Off Limits

Among the mysteries posed by the gorillas' mating dance: whether AT&T will have to double or triple cable rates to recoup its huge investment in TCI. The market will deliver the final judgment on Malone's belief that there are billions to be made from a single company piping everything from telephone and Internet service to the Home Shopping Network into consumers' homes. But cities don't have the option of wheeling and dealing. Thanks to monopoly contracts, they'll have to live with whatever cable company Wall Street gives them, whether it's a Malone-led TCI or an offshoot controlled by AT&T. Richard Varnes, the Boulder municipal cable director who last year delivered the prescient warning that TCI's huge debt service was threatening its ability to provide a promised local fiber-optic rebuild--"the 800-pound gorilla has a big tab on his charge card right at the moment," he said--says he sees reason for hope. AT&T's an even bigger gorilla, he notes, adding that he believes "they [AT&T] have a rational game plan going into this that takes into account the technical and customer-service legacies of the cable industry." (Among those legacies: TCI backed out of its local fiber-optic rebuild before it was halfway done, leaving cities fuming.)

Varnes says he thinks AT&T chairman C. Michael Armstrong saw value in TCI because of the way the cable company has consolidated its control of cable systems in major metropolitan areas, a bit of bundling that could allow a phone company to compete with local carriers by reaching through the cable pipe. TCI, for instance, has headlocks in Chicago, San Francisco and Washington, D.C.--and in metro Denver, where the company controls 90 percent of its own backyard. The downside, of course, is that TCI's relations with local customers have tanked. Two years ago Boulder voters got so fed up with TCI that they turned down a proposed franchise agreement, forcing the city to make do with a temporary contract extension. Aurora and Westminster have feuded with the company over last year's abrupt termination of the fiber-optic rebuild. And in Denver, the state's largest cable market, TCI's franchise agreement expires in June 1999, meaning that Denver will have to negotiate a new deal at the same time that Malone and Armstrong are busy punching each other in the shoulder and shouting, "Flinch!"

The most immediate consequence for local cities should the AT&T deal go through will be having to haggle all over again with a new corporate entity--a prospect they may actually relish, given their past dealings with TCI. Only later will they discover whether it is in fact possible to channel phone service over stone-age cable lines--and whether price-gouging will take place either way. "The relative movement of the stock price after the merger tells you where most analysts believe this is going--that AT&T may have bitten off more than it can chew," says Varnes. "Certainly the cable plant in general is in no way ready for a switch to offering anything that looks like local exchange service over coaxial lines. Internet service is certainly possible, but it will be some time before the system is technically tight enough and before service organizations are tight enough to provide phone service on the level of reliability you've come to expect from a local exchange carrier."

Hold the phone--and keep an eye on that cable bill.

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