Armstrong details AT&T breakup plan

By Margret Johnston and Matthew Woollacott
IDG News Service, 10/25/00

WASHINGTON, D.C. - AT&T Wednesday confirmed that the telecom giant will become four distinct companies operating what now are AT&T's wireless, broadband, business and consumer groups in a move that Chairman and CEO C. Michael Armstrong said is a logical and necessary step in the transformation of the company.

The new companies will be called AT&T Wireless, AT&T Broadband, AT&T Business and AT&T Consumer, Armstrong Wednesday said in a conference call in which the company also announced third-quarter financial results.

AT&T's plans, which were first reported on Monday, are aimed at creating a "foundation" on which the company can increase in value, Armstrong said. But they also have been criticized for leaving the appearance that the company has lost its way, while others say it is designed to please shareholders, charges that Armstrong firmly denied.

"We believe that we have announced the foundation and the path for the creation long-term of shareholder value and will enable these companies to be even more performance, market and customer focused, faster in their response and more competitive in their offerings," Armstrong said. "I hope to dispel the myth that it's for any short-term purpose or for any lack of operational execution as some like to suggest. Fundamentally, it's not only the next logical step, but the next necessary step in the transformation of this company."

AT&T's investments over the past 2 1/2 years have been in the areas of its business that have been growing: wireless, broadband and in business services, Armstrong said. The wireless division signed up 750,000 new customers in the third quarter, while the number of high-speed data customers totaled 880,000 in the quarter, and the number of digital television subscribers totaled 2.5 million, he said.

But long-distance, which in January 1998 comprised 82% of AT&T's revenue, is in decline, precipitating the need to transform. Revenue from consumer long-distance dropped an expected 10.8% in the quarter, Armstrong said. By year-end long-distance will be 60% to 65% of revenue, dropping into the 50% range next year and to 35% or less of the four companies' revenue by 2002.

Under the plan, by 2002 AT&T Wireless and AT&T Broadband, representing the company's wireless interests and its cable television interests (including the Excite@Home Internet access service) respectively - will trade as independent common stocks. AT&T Consumer, which includes the residential long-distance and WorldNet businesses, will be represented by a tracking stock, leaving the company's business services, AT&T Business, as its principal unit.

Establishing the four companies follows an investment phase in which AT&T brought together the assets of many companies, including the major acquisitions of cable access companies Media One and Tele-Communications over the last 2 years. Armstrong said the new companies are intended to be more responsive to customer needs, while still providing the benefits of one-stop shopping and bundled services through intercompany agreements.

As examples of this, AT&T confirmed that AT&T Business customers would still be able to get bundled AT&T Wireless services, and that AT&T Business services would still be provided over AT&T Broadband's cable systems. Long-term commercial contracts will tie the wireless, broadband and consumer companies into buying their services from AT&T Business.

Jeffrey Kagan, an independent telecom industry analyst and commentator, said in e-mail regarding AT&T's announcement that the success of the company's move will be its ability to stitch together services from the different companies and create the unified bundling experience promised to customers.

"AT&T needs to make sure they don't negatively impact the customers experience," Kagan wrote. "Customers don't care about the same thing investors do."

AT&T has spent the last few years selling the concept of one-stop shopping and now they have to find a way to deliver on that promise as separate companies, Kagan added. If the customer sees this is as just a behind-the-scenes restructuring, and if they can still get everything with one call and on one bill, this restructuring could work, Kagan wrote.

AT&T's board of directors approved the decision unanimously, and the company intends to file its exchange proposal with the Securities and Exchange Commission in the fourth quarter of 2000. It plans to spin off AT&T Wireless as a publicly traded company next summer, and to have an IPO for a tracking stock in AT&T Broadband within the same timeframe. That tracking stock is intended to become an asset-based common stock within 12 months of the IPO.

Armstrong said he and other AT&T executives Tuesday met with Federal Communications Commission Chairman William Kennard to discuss regulatory aspects of the breakup, and he described Kennard as "understanding."

AT&T, in Basking Ridge, N.J., can be reached at +1-908-221-2000 or www.att.com/.