CHICAGO (AFX) -- Expect cable-television operators to step up their rollout of digital-telephone service and press for more consolidation in the industry in the wake of news that phone titan AT&T Inc. has agreed to acquire rival BellSouth Corp.
AT&T said Sunday that it will buy BellSouth for $67 billion in stock.
Cable companies have seen their market capitalizations drop significantly in the past two years, as investors feared that large regional-phone companies would pose a huge threat once they launch video services.
The situation prompted two major players, Cox Communications and Insight Communications, to take themselves private. Cablevision Systems Corp.'s founding family tried to take that company private, but abandoned that effort when the board wanted a higher bid.
Right now, the phone giants generally compete with cable for broadband and voice customers. With Verizon Communications Inc. already selling its television service in parts of six states, including Texas, New York and California, video will definitely be the third leg of that competition -- and the AT&T-BellSouth deal could stiffen that competition.
'That's assuming [AT&T] can widely roll out video, and that's a big stretch,' said Robert Rosenberg, president of Insight Research in Parsippany, N.J. 'The phone companies have tried to do this many times, and every time they've fallen on their faces.'
AT&T, for example, got into the video business when it acquired one of the nation's largest cable operators, TCI, in 1999, in a $48 billion deal. A year later, it purchased MediaOne for $62 billion, creating AT&T Broadband, then the largest U.S. cable company.
Many of the TCI systems needed significant upgrades to meet two-way digital standards and be in a position to offer emerging services such as video on demand. Between the perception of inferior service and aggressive marketing by satellite rivals, AT&T Broadband was hit with significant subscriber losses, and ended up selling its cable operations to Comcast Corp. in 2002 for $72.5 billion in cash and stock.
Certainly, ramping up a state-of-the-art video offering is challenging for the phone companies, even with massive amounts of cash to spend on the buildout. They are obligated to expensive three-year labor agreements that will add significant costs to the effort, and they don't have ownership of content, as most of the biggest cable operators do.
Comcast, now the largest U.S. cable company with more than 21 million subscribers, owns the sports network Outdoor Life and regional-sports outlets in Baltimore, Chicago, Philadelphia and other markets. Time Warner Inc. , the No. 2 cable operator, is of course the world's largest media company -- with vast, powerful cable network holdings such as HBO, CNN, Cartoon Network, TNT and TBS Superstation.
By owning programming, Comcast and Time Warner can guarantee themselves significant distribution of their networks and assure themselves of favorable terms for the carriage of those channels on their cable systems.
'It will be many years before you see a phone company in that position,' added Rosenberg.
Shot across the box
On a near-term basis, cable analysts don't see a significant impact from the AT&T-BellSouth transaction, but over a longer period, it will present a major challenge.
The AT&T-BellSouth deal is expected to close by the fourth quarter. After that, the cable operators will have to react to more aggressive price cuts by the phone companies on broadband, according to Sanford Bernstein analyst Craig Moffett.
For Thomas Eagan of Oppenheimer, the merger is ultimately a negative for Comcast, which has systems in many of the large metropolitan areas served by BellSouth.
Cable operators would be ill-advised to get into a prolonged price war with the phone companies, said Insight's Rosenberg, as phone companies have superior cash flows. 'If they got into a cost-cutting war, the phone companies could last a whole lot longer than the cable operator could.'
There may be a couple of salutary effects from the megamerger, noted Ted Henderson of Stifel, Nicolaus & Co. in Denver.
'It possibly causes cable to accelerate the deployment of its bundle,' Henderson said, referring to packages of digital cable, voice and broadband service that cable companies use to attract and retain customers.
Eagan agrees, saying that cable operators also will add wireless-phone service to the bundle. 'And it also possibly forces further consolidation in the cable industry. Think Cablevision.'
Cablevision, which weathered a number of controversies over the past three years, has long been seen as a possible acquisition target. It is one of the few stand-alone cable companies left after various deals over the last several years.
Shares of Cablevision closed at $26.75 on Monday, up 25 cents, or 1%.
Henderson said the AT&T-BellSouth transaction also is likely to motivate cable companies to be more aggressive in their arguments against statewide video franchising for phone companies in states such as Texas, where Verizon was able to obtain a video franchise.
In addition, cable firms may be more inclined to complain to Congress that should phone companies be allowed to secure more video franchises, ownership restrictions that apply to cable are outdated.
Cable operators are not allowed to own systems that pass more than 30% of U.S. households. They are also prohibited from owning television stations.
Rosenberg isn't sure that cable will prevail over the arguments phone companies would make. 'The cable operators have enjoyed much less oversight of their operations than the phone companies have,' he said. 'I doubt that they could surpass the traditional phone industry, which has 70 or 80 years of experience in lobbying.'
