The corporate world can be a complicated place. It's full of technical jargon, conflicting claims, and numbers so huge they seem unreal. Beneath all the prattle and puffery, though, big business operates under a simple rule: Persuade a lot of people to buy what you're selling, and get as much money from them as you can.
At this moment, there is perhaps no company in the world that is pursuing these goals more aggressively, and at greater risk, than AT&T; Corp.
The nation's biggest long-distance telephone company, a corporate presence so comfortable and familiar to Americans that it is often referred to simply as Ma Bell, is remaking itself as a do-it-all communications juggernaut that sells everything from cable television to local phone service to Internet access.
If this strategy works, AT&T; will be positioned to profit enormously from Americans' ever-growing appetite for communications and entertainment services. If it fails, AT&T; will have thrown billions of dollars down a rat hole and fallen further behind in the hyper-competitive telecommunications industry.
"AT&T; is either going to win big or lose big, and there's nothing in between," said Jeffrey Kagan, an Atlanta telecommunications analyst.
This month, the transformation of AT&T; has entered high gear. On the evening of May 4, the company emerged as the sole remaining suitor for MediaOne Group Inc. -- one of the cable industry's technology leaders -- after another cable firm, Comcast Corp., dropped out of the bidding.
That same night, AT&T; and the vanquished Comcast announced a deal to swap cable markets around the country, including Baltimore. The agreement strengthened AT&T;'s blooming cable network and allowed the company to carry local telephone service over Comcast's lines.
Two days later, AT&T; received the ultimate digital age tribute: Microsoft Corp. agreed to pay $5 billion to grab a sliver of AT&T; stock and put Microsoft software in AT&T;'s TV-top boxes.
If all goes according to plan, those boxes will carry cable television and high-speed Internet transmissions nationwide.
"What we are up to with all of our investments in [high-capacity networks like cable] is the ability to deliver this revolutionary digital world to an increasing number of consumers across America and to compete in local [telephone] service," AT&T; Chairman and Chief Executive Officer C. Michael Armstrong, the man who has put the company on its giddy but uncertain new trajectory, said after the Comcast deal.
For now, Wall Street likes what it sees. AT&T; stock closed Friday at $58.9375, a price 86 percent higher than the $31.6719 it commanded Oct. 20, 1997, the day Armstrong was introduced as the new head of the company.
"I give him an A-plus grade right now," said Brian Adamik, an analyst with the Yankee Group in Boston. "He's doing what he needs to do right now, but his biggest challenge is ahead of him, which is execution."
Once in trouble
At the time of Armstrong's arrival, AT&T; was in trouble.
Founded in 1885, the old American Telephone & Telegraph Co. had been America's unchallenged local and long-distance telephone provider for nearly a century before it was broken up by a consent decree in 1984. Competitiveness was not an instinct that came naturally to AT&T.;
And it showed. For a long time it seemed that AT&T; could do nothing right. The company tried to get into the computer business by buying NCR Corp., but that venture turned out to be an expensive failure. The company was also suffering from flat revenue in its core long-distance business.
The world was changing, and AT&T; was not ready. The entire telecommunications industry, from telephones to cable television, was redefining itself.
Enabling legislation
President Clinton signed landmark legislation in 1996 that would allow long-distance companies such as AT&T; and local phone companies such as Bell Atlantic Corp. to compete in each other's markets.
Phone and cable firms, once kept apart, could now battle to offer customers a full package of communications services.
Everyone agreed that AT&T; needed to find a way to break back into the $100 billion local telephone market to compensate for its problems in the $80 billion long-distance market, but the company had no real strategy for doing this.
"AT&T; was still a strong company, but it was playing by the rules of the old marketplace, which was just coming to an end," said analyst Kagan. "If they'd continued down that path without making any changes, they would have quickly become irrelevant. They had to make some bold moves."
The company sought a successor to the retiring chairman, Robert E. Allen, but even this turned into an embarrassment.
Allen tried to groom former commercial-printing executive John R. Walter for the post, but a board member publicly questioned whether Walter had the "intellectual leadership" ability to run AT&T.; After it became clear that he was no longer the heir apparent, Walter resigned from AT&T;, taking a $26 million compensation payment with him.
AT&T; ultimately settled on Armstrong, the first outsider ever to lead the company.
Born in Detroit 60 years ago, Armstrong is a CEO out of central casting: the lofty, hairless brow, the broad ex-footballer shoulders, the steady Midwestern timbre. He came to AT&T; with a reputation for both decisiveness and charm. He had won raves for changing Hughes Electronics Corp. from a declining military contractor to an up-and-coming satellite TV company.
Before becoming chairman of Hughes in 1992, Armstrong had spent 31 years at International Business Machines Corp. Armstrong played a key role in numerous IBM operations -- including telecommunications -- but was passed over for the chairman's seat.
When he finally took the helm at AT&T;, Armstrong moved quickly to set the company's course. Hastening a process that had begun under Allen, Armstrong stripped the company down, getting rid of extraneous, noncommunications divisions like the credit-card and customer services units.
