AT&T Betting On Its Bundle

By Daniel Kadlec

You're online flirting and decide it's time to make the call. No problem. Click on an icon, and your cyberhoney's phone rings in an instant--a few blocks or a few thousand miles away. And it's not just any ring. Everyone in the house has a separate phone line, each with a distinct sound. So when they're all huddled together watching a movie on cable, they know who needs to get up to answer. Of course, no one really has to get up, because they all have a cell phone handy, and it doesn't cost anything extra to take the call that way. Best of all, this whole web of communication--via Internet, cable TV, hard-line and cell phone; whether for local calls or long distance--can be bought as a bundle for less than today's total cost of the same services, and paid on a single bill. It's from AT&T.

Talk about back to the future. Ma Bell wants to be your sole communications provider again, just 15 years after regulators broke up AT&T's telephone monopoly. A major difference this go-round is that there's no monopoly. Another difference is that we're talking about much more than your phone. The vision described above, of lower cost and simpler billing for a whole complex of telecommunication services, could become reality in only a year or two--after billions of dollars in hardware upgrades. AT&T's dynamic CEO, C. Michael Armstrong, who took over in November 1997, is out to win your loyalty on many fronts, in the face of ferocious competition from giants like MCI Worldcom, Sprint, Bell Atlantic and SBC Communications. Each wants to sell you a bundle of wired and wireless connections.

Just last week long-distance company MCI rolled out local-phone service to compete with Bell Atlantic in New York State, and launched a service, with America Online's CompuServe unit, to offer Internet access to households. "The barriers for who provides what are blurring," says Daniel Reingold, telecom analyst at Merrill Lynch. "Every player needs a full shelf of products."

For now, AT&T is setting the pace, and Armstrong's vision is playing well on Wall Street: AT&T's shares--the most widely held in the U.S.--are up 65% in five months. After years of tepid growth, earnings should build 20% a year starting next year, analysts say.

Armstrong has leveraged his stock's rising value in a series of bold deals, including a joint venture announced last week with the country's No. 1 cable provider, Time Warner (parent company of Time). The deal--which still needs the approval of another Time Warner partner and possibly that of local regulators--would give AT&T exclusive access for 20 years to Time Warner cable systems, which reach 12.6 million subscribers in 33 states. Starting next year, AT&T would provide local-phone service through the same wires that carry cable TV, thus circumventing the regional-Bell local-phone monopolies.

The Time Warner deal builds on the local-market access that AT&T bought last June, when it agreed to pay $48 billion in stock for No. 2 cable provider Tele-Communications Inc. (TCI). That deal is expected to close in the next few weeks and, along with the Time Warner joint venture, would give AT&T the ability to pitch local-phone service to more than 40% of the nation. Armstrong is talking with every major cable operator, seeking to expand his company's access to local-phone markets. The Time Warner deal calls for AT&T to pay for every local-phone account served over Time Warner's cable lines. Armstrong guarantees that 25% of Time Warner's cable customers will sign up for phone service within six years.

His optimism hinges on the wide range of services he would be able to provide: high-speed Internet access through Time Warner's Road Runner service and the At Home service that AT&T will control through TCI; traditional Internet access through AT&T's WorldNet; local-phone service through the cable deals; long distance, in which AT&T remains dominant with about 50% of the market; wireless phone service, which AT&T has been building since it bought McCaw Cellular in 1993 for $12.6 billion; and cable programming for those who take a package of services. "It's not Congress or the FCC that's advancing the state of competition in America; it's AT&T," says Ken McGee, a vice president at Gartner Group.

AT&T plans to charge about 25% less than the current cost of a similar bundle of services. Underscoring that edge, AT&T on Jan. 27 unveiled its Personal Network package, which offers consumers a uniform rate on long-distance calls whether they're made via cell phone, home phone or calling card. And it continues to attract customers to its Digital One Rate plan, launched last May, which shook up the wireless business by eliminating prohibitive long-distance and roaming charges.

But famously bureaucratic AT&T must prove that it is nimble enough to compete in the quick-decision Internet environment. As John Donoghue, a senior vice president for MCI, gibes, "They've gone from a dead dinosaur to a lumbering dinosaur. They have a long road ahead." Indeed, AT&T has bungled deals before, most gloriously its $7.4 billion acquisition of computer company NCR in 1991. Armstrong acknowledges the challenge: "We've put together a tremendous set of assets. Now it's time to execute: to bring to the consumer value and simplicity."

Armstrong must also cope with an outcry from competitors--including AOL, US West and MCI--that want regulators to mandate equal access to the wires of AT&T's cable partners. James Cullen, president of Bell Atlantic, complains that "AT&T is trying to lock customers into package deals before we're allowed [by regulators] to include long-distance service." Many industry analysts believe, though, that AT&T's strategy will prompt regulators to allow Bell Atlantic and SBC to start offering long-distance service later this year. And further competition is coming from other technologies, including wireless transmission of video, voice and data via towers and satellites.

The FCC, in a study released last week, cited the billions of dollars being spent by companies like Sprint on their own high-speed voice and data networks, saying that such robust competition "will lead, in the near future, to greater deployment of this capability." In other words, more people will get better wires cheaper and faster. And that's good news.

--With reporting by Daniel Eisenberg/New York

With reporting by DANIEL EISENBERG/NEW YORK