Comcast Under Scrutiny

Consumer groups are increasingly hostile to Comcast's merger with AT&T Broadband. It doesn't help that while AT&T Broadband is friendly to open access, Comcast is not—but what really hurts is the special relationship with Microsoft.

by InternetNews.com Staff [April 25, 2002]

While senators and their aides, witnesses with their lawyers and lieges in tow, and the media wedged into a cramped hearing room on the second floor of the Senate Dirkson Office Building Tuesday for a subcommittee hearing on the proposed AT&T Broadband-Comcast Corp. merger, across the street in the spacious fifth floor meeting room of the Reserve Officers Association headquarters, consumer groups opposed to the merger pitched their case to a handful of reporters grazing on a free lunch.

The main item on the menu was Microsoft.

In 1997, the Redmond, Wash.-based software giant invested $1 billion in Comcast and in 1999 Microsoft sank another $5 billion in AT&T. When Comcast and AT&T were hammering out the details of their proposed $72 billion deal late last year, Microsoft's considerable investment in both companies became a significant factor.

"Up until now, Microsoft has been unable to make significant inroads into the cable market, where it had hoped to sell interactive TV operating system software and provide Internet access through its MSN subsidiary," said Jeffrey Chester, executive director of the Center for Digital Democracy. "But Microsoft's $6 billion investment has paid off, as the proposed new cable company struggles to appease one of its largest investors and Wall Street. Given that the company will operate under considerable debt ($20 billion), Comcast leadership has agreed to a number of conditions set by Microsoft."

Among the considerations given to Microsoft in an agreement filed with the Federal Communications Commission on Dec. 7, Comcast agreed to permit Microsoft entry into Comcast's interactive television set-top box plans and AT&T granted the company a five-year promise that the merged cable company, which would be the nation's largest with approximately 22 million subscribers, "will not discriminate against Microsoft with respect to high-speed Internet services."

In return, Microsoft agreed not to "cash-out" its AT&T preferred securities and remain a supportive major stockholder. If the merger is approved, Microsoft will own approximately 115 million shares of the new AT&T Comcast Corp.

According to Chester, Microsoft will be offered a slot on any AT&T Comcast system when it provides access to any other Internet service provider (ISP). Microsoft even secured a promise from AT&T Comcast that it could not offer America Online, Inc., an ISP slot unless it could also provide Microsoft with one.

"No one can have a better deal than Microsoft," said Edward J. Black, president and chief executive officer of the Computer & Communications Industry Association. "Anyone who wants to compete has been marginalized. We're on the brink of a bad situation getting even worse."

Potentially most profitable for Microsoft, however, is the set-top box agreement. During a three-year period, AT&T Comcast and Microsoft will "conduct a trial during 2002 of an interactive television platform, including set-top box middleware." Under the arrangement, AT&T Comcast stipulated that if the "trial results meet agreed technical standards, the platform meets competitive requirements and a launch would meet Comcast Cable's reasonable business objectives, Comcast Cable has agreed it will commercially launch the Microsoft platform to at least 25 percent of its newly installed middleware customer base."

"At a time when we are looking for ways to advance competition in the cable and broadband industries, the merger of Comcast and AT&T would be a huge step backwards for consumers, for competition and the economy," said Black. "Microsoft's investment in the transaction also raises concerns about the anti-competitive impact of guarantees that Microsoft MSN and Microsoft set-top box technology were given as part of the deal."

As Capitol Hill debates the regulatory implications of AT&T Corp.'s plan to sell AT&T Broadband—the largest cable system in the country—to Comcast Corp., the business is looking more like a diamond in the rough for AT&T.

In first quarter 2002 results released Wednesday morning, AT&T said its net loss increased to $975 million, 28 cents a share, from $192 million, 10 cents a share, in first quarter 2001. It also reported that its revenue fell to $12.02 billion, a drop of 8.4 percent on a pro forma basis, in the quarter. But the company laid most of the blame for the decline on its continuing struggles in long distance voice services, noting that the revenue declines were offset by growth at AT&T Broadband, primarily in high-speed data, telephony and digital video.

AT&T said AT&T Broadband recognized $2.44 billion in pro forma revenue in 1Q 2002, a 13.9 percent increase over 1Q 2001, adjusted for significant cable acquisitions and dispositions, as well as the deconsolidation of Excite@Home.

AT&T also noted growth in data/IP/managed services and local services in its AT&T Business unit, though pro forma revenue declined 8 percent to $6.53 billion in 1Q 2002 as compared to 1Q 2001.

"AT&T Business experienced solid growth in packet and local services, despite challenging economic conditions," said AT&T Chairman and Chief Executive Officer C. Michael Armstrong. He added, "And AT&T Broadband reached an important milestone as cable telephony reached the EBITDA break-even point. The unit also hired and trained approximately 1,000 new customer service representatives and added more than half a million new telephony, high-speed data and digital video customers."

Looking ahead, the company expects its second quarter revenue to decline another 8.4 percent, and also expects AT&T Broadband's second quarter revenue to grow about 10 percent compared to 2Q 2001—growth which it expects will be the low point of the year for the unit. It anticipates third and fourth quarter growth rates to increase from there, ending the year with full-year revenue growth in the low double digits.

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