02/02/98 TABLE: What Armstrong Plans to Do

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What Armstrong Plans to Do

The 14-hour days AT&T execs are working of late may have to continue if they hope to fulfill his agenda

LOCAL TOTAL MARKET: $100 BILLION

CHALLENGE: Any entry into the $80 billion residential market will be slow, expensive, and litigious because the only telephone lines into homes belong to AT&T's competitors. Today, its means of providing residential service is by reselling capacity it buys wholesale from the Baby Bells. But AT&T can't make a buck--it must hand over 80% of the revenues to the Bells.
SOLUTION: Agreed to pay $11 billion for Teleport, which has facilities in 66 cities in the $20 billion local business market. To service additional residential customers without using the Bell networks, AT&T will try to piggyback on cable-TV networks and develop wireless technologies. Insiders say AT&T is working on a cable-telephony deal with Tele-Communications Inc.

LONG DISTANCE TOTAL MARKET: $80 BILLION

CHALLENGE: AT&T's market share has fallen from 62% to 50% in the past five years and will continue to drop as Baby Bells enter the business. Some analysts estimate that once the Bells arrive, they could take 10% of the market each year for three years. Prices also are expected to fall 20% because of the new competition.
SOLUTION: Become the low-cost company in the industry through layoffs, cutting employee perks, and ending expensive marketing promotions, such as sending checks to new customers. Focus on marketing to the biggest long-distance customers in order to improve profitability.

INTERNATIONAL TOTAL MARKET: $400 BILLION

CHALLENGE: AT&T's foreign partners, such as the Swiss national phone company, are smaller than Sprint's or MCI's partners. They also don't give AT&T much control over the quality of the foreign service. That has made it difficult for AT&T to satisfy multinational corporations.
SOLUTION: Expand AT&T's own networks around the world through construction and probably an acquisition or two. AT&T has been in merger talks with Britain's Cable & Wireless. Armstrong has not rekindled those talks, but he says he's studying all the major foreign carriers.

WIRELESS TOTAL MARKET: $28 BILLION

CHALLENGE: Revenue growth at the largest U.S. wireless company slowed to below the industry average, while profits are also subpar. AT&T has not been able to successfully integrate its wireless business since its purchase from Craig McCaw in 1994. Margins also are being squeezed by competitors, particularly Sprint PCS, which is offering rates of 10 cents a minute--up to 80% less than AT&T.
SOLUTION: Sacrifice growth for higher-profit customers. Aggressively move customers to its digital service, which is lower-cost and higher-margin. Charged top executives with integrating the wireless business with long distance and other services, so AT&T can offer consolidated billing and customer service.

INTERNET TOTAL MARKET: $6.5 BILLION

CHALLENGE: AT&T's WorldNet is a midsize Internet service provider in a $20-a-month commodity business that's unprofitable for all but the biggest players. WorldNet has hit 1.1 million subscribers, but it's losing money and growth is slowing. It's still a far cry from America Online's 10 million customers.
SOLUTION: Differentiate service with high-speed access so AT&T can boost prices, gain share, and make money. AT&T is negotiating with @Home so it can use cable networks to give customers additional speed. @Home may manage the AT&T accounts, while AT&T bundles Net access with its other services.

COST-CUTTING

CHALLENGE: AT&T's overhead is 29% of revenues, higher than that of competitors such as MCI Communications and WorldCom. Despite earlier plans for layoffs, the number of AT&T employees has remained steady at about 125,000. AT&T has also spent heavily on perks, consultants, and pricey promotions.
SOLUTION: Armstrong plans to cut overhead to 22% of revenues within two years-a target that analysts figure would take him five years to hit. That should wring $3 billion to $3.5 billion out of annual costs and allow the company to compete more effectively on price in long distance and other markets.

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