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Despite breakup, AT&T continues to reshape telecom landscape

Ma Bell has always been the most closely watched telecommunications company, and despite the breakup, that's not likely to change.

AT&T has always been the most closely watched telecommunications company, and despite Wednesday's breakup, that's not likely to change, as it shrinks amid a changing market landscape.

The announcement Wednesday that Ma Bell will spin off its cable and wireless units and apply a tracking stock to consumer services is just the latest in a series of moves by the company that has historically rocked the communications universe. Through all of these, AT&T's experience has been the industry bellwether.

Now that AT&T is in the throes of a brutal downturn on Wall Street amid rampant skepticism concerning its strategy, the company has found solace in a self-inflicted breakup--an action once thought impossible for one of the most widely recognized companies in the world.

The breakup plan is a black eye that could be slow to heal for a company that just a year ago appeared to be a step away from creating an empire that rivaled its erstwhile monopoly. The company that has served as a standard-bearer of a unique and ambitious acquisition strategy now may serve as a worldwide warning that bigger is not necessarily better, analysts say.

"The large old-economy companies that are also new-economy companies need to convey to the financial community that they have a strategy," said Brownlee Thomas, international telecommunications analyst at Giga Information Group. "The idea of being all things to all people is no longer that persuasive."

As influential telecommunications analyst Jack Grubman of Salomon Smith Barney said today after downgrading the company's stock: "We believe that the business is melting down."

To understand why Ma Bell is in its current position, it is important to understand the various regulatory and market-oriented events that led to the current volatile and cutthroat communications market of which AT&T appears to be a victim.

The communications industry began fracturing in 1984, when the U.S. see story: Telecom players spend big, but win little government broke up the AT&T local telephone monopoly as a first step toward creating competition in the industry. Ma Bell's local business was split into seven so-called Baby Bells: Pacific Bell, Ameritech, Southwestern Bell, US West, Bell Atlantic, BellSouth and Nynex.

That helped create the landscape that allowed WorldCom (previously called MCI) and Sprint to thrive as long-distance competitors, but it also spawned a series of local phone fiefdoms controlled by the Baby Bell companies.

Originally seven in number, only three remain as independent local phone companies because of a series of mergers. Long viewed as the most slow-moving of the giants, these local companies didn't benefit much from last year's run-up in telecommunications stock prices, and have been similarly shielded from the last few months' crash.

In 1996, Ma Bell decided on its own to go through another series of spinoffs, abandoning its NCR computer division, and creating Lucent Technologies from its successful equipment manufacturing branch.

That offspring too is facing hard times after years of plenty. With stiff competition from giant Cisco Systems and a growing list of hungry start-ups like Juniper Networks, Lucent has issued a series of earnings warnings, and its chief executive, Richard McGinn, resigned earlier this week.

AT&T also played a key role in the philosophy behind the landmark 1996 telecommunications legislation. While that law was focused most specifically on introducing competition into the Baby Bells' protected

AT&T's history

1984
Local phone divisions broken off as Baby Bells, long-distance division retains AT&T name.

1996
AT&T spins off computer division NCR and creates Lucent Technologies from equipment unit.

Federal telecommunications deregulation sets up drive for bundled services.

1998
AT&T buys Tele-Communications Inc.

1999
AT&T buys MediaOne Group to become largest U.S. cable company.

2000
AT&T releases AT&T Wireless as independent tracking stock.

AT&T plans to spin off AT&T Wireless and AT&T Broadband and place a tracking stock on AT&T Consumer.

local phone monopolies, the intention was to spur AT&T and its long-distance brethren to compete against the Bells.

That, in turn, helped spark the flurry of mergers that led to Wednesday's decision to split the company into four segments--a largely self-inflicted move that could have more to do with market perceptions than Ma Bell's usual nemesis, regulatory scrutiny.

Ironically, it appeared that shortly after the Telecom Act was passed, AT&T would be a wallflower at the merger dance.

Bell Atlantic bought Nynex, and SBC Communications bought Pacific Telesis, but the informal talks that AT&T had with various parties, including BellSouth, went nowhere.

That changed with the arrival of CEO Michael Armstrong three years ago.

The deregulation had created a new kind of holy grail for all of the telecommunications firms: the ability to offer their customers a complete package of services, including local and long-distance phone, Internet, and, increasingly, video and wireless phone services.

Loathe to rely solely on the Baby Bells' extensive--and expensive--networks for local service, Armstrong led an ambitious drive to acquire cable networks, with an eye toward using them for local telephone service.

Over the course of a year, Armstrong spent more than $100 billion on Tele-Communications Inc. and MediaOne Group, transforming the long-distance company into the country's largest cable TV company as well.

It's that bundling strategy which has been questioned amid Ma Bell's see story: Weak business tracks spun off high-profile crash and burn. By splitting up the company, AT&T can isolate its high-growth areas from its consumer long-distance business, the historical strength that has now turned into a millstone around the company's neck.

Analysts note that the company's dominance over the industry has waned, however. Its failure to deliver on its most ambitious bundling strategy doesn't mean that others won't continue to pursue the dream. "It's still seen as a valuable proposition," said Courtney Quinn of industry consultants the Yankee Group. "For the (local phone companies), it's still the holy grail."

News.com's Patrick Ross contributed to this report.