AT&T; Returning to the Basics
After four years of wandering in the telecommunications wilderness, AT&T; is finally about to retreat into the phone businesses it once dominated--but as a smaller, less profitable company than before it mounted its costly ventures into cable television, wireless phone service and Internet access.
“Investors can’t underestimate how much of a distraction the entire wireless and broadband episodes have been to T management as well as to personnel out in the field,” Jack B. Grubman, telecommunications analyst for Salomon Smith Barney, said Thursday, referring to AT&T; Corp. by its historic “T” ticker symbol.
With the proposed merger of its broadband unit, comprising its cable properties and Internet access business, with Comcast Corp., AT&T; will be well on the way to completing the corporate breakup announced 13 months ago by its chairman and chief executive, C. Michael Armstrong. That announcement, which involved splitting AT&T; into four separate businesses serving the consumer, business, wireless and broadband markets, presaged the end of Armstrong’s multibillion-dollar experiment in transforming the giant phone company into a multi-platform provider of media and communications services.
AT&T;’s wireless unit was spun off as an independent company earlier this year.
The result of the latest deal could be one of the most rapid contractions of a U.S. industrial behemoth in history. From a company that recorded $51.3 billion in sales and $4.5 billion in profit in 1997, the year Armstrong took over, AT&T; will be reduced to $38 billion in sales and about $3 billion in profit after the Comcast deal, according to Grubman’s estimate. Moreover, at least one of AT&T;’s fastest-growing and most promising businesses--providing telephone service over cable lines--will be transferred to the AT&T-Comcast; merger. That business has nearly doubled its customer base in one year to 1.05 million, according to industry estimates.
As for the larger strategy, “It was a multibillion-dollar oops,” said Scott Cleland, telecommunications analyst at the Washington-based Precursor Group, an independent research firm. “AT&T; decided on a bet-the-farm strategy, and many billions were destroyed over time.”
Stock Dropped 10% a Year
Investors have seconded that judgment. AT&T; shares have fallen by roughly 10% a year in the four years of Armstrong’s tenure, a period in which the benchmark S&P; 500 index has risen by nearly 6% a year. Since the company announced it would unwind its strategy, however, the shares have gained nearly 26%, and rose $1.05 to $17.85 Thursday on the New York Stock Exchange, after trading as high as $18.75.
Some industry observers say the breakup may indeed represent AT&T;’s best chance for survival and growth. For one thing, the Comcast deal will relieve AT&T; of more than $22 billion in debt it acquired during its recent acquisition spree. That will free up resources to finance growth in business services and others in which the residual AT&T; may well be a dominant player.
Armstrong’s original notion, analysts say, was not necessarily a bad one for an environment in which its core business, long-distance phone service, was coming under attack. Not only were the seven “Baby Bells,” created as local phone providers by the court-ordered breakup of the AT&T; monopoly in 1984, permitted to eventually enter the long-distance market, but wireless service offered customers an increasingly cost-effective alternative to long-distance calls on land lines. Long-distance revenue declined by some 10% between 1999 and 2000, the last full years for which figures are available, a trend AT&T; says is certain to continue.
From his appointment as chairman and CEO in October 1997, Armstrong preached that the only way for AT&T; to secure its future was to become dominant in the new-media technologies that would allow a single provider to bring a wide range of communications services into the home--cable television and high-speed Internet access (lumped together as “broadband”) and wireless telephony.
But Armstrong’s critics say he bungled in executing this strategy, first by hugely overpaying in 1999 to acquire Tele-Communications Inc., the Denver-based cable operator that brought AT&T; its first 10 million cable subscribers. TCI, for one thing, owned one of the most decrepit cable networks in the industry, which saddled AT&T; with unexpected billions in costs to upgrade the system to handle two-way digital data, a prerequisite for Internet service. The company also is thought to have heavily overpaid for MediaOne, a 4-million-subscriber cable operator acquired in 2000.
In total, AT&T; paid about $100 billion for the two companies, which industry analysts valued at roughly half that sum.
Perhaps even more damaging than the cable purchases was the company’s handling of @Home, the broadband Internet provider in which it acquired a large stake through the TCI purchase.
From its inception, @Home was a good technological idea embedded in a dysfunctional corporate structure. It was partially owned by a partnership of cable operators for whose subscribers it provided Internet access. The cable bosses, who came from a culture of conservative family firms happily running what were essentially monopoly utilities, clashed with the Silicon Valley engineers who created the @Home network. The latter envisioned themselves leading American TV viewers into a new world of Internet content and identified with the freewheeling corporate lifestyles of the dot-com boom. In order to give @Home a foothold in the world of Internet content, for example, they arranged to acquire the Internet search engine Excite in 1999 for $8 billion in stock.
A Costly and Mistimed Buyout
To relieve the resultant conflicts, AT&T; moved to acquire a controlling stake in what had become known as Excite@Home by purchasing the stakes of its two other major owners, Cox Communications Inc. and Comcast. That buyout, however, proved to be one of the costliest, and strategically mistimed, deals of Armstrong’s tenure.
AT&T; agreed in March 2000 to pay Cox and Comcast $48 a share for their Excite holdings at any time between January of this year and June 2002. By the time the two cable operators exercised their options to sell Excite@Home, shares had fallen by 80%. AT&T; therefore was forced to pay them a combined $2.9 billion for shares selling on the open market for only $523 million.
Moreover, the sale gave AT&T; unquestioned control of Excite@Home just as it was losing some of its most important customers. Cox and Comcast were determined to shed Excite@Home as their Internet service provider, in part because by selling Internet service to their subscribers themselves they got to keep 100% of the monthly subscription fee instead of having to share it with Excite@Home.
The Internet provider finally filed for protection from creditors under Chapter 11 of the federal Bankruptcy Code; among its final acts was to cut off service to 900,000 AT&T; customers in a last-gasp contract dispute.
