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Information Technology: Telecommunications
Mike Armstrong's Strong Showing
AT&T's boss has--surprise--kept his promises to investors
When AT&T CEO C. Michael Armstrong laid out his strategic vision for Wall Street a year ago, several analysts sniped that most of his plans had been tried before--and had failed. One glaring example: In 1995, Robert E. Allen, Armstrong's predecessor, had made the same pledge that Armstrong was making to cut costs by eliminating jobs at the long-distance giant. Allen, as it turned out, wound up increasing the size of the payroll. Would it really be any different under Armstrong? "I'm not sure we have a history, but we're going to have a future of having a commitment culture," Armstrong vowed at the time.
Surprise, surprise--Armstrong is emerging as AT&T's long-awaited promise keeper. Of the major commitments he made to investors last January, he has delivered on nearly all of them--and gone a step beyond in a few key areas. Numero uno: He said he would cut 15,000 to 18,000 jobs in two years; instead, he wiped 18,000 off the books in a year flat. He also has made gale-force headway in moving AT&T into the $100 billion local phone market, improving global operations, boosting profitability in the wireless business, and making AT&T a major Internet player. "The previous management suffered from making a lot of false promises," says Stuart P. Conrad, managing director at Deutsche Bank Securities Inc. "Armstrong has done what he said he would do."
And investors are loving it. The much-needed boost in AT&T's credibility has helped push its stock to an all-time high of 85 3/8 on Jan. 11. The company's return to shareholders since the analyst meeting a year ago has been 41%, compared with a 34% return for the Standard & Poor's 500-stock index. "Armstrong's one of the more impressive management leaders out there," says Jeffrey Heil, director of equity investments for the University of California, which holds about $600 million in AT&T stock.
Armstrong's success has even prompted him to put aside a plan that would have softened losses. On Jan. 8, he shocked Wall Street by deciding not to issue a "tracking stock" for its fledgling operation to provide local phone service over the network of cable provider Tele-Communications Inc., which AT&T is acquiring. The business is sure to be a huge money-loser for several years. So AT&T had originally wanted to break out its financial results to avoid tainting the overall company's performance. But over the Christmas holiday, Armstrong and top execs decided against the move. Why? Investors now have enough confidence in AT&T that they'll accept short-term losses for long-term gain. Armstrong declined to comment for this article because of the TCI filing.MONEY AND TIME. No question, Armstrong still faces staggering challenges. AT&T's core long-distance operation, which accounts for nearly 90% of its revenues, continues to look like a Titanic in the making. Particularly vulnerable is the consumer long-distance business. Experts are predicting that prices could skid from an average 15 cents a minute today to 5 cents within two years. Worse, as the Baby Bells and aggressive newcomers like Qwest Communications International Inc. enter the business, AT&T could see its share of the market slump from 50% today to 30% in three years, analysts say. "They're going to see enormous pressure on profits in their cash cow business," says Joseph P. Nacchio, Qwest's CEO and a former top AT&T executive.
Knowing that time is short, Armstrong is barreling into more promising markets, no matter the risk. For example, he's betting he can deliver local phone service and high-speed Internet access over cable-TV networks. That's why he agreed to buy TCI in a stock swap valued at $48 billion last June. (The value has risen to $57 billion with the rise in AT&T's stock.) There's just one scary detail: Cable telephony is largely untested. "It's going to take a lot of money and a lot of time," predicts Timothy F. Price, the president and CEO of MCI WorldCom Inc.'s Communications Div. "I'm sure glad it's them and not us."
Pshaw, says Armstrong, who is busy doubling his efforts. On Jan. 8, AT&T announced agreements with five smaller cable companies so it can deliver services to 5 million homes in addition to the 17 million TCI customers. And AT&T is continuing to negotiate a similar deal with cable giant Time Warner Inc.BIGGER BILLS. The dealmaking hasn't stopped there. After confessing to analysts a year ago that AT&T's international operations weren't delivering high-quality services to corporate customers, Armstrong quickly set about fixing things. In July, he negotiated a joint venture with British Telecommunications PLC. By combining the two companies' resources, the duo should be able to buy or build a high-quality international network. And Armstrong bought IBM's Global Network for $5 billion in December, giving AT&T the network to deliver voice and data services in 59 countries.
Armstrong also is boosting the company's wireless business. A year ago, he promised to improve profitability by attracting high-revenue customers--even if the effort cost him revenue growth. With its innovative Digital One Rate, which carries no long-distance or roaming charges for cellular customers, the average subscriber bill rose to $58 a month in the third quarter from $50 six months earlier. What's more, the company's wireless revenues for the third quarter jumped 19%, to $1.4 billion--matching the industry's growth rate. "They're setting the pace for everybody else," says Jane Zweig, executive vice-president at researcher Herschel Shosteck Associates.
Little noticed among the flurry of deals is how Armstrong is putting together the pieces to make AT&T a cyberspace colossus. With the TCI purchase, AT&T will get majority ownership of @Home Corp., which provides high-speed Net access over the cable network. That's in addition to AT&T WorldNet, its dial-up Net service with 1.4 million customers. Still, AT&T wants to provide more than Internet access--it hopes to become the communications provider of choice for major Web sites. That's why it has cut deals with Yahoo! Inc., Lycos Inc., and other Internet portals to provide services such as Chat'NTalk, which lets cybernauts surfing the Web chat on the phone without exchanging phone numbers. AT&T is negotiating with America Online Inc. to provide similar services.URGENCY. Armstrong isn't stopping there. When the company begins delivering telephone service over cable networks later this year, it will use Internet protocol (IP) technology rather than the traditional circuit switched approach. That will make it possible for AT&T to offer a host of innovative Net services. Customers, for example, could pick up their voice mail from an AT&T Web site. "The debate is over inside AT&T," said Daniel Schulman, president of AT&T WorldNet Service, in an October interview. "We're focusing all our resources on IP." Indeed, all 2,000 of the AT&T Labs researchers are noodling over Net technologies.
That's key to Armstrong's sense of urgency in moving AT&T into businesses with brighter prospects than long distance. He's banking not only on the Net but also on local, wireless, and international markets to kick-start revenues. "Strategically, he's filling not all the holes, but the major holes," says Deutsche Bank's Conrad.
Armstrong's work is far from finished. After striking all his deals, he has yet to make them work. Competitors think the company remains handicapped by high costs and old technology. "The rest of us aren't terribly worried about competing with AT&T even a year after Armstrong has been there," says Nacchio. But Armstrong vows that, once he's done, AT&T will have the lowest cost network in the industry. Given his track record on promises, maybe competitors should start worrying.By Peter Elstrom in New YorkReturn to top