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Now AT & Ts real battle begins

After battling mightily to grab MediaOne Group Inc.'s portfolio, AT & T Broadband executives now must make it fit into its operations.

AT & T fought for a year to secure MediaOne's 5 million cable subscribers. On top of the $48 billion buy, AT & T had to pay $1.5 billion to make Comcast-which had first secured a deal to buy the MSO-go away and then had to placate regulators worried about AT & T's leverage over programmers.

But with the high drama now over, AT & T executives face the more mundane task of reorganizing management of the systems, unifying marketing plans and expanding the reach of new cable services.

"It was sort of anticlimactic when we closed last week, but we're excited," said AT & T Broadband President Dan Somers. "I think we're really quite well organized. I've had a team working on this since I walked in last October."

It's a lot of work. AT & T was having enough difficulty digesting the old Tele-Communications Inc. operations it acquired last year, with the company's plunging cash flow demonstrating how tough that battle has been. Now Somers has to smoothly join the two parts.

"For AT & T, the challenge is integration," said Sanford Bernstein & Co. media analyst Tom Wolzien. "They have to pull all this together."

The immediate task is a new management structure. Both AT & T and MediaOne's dozen or so regional and state offices are being eliminated. Instead, the combined companies are split into just two, with ex-MediaOne Western U.S. Senior Vice President Theresa Elder becoming president of AT & T Broadband's Western division and former Tele-Communications Inc. Pittsburgh-region Vice President Jim Mazur becoming president of a new Eastern division.

The goal is not necessarily to centralize operations but to remove what outside consultants decided was an unneeded barrier of regional management while leaving some autonomy at the major system clusters.

AT & T wouldn't say how many regional jobs would be affected or lost in the shift. An executive did acknowledge that, of the 1,500 corporate employees at the two companies' suburban Denver headquarters, about 300 will lose their jobs, many of them willingly taking severance packages.

In buying MediaOne, what Somers gets is a company in much better shape than the systems AT & T bought from TCI. MediaOne is further along with the system rebuilds needed to launch local phone and high-speed Internet services.

According to Morgan Stanley Dean Witter media analyst Richard Bilotti, the spin-off of Baby Bell US West has invested in upgrades more aggressively ($294 per subscriber last year vs. $208 for AT & T). MediaOne is much further ahead in deploying high-speed Internet service (3.6% of homes passed at year-end vs. 1.8% at AT & T). It generates slightly more revenue per subscriber, ($43.08 vs. AT & T's $41.58) and squeezes more profit out of every dollar (38% cash flow margin vs. AT & T's 23%).

But MediaOne is much further behind in deploying digital cable (7% of homes passed vs. AT & T's 22%). That's in large part because TCI's relatively weak systems needed digital cable to expand channel capacity, while MediaOne's rebuilt systems did not.

AT & T Chairman Mike Armstrong's lust for MediaOne goes back to his ambitions in the local phone business. Faced with shrunken profits in the company's core long-distance business, Armstrong saw the company's rescue in a bold plan to take Baby Bells on directly by pushing into the local phone business throughout the country.

Now Armstrong and Somers have cable systems serving 16 million subscribers passing a total of 28 million homes, or 28% of all homes.

Unlike many cable system deals, the MediaOne acquisition is not about clustering. There's very little overlap in the markets the two companies service.

What AT & T gets is reach. As big as it was, AT & T's takeover of TCI gave the company dominance of only seven markets, including Chicago, San Francisco, Seattle and Portland, Ore.

MediaOne's operations dominate Atlanta, South Florida, Jacksonville, and St. Paul/Minneapolis. MediaOne also gives a foothold in Los Angeles (although in some weak neighborhoods, including South Central L.A.) and offers dominance of the Boston market once AT & T completes a planned $1.7 billion takeover of Cablevision Systems' cluster there.

But there will be some efficiencies. First off will be programming costs. MediaOne paid 26% of its revenues to cable networks last year, about $660 million. But AT & T's size lets it command better rates from programmers, so programming runs about 22% of revenues. Applying its cheaper rates to MediaOne's systems could immediately save $90 million. That alone would add 1.5 to 2 points to the combined companies' cash flow margin.