AT&T rings in a new business strategy
[talks about AT&T going to attempt sell voIP to cable; cut down on PR costs, and try to survive largely thru getting new business clients quickly; mentions IDT as a possible suitor (and others), as the value of AT&T's consumer division drops toward $10 billion (now approx. $11.5 billion)
AT&T rings in a new business strategy
By Leslie Cauley, USA TODAY
usatoday.com
BEDMINSTER, N.J. — Ma Bell as an arms dealer? Sure, why not, says David Dorman, AT&T's (T) chairman and chief executive. Dorman is convinced that the big regional phone companies and cable operators are gearing up for war with each other.
He wants the fading American icon to be a main supplier of armaments — in the form of Internet telephony and wholesale long-distance minutes — to both sides.
"I'd rather sell bullets than be shot at," deadpans Dorman, who recently pulled the plug on AT&T's 100-year-old consumer long-distance business.
AT&T last month said that it would stop promoting its local and long-distance services to consumers, marking the end of an era for the company that once served virtually every U.S. home. AT&T plans to focus exclusively on big business customers, which account for 75% of overall revenue. The strategy is expected to save AT&T about $1 billion annually.
Dorman's decision to walk — make that run — away from AT&T's legacy long-distance business, a bedrock of the company since its formation in 1885, grabbed headlines. It also caused chortling among the regional Bell phone companies.
The skepticism was understandable. AT&T had waged a bitter legal fight in Washington about "resale," industry parlance for the idea of leasing the Bells' local phone networks at discounted rates. AT&T was pushing to preserve resale rates that the Bells considered far too cheap. AT&T ultimately lost.
The Bells are convinced that AT&T will resurrect its legal fight once the presidential election is finished. Dorman says that's dead wrong. "I'm disarming," he says, throwing his hands up for emphasis. "We're moving on."
The Bells are right about one thing: AT&T's decision to pull back from the consumer business was staged for maximum attention. Why so bold? "I literally wanted to make sure that this was an irrevocable decision," Dorman explains, adding that he wanted to send a strong signal to the market about AT&T's new direction.
Privately, at least one Bell executive thinks Dorman is on the right path. "It's smart," a senior Bell executive says. "Late. But smart." Boyd Peterson, an analyst at Yankee Group agrees: "Given Dorman's choices, he's made the right ones."
For the moment, AT&T is still the No. 1 long-distance company, with more than 30 million residential customers. But not for long. Even AT&T expects its fat consumer base, a source of pride and envy for decades, to wither within 36 months.
Eager to speed things along, the regional Bells have taken out ads in newspapers declaring their interest in serving AT&T's customers. Verizon, the New York-based communications giant, weighed in with full-page ads. The tagline: "Some phone companies don't think you're worth it. We do."
Dorman says the decision to pull the plug on the consumer business was painful but necessary. Revenue in AT&T's Consumer Services division is falling almost 20% a year. Dorman says he could no longer justify spending tens of millions of dollars a year to save a dying business. "I have a better way to play this," he says.
All of which is a long way back to one of his favorite topics: the coming Cable-Bell War. Through the years, cable and phone companies have largely avoided treading on each other's turf. But the emergence of Internet telephony, which gives cable operators a way to muscle in on the $120 billion local phone market, has proved enticing. The regional Bells, sensing danger, are adding satellite TV to their service bundles. Dorman wants AT&T to be in position to help both sides once the shooting starts in earnest.
Ripple effect
Verizon (VZ), SBC (SBC) and other big carriers already buy billions of long-distance minutes a year from AT&T and others to resell to their customers. Dorman thinks the strategic shift will make those working relationships a lot easier (read: lucrative). "By saying I don't have a pony in this race any more, I'm a much more credible arms merchant," the AT&T chief says.
That was the same rationale offered in 1995 by Robert Allen, another AT&T chairman and CEO, when he decided to spin off Lucent, the company's longtime equipment arm. The move proved pivotal in helping AT&T win more business with the Bells, which had always been suspicious of sharing too much confidential information with an AT&T subsidiary. Once the unit was spun off, Lucent's equipment orders soared.
The ripple effect of Dorman's decision is having a profound impact on its plans for VoIP — Voice Over Internet Protocol — and wireless. AT&T had vowed to have 1 million VoIP customers by the end of 2005. Dorman now says the company will be taking a "more measured approach." AT&T will no longer use traditional marketing, such as telemarketing and mass mailings, to win VoIP customers. Instead, it will rely on Google, Yahoo and other Internet and retail channels where broadband devotees abound.
In keeping with its new focus, AT&T also plans to step up its VoIP push with big business accounts and cable operators.
AT&T has a handful of major multinational corporations that are experimenting with VoIP as a work-at-home solution. The company will also start pitching AT&T-branded VoIP to cable operators. Though the iconic AT&T name has taken a beating, it's still considered golden, Dorman notes.
