Now that AT&T has cut cable

Experts see shedding of debt as key to reorganized company’s future.

NEW YORK – AT&T’s corporate makeover truly is under way now that it has shed AT&T Broadband, the once coveted but ultimately unwanted weight that the carrier has toted around for the past four years.

Attempting to fulfill the vision of CEO C. Michael Armstrong, AT&T bought its way into the cable network services business by doling out more than $100 billion. The investment was intended to ease AT&T’s dependency on incumbent local exchange carriers that carry AT&T customer’s last-mile traffic. Instead, AT&T watched its debt load increase exponentially.

Thankfully for AT&T, Comcast has been interested in AT&T’s cable business since early 1999. After nearly a year of regulatory review, Comcast officially acquired AT&T Broadband last week for $30 billion and assumed $24 billion in debt. The deal was valued at $47 billion almost a year ago, but sliding stock prices took a toll.

The merger of Comcast and AT&T Broadband includes the departure of Armstrong, who now becomes chairman at Comcast.

AT&T and broadband did not mix well. The combined AT&T Broadband and Comcast are roughly valued at $60 billion – $40 billion less than AT&T’s cable investment alone. AT&T didn’t seem to see past the fact that cable network services is a slow-growth business with much overhead, experts say. It also didn’t seem to realize it was buying a business built around home entertainment and that high-speed data and voices services came much later.

“Broadband stopped being an important part of AT&T the minute Armstrong announced his spin-off plans over two-years ago,” says Lisa Pierce, an analyst at Giga Information Group. “That was an implicit admission that his original vision could not succeed. AT&T spent the last two years defending it at every turn, now they can finally admit what many have long said to be true.”

AT&T now has only two divisions: AT&T Business and AT&T Consumer. David Dorman has taken over as chairman and CEO.

“Shedding the majority of [its] debt is ultra-important for AT&T,” says David Rohde, an analyst at TechCaliber. “AT&T as a company has been maintaining break-even by almost exactly matching any revenue declines with expense cuts.”

AT&T Business is charged with increasing its revenue growth rate to offset a continuing slowdown in residential voice. The company is expected to move more nimbly with the weight of AT&T Broadband lifted.

“AT&T has maintained and is pushing product development to market,” Rohde says. “Real proposals we see for migrations to either [Multi-protocol Label Switching] or encryption-based VPN services . . .are from AT&T.”

Expense cuts have affected how AT&T operates and deals with customers.

“The expense management forced by the double-whammy of price-driven revenue declines and debt burden has been a real bear,” Rohde says. Some users have “been getting really frustrated with AT&T.” Customers cite account team turnover and account representatives with little experience, he says.

AT&T acknowledged some of this recently by saying it has made changes on the sales side. In the past year, AT&T has hired 700 sales associates because of employee turnover, yet it hasn’t increased its salesforce. AT&T says the new employees are “experts in complex data networks.”

The company promises an AT&T that is more keenly focused on its customers.

“Our culture will reward customer satisfaction, operational excellence and emphasize accountability,” Dorman said last week. “Working together, we will continue to scale our growth businesses and maintain our financial flexibility and strength, while locating and capitalizing on opportunities to take market share.”

Will Dorman have an effect on AT&T in the near term?

“He will; in fact, he’d better,” Rohde says. One of his biggest assets is he’s a real “telecom/datacom guy; Armstrong ultimately was not.”

While Dorman will be walking a fine line over the next couple of years trying to keep expenses in check while upgrading and expanding the company’s data networks and services, he has two advantages, Rohde says.

AT&T is not in bankruptcy, and it does not have to worry about selling off any additional assets, he says. AT&T now can focus on building its AT&T Business division while controlling the bleeding at AT&T Consumer.