Voicing Optimism About AT&T;’s Vision for Communications

Stock Exchange lets readers listen in as staff writers James Peltz and Michael Hiltzik debate the merits of individual stocks.

AT&T; (T)

Jim: Remember the good old days, Mike, when it was pretty easy to size up AT&T;? It was just a giant phone company. Now it’s pretty hard to get your arms around this outfit.

Mike: That’s because a fellow named C. Michael Armstrong took over as chairman about 18 months ago, after Bob Allen’s reign of pure mediocrity. At the time, this was a company and a stock that were going absolutely nowhere, mainly because AT&T; was getting hammered by competitors on all sides.

Jim: But look at it now.

Mike: It’s a completely different company.

Jim: And it seems to keep changing by the hour. Armstrong, who earlier held top posts at Hughes Electronics and IBM, has this company practically racing to get involved in areas that complement its long-distance phone business. He’s made a gigantic push into cable TV and Internet service so that one day AT&T; can be the one-stop supermarket for communications needs.

Mike: Well, the key word here is “broadband,” which refers to shoving all sorts of data, voice, pictures, you name it through that cable line. Now, we’ve talked about this before in relation to some other companies including, interestingly enough, MediaOne.

Jim: The cable company.

Mike: Right, which we both recommended just before it accepted a takeover bid from--whaddaya know!--AT&T.;

Jim: Well, at least our recommendation panned out.

Mike: The cable transmission of data is clearly the centerpiece of Mike Armstrong’s strategy for AT&T.; He believes that in the near future, vast amounts of data are going to float to homes and businesses through the coaxial and fiber lines that power cable TV today. And he wants to be in that business big-time.

Jim: You mean Armstrong thinks that whether we’re watching cable, or looking at the Internet or talking on the phone, that it’s going to be coming over those lines?

Mike: Let’s retrace things a bit and go back to the old days, Jim--and we’re talking the really ancient times, like three or four years ago, before the Internet really took off. As the Net was being developed, it was assumed that Net data would flow over telephone lines, because the volume of data was minuscule compared with the volume of voice communications.

Jim: Like long-distance conversations.

Mike: And everything else. We talked on the telephone all day long but not too many people were shooting data from one computer to another. That ratio is now being turned on its head. If it hasn’t happened already, in the near future the volume of data transmissions is going to overwhelm the volume of voice transmissions.

Jim: And that can’t be handled over telephone lines?

Mike: It can be, but phone lines aren’t optimized for data--the system isn’t tuned for data packets as it is for voice. The question is: Why should everything run over a communications system that’s really designed for voice, when voice will be a small part of it and data will be so big?

Jim: Better to run them over systems designed for huge amounts of data.

Mike: The technologies to do this are still under development. There are a lot of issues that have to be resolved--not only technical ones but also regulatory issues, security issues, law-enforcement issues, you name it.

Jim: Point is, though, that Mike Armstrong wants to be the data guy handling all of this, no matter how it’s sorted out. So that’s why he’s been on an acquisition spree, buying not only MediaOne, but cable-TV giant Tele-Communications, or TCI. That was his blockbuster deal.

Mike: He’s now created the nation’s largest cable company, with access to more than 60% of households. So whatever ends up coming over those cable lines, the vast majority will be Armstrong’s lines.

Jim: Not that any of this will be slam-dunk to accomplish. I mean, all these technologies and operations have to be integrated.

Mike: That’s the risk with this stock. For instance, we’ve already seen what happened with its so-called One Rate digital cellular phone plan. AT&T; encouraged people to think of their AT&T; cell phone as their long-distance phone, their home phone and their office phone by offering a single flat rate. The company was so overwhelmed by demand that a lot of customers ended up disappointed by the service.

Jim: Then there’s the problem of merging the infrastructures, and the people, of the companies AT&T; is buying. You know, cutting deals and melding together huge companies and all their folks are two different matters. And I don’t doubt that AT&T; will stub its toe more than once trying to pull this off, which could affect the company’s earnings growth and stock price.

Mike: But let’s face it, if AT&T; isn’t already the dominant player in this ongoing drama, it’s certainly on a roll. And it’s Armstrong’s vision that is really driving this company. It’s finally given all of AT&T;’s workers and stockholders something to live for, and that’s an achievement all in itself.

Jim: Plus, I think the stock currently trades at a nice entry point for new investors. It’s in the low $50s, which is only about 25 times earnings, a price/earnings multiple below the broad market. But as you say, this isn’t a stock you dip in and out of. It’s a buy-and-hold investment as all these changes get sorted out.

Mike: Right. I believe AT&T; is poised to benefit from these changes, but remember, the changes are going to tax its traditional long-distance phone service severely. As voice communications migrates to the Internet or to cable lines or whatever, it’s going to be impossible for most phone companies to do what they’ve done all of our lives--charge by the minute or by distance for a phone call. That major revenue source for AT&T; is going to dwindle away, and Armstrong will have to be on his toes to make sure he replaces that money and more.

Jim: You mean the day is coming when phone calls will be covered with a flat rate.

Mike: If you make a phone call over the Internet, as you can do now with the proper equipment, you’re basically paying nothing for that call, regardless of whether you’re calling your friend down the block or someone in Kuala Lumpur.

Jim: That makes sense, because we seem to be talking about a world in which one flat rate eventually will cover your phone, cable, Internet connection and so on.

Mike: And your cell phone and your e-mail and your beeper. Yes, everything could go through one system. But it better damn work.

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Write or e-mail with a stock you would like to see discussed in this column. Times staff writer James Peltz (james.peltz@latimes.com) covers the markets and corporate financial trends. Times staff writer Michael Hiltzik (michael.hiltzik@latimes.com) covers technology and entertainment and is the author of the new book “Dealers of Lightning: Xerox PARC and the Dawn of the Computer Age.” Either can also be reached at Business Section, Times Mirror Square, Los Angeles, CA 90053.

You can hear a preview of Peltz and Hiltzik’s weekly column Mondays on the KFWB-Los Angeles Times Noon Business Hour on KFWB-AM (980).

AT&T;

Monday: $51.50