Bell Mergers Are Giving Cable Companies Even More to Worry
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.
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
"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
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.
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
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
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
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
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
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 à la carte.
That would be a setback, particularly for cable companies
that also own cable networks, like
Time Warner. À 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
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.