Commentary: Size, clout--and challenges

By Patti Reali, Jay Pultz and Alex Winogradoff, Gartner analysts

By acquiring AT&T Broadband, Comcast will gain nearly nationwide cable coverage while inheriting telephony and cable facility challenges. AT&T will rid itself of a major distraction and make its new slimmed-down self an acquisition target.

This outcome was expected by Gartner. On July 11, three days after Comcast made an unsolicited offer to buy AT&T Broadband for approximately $44.5 billion, Gartner predicted that Comcast would persevere and end up buying the unit, albeit at a higher price.

	See news story: Comcast, AT&T cable deal to create Net giant

AT&T's decision to sell its cable business hinged on a buyer's ability to successfully address four key factors: price, strategic fit, ownership and board control, and regulatory matters. Comcast, better than the other two suitors for the business--Cox Communications and AOL Time Warner--met the first three criteria and feels confident it will secure regulatory support.

A potential deal-breaker--the future of AT&T's telephony services--was apparently resolved. Comcast will keep the telephony operations instead of selling them, although the deal's announcement didn't cite specific expansion plans. Comcast is likely awaiting arrival of a more efficient and cost-effective Internet Protocol (IP) voice technology before mounting campaigns to offer telephony and enhanced services, such as interactive TV, to new markets. Present costs are still too high, and technology readiness and system integration issues for IP voice over cable must be resolved before large-scale rollouts can occur.

Comcast also faces hard work in invigorating AT&T's cable facilities (primarily the former Tele-Communication Inc. properties) to meet the more rigorous operating and financial return on investment standards of much of the rest of the cable industry. Upgrades and rebuilds in some markets were stalled in the past year, due to AT&T's focus on its restructuring, uncertainties over AT&T Broadband's future ownership, and capital generation woes. Gartner expects that Comcast will find the capital to make necessary network upgrades while selling off some of the smaller, less-developed cable systems.

AT&T Comcast, with a market-leading subscriber base, will likely become a major distribution channel for a much-promised new generation of consumer services that will increasingly tie together information, communications and entertainment services. However, whether consumers want or are willing to pay for such converged services is another matter. Because of its consumer focus, AT&T Comcast will likely offer businesses little.

AT&T--without the distraction and investment needs of its cable business--will likely return to its network services roots. Businesses should benefit from that renewed focus. Although its financial health will improve, and its strategic focus will narrow and sight in on new market initiatives (such as global network services), AT&T makes itself a compelling acquisition target, particularly by large incumbent local-exchange carriers.

(For a related commentary on the sale of AT&T Broadband, see Gartner.com.)

Entire contents, Copyright ? 2001 Gartner, Inc. All rights reserved. The information contained herein represents Gartner's initial commentary and analysis and has been obtained from sources believed to be reliable. Positions taken are subject to change as more information becomes available and further analysis is undertaken. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of the information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof.