Moments after the flashbulbs and euphoric talk subsided on the New York podium where they announced their merger, America Online Inc. chief executive Steve Case and Time Warner Inc. chief executive Gerald M. Levin picked up the telephone and dialed C. Michael Armstrong, their counterpart at AT&T Corp.
The purpose: "to reiterate their interest in working closely with AT&T," recounted Jim Cicconi, AT&T general counsel.
Whether that call amounts to a mere courtesy or a sign of an enduring relationship could say a lot about the future of the Internet, the television world and the telephone business. It could determine how quickly consumers gain the long-promised benefits of their convergence.
AT&T and the newly proposed AOL Time Warner have virtually identical missions in mind. Both want to provide the spectrum of modern communications and entertainment services--video-on-demand, the Internet, local and long-distance telephone connections. They count on upgraded cable television wires as central conduits to deliver those services into American households.
Before this week, AT&T stood alone at the forefront of the effort. The once-staid telephone company has refashioned itself for the future by amassing more cable systems than any other company. On Monday, that changed. America Online is the dominant gateway to the Internet, boasting more than 20 million subscribers. Time Warner is a global media and entertainment empire. The new company comes well equipped to take on AT&T.
"They're both going after the whole country, and both have big aspirations," said Scott Cleland, an analyst with Legg Mason Precursor Group. "AT&T views AOL as one of its biggest competitors. . . . It's not a good development for AOL and Time Warner to get together."
But AT&T vehemently rejects that notion, portraying the deal as a clear sign that its bet on cable as the means of delivering high-speed Internet links was a smart move.
"On AOL's part, it's a very clear commitment to cable as the preferred means of carriage," said AT&T's Cicconi. "That, in itself, is a vindication of AT&T's cable strategy."
Some analysts said AT&T and the new AOL Time Warner are not rivals but prospective joint-venture partners. Time Warner's roughly 12 million cable customers, scattered in major cities nationwide, do not overlap with the 16 million customers AT&T would claim after its purchase of Tele-Communications Inc. and its pending merger with MediaOne Group. No household could choose one or the other.
The three companies have a web of intersecting interests. Before the Time Warner purchase, AOL badly needed a way to sell a high-speed version of its service. Time Warner provides a route to 20 percent of all cable households, but AOL has bigger aims. It wants to ride into more homes via AT&T's system, which would boast roughly a third of the nation's cable wires after the MediaOne deal. AT&T needs a reason for people to buy its service: Offering AOL, the nation's most popular Internet service, would hardly hurt.
Meanwhile, AT&T needs to make deals with other cable companies to sell its telephone services over their networks. Time Warner needs to buy phone service wholesale somewhere so it can retail it to its cable customers. AT&T would be a prime candidate: With 60 percent of the residential long-distance business, its marketing machine could funnel great flows of new business to AOL Time Warner.
"AT&T would seem to be in an enviable position to strike a deal," said Guy W. Woodlief, an analyst with Prudential Securities.
Of course, none of those alignments is new. Long before AOL announced its marriage to Time Warner, AT&T and AOL were negotiating over the terms by which AOL could sell service over AT&T's cable system. But those negotiations have grown bitter, industry sources said. The two companies have clashed over who would control the direct relationship with the customer--not a trifling matter in an era defined by "bundles" of service: Long-distance companies build on billing relationships with customers to push local service. Cable companies move sideways into Internet service.
Most damaging to the talks, sources said, was AOL's decision to lobby federal authorities and local governments around the country to impose rules forcing AT&T to make its cable systems available to rival Internet providers.
Meanwhile, AT&T has been unable to make a deal to sell its telephone service over Time Warner's system. Other cable companies have opted not to negotiate, preferring to wait and see what terms Time Warner would get.
Now that AOL has landed Time Warner, many assume AT&T has lost bargaining leverage on both fronts. AOL still badly wants a deal to sell service over AT&T's cable wires, but some of the urgency is gone, analysts said. And AT&T probably will have to accept a smaller share of revenue in any telephone deal with Time Warner, analysts said, because AT&T service would now stand as a smaller part of the package of services attracting customers.
"Time Warner combined with AOL would have a more impressive mix of assets to bring," said Robert B. Wilkes, an analyst with Brown Brothers Harriman & Co. "If you're dividing up the money the venture would bring and you're bringing more value, then you get to keep more of the money."
AT&T challenged the notion that a fused AOL and Time Warner undercuts its bargaining position with the two companies.
"This could have the effect of more closely aligning our interests with both Time Warner and AOL," Cicconi said. "We have discussions underway about a telephony deal. . . . We still feel that we should be able to put together a mutually beneficial transaction."
Further improving relations, AOL's merger announcement came accompanied with a key policy reversal: While the company says its cable system will be shared with rival Internet providers, Case renounced government mandates as the means of guaranteeing that policy.
"The open-access issue is on its last legs," Cicconi said, suggesting that its demise would clear a major hurdle preventing a deal with AOL.
Cicconi also noted that AT&T's cable systems amount to Time Warner's largest customers for programming, supplying CNN, HBO, TNT and the Cartoon Channel, among so many others. If AT&T closes its deal with MediaOne, it will inherit a 25 percent stake in Time Warner's cable systems, further solidifying the relationship.
But several industry sources suggested that those relationships could play against AT&T. Its stake in Time Warner has complicated its efforts to gain federal approval for its MediaOne merger, and its dependence on Time Warner for programming AOL now owns could supply the new AOL Time Warner greater leverage in its negotiations with AT&T.
"Take a cynical view of AOL," a senior lawyer at another telecommunications company suggested. "What does AOL do to AT&T now? They call them up and say, 'Give us access to your cable pipeline or you don't get CNN, [Atlanta] Braves games, HBO.' Cable companies do that every day."