Ma Bell attempts to strike balance

Amid declining profits in its core long-distance phone business, Ma Bell has a slew of challenges ahead, not the least of which is getting consumers to use its new local phone service.

On the eve of next week's National Cable Television Association annual conference, AT&T is facing questions about its long-term strategy and its ability to perform and retool the company in the short term, just as its earnings forecast for its fiscal year drops below expectations.

Ma Bell has spent roughly $110 billion on cable acquisitions over the past two years, namely with the goal of providing cable-based local phone service to consumers. But now it appears AT&T could have trouble reaching its goal of at least 400,000 cable-based local phone customers this year. Ma Bell expects to service millions of customers in 2001, though smaller rivals such as Cox Communications continue to outpace AT&T in terms of cable telephony service.

The company today revealed it had 39,500 local cable telephony customers at the end of March, when it was adding roughly 500 new customers per day, according to executives.

"It used to be that conservative companies would put out conservative estimates. But in the Internet economy sometimes people get carried away," said Bruce Leichtman, