connections are slower than cable broadband.)

In the past year, AT&T and Verizon have cut their introductory broadband prices to $14.95.  The low-cost strategy has worked:  in 2005, the Bells added more broadband customers than the cable companies for the first time, according to the Leichtman Research Group.

But at least for now, cable companies are not budging.

"The $14.95 D.S.L. product is so slow that it shouldn't be legal to call it broadband," said Thomas M. Rutledge, Cablevision's chief operating officer.  "Cable has already built a network throughout the United States that is vastly superior to what the phone companies can build in a reasonable time."

This heightened competition comes at a bad time for the cable companies.  Together, they have spent about $85 billion during the past decade to expand their networks so they can handle more digital and high-definition TV programming, as well as faster broadband connections and Internet phone services.

Under pressure from Wall Street to recoup that investment, the cable industry has tried to avoid price wars with DirecTV and EchoStar, two satellite companies that were dismissed as upstarts 10 years ago.  Now they are the second- and third-largest pay-TV providers in the United States, after Comcast.

By 2010, the Bells are expected to add six million video customers for a 5 percent share of the pay-television market, according to Kagan Research.  While that is just one-tenth the number of cable subscribers, the Bells' additions will come at cable's expense, Kagan estimates showed.

Cable companies will face different adversaries depending on where they operate.  For instance, all of Cablevision's subscribers are in the New York metropolitan area, where Verizon is the primary rival, so the AT&T-BellSouth merger will not affect them.  Time Warner Cable, however, has 2.7 million basic cable subscribers on Verizon's turf and 6.7 million in AT&T and BellSouth territory, so it must grapple with two Bell giants, according to Pali Research.

Of course, the cable companies have plenty of firepower to aim at the Bells.  In just two years, they and start-ups like Vonage have signed up four million Internet phone customers, and that number should double in 2006, according to Sanford C. Bernstein & Company, a brokerage firm.

Comcast, Cox and others have also been giving consumers hundreds of hours of on-demand movies and TV shows without charge, adding high-definition programming and leasing more advanced digital video recorders, including some that include DVD recorders.  They are also starting to sell more telecommunications services to businesses.

The cable providers say these advances will allow them to fend off competition from the Bells, something investors have not fully understood in their rush to sell cable stocks during the past two years.

"When one of your major competitors gets bigger, we have to notice," said Stephen B. Burke, the chief operating officer at Comcast.  "But we're so far ahead of them.  What is going to be fun is to prove that the market is wrong by putting great numbers on the board."

In addition to the Bell threat, there are other clouds on the horizon.  The cable companies are under pressure from consumer advocates to start selling TV channels la carte.

That would be a setback, particularly for cable companies that also own cable networks, like Time Warner.  la carte sales could make it harder for cable programmers to create new networks, which may not be able to attract big audiences quickly enough to win advertisers.

If channels were sold individually, cable programmers argue that it would be prohibitively expensive for networks to market themselves to every home in America.  For cable operators, the possibility that consumers would be allowed to pay for only the channels they want is just one more reason to fret about their future.

http://www.nytimes.com/2006/03/13/business/13cable.html?_r=1&adxnnl=1&oref=slogin&adxnnlx=1142253164-PN8DkTF/4tofy0sfk1qOjA