AT&T, the nation's largest telecommunications company, and media giant Time Warner have formed a joint venture to offer telephone service over Time Warner's cable television wires in 33 states, the companies said Monday.
The partnership, which has been widely expected since last July, will be owned 77.5 percent by AT&T (T) and 22.5 percent by Time Warner (TWX). The companies forecast that after three full years of operation, the joint venture will be making a profit on annual revenues of US$4 billion.
The pact with Time Warner follows AT&T's proposed $48 billion agreement to buy cable television giant Tele-Communications Inc. The two deals will allow AT&T to reach more than 40 percent of US households. AT&T aims to compete for local phone business over the cable companies' networks rather than over traditional copper phone lines.
"Today's announcement with Time Warner will significantly advance AT&T's ability to offer end-to-end 'any distance' communications services to American consumers and businesses," AT&T Chairman C. Michael Armstrong said in a statement.
The joint venture will offer multiple phone lines per household, along with features such as conference calling, call waiting, call forwarding, and individual message centers for family members.
AT&T and Time Warner expect to offer the service in a pilot project in one or two cities by the end of this year and to begin broader commercial operations in 2000. They have agreed to jointly market communications services and to develop other broadband communications services, such as video telephony.
AT&T will fund the joint venture's negative cash flow, but after three full years of operation the partnership should have positive cash flow and be making a profit with annual revenues of $4 billion, the companies said.
The venture will give AT&T exclusive rights to offer residential and small-business telephony services over Time Warner's cable systems for 20 years. The partnership will pay $15 to Time Warner for each home its network reaches. The payment, which will be made in two annual installments, is expected to total about $300 million.
The venture will also pay a monthly fee of $1.50 per telephone subscriber, rising to $6 per month over a six-year period. AT&T said this fee, even at the highest level, is far below the best rate offered by incumbent local telephone companies for leasing the wires to people's homes.
Time Warner will be responsible for upgrading its cable systems to support phone service. It expects the upgrade to be 85 percent completed by the end of the year and finished by the end of the year 2000.
AT&T will be responsible for the joint venture's capital expenditures, including the cost of powering the system. AT&T will also pay for the cost of adding the communications equipment to people's homes, which will cost $300-$500 per home, depending on whether the customer already subscribes to Time Warner's video service.
AT&T is expected to forge similar pacts with Comcast, Cablevision Systems, and other cable companies as it tries to provide local phone service to the entire US using cable telephone lines.
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