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July 20, 2005
AT&T results shed light on pending deal
SBC's pending acquisition of AT&T is based on the assumption that AT&T's long-declining business eventually will turnaround. It's betting that the growth of Internet-based services to corporate customers eventually will overshadow the decline in more traditional business services such as phone service and proprietary data networking technology. For now on, it will be interesting to track the performance of the huge business services division. Today, AT&T announced its results for the second quarter. Overall, profits rose despite falling sales. That's chiefly the result of efforts to lower costs by writing down the value of its assets. But the really interesting part of the story is the performance of business services, for that will shed light on the future of this deal. For the moment, it appears that a turnaround in business services is still well in the future. Revenue from Internet-based services rose 9.5% to $619 million. But overall, business services revenue fell 8.1% to $5.1 billion. The challenge for SBC is this: IP services is still a tiny fraction of overall business revenue, so it will be years before the next-generation services overshadow the old. SBC thinks the transition will occur in just a few years, because the decline of the older services will be slowed as prices stabilize in a market with fewer rivals. Cross-selling wireless services to big corporate customers will help, too according to SBC. Over the long-run, these assumptions may very well prove correct. But given the historic leverage wielded by big corporate customers, who play one telecom vendor off the other for sport, the short-term may be rocky.
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