Old Ma Bell tries a digital makeover

Gamble: AT&T Corp. is betting billions that it can remake itself as a communications juggernaut.

May 16, 1999|By Mark Ribbing | Mark Ribbing,SUN STAFF

The corporate world can be a complicated place. It's full of technical jargon, conflicting claims, and numbers so huge they seem unreal. Beneath all the prattle and puffery, though, big business operates under a simple rule: Persuade a lot of people to buy what you're selling, and get as much money from them as you can.

At this moment, there is perhaps no company in the world that is pursuing these goals more aggressively, and at greater risk, than AT&T Corp.

The nation's biggest long-distance telephone company, a corporate presence so comfortable and familiar to Americans that it is often referred to simply as Ma Bell, is remaking itself as a do-it-all communications juggernaut that sells everything from cable television to local phone service to Internet access.

If this strategy works, AT&T will be positioned to profit enormously from Americans' ever-growing appetite for communications and entertainment services. If it fails, AT&T will have thrown billions of dollars down a rat hole and fallen further behind in the hyper-competitive telecommunications industry.

"AT&T is either going to win big or lose big, and there's nothing in between," said Jeffrey Kagan, an Atlanta telecommunications analyst.

This month, the transformation of AT&T has entered high gear. On the evening of May 4, the company emerged as the sole remaining suitor for MediaOne Group Inc. -- one of the cable industry's technology leaders -- after another cable firm, Comcast Corp., dropped out of the bidding.

That same night, AT&T and the vanquished Comcast announced a deal to swap cable markets around the country, including Baltimore. The agreement strengthened AT&T's blooming cable network and allowed the company to carry local telephone service over Comcast's lines.

Two days later, AT&T received the ultimate digital age tribute: Microsoft Corp. agreed to pay $5 billion to grab a sliver of AT&T stock and put Microsoft software in AT&T's TV-top boxes.

If all goes according to plan, those boxes will carry cable television and high-speed Internet transmissions nationwide.

"What we are up to with all of our investments in [high-capacity networks like cable] is the ability to deliver this revolutionary digital world to an increasing number of consumers across America and to compete in local [telephone] service," AT&T Chairman and Chief Executive Officer C. Michael Armstrong, the man who has put the company on its giddy but uncertain new trajectory, said after the Comcast deal.

For now, Wall Street likes what it sees. AT&T stock closed Friday at $58.9375, a price 86 percent higher than the $31.6719 it commanded Oct. 20, 1997, the day Armstrong was introduced as the new head of the company.

"I give him an A-plus grade right now," said Brian Adamik, an analyst with the Yankee Group in Boston. "He's doing what he needs to do right now, but his biggest challenge is ahead of him, which is execution."

Once in trouble

At the time of Armstrong's arrival, AT&T was in trouble.

Founded in 1885, the old American Telephone & Telegraph Co. had been America's unchallenged local and long-distance telephone provider for nearly a century before it was broken up by a consent decree in 1984. Competitiveness was not an instinct that came naturally to AT&T.

And it showed. For a long time it seemed that AT&T could do nothing right. The company tried to get into the computer business by buying NCR Corp., but that venture turned out to be an expensive failure. The company was also suffering from flat revenue in its core long-distance business.

The world was changing, and AT&T was not ready. The entire telecommunications industry, from telephones to cable television, was redefining itself.

Enabling legislation

President Clinton signed landmark legislation in 1996 that would allow long-distance companies such as AT&T and local phone companies such as Bell Atlantic Corp. to compete in each other's markets.

Phone and cable firms, once kept apart, could now battle to offer customers a full package of communications services.

Everyone agreed that AT&T needed to find a way to break back into the $100 billion local telephone market to compensate for its problems in the $80 billion long-distance market, but the company had no real strategy for doing this.

"AT&T was still a strong company, but it was playing by the rules of the old marketplace, which was just coming to an end," said analyst Kagan. "If they'd continued down that path without making any changes, they would have quickly become irrelevant. They had to make some bold moves."

The company sought a successor to the retiring chairman, Robert E. Allen, but even this turned into an embarrassment.

Allen tried to groom former commercial-printing executive John R. Walter for the post, but a board member publicly questioned whether Walter had the "intellectual leadership" ability to run AT&T. After it became clear that he was no longer the heir apparent, Walter resigned from AT&T, taking a $26 million compensation payment with him.

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