Phone firms sitting at cable table

AT&T-BellSouth merger gives new heft to telco's foray into net p'gramming

Telephone companies are hell-bent on getting into the TV biz, but they could end up getting more than they bargained for.

Last week telco titan AT&T announced its plans to acquire BellSouth. The move was motivated in part, AT&T suggested, by the new customers and fiber-optic cable BellSouth would bring in, helping to solidify AT&T’s nascent video business.

The telcos are pushing now as never before in building up their own TV infrastructure; among the notable new efforts are AT&T’s IPTV venture Project Lightspeed and Verizon’s FiOS TV.

Of course, telcos have been down this road before, only to see their TV ambitions thwarted. In the mid-1990s, telcos’ great plans for creating a fiber-optic superhighway fell by the wayside. The earlier incarnation of AT&T acquired TCI and part of Time Warner Cable, but it eventually spun off its cable properties and sold them to Comcast.

This time, to pull it off, telcos have hired not just technical expertise but programming execs like Verizon’s Terry Denson, formerly of multisystem cable operator Insight.

But even if the AT&T-Bell South merger gives the telcos’ TV forays new heft, a host of problems may doom the play.

Telcos want to enter the market in part so they can offer services as a complete bundle — phone, Internet and TV.

But cable operators already have a serious head start. Verizon has just a handful of customers for its FiOS TV in small test markets like Keller, Texas, while cable operators have converted millions of subscribers into phone users. Getting those subs — or new ones — to switch their cable service to a telco won’t be easy.

Cable systems also have a leg up on costs. They can spread the expense of new technology — such as two-way interactivity, which allows for such things as video on demand — across millions of existing customers. By contrast, AT&T will be spending a similar amount for a relative handful of homes.

Potentially even more damning is the fight between the telcos and the cable ops over a proposed waiver of franchise requirements.

AT&T and Verizon are pulling strings to avoid the slow, agonizing process of soliciting local governments to give them permission to start serving customers.

They want the federal government to grant a blanket waiver that would supersede local franchise authorities — but the cable operators are mustering clout to defeat the package, and a victory for the telcos is no guarantee.

Ironically, one of the key impediments could be the cable networks.

On the surface, nets love the telco forays. A new player always drives up the price of programming; it’s a lesson nets learned the rich way when satellite came on the scene a decade ago.

But they won’t love what the telcos may need from them.

To lure customers from cable and satellite, “it won’t be enough for the telcos to be better or cheaper. They’ll have to offer something different,” says Gartner analyst Laura Behrens. And one of the main ways to do that is exclusive content, which cable nets would balk at providing.

Given all of the hurdles that telcos face, some have speculated that all this TV talk is a smokescreen for the merger-driven telcos to avoid regulatory scrutiny of another, more important agenda.

“I’m not so sure that video is really so high on the list of priorities,” says media analyst Bruce Leichtman. “Wireless is a much more natural bundle.”

Still, few doubt that the merger won’t at least help pave the way for telcos’ TV ambitions. After all, with a larger footprint, the beefed-up AT&T will be able to make a profit in TV by luring a smaller percentage of customers in each state.

But telco stockholders are famously impatient. If AT&T and Verizon begin to lose tens of millions — as they very well could — the whole video experiment could go dark.