| BUSINESSWEEK ONLINE : NOVEMBER 6, 2000 ISSUE | ||||||||
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| INFORMATION TECHNOLOGY
ONLINE EXTRA: Q&A with AT&T's Mike Armstrong: "You Damn Betcha It's for Shareholders" The beleaguered CEO explains the thinking behind the telecom giant's breakup plan C. Michael Armstrong arrived at AT&T Corp. in the fall of 1997 and quickly went about remaking the American business icon. His most significant move was to acquire two cable companies, Tele-Communications Inc. and MediaOne Group, for more than $100 billion. His strategy was to use the cable television networks to deliver local telephone service and broadband connections to the Internet. But Armstrong's approach proved difficult. AT&T's core long-distance business has been deteriorating much more rapidly than he expected. And the new local phone and Net businesses have proved costly and complicated. The result is that AT&T's overall financial performance has been disappointing for investors. The company's stock has dropped 62% from its peak last year to about $24. It's even trading at less than when Armstrong arrived three years ago. Under intense pressure from shareholders, Armstrong laid out a new strategy for the company on Oct. 25. He said he would break the company up into four different businesses -- wireless, cable, business, and consumer long-distance services. Each business would have its own management and shareholders, although the consumer unit would be a tracking stock of the business unit. Shortly after Armstrong presented his plans to Wall Street analysts and the media, he sat down with Business Week's Peter Elstrom at the Sheraton Hotel in New York City to explain his new approach. Here are edited excerpts of their conversation: Q: You spent a lot of time and money buying cable companies and other businesses. Why does it make sense to break the company up? A: We started out on a journey at a very broad level in 1998. We had a business called long-distance that wasn't really a business. It was an application. It wasn't durable or sustainable. It was going away. Our strategy was to bring together the assets that would allow us to be an effective competitor in the facilities-based delivery of communications services. So we invested heavily in wireless, we invested heavily in broadband, and we invested heavily in business-service networks. Now, it's time for the value-creation phase in the transformation of the AT&T Corporation. Why now? Because operationally, these businesses are ready for public investment. Now these companies can thrive and stand and [realize] the potential that we thought they could achieve. Q: These were publicly held companies before. Is this just for Wall Street? A: When you say Wall Street, you say shareholders. Is this for shareholders? You damn betcha it's for shareholders. If that's not the interest of management.... Yes, of course, it's for shareholders. It's also for employees, so their achievements can be recognized. Do we think we'll be faster to market because we're more focused? Yes. Q: What is the strategic value for these businesses of being independent? A: Let's take a real simple one: Currency. The enterprise, AT&T, has a currency today that's valued at the lowest common denominator. It's basically valued at a multiple of the voice long-distance business. That's why it's sitting at $23 or $24. And we've got these dynamite growth businesses -- wireless growing at 37%, broadband growing at 11%, 12% -- accelerating its growth. Having a currency that's valued based on the multiple for that industry is valuable for that company in industry consolidation and in extending its reach and in going global. Q: You still want these companies to cooperate, but how do you cooperate? For example, if Dan Somers, the head of AT&T Broadband, decides that cable telephony is too expensive and he wants to dump it, can he? A: Dan Somers should always operate in the best interests of his shareholders. The reason that I think he'll continue with his communications approach is that cable telephony is the highest revenue-producing segment of his bandwidth. He's getting $60 to $70 per customer. His data application gives him $39.95 per customer, of which he gets 60%. His digital TV is an incremental $15. I don't worry about our Broadband team not driving [those services]. If your question is why he'll always cooperate with other people at AT&T or if he'll give his long-distance business to the AT&T Network, he's free to take his business anywhere if AT&T isn't cost-competitive. You've got to be cost-competitive. The fundamental underpinning of these relationships is that they must be market-based. Q: Is the consumer business obligated to carry its traffic on the AT&T Network, or can it shop that around? A: It has an obligation for five years, only if the Network rates are competitive in that market. Let's say the Network can't keep up with market forces. It's going to lose the business. Q: Who's going to run Business Services? You've got what looks like two CEOs -- yourself and Rick Roscitt. A: You mean after I get all this done? I'll figure that out when I get there. Just help me get there. I'm 62 now. This won't be through until mid-2002. By that time, I'll be 64. I could retire or transition. Q: What are the advantages that AT&T has now, vs. two years ago, when you started buying cable assets? A: Very simple -- AT&T now has a future. If we hadn't done this, AT&T would have been in systemic decline. It would've simply been in the long-distance business. Q: What is the future of long-distance? A: We're trying to be realistic. It's going to be in decline for the foreseeable future. Now that the consumer business is independent though, the company can use its cash flow to move into DSL [digital subscriber line]. So what's the future? For the first four or five years, it's going to be a dividend play for high-yield investors. After that, the growth of the DSL revenue should turn that into revenue growth. Q: You say this isn't a reversal in strategy. You went out and acquired these cable companies, and now you're spinning them off. Why isn't that a reversal in strategy? A: That's a very logical observation. What I bought isn't what I'm spinning off. What I bought was coaxial cable and analog broadcast cable television companies. What I did with those in the last two, two and a half years is I invested in them and converted their infrastructure. So, instead of being low-capacity analog, they're now high-capacity. We took them from 350 megahertz to 550 Mhz to 750 Mhz. We converted them from analog to digital, and we converted them from analog to interactive. Then we put three new digital services on them. What I took in ain't what I'm taking out. The strategy hasn't changed. What's changed is the contruct. Construct should serve strategy, not be beholden to it. _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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