AT&T; Bid Reflects Sound Internet Strategy--but Execution Will Tell

Despite the stock market’s typically nervous and negative reaction to AT&T;’s offer last week to acquire the MediaOne cable company for $58 billion, the giant telecommunications company has made a smart move for its long-term future.

AT&T; stock lost about $11 billion, or 6% of its market value, on Friday. But the amount was moderate given the fact that the additional shares AT&T; will issue if the MediaOne deal goes through could dilute the value of AT&T;’s existing shares by about 14%.

And the coming months and years will tell a different story. AT&T;, the company that practically originated communications over telephone lines, has ensured that it will now be identified with cable television lines--or, rather, cable Internet lines. The MediaOne bid follows AT&T;’s $44-billion purchase earlier this year of Tele-Communications Inc., another cable firm.

AT&T; Chairman C. Michael Armstrong is looking to the development of Internet traffic in the next three to five years. AT&T;’s actions say that cable will be a medium for carrying expanded traffic and, more important, handling billing and service to customers, both residential and business.

To be sure, upgrading today’s television cables with capabilities for expanded two-way communications--online movies, classroom lectures, medical diagnoses--will take major investments in the next few years. AT&T;, with $53 billion in annual revenue and roughly $10 billion in annual capital investment, will make those investments. It will use cable to deliver local telephone service to complement its own long-distance service.

That alone will change equations for the telecommunications industry. Watch for regional Bell companies to rush their entry into long-distance this year, which means local telephone markets will open up to increased competition that much sooner.

Also, goaded by AT&T;’s pushing of cable modems for faster Internet access, the regional Bell companies will hurry to get greater-capacity telephone lines to their customers, predicts telecommunications analyst Peter Bernstein, head of Infonautics Consulting, a Ramsey, N.J., firm.

The Bell companies have been busy making alliances with providers of fiber-optic lines to facilitate the Bells’ ability to provide long-distance and Internet service. BellSouth last week made a $3.5-billion investment in Qwest Communications, the Denver-based developer of a national fiber-optic network. SBC Communications last month invested $500 million in Williams Cos., the Tulsa, Okla.-based gas pipeline company that has built a fiber-optic network. Bell Atlantic, through its proposed merger with GTE, would acquire GTE’s pioneering Internet network subsidiary, BBN.

But the key to figuring AT&T;’s latest move doesn’t lie in questions of technology--such as the relative merits of cable or fiber-optic lines. Rather, the appeal of cable is that its system of billing is easily adaptable to charging for content on the Internet.

Simply put, communications charges are going to be flat-rate. Cable TV services charge a flat rate for basic cable plus premiums for HBO and other specialized channels. That’s a contrast to traditional phone billing, which charges by minutes and seconds of use. Internet services, too, are billed in flat monthly rates, but without premiums for different kinds of services.

In the future, with a greatly expanded capacity on the Internet, differential billing for a movie, a lecture, a medical analysis will be a business requirement. And the flat-rate cable system lends itself more readily to that future. Experts inside AT&T; are already contemplating the possibilities of charging a basic rate plus premiums for all sorts of services.

Note the thinking of those AT&T; experts. AT&T; is not looking simply to be the provider of a cable or a wire into the home or office.

By providing the major channel for Internet access, it can be a central marketplace of the future. Films will be transmitted through its lines. Joint marketing ventures with other businesses will be possible--car sales through AT&T;, global family reunions through AT&T.; These visions are realistic because they are only extrapolations of current trends.

The Internet revolution is proceeding at warp speed. Commerce among companies on the Internet totaled more than $40 billion last year and will surpass $1 trillion early in the new century.

Consumer purchases and Internet service provider revenues still total less than $10 billion, but business is growing faster than most predictions. Jupiter Communications, a San Francisco research firm, predicted in November that gift buying on the Internet would total $2.3 billion for the year. The actual total, measured after the holiday shopping season, was 25% greater.

But visions are easy; bringing them to fruition is difficult. For more than 15 years after the breakup of the old AT&T; in 1984, the giant company adopted one plan after another, fumbling most of them. By late 1997, says William Davidson, a Los Angeles-based communications consultant, “the company was paralyzed and confused.”

Then Armstrong came in as chairman in October 1997, recruited from Hughes Electronics by the AT&T; board of directors. “And now AT&T; has seized momentum, and its competitors are being forced to react,” Davidson says.

The company has added the Excite Internet portal to its ownership of the @Home service provider, acquired last year with TCI. It has aggressively pushed its way to leadership in wireless telephony, analysts say, and it is using cable to get into local telephone markets.

And it has a focused strategy for the long-term future, which is where the proposed acquisition of MediaOne fits in.

Of course, in business as in football, execution is everything. Armstrong’s strategy is sound, but it remains to be seen whether the 100,000-employee company can execute it. Undeniably, however, it has potential.

“There are no second acts in American life,” author F. Scott Fitzgerald once wrote. AT&T; may well disprove that.

James Flanigan can be reached by e-mail at jim.flanigan@latimes.com.