AT&T Units Face Adjustments To Turbulent Markets

As the complex dismemberment of AT&T Corp. lumbers forward, the four companies gaining independence face widely varying prospects in difficult and often tumultuous communications markets. Analysts generally finger AT&T Broadband, with its far-ranging cable TV systems, high-speed Internet access, and other broadband services, as the likely star. AT&T Consumer, the long-distance telephone business once at the core of the entire system, is viewed as the most troubled offspring. AT&T Wireless Group, which already has been cut loose, and AT&T Business, the new core company, fall in between – formidable competitors whose futures nonetheless depend on how their markets evolve and they respond to the changes. These outlooks match the restructuring techniques used to cut each company loose – IPOs for the constituent firms with the most investor appeal, spin-offs for the more lackluster. AT&T Wireless was dealt off through an IPO and subsequent distribution of the parent’s remaining interest through a split-off in which parent AT&T swapped shares for the Wireless unit. An IPO and later share distribution is planned for Broadband. With the split-off technique, AT&T shrinks the number of its outstanding shares and ultimately reduces the equity capitalization to jibe with the smaller size of the projected core company, which will provide business-oriented enterprise and networking services. AT&T Consumer will be spun off as a tracking stock. In a shirttail to the main restructuring, AT&T in April secured a divorce from its Liberty Media Corp. tracking stock via a split-off. Paul Waadevig, a telecom analyst at Frost & Sullivan, likes Broadband’s value-added service strategy and says that its financial resources should enable it to weather the current turmoil in its market. He notes that the unit also will benefit in the short term from the decisions by competitors to go slow or scrub plans for digital subscriber loops (DSLs) that conflict with Broadband’s primary services. “Broadband is in a fairly good position,” he says. “It’s a competitive market, but we have seen competitors going out of business, so actually it’s a consolidating market. AT&T management traditionally has done well in consolidating markets, so I think they will do well there.” Business services, the largest of the four units, with 2000 revenues of nearly $29 billion, is being constrained by general economic uncertainties and the resulting cutbacks by companies on spending for information and other technologies. The “equipment side is being cut back dramatically” and “the services side is hurting” because customers have scaled back spending on newer services and infrastructures. “The market is very competitive and very much in flux right now,” he states. “It’s a real question mark not just for them (AT&T Business) but for a number of their competitors.” However, Waadevig says that AT&T Business could have an edge in being able to offer long-distance telecom service in conjunction with long-distance data transportation services. AT&T Wireless, Waadevig points out, operates in a consolidating market, and the trick for the company is to “find a good niche.” That niche, he suggests, could be prepaid service, which already accounts for 13% of the business. “They are doing a good job of trying to find where AT&T Wireless can fit into a new wireless framework,” he says. “The changing data side of the wireless field is a question mark.” While the reorganization will spotlight some of AT&T’s most attractive parts, it also will expose the problems in the consumer long-distance business. Waadevig thinks that the unit will be an early target for an acquisition bid. “A lot of the long-distance problems have been masked because there have been other areas in the company like business services and broadband,” he says. “Once these problems are kind of naked to the shareholders, I think you will see pressure to acquire or merge.” Waadevig sees the old telephone business suffering from a scarcity of capital, a debt load, and management troubles. “In AT&T, the best and the brightest are going to the other two companies,” he says. “The old-timers – the ones that don’t want to move with the market – are going to consumer long distance. They don’t have that dynamic management going to them, and that makes them a target themselves.” Waadevig sees the long-distance business making some stabs at innovation in rates, such as a flat monthly rate for domestic calls and prepaid long-distance rates – “anything to get revenues and the price per minute up.” “A lot of people might pay $40 a month for unlimited calls but actually use less than that,” he says. “It’s a higher price per minute than what AT&T is getting now but the end user may be willing to pay a premium just to know what the bill is going to be every month.” Waadevig believes that the newly emerging independents will be soft-pedaling acquisitions for the short run. “Initially, the odds of going and expanding by acquisition would be 50-50,” he says. “We haven’t been able to gauge what the economy will look like and how it will affect each of these companies, how they will expand, and how they will handle strategy.” p