NEW YORK (CNNfn) - AT&T Corp.'s $48 billion deal to buy cable giant Tele-Communications Inc. will have far-reaching ramifications for Internet service providers.
AT&T (T) has struggled to become a big player in the Internet space. Although its 1.1 million customer base makes it the largest Internet service provider, that figure pales in comparison with America Online's (AOL) 11 million subscribers.
That would change in an instant, however, as AT&T gains access to TCI's 33 million cable subscribers as well as the controlling stake in TCI's @Home (ATHM) venture, which provides high-speed Internet access via cable.
The 800-pound gorilla has entered the room.
Analysts say the small- to mid-size Internet service providers (ISPs) probably will suffer while the bigger companies, such as AOL, and the industry in general likely will benefit from the alliance.
This is partly because AT&T would likely push for cable-modem standards instead of the digital subscriber line (DSL) standards that many Internet providers support.
DSL technology uses traditional copper phone lines for faster transmission of data. Cable modems, however, provide much greater bandwidth than telephone lines.
"This may be bad news for dial-up Internet providers," said Matt Janiga, telecommunications analyst at Lazard Freres. "[The AT&T deal] is basically an endorsement of cable modems. Most of the dial-up providers are moving to DSL."
But whereas such providers as Earthlink Network Inc. (ELNK) and Mindspring Enterprises Inc. (MSPG) may be the first to feel a squeeze, analysts say the industry in general will stand to benefit from an expected AT&T-backed cable modem push.
"It will increase [cable modem] usage and speed up new technology development," said Aydin Tuncer, Internet and telecommunications analyst at S&P Equity Group. "You'll have AT&T involved in cable modem development and getting involved in standards bodies."
AOL high on broadband outlook
Tuncer added Internet giants like AOL also will benefit from a push for cable modem standards, because the faster access probably will lure new subscribers to its already substantial customer base.
"They already have a tremendous brand name out there. They're not going to lose any customers," Tuncer said.
AOL itself has applauded the AT&T-TCI union. Steve Case, AOL chairman and chief executive officer, said the Internet king hopes to work with AT&T to offer cable-based Internet access to its customers.
"We're confident that under AT&T's ownership, TCI's cable infrastructure will be opened up so we and others can purchase broadband connectivity wholesale and make it available to our online customers," Case said in a statement.
"We look forward to entering into a broadband reseller agreement with AT&T once the merger with TCI (TCMOA) (TCMOB) is complete, and we look forward to entering similar agreements with other cable companies as they too embrace a truly 'open cable' approach."
However, some industry executives expressed doubt about how well the cable modem technology would fare.
"Cable is still a small piece of the pie," said Garry Betty, president and chief executive officer of Earthlink, one of many providers working to promote DSL technology. "The predominant way people will be connecting, even in five years, will be over plain old copper phone wires."
-- by staff writer John Frederick Moore