TELECOM Digest OnLine - Sorted: Great-Grandma Bell: Is the Once Great Telco on Last Legs?

Great-Grandma Bell: Is the Once Great Telco on Last Legs?

Marcus Didius Falco (
Sun, 31 Oct 2004 21:18:26 -0500

Graph of AT&T's stock price, 1985 -2004, in the original

Is the once great telecoms company on its last legs?

CHURCHES have altars, royalty has thrones, and AT&T has its
network. For over 125 years, this was the source of the telecoms
company's power and its most prized asset. Yet as telecoms
capacity has become a commodity, the value of owning a network has
diminished dramatically. It has forced AT&T to search for new areas
of growth, but its prospects are not promising.

Last week, the company's latest earnings figures included an $11.4
billion write-down of its assets, forced by a fall in prices due to
competition and technologies such as voice over internet protocol
(VOIP). The troubles which AT&T faces are severe. The company earns
roughly half its revenue by charging for long-distance calls, but
these earnings are tumbling at around 20% a year and will never
recover. Long-distance calls using VOIP are essentially free.

The company is therefore between a rock and a hard place: it must
migrate to the more efficient technology without cannibalising its
existing revenue, at a time when there is a plethora of competitors.
This dilemma has been predicted by telecoms pundits for a decade, but
AT&T never developed a suitable strategy to cope. Its plan now is to
slow its decline in income and cut debt by continuing to slash its
workforce. It hopes that a better balance sheet will help as it hunts
for new business, focusing on large corporate accounts, which make up
about 60% of its revenue. It is also betting on managing business
customers' own networks to boost revenues.

The company drew back from marketing to residential customers this
summer after a regulatory decision increased the prices it would have
to pay to access the lines of America's local telecoms operators the
Baby Bells that were spun out of AT&T 20 years ago. AT&T's desire is
to sell VOIP over broadband, and it has struck a number of marketing
deals with cable companies, which own a line into people's homes. It
is a sad outcome for a company which, in the 1990s, acquired cable
companies for this very purpose, but was forced to dispose of them a
few years later when the cost of upgrading the lines and its heavy
debt got in the way.

AT&T's foundering fortunes come amid difficulties in the telecoms industry
as a whole. America's second- and third-largest long-distance companies,
MCI and Sprint, are also suffering from the glut of telecoms capacity and
the fast erosion of revenue from selling voice-minutes. Newer rivals, like
Level 3 and Global Crossing, are ailing too. Analysts predict a
consolidation of today's ten-or-so long-haul networks to around four. The
industry needs to restructure, says Tim Horan, an analyst at CIBC, an
investment bank. AT&T has a future; we just don't know in what form.

Can AT&T weather the storm? Touting the quality of its network may attract
large companies which need time and help in switching their existing
computing applications on to an internet platform. Moreover, the company
plans to enter the attractive wireless market for business customers in six
months as a virtual operator by buying capacity on Sprint's mobile network.

This follows the sale of AT&T Wireless to Cingular, which was approved
(with conditions) by regulators this week.

AT&T has not had much success in adapting to new technologies and to
competition since it was broken up 20 years ago. All the old-model telcos
are on their way out, says David Isenberg, a telecoms expert who accurately
predicted the fall in value of AT&T's network in the 1990s when he worked
for the company's famed Bell Labs (though his warnings went unheeded and he
resigned). AT&T , he adds, will show them the way.

Copyright 2004 The Economist Newspaper and The Economist Group. All
rights reserved.

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