He announced an ambitious timetable for paring down AT&T;'s notoriously high overhead expenses. He said 15,000 to 18,000 jobs would be cut, through buyouts and attrition if possible, through "involuntary separation" -- layoffs -- if necessary.
Armstrong also moved to strengthen AT&T;'s assault on the crucial local-service telephone market. That market is dominated by the regional Bell companies that were split off from AT&T; in the 1984 breakup.
Under the Telecommunications Act, companies like AT&T; that want to compete with the Bell companies in the local market have a number of options, none of them easy or cheap.
At first, AT&T; tried to simply resell Bell service. However, after it spent $4 billion in 1997 in a fruitless effort to jump-start its local service, Armstrong abandoned this approach.
There was another way to enter the local market: Build your own network. This may sound like an obvious solution, but it's also incredibly difficult and expensive.
It took a century to create a phone network that links virtually every home and business in America to the national phone grid.
Sure, AT&T; could carry a long-distance call from Maine to Hawaii, but it eventually had to hand off the call to the local Bell company, which had the wire into the house in Bangor or the office tower in Honolulu.
As communications companies become able to compete with each other across old industry boundaries, having that wire into the home or office is an irreplaceable asset. However, the Bell company's local phone line is not the only wire that goes directly to the consumer.
The cable television line does, too. In fact, a cable can carry far more information than a typical phone line. This capacity makes Internet transmissions and other communications faster and more powerful.
That is why Armstrong has made cable the heart of his local-service strategy. On June 24, AT&T; announced that it was buying Tele-Communications Inc., the second-largest cable company, in a deal initially valued at $48 billion. In one stroke, AT&T; had redefined itself.
But more was to come. On July 26, AT&T; said it was merging the bulk of its international operations with British Telecommunications PLC, the United Kingdom's dominant communications company. The new joint venture with BT was seen as a way for AT&T; to shore up its relatively weak international presence.
AT&T;'s global profile got another boost Dec. 8 when Armstrong unveiled a major deal with his old company, IBM. Under the agreement, AT&T; would take control of IBM's global communications network for $5 billion.
42% of households
On Feb. 1, AT&T; continued its cable campaign, announcing an agreement to use the cable networks of Time Warner Inc. Combined with the earlier TCI deal and other agreements, the Time Warner accord would allow AT&T; to offer cable TV, local and long-distance telephone service and Internet access to about 42 percent of American households within five years.
Then came Comcast and MediaOne, both of which could further boost AT&T;'s cable holdings and, by extension, its local-telephone and Internet services. If AT&T; can put this whole package together, it could emerge once again as the undisputed king of American telecommunications.
The Yankee Group says that two-thirds of all consumers would prefer to deal with one company for all communications and entertainment needs, and that AT&T; is the brand name that those consumers prefer over all others.
AT&T;'s deal-making could have major consequences for Baltimore. As part of the Comcast agreement, AT&T-owned; TCI is expected to give up its franchise in Baltimore City to Comcast, which already has 300,000 cable customers in Harford, Howard and Baltimore counties.
While AT&T;'s cable strategy has enormous potential, it also carries great risk. Cable lines are powerful, but they are designed to carry communications only one way -- from the cable company to your television. Telephone and Internet transmissions, of course, require two-way connections. Revamping the nation's cable networks to carry two-way traffic would be an extremely complex and costly undertaking.
Regulatory approval needed
That's assuming that AT&T; will be legally permitted to carry out much of its cable plan. The TCI purchase has already closed, but the flurry of subsequent moves has sparked fierce objections from consumer advocates, public officials and competitors.
Gene Kimmelman, the co-director of Consumers Union's Washington office, said cable customers will end up footing much of the bill for AT&T;'s spending spree.
"The implications are enormous," Kimmelman said. "Because of the price they're paying for all these cable companies and the price they're paying for the equipment upgrade, cable rates are going to skyrocket over time."
"We think this violates the law that there's supposed to be a limit on the cable one company can own," said Kimmelman, referring to 1992 cable legislation, which he said was intended to limit the number of cable customers a single company could have.
"The only question is whether the administration, which has a terrible track record on consolidation in the telecommunications industry, finally gets the backbone to say no," Kimmelman added.
For all its hazards, Armstrong's strategy might be the most direct way for AT&T; to regain its former power and prestige. "It's risky in the sense of technology, it's risky in the sense of the balance sheet, it's risky in the sense of regulation," said Robert B. Wilkes, an analyst with Brown Brothers Harriman & Co. in New York.
"However, compare that to the risk of doing nothing," Wilkes said. "Doing nothing would mean consignment if not to oblivion, then to a period of decline."
C. Michael Armstrong
1961: Graduates with a B.S. in business and economics from Miami University of Ohio
1992: After more than three decades at IBM, becomes head of Hughes Electronics Corp. Wins plaudits for turning the company around.
1997: Takes top spot at AT&T;, moves quickly to cut costs-then goes on to spend billions to move the company into cable television.
Personal: Married, has three children. Serves on numerous boards, including (since 1990) that of the Johns Hopkins University.
Pub Date: 5/16/99