CEO’s Vision for AT&T; Is to Be Much More Than the Old Ma Bell

At first glance, AT&T;’s bold $58-billion bid to wrest MediaOne away from Comcast looks like an attempt to rebuild the classic Ma Bell monopoly. But AT&T; Chief Executive C. Michael Armstrong’s vision appears to be much bigger than that.

A combination of MediaOne, Tele-Communications Inc. and Time Warner’s cable systems would give AT&T; a direct link to nearly 50 million American homes. But the company aims to use those connections to sell more than just local and long-distance phone service.

The nation’s biggest phone company would also be able to deliver cable television, sell data services, provide Internet access and move aggressively in electronic commerce.

“It won’t be the old AT&T;,” said Brian Adamik, a telecommunications analyst with Yankee Group in Boston. “The end game is the Internet.”

In pursuing that vision, Armstrong has shown he is willing to bet the company on cable systems.

With major investments, the cable lines that were built to deliver television programs can be enhanced to offer phone service and high-speed Internet access as well. That would give AT&T; a direct link to its customers for the first time since the breakup of the Bell system in 1984.

AT&T; announced the strategy last year with its shocking bid to buy TCI for $44 billion. Once it became apparent that Armstrong was committed to that strategy, further acquisitions were seen as inevitable.

“TCI was the initial earthquake, and these other deals are aftershocks,” said Ken McGee, a telecommunications specialist at Gartner Group in Stamford, Conn.

But a second major cable acquisition would not have happened so soon after the swallowing of TCI if Comcast hadn’t gone on a buying spree of its own.

“This is a big fish they didn’t want to get away,” said Jeffrey Kagan, an independent telecommunications consultant in Atlanta. “They need to get their hands on as many cable properties as they can.”

That might be the easy part.

While Armstrong has struck a series of splashy deals since he arrived at AT&T;, the success of his strategy depends on how well he can integrate all of the pieces.

“The integration issue is going to be immense,” McGee said. “The only bigger problem is the disaster that would occur if they did nothing.”

Blending the vast operations of cable and local phone companies will be hard enough. But it may be harder still for AT&T; to keep its footing while working through personality conflicts among top executives and bridge vast differences in corporate cultures.

Already, AT&T; has lost many of its top managers to upstart rivals, and more are likely to leave as Armstrong sorts through changes in his management team in the wake of each new deal.

Even as Armstrong plunks down $58 billion for another cable company, he is still hedging his bets in his efforts to get AT&T; back into the local phone business.

For example, AT&T; is testing a wireless system for local phone service, and it already owns one of the nation’s largest wireless phone networks.

In addition, AT&T;’s $11.3-billion purchase of Teleport Communications Group gave the company a foothold in the lucrative market of serving up dial tones to business customers.

If AT&T; succeeds in buying MediaOne, it would own cable systems that could serve up to 29 million homes. It also has access to up to 20 million more homes available to Time Warner’s cable systems.

But even with a link to 49 million homes, AT&T; could still end up offering direct service to fewer customers than its Baby Bell rivals. If Bell Atlantic and GTE complete their proposed merger, the combined company would have 68 million access lines. SBC Communications will have 52.5 million access lines of its own if it completes its own deal to buy fellow Baby Bell Ameritech.

Armstrong’s moves to embrace cable show how dramatically he has changed the company.

“Even if you had predicted a spectacular move at AT&T;, you would’ve underestimated what has unfolded,” McGee said. “The FCC and the Congress are not reshaping the industry anymore, it’s Armstrong and AT&T.;”

* BRASH MOVE: AT&T; offers $58 billion for MediaOne Group. A1

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Calling Card

When C. Michael Armstrong took the helm at AT&T; in October 1997, the nation’s largest phone company was hobbled by bureaucratic decision-making, falling market share and an unfocused business strategy. Since then, Armstrong has moved to expand AT&T;’s reach and made a bid to enter local phone markets on cable operators’ networks.

Highlights of Armstrong’s Tenure

* December 1997: Sold AT&T;’s customer services unit to Cincinnati Bell for $650 million.

* January 1998: Agreed to buy Teleport Communications Group, which offers local service in California and 27 other states, for $11.3 billion in stock. The deal closed in July.

* June 1998: Announced that AT&T; would buy cable powerhouse Tele-Communications Inc. for $44 billion in an all-stock transaction. The merger was completed earlier this year.

* July 1998: Formed a global joint venture with British Telecom to serve the communications needs of big business.

* December 1998: Agreed to buy IBM ‘s global communications network for $5 billion in cash, allowing AT&T; to expand its worldwide business services.

* February 1999: Announced a joint venture with Time Warner to deliver AT&T-branded; local phone service over the entertainment giant’s cable wires.

Sources: Times and wire reports

How the Players Stack Up

AT&T; has offered $85 a share for MediaOne, topping Comcast’s ofer. Key financial data for the companies:

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AT&T; MediaOne Comcast Market capitalization, in billions $190 $42 $25 Shares outstanding, in millions 3,342 603 401* 1998 revenue, in billions $53.2 $2.9 $5.1 1998 net income, in millions $6,398 $943** $972 Thursday stock close $56.75 $69.50 $67.63*** Stock price gain since 12/31/96 +106% +278% +280%

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* Voting and non-voting classes combined

** Operating cash flow

*** Price for non-voting shares

Source: Company reports, Bloomberg News