Armstrong on the Record

Hailed as a savior when he arrived at AT&T three years ago, CEO C. Michael Armstrong quickly made $120 billion worth of acquisitions to position the company for the digital era. Now, amid a steep decline in its share price, Armstrong is separating the company into four pieces. He explained why in an interview with BusinessWeek telecommunications editor Steve Rosenbush at AT&T headquarters in Basking Ridge, N.J.

Why break up AT&T?
To answer that, first you have to understand that in 1997, 82% of our business was long distance and it was going to go away. So to save AT&T (T) from becoming an American memory, we invested in three networks--wireless, cable, and data. By 2000, we had defined our strategy, made the investments, bundled communications services on each one of those networks, and begun scaling the businesses. Then we took a step back and said: What structure will best serve this strategy?

That's when we decided to restructure for three reasons: currency, shareowner value, and employee motivation. Shareowners had been very patient while we made those investments. How was the value out of all those investments going to be delivered to them? If we waited, would these businesses have missed the opportunity to strengthen themselves for industry consolidation? Would they have been able to keep the employees that they should keep and attract? And would shareholders have the patience to wait much longer? I judged not. It was time for the currencies, the equities, and the shareholder value to come through. I couldn't make that happen any other way.

Many people believe the restructuring reverses AT&T's ''one-stop shop'' strategy. Has it changed?
The strategy was about bundling services that travel over the same network. For example, on our wireless network, we bundled a local wireless call, a roaming charge, and a long distance call--and charged a flat rate for it. That redefined the whole industry. In cable, we took a broadcast analog video business and transformed the network into a high-capacity, digital interactive network, and we're bundling digital TV, high-speed Internet access, telephone service, and we're testing video on demand. That's bundling communications services ''on net.''

What some people thought they heard was that we would put your cable bill on your telephone bill, or put your telephone bill on your cable bill, and they called that bundling. I guess you'd call that cross-network bundling. That kind of bundling doesn't keep customers or attract customers to any degree. We never put a big emphasis on bundling all kinds of services, only those that travel over the same network. This confusion really frustrates me.

Will the full sum-of-the-parts value of the stock be achieved before the spin-offs and other transactions close?
I believe the market today is a ''show me'' market. So I think when the restructuring is complete, that's when the most value will accrue.

Are there drawbacks to the plan?
In the end, no. But we've gotta maintain operational execution and not get sidetracked by asset allocation, proxy preparation, shareholder votes, and all of the administrative things we've got to go through to get this accomplished. I think we did a pretty good job of that in 2000, as evidenced by our Wireless results, our Broadband results, and our comeback in data in our Business Services unit. On the other hand, long distance declined faster than we anticipated, both for the industry and for us. And it really hurt.

I thought it was really fascinating to read some of the things criticizing me. For example, if only I would just do like [IBM's] Lou Gerstner and focus on my core business, then AT&T could be much more successful. But the market did not understand that technology and deregulation are taking the middle of the [long-distance] phone call away. It cannot exist by itself. The alternative today, had we not done what we did, was extinction.

Why do you believe your message has been coolly received?
There's been a lot of piling-on because our stock price is down and people have been critical that we are changing our strategy. Our stock price is down because the core business, called long distance, is going away and the market is now realizing it. Thank God we realized it three years ago.

I suspect that a lot of this is fueled by people who don't want to see AT&T succeed. You think the [Baby Bells] aren't afraid of bundling over cable? I can put high-speed data, local and long-distance telephone service, video on demand, and hundreds of channels of digital video all together in one connection. You don't think they don't think that might be a tough thing to compete with? Damn right they do.

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Mike Armstrong's Last Stand

CHART: The Trouble at AT&T

TABLE: AT&T: Breakup III

TABLE: Breaking Up Is Easy to Do

CHART: AT&T Stock Price

TABLE: Grading the Chief

Armstrong on the Record

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