AT&T's wireless strategy is also being overhauled. The company recently announced plans to resell Sprint's wireless services. AT&T had originally planned a big push into the consumer wireless market. Dorman now says AT&T will sell those services mostly over the Internet. AT&T, he says, gets "thousands" of hits on its Web site every day from people inquiring about wireless. AT&T currently sends those would-be customers over to AT&T Wireless, which was spun off as a separate company three years ago. By simply holding onto those would-be customers, Dorman thinks AT&T might be able to sign up several million subscribers, at least.
Betting against history
Can all this strategic tinkering save AT&T?
It's unclear. AT&T's century-old network was engineered to serve America's vast and unending telecommunications needs, and it's expensive to maintain. Those embedded costs — about $23 billion worth — won't go away soon. Unless AT&T can recruit enough big-money business customers to step up quickly, the shift might not be enough to offset AT&T's crushing declines on the consumer side. Another option would be to simply write off the older parts of the network that have been rendered irrelevant by new technologies and start again. In a recent financial filing, AT&T indicated that it is considering doing just that.
The odds are squarely against Dorman. No carrier of AT&T's size has ever managed to make a go of it by depending solely on business customers. History is littered with the carcasses of those that have tried. On the plus side, AT&T has a decisive head start on its rivals. David Parks of Yankee Group says AT&T commands about 22% of the business market in the USA, making it the No. 1 player.
The bad news is that the business market is tougher. Pricing is already cutthroat, one reason AT&T is only managing to deliver razor-thin operating margins of 2.4%, and that's with AT&T competing against a crippled MCI, which just emerged from bankruptcy protection, and a weakened Sprint. The Bells currently aren't major players in the market, but all are eyeing it.
Growing unease about AT&T's prospects is one reason Moody's cut the company's long-term debt ratings to junk. Standard & Poor's followed suit last week. "We are watching the wilting of one of the great American icons," says Dennis Saputo, a senior vice president at Moody's. Dorman says the effect of the rating "is more psychological than financial." AT&T, he notes, has $2.5 billion in cash on hand, more than enough to meet its near-term financial obligations. Still, he says, "No one wants to be considered junk."
AT&T's creditworthiness aside, Dorman is adamant that his company is poised to prevail. "There are a lot of people who would love to trade places with us at this moment in time, looking forward," he says.
The rumors, meanwhile, persist.
Late last year, there was a lot of speculation that AT&T and BellSouth were talking about a possible merger. As it turns out, it was a lot more than speculation. According to people with direct knowledge of the matter, BellSouth (BLS) actually agreed to buy AT&T. The two sides even agreed on a per-share price — in the $24 range — and a succession plan. Under that framework, these same people say, BellSouth's CEO, Duane Ackerman, would have remained at the helm for a time, then been succeeded by Dorman.
The deal unraveled rather dramatically after BellSouth got a good look at AT&T's internal financial projections. Ackerman pulled the plug a few days before the transaction was to be announced at a splashy press conference in New York.
Uncertain valuations
AT&T's withdrawal from the consumer market probably makes it easier for would-be suitors to put a hard valuation on assets. Unlike residential customers, who can switch carriers at will, business customers typically sign long-term contracts, providing some stability. AT&T's retreat might also make a merger more palatable to regulators, always concerned about the impact on residential customers.
Over the years, Sprint (FON), SBC, Verizon and even IDT (IDT) have expressed interest in buying AT&T, or some of its parts. A lot of AT&T-watchers seem to think the company will become a nice-size bite for somebody as soon as its market capitalization — the market value of its shares — falls below the $10 billion mark. At the current rate of erosion, that might not take long. AT&T's stock closed at $14.19 on Friday, giving it a market cap of $11.3 billion.
Dorman insists he doesn't need to do a deal to keep AT&T afloat. AT&T, he points out, has little debt, a ton of cash and finally, a stable business plan.
Is AT&T for sale?
Peterson of Yankee Group thinks so. While Dorman's not saying outright that he's putting AT&T up for sale, "It's clear that he is willing to look at mergers," Peterson notes, referring to the BellSouth episode.
Dorman punts. "I'm looking at this whole thing as a 3-D chessboard," he says. As a fiduciary matter, Dorman notes, he'd be obliged to consider any reasonable offer that came his way.
Still, the hard question remains: Can AT&T survive as a stand-alone company?
Dorman, whose charm sometimes belies his tough-as-nails constitution, pushes back. Given AT&T's new focus on business, "I am quite certain we can be prosperous" as a stand-alone company, says Dorman, who hails from Georgia. The second answer to that question, he offers, is far more personal. "Look, I'm 50 years old. I enjoy what I do ... and I kind of hope I get grayer and balder and older in this job." |
