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 THE STAT 26Percentage of wireless customers who use their cell phones to take picturesMore Vitals
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FEBRUARY 4, 2003 SPECIAL REPORT: ALL-DISTANCE TELECOM Can AT&T Uncross Its Wires? Chairman and CEO David Dorman is having a "bad dream," and if the FCC's coming rule changes go against him, it could be a nightmare
Indeed, charting AT&T's future is becoming a nightmare -- even for a veteran telecom exec like Dorman, who has served in top posts at long-distance carrier Sprint (FON ) and at SBC. The sluggish economy and bankrupt WorldCom's (WCOEQ ) willingness to slash prices for corporate data services have cast a cloud over AT&T's prospects. Worse, new Federal Communications Commission (FCC) regulations that are due soon could overturn rules that have allowed AT&T easy and inexpensive access to the lucrative local-phone market -- a development that at the least will slow AT&T's entrance into the new world of all-distance telecom. "Dorman doesn't have a lot of options," says Patrick Comack, a telecom analyst at Miami-based Guzman & Co. "The evolution of the industry is turning AT&T into a dinosaur." CONVENTIONAL RESPONSE. AT&T declines to comment on its strategy while the FCC decision is pending. But in a speech at the National Press Club on Jan. 30, Dorman himself described the threat AT&T faces: "The telecom industry is at a crossroads.... If the [FCC] decisions [undo the current rules], there will be an interim period where the Bells will get stronger and the competitive industry weaker." What can Dorman do? Faced with the same challenge four years ago, former CEO Michael Armstrong set out on a $110 billion cable-TV acquisition spree that AT&T has since undone at a huge loss: It finalized the $54 billion sale of its cable assets to Comcast (CMCSA ) in November. Dorman's main strategy is more conventional and less risky: Try to cut costs as fast as revenues fall -- or faster. That's a tall order. AT&T's revenues slid 10% in 2002, to $37.8 billion, but operating income plummeted 31%, to $5.5 billion. For the short term, at least, that trend seems likely to continue. According to UBS Warburg analyst John Hodulik, voice services generate roughly 80% of AT&T's operating income. In that part of its business, it continues to face aggressive price competition from the Bells -- and it's losing market share to them and to wireless calling and e-mail. AT&T's margins are also eroding in the business market thanks to the Bells. In the fourth quarter, AT&T said it sold 40% of its business voice minutes at wholesale prices. WORLDCOM HANGS ON. And its vaunted data-transmission business won't be enough to offset sagging voice revenues. Though many analysts had predicted that WorldCom's Chapter 11 bankruptcy filing could create a windfall for AT&T, Ma Bell's revenues from business customers fell 3% in 2002, to $26.6 billion (see BW Online, 6/27/02, "Is WorldCom Opening the Door for AT&T" ). That's because business customers continue to spend cautiously and demand better deals when their contracts come up for renewal. Moreover, AT&T officials noted during the Jan. 23 earnings conference call that the WorldCom effect hasn't been as pronounced as observers expected. Instead of falling apart, WorldCom has held itself together in Chapter 11 by aggressively cutting prices to retain customers. Even if WorldCom disappeared, Hodulik calculates, AT&T probably couldn't reverse its decline. He estimates that if AT&T took 100% of WorldCom's best business customers, its revenues from the corporate market would increase only 2% annually. Faced with such prospects, AT&T now sees its salvation in the local-phone business. It still holds 40% of the residential long-distance market, and selling a combined package of long-distance and local service has proved to be a powerful customer-retention tool. At the end of 2002, AT&T had 7.3 million local lines serving residential and business customers. The majorityof those customers bought both local and long-distance service from the telecom giant. RULE ROULETTE. Today, AT&T serves most of those customers by reselling local service it purchases at wholesale from the regional Bells. However, it could lose that right or have to pay more for such access, depending on new regulations that the FCC is scheduled to unveil on Feb. 13. AT&T has vigorously argued against changing the existing arrangement, warning that it would undermine competition and subvert the aims of the 1996 Telecommunications Act (see BW Online, 10/17/02, "When Telecom Regulation = Competition"). Right or wrong, though, the rules are likely to change. According to sources at the FCC, the commission is mulling revisions that over time would exempt densely populated, profitable markets such as New York City from the regulations that require the Bells to sell wholesale access to their networks. Even if the rules aren't changed, the local-phone biz likely won't be AT&T's savior. Of the nine states in which it sells local service, it's profitable only in New York, where it grabbed a 17% market share, then drastically cut back marketing outlays.
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