Text of an interview with Money.com @ AT@T's Michael Armstrong:
Friday, July 16, 1999
AT&T chief tells all
Michael Armstrong talks to Money about Ma Bell's ambitious plans for cable TV, broadband and more.
By Suzanne Woolley and Duff McDonald
Getting in touch with Mike Armstrong, AT&T's chairman and chief executive officer, isn't easy. Armstrong has been extraordinarily busy for the past 18 months or so, cutting megadeal after megadeal in a quest to transform a stodgy old-line phone company into a cutting-edge telecommunications leader.
We finally caught up with Armstrong via e-mail. The results of that exchange follow. For more on AT&T's travails, see Money's August special report, "What Have They Done to Ma Bell?"
MONEY: Are there any more cable acquisitions to come?
ARMSTRONG: The TCI and MediaOne acquisitions give us owned and operated systems that pass about 26 million households. That's a base from which to form joint ventures. We'll use other means--fixed wireless and resale, for example--to reach the rest of the country. AT&T is building the national subscriber base and geographic coverage it needs to deliver broadband services to our customers. Although we intend to continue refining our reach and capabilities through systems swaps, joint ventures and other arrangements, we are not planing another major cable acquisition. And besides, I don't know of any that are for sale!
MONEY: Do you have any plans to become involved in the creation/distribution of content?
ARMSTRONG: We've consistently said that we are not in the business of creating content, and don't see ourselves as a value-added player in this area. Our plans call for us to deliver and/or make available to consumer and business customers all kinds of content created by others from movies and weather to web pages and Internet services through the bundled offerings we intend to roll out to our customers over the next three to five years.
MONEY: Why is AT&T pursuing a broadband strategy instead of merely entering into DSL arrangements with local phone companies? Is the ownership of physical infrastructure so important that you're willing to spend billions to get there? What sort of threat does DSL pose to AT&T's strategy?
ARMSTRONG: We believe coaxial cable is the best infrastructure for the delivery of new digital services like telephone, data and video applications to customers. It has the cost, flexibility, speed and bandwidth to offer an array of bundled services including data, local and long-distance telephony that is at the core of AT&Ts strategy. The infrastructure we've acquired through our TCI and MediaOne deals is a crucial last mile competitive alternative to local phone companies.
DSL is not a threat to AT&T's strategy. In fact, we plan to complement our cable efforts by using DSL technology--through resale arrangements with local telephone companies--to provide broadband services to those customers who we can't reach through our owned and operated cable systems. It's interesting that the Bell companies didn't get serious about deploying DSL until they saw the cable companies start offering cable modems.
MONEY: America OnLine is being increasingly mentioned as a powerful player in the future of Internet/telephony/communications. The media has focused recently on AOL' s agitation to find a place on cable/Internet networks, particularly those of AT&T, @Home and Road Runner. In light of AT&T's cable strategy, what part will/might AOL play in the bundled services you intend to offer your customers?
ARMSTRONG: AOL ultimately has to decide how its current business model can adapt in the emerging market for Internet services. Contrary to AOL's claims, any customer of ours that wants to get to AOL can do so, with just a few clicks of the mouse. Our systems are open to all content providers with immediate access to the net and any content. If AOL wishes access to our cable customers, they must enter into a commercial arrangement that adequately compensates us for the billions that we've spent to come up with a viable high speed infrastructure.
MONEY: Other than the obvious, (a $5 billion cash payment), why enter into a deal with Microsoft? Aren't you handcuffing yourself before the playing field has even been determined?
ARMSTRONG: Microsoft's investment is an endorsement of AT&T's broadband strategy. However, we're working with a host of software suppliers and developers. Our non-exclusive agreement with Microsoft calls for us to work together to accelerate the deployment of next-generation digital cable services to millions of American homes. Other vendor's software will be tested and used as well, and the Microsoft software will easily accommodate third party applications. At the same time, we're pleased to be working with one of the industry's foremost leaders to develop and deploy new services to our customers as quickly as possible.
MONEY: What strategic holes still exist in AT&T's business? What type of alliances are you seeking?
ARMSTRONG: At this point, our strategy is well-defined. Our greatest challenge now is execution. Delivering a truly integrated package of services to more than 80 million customers is a complicated and massive task. I have every confidence that we're going to do it, but we have to do it right while continuing to drive down our costs.
We will, of course, continue to seek alliances and partnerships, consistent with our strategic goals, but they will be defined by our customer's communications needs and the technology choices available to us. For example, we have an investment strategy to continue expanding our geographic reach and capabilities in places like Asia and Latin America.
MONEY: In the face of all the interesting acquisitions AT&T has made in the last several quarters, an investor might actually forget about the company's core long-distance focus. At the same time, a major market research firm recently predicted that AT&T's share of retail long-distance would continue to fall from 50 percent in 1996 to 38 percent by the year 2000. Those same customers would seem crucial to AT&Ts long-term bundling strategy. What strategies exist for stemming the outflow?
ARMSTRONG: The whole point of AT&T's strategy is to de-commoditize long-distance by combining it with an integrated set of communication, information and entertainment services that simplify peoples lives while allowing them to communicate anytime and in any form that they want. Earlier this year, for example, we introduced Personal Network, which offers a combination of communications services including wireless and wired calling--at a single rate and on a single bill. Our wireless Digital One Rate offer, which established a single rate for a bundle of anywhere minutes and eliminated roaming charges for customers, is another example. Our cable broadband strategy will build upon these efforts by delivering to customers a bundled set of telephony, video and high-speed Internet services. We're as enthused about the local exchange $110 billion market opportunity as we are prepared to bundle our long distance business.
MONEY: How does wireless service fit into all this physical cable and backbone that AT&T is purchasing?
ARMSTRONG: We've moved from offering local analog cellular service to offering national digital wireless service. Our goal has been to simplify the pricing elements and eliminate artificial local and long-distance distinctions so that people easily understand what they're paying for and what they're getting. This is one reason why our Digital One Rate offer has been such a phenomenal success.
We also intend to use wireless technology and resale arrangements with local telephone companies to provide local service to customers in those parts of the country that we cant reach through our cable infrastructure.
MONEY: What will AT&T's revenue mix look like in five years versus the revenue mix today?
ARMSTRONG: We're in the process of diversifying our revenue portfolio and investing in products and services in a number of growth segments.
Today, consumer long distance accounts for 33 percent of our revenues; wireless, 10 percent; business long-distance, 27 percent; business data, IP and local services, 18 percent; and video services, 11 percent.
By the year 2004, we anticipate that consumer long distance will account for roughly 13 percent of our revenues, while video and residential data/broadband telephony will account for 13 percent and 10 percent, respectively. Wireless will total about 14 percent. We're also anticipating that business long-distance services will total 17 percent of our revenues, while business data, IP and local will account for about 33 percent.
MONEY: And within what debt to capital range does AT&T plan to operate within the next few years?
ARMSTRONG: AT&T's debt ratio was 44.7 percent on March 31, 1999, reflecting the company's merger with TCI. This ratio will be reduced in future quarters.
MONEY: How safe is AT&T's dividend over the long-term?
ARMSTRONG: We have a pretty impressive track record--AT&T's common shareholders have received continuous quarterly dividend payments since 1893.
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