The Tycoon Report

Why Comcast has the Baby Bells Shaking in their Copper.

Shareholders of Comcast Corp., (SYM: CMCSK) applauded this week when the cable company announced plans to offer customers telephone service.

Why the move has the Baby Bells shaking in their pants.

 THE EMPIRE STRIKES BACK.

No, I'm not taking about the Bushies and their post-election whacking of Dan Rather and half of 60 Minutes. Nor am I talking about the Clintonites spreading rumors that Howard Dean is too crazy to win the DNC job. I'm talking about what's left of At & T (SYM: T). You remember Ma-Bell don't you? The last true casualty of the Sherman Anti-Trust Act. Creator of the five-headed Aliens who ate their own Mother - the Baby Bells.

Well for those who root for the losers, here's one for you: The empire struck back. Well, maybe that's an exaggeration. It was more like a whimper really - and indirect one at that.

Confused yet?

It all started when Comcast (SYM: CMCSK) announced this week that they would offer telephone services to all of their cable subscribers. Local...long Distance... Even international service for those of us worldly enough. So what does Comcast's announcement have to do with At & T, you ask? Nothing today. But everything yesterday. And maybe more tomorrow.

Let me explain:

It wasn't too long ago that Comcast bought all of the cable assets of At & T. THis was after C. Michael Armstrong, the big-dreamin former Chief of AT & T, decided to get into the cable business in the first place. And get Ma-Bell into cable he did. Without regard for money, he overpaid for TCI cable, saddling Ma-Bell with a ton of debt. But he had a dream.

Some thought it was pollyannaish, but he had a dream. A dream to offer customers a one-stop shop of all things telecom: cable, phone service and high speed internet - all from one provider. Some call it "Bundled Services." Others call it the "Holy Grail" of business. Get customers to sign up for everything under the sun, make it hard to switch to another provider, kick back and reap the rewards.

Not a bad dream as far as dreams go.

But there was a small problem. Three, actually. First, he overpayed for TCI's assets. Second, he saddled Ma-Bell with too much debt. And third, his timing was disastrous - almost as soon as he did the deal, the Fed began to raise rates. That made the price of money more expensive. Companies with a lot of debt have a lot of problems when the price of money rises.

But that's another story. The story of today is that C. Michael Armstrong was right. Not right in the sense that Ma Bell won the war against her Baby Bells. Not even close. Right in the sense that when he sold TCI to Comcast - at almost half the price he paid a few years before - he gave the Baby Bell's one last parting shot. The kind of parting shot you give your enemies who overcharge you for using their local copper. The kind of parting shot that you give your enemies because they own Congress and block every regulatory move you make. The kind of parting shot that only Sigourney Weaver could appreciate.

What he did was he gave the wily Chief of Comcast, Brian Roberts, a small business that was losing $200 million a year. A business so small that nobody - except Brian Roberts - took it seriously when the deal was announced. A business that only Brian Roberts could turn around. In short, he gave Brian Roberts a Voice-Over-Internet business that one day could offer local, long distance and international phone service to all of the cable companies customers. And that day is today.

That tiny former division of Ma Bell - now wholly owned by Comcast - just threw a grenade into the den of Baby-Bell Aliens. But now the timing is right. And Comcast has the numbers to prove it: $300 to convince a customer to try it. $40 per month for unlimited local and long distance service. Less than 8 months to get your $300 back. A 40% margin - which means $16 in profit per customer each month.

But you know what's even better for Comcast? Besides the fact that they have 22 million custies to pitch this to? Each customer who signs up for additional services won't switch easily to the Bells when they begin to offer the service themselves. That's if they ever get around to it. Remember, the Bells haven't even built out their network yet to offer all the goodies that Comcast offers. Nope, Ma-Ball threw the grenade right into the Alien den.

To bad what's left of Ma-Bell - that weird long distance company that's actually living Stephen King's Thinner - won't profit from it. But I have the feeling that somewhere- hiding deep in the cave he calls his office at Comcast - C. Michael Armstrong is smiling. Grinning, actually.

That almost makes him more than just a telecom footnote in my book. It makes him the guy who tossed the grenade to the Baby-Bell-Aliens in the shaft just at the right time... To bad his career blew up with it.

Remember, you are what you read!