AT&T's split decision

Customers cautiously optimistic about impact on business services.

By Denise Pappalardo AND Michael Martin
Network World, 10/30/00

NEW YORK - Wall Street may be reeling over AT&T's impending split into four companies, but business customers are having a tougher time seeing any downside for their critical services.

Long pressured by the investment community to take dramatic action, AT&T last week announced that the company - the eighth largest in the U.S. - would be carved into four units: AT&T Business, AT&T Broadband, AT&T Consumer and AT&T Wireless.

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"The restructuring sends a message that the business segment is the core of AT&T," says Russ McGuire, a vice president at TeleChoice, a consulting firm in Boston. "This hasn't been clear, and it hasn't been true in the past."

With two exceptions, AT&T Business will retain ownership of the company's network assets and services, which is seen by some as a big plus for corporate customers. AT&T Business will offer voice, data and Internet services to corporate users. It will also retain the company's "T" stock symbol and hold the AT&T Consumer division slightly closer than the other two divisions. AT&T will issue a tracking stock for the consumer group, which will include residential voice services, WorldNet Internet access services and DSL.

AT&T Broadband will have its IPO next year and be completely spun off by the end of 2002. This division will own its cable infrastructure and offer video, Internet and voice services. AT&T Wireless, which had its IPO earlier this year, will be completely spun off next year and retain ownership of its network. This division offers mobile and fixed wireless voice and data services.

AT&T customers were cautiously optimistic about how the restructuring will affect their companies.

"We will over time touch at least three out of the four business units," says Robert Krestakos, director of IS for Steelcase, a Grand Rapids, Mich., office furniture manufacturer. Krestakos says he has confidence in the company and expects service levels will remain high. An Integrated Network Connect Service and frame relay customer, Steelcase also uses AT&T's wireless services for U.S. employees and Concert data services in France.

One customer questions how the change will affect his relationship with AT&T.

"I think it might make it more difficult to work with them," says Doug Hogue, project manager for UniFirst in Wilmington, Mass., an AT&T data services customer. He doubts the four units can coordinate with one another as effectively as in the past.

ACE Hardware is in the process of renegotiating its contract with AT&T.

"The [restructuring] deal could play in somehow, but AT&T has a very solid operation, so we're not really concerned. But I do need to analyze the restructuring further," says Frank Murphy, general product manager of retail technology for the chain. ACE buys dial-up Internet and dedicated services from AT&T for about 2,000 stores.

Customers and analysts generally agree that it was Wall Street that drove AT&T's drastic decision.

"I think it's more of a stock play than anything else," Hogue says.

AT&T had no choice but to address its plummeting market valuation - down $70 billion since January - agrees David Novosel, managing director at Bank One in Chicago. Rapidly declining consumer voice revenue - also a heavy burden for competitors WorldCom and Sprint - is a key reason for that decline. However, AT&T's business services growth also slowed earlier this year and is still not growing as fast as WorldCom's.

While AT&T reported third-quarter growth of 20% in business services, company officials say that's not good enough.

"We have to be at least in the low 20s," says Rick Roscitt, president of business services. WorldCom is setting pace in this department with third-quarter data/business services growth reported at 23% more than the third quarter of last year.

Most of the financial community believes that AT&T's heavy investment in cable assets is also a burden for the company. AT&T has invested more than $100 billion in acquiring TCI and Media One to build a cable network arsenal.

Federal Communications Commission Chairman William Kennard has called AT&T's cable acquisitions one of the best hopes for local residential competition and has virtually shielded AT&T from the same open access regulations that AT&T regularly demands for the Bell companies. But last week Kennard appeared to be searching for assurances that AT&T wasn't backing away from aggressive cable telephony and Internet rollout plans.

"The Commission has the authority and the responsibility to ensure that this restructuring does not adversely impact the quality of consumer service, competition in the telecommunications markets, and the integrity of the telecommunications network," Kennard said in a written statement.

Despite grumblings from some quarters, AT&T Chairman and CEO C. Michael Armstrong was adamant - almost indignant - in defending the restructuring blueprint.

"The creation of these four companies is the foundation of value creation and a clear path of how we can accomplish that," Armstrong says. "Those who say this is a reversal or repudiation of our stance, I find are not only wrong, but offensive."

But the fact is AT&T spent those billions buying cable companies as a means to provide local access in addition to offering voice, data and video services. Under Armstrong's restructuring plan those cable assets and services will be spun off into AT&T Broadband, which AT&T Business will not own by the end of 2002.

AT&T has five-year contracts with each business unit, in which each could use the other's network facilities. For instance, AT&T can use AT&T Broadband's cable network or AT&T Wireless' services, just as any other service provider customer. However, that's not as advantageous as controlling those assets, TeleChoice's McGuire says.

However, for AT&T, cable is actually not its only local access play, just its largest. In 1998, AT&T acquired competitive local exchange carrier Teleport Communications Group (TCG) for $11.8 billion. TCG's network then reached about 66 markets, which the company will likely fall back on to expand locally.

Lisa Pierce, a consultant with Giga Information Group in Cambridge, Mass., believes AT&T has a renewed focus on DSL as its local access service of choice. With the broadband spinoff, it will want its own local assets.

"If AT&T raises enough money from its spinoffs, they could be in a position to buy Covad Communications," she says. "Owning local access is critical."

This is also one of the reasons why AT&T may be keeping the consumer business slightly closer than its broadband and wireless divisions, even though consumer voice revenue has declined 10.9% in one year. AT&T says it will issue a tracking stock for its consumer division that will focus on selling residential long-distance and local voice, Internet access and DSL services. While the consumer network from a voice perspective will continue to be a drain on the company, McGuire says, DSL could be its saving grace.

David Rohde, managing editor of The Edge section of Network World, contributed to this story.