A return to the basics for AT&T

After four years of wandering in the telecommunications wilderness, AT&T is finally about to retreat into the phone businesses it once dominated -- but as a smaller, less-profitable company than before it mounted its costly ventures into cable television, wireless phone service and Internet access.

"Investors can't underestimate how much of a distraction the entire wireless and broadband episodes have been to 'T' management as well as to personnel out in the field," Jack B. Grubman, telecommunications analyst for Salomon Smith Barney, said Thursday, referring to AT&T Corp. by its historic "T" ticker symbol.

With the proposed merger of its broadband unit, comprising its cable properties and Internet access business, with Comcast Corp., AT&T will be well on the way to completing the corporate breakup announced 13 months ago by its chairman and chief executive, C. Michael Armstrong. That announcement, which involved splitting AT&T into four separate businesses serving the consumer, business, wireless and broadband markets, presaged the end of Armstrong's multibillion-dollar experiment in transforming the giant phone company into a multi-platform provider of media and communications services.

AT&T's wireless unit was spun off as an independent company earlier this year.

The result of the latest deal could be one of the most rapid contractions of a U.S. industrial behemoth in history. From a company that recorded $51.3 billion in sales and $4.5 billion in profit in 1997, the year Armstrong took over, AT&T will be reduced to $38 billion in sales and about $3 billion in profit after the Comcast deal, according to Grubman's estimate. Moreover, at least one of AT&T's fastest-growing and most promising businesses -- providing telephone service over cable lines -- will be transferred to the AT&T/Comcast merger.

As for the larger strategy, "It was a multibillion-dollar oops," remarked Scott Cleland, telecommunications analyst at the Washington-based Precursor Group, an independent research firm. "AT&T decided on a bet-the-farm strategy, and many billions were destroyed over time."

Investors have seconded that judgment. AT&T shares have fallen by roughly 10 percent a year in the four years of Armstrong's tenure, a period in which the benchmark S&P 500 Index has risen by nearly 6 percent a year. Since the company announced it would unwind its strategy, however, the shares have gained nearly 26 percent.

Some industry observers say the breakup may indeed represent AT&T's best chance for survival and growth. For one thing, the Comcast deal will relive AT&T of more than $22 billion in debt it acquired during its recent acquisition spree. That will free up resources to finance growth in business services and others in which the residual AT&T may well be a dominant player.

Armstrong's original notion, analysts say, was not necessarily a bad one for an environment in which its core business, long-distance phone service, was coming under attack. Not only were the seven "Baby Bells" created as local phone providers by the court-ordered breakup of the AT&T monopoly in 1984 permitted to eventually enter the long-distance market, but wireless service offered customers an increasingly cost-effective alternative to long-distance calls on land lines. Long-distance revenues declined by some 10 percent between 1999 and 2000, the last full years for which figures are available, a trend that AT&T says is certain to continue.

From his appointment as chairman and CEO in October 1997, Armstrong preached that the only way for AT&T to secure its future was to become dominant in the new media technologies that would allow a single provider to bring a wide range of communications services into the home-cable television and high-speed Internet access (lumped together as "broadband") and wireless telephony.

But Armstrong's critics say he bungled in executing this strategy, first by hugely overpaying in 1999 to acquire Tele-Communications Inc., the Denver-based cable operator that brought AT&T its first 10 million cable subscribers. The company also is thought to have heavily overpaid for MediaOne, a 4-million-subscriber cable operator acquired in 2000.