Comcast shares lost 1% to close at $27.02, while Time Warner fell 1.1% to $17.24. This story was supplied by MarketWatch. For further information see www.marketwatch.com.
AT&T said Sunday that it will buy BellSouth for $67 billion in stock.
Cable companies have seen their market capitalizations drop significantly in the past two years, as investors feared that large regional-phone companies would pose a huge threat once they launch video services.
The situation prompted two major players, Cox Communications and Insight Communications, to take themselves private. Cablevision Systems Corp.'s founding family tried to take that company private, but abandoned that effort when the board wanted a higher bid.
Right now, the phone giants generally compete with cable for broadband and voice customers. With Verizon Communications Inc. already selling its television service in parts of six states, including Texas, New York and California, video will definitely be the third leg of that competition -- and the AT&T-BellSouth deal could stiffen that competition.
'That's assuming [AT&T] can widely roll out video, and that's a big stretch,' said Robert Rosenberg, president of Insight Research in Parsippany, N.J. 'The phone companies have tried to do this many times, and every time they've fallen on their faces.'
AT&T, for example, got into the video business when it acquired one of the nation's largest cable operators, TCI, in 1999, in a $48 billion deal. A year later, it purchased MediaOne for $62 billion, creating AT&T Broadband, then the largest U.S. cable company.
Many of the TCI systems needed significant upgrades to meet two-way digital standards and be in a position to offer emerging services such as video on demand. Between the perception of inferior service and aggressive marketing by satellite rivals, AT&T Broadband was hit with significant subscriber losses, and ended up selling its cable operations to Comcast Corp. in 2002 for $72.5 billion in cash and stock.
Certainly, ramping up a state-of-the-art video offering is challenging for the phone companies, even with massive amounts of cash to spend on the buildout. They are obligated to expensive three-year labor agreements that will add significant costs to the effort, and they don't have ownership of content, as most of the biggest cable operators do.
Comcast, now the largest U.S. cable company with more than 21 million subscribers, owns the sports network Outdoor Life and regional-sports outlets in Baltimore, Chicago, Philadelphia and other markets. Time Warner Inc. , the No. 2 cable operator, is of course the world's largest media company -- with vast, powerful cable network holdings such as HBO, CNN, Cartoon Network, TNT and TBS Superstation.
By owning programming, Comcast and Time Warner can guarantee themselves significant distribution of their networks and assure themselves of favorable terms for the carriage of those channels on their cable systems.
'It will be many years before you see a phone company in that position,' added Rosenberg.
Shot across the box
On a near-term basis, cable analysts don't see a significant impact from the AT&T-BellSouth transaction, but over a longer period, it will present a major challenge.
The AT&T-BellSouth deal is expected to close by the fourth quarter. After that, the cable operators will have to react to more aggressive price cuts by the phone companies on broadband, according to Sanford Bernstein analyst Craig Moffett.
For Thomas Eagan of Oppenheimer, the merger is ultimately a negative for Comcast, which has systems in many of the large metropolitan areas served by BellSouth.
Cable operators would be ill-advised to get into a prolonged price war with the phone companies, said Insight's Rosenberg, as phone companies have superior cash flows. 'If they got into a cost-cutting war, the phone companies could last a whole lot longer than the cable operator could.'
There may be a couple of salutary effects from the megamerger, noted Ted Henderson of Stifel, Nicolaus & Co. in Denver.
'It possibly causes cable to accelerate the deployment of its bundle,' Henderson said, referring to packages of digital cable, voice and broadband service that cable companies use to attract and retain customers.
Eagan agrees, saying that cable operators also will add wireless-phone service to the bundle. 'And it also possibly forces further consolidation in the cable industry. Think Cablevision.'
Cablevision, which weathered a number of controversies over the past three years, has long been seen as a possible acquisition target. It is one of the few stand-alone cable companies left after various deals over the last several years.
Shares of Cablevision closed at $26.75 on Monday, up 25 cents, or 1%.
Henderson said the AT&T-BellSouth transaction also is likely to motivate cable companies to be more aggressive in their arguments against statewide video franchising for phone companies in states such as Texas, where Verizon was able to obtain a video franchise.
In addition, cable firms may be more inclined to complain to Congress that should phone companies be allowed to secure more video franchises, ownership restrictions that apply to cable are outdated.
Cable operators are not allowed to own systems that pass more than 30% of U.S. households. They are also prohibited from owning television stations.
Rosenberg isn't sure that cable will prevail over the arguments phone companies would make. 'The cable operators have enjoyed much less oversight of their operations than the phone companies have,' he said. 'I doubt that they could surpass the traditional phone industry, which has 70 or 80 years of experience in lobbying.'
Comcast shares lost 1% to close at $27.02, while Time Warner fell 1.1% to $17.24. This story was supplied by MarketWatch. For further information see www.marketwatch.com.