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AT&T's woes may yet lead to consumer voice spinoff

In an effort to jump-start its local phone service business, Ma Bell is mulling a spinoff of its consumer long-distance division.

As part of AT&T's restructuring plans, the company will discuss a spinoff of its consumer long-distance division into a partnership with other cable companies as a means to jump-start its local phone service efforts, according to sources.

AT&T chairman Michael Armstrong has told Wall Street and federal regulators he spent more than $100 billion on cable systems to provide local phone service, and he planned to partner with other cable operators to cover the country with a network alternative to the Baby Bells.

That long-promised cable telephony strategy has been slow to arrive, however. More than two years after entering the cable business, AT&T still lacks the phone partnerships it has sought with cable providers. The proposed standalone business to be floated this week could change that, according to sources.

The cable giant is making some progress in its efforts to use cable to deliver local voice services, offering phone service in 16 communities. Ma Bell surpassed 300,000 customers two weeks ago, with more than 500,000 customers projected by year's end.

Analysts predict the cable telephony market will heat up. The Strategis Group projects annual revenues in the U.S. market of $2.67 billion by 2005. Analyst Keith Kennebeck said he could see subscriber totals "growing to 12.5 million over the next five years."

"Cable companies must differentiate cable telephony service from existing offerings to take market share from incumbents," Kennebeck said, and this is what some say AT&T would be attempting to do with a standalone cable telephony venture with other cable operators.

Cahners In-Stat Group projects a global cable telephony market of $7 billion by 2004, with "improved scalability and lower costs" in packet-switched technology driving the boom, said senior analyst Mike Paxton.

Armstrong has discussed the possibility of in some way severing the company from its core business--consumer long-distance--ever since its last quarterly earnings statement. Investors have gone sour on the venerable Ma Bell, with the company hitting its 52-week low of $29.63 Aug. 8.

The possible consumer voice spinoff is only one of a few items for AT&T that will likely be on the table at the company's Basking Ridge, N. J., retreat beginning Thursday. The company will also discuss further separating its wireless assets, either by itself or in partnership with Nextel or British Telecom.

Although BT in a statement has confirmed it is in talks with AT&T, all other parties have refused comment.

Handing over its prized consumer long-distance customer base would be a dramatic turnaround for the cable giant. When AT&T first bought Tele-Communications Inc., it began negotiating with Time Warner Cable for what it thought would be a template for phone partnerships with the other, smaller cable companies.

Though the two largest cable companies adopted a memorandum of understanding, they never consummated the partnership. AT&T bought MediaOne, which owned a minority stake in Time Warner Entertainment, forcing the latter's parent company to call off talks. Time Warner then got involved in its own merger with America Online, putting a Ma Bell alliance on the back burner.

Some cable companies, such as Atlanta-based Cox Communications, have pressed forward on telephony without AT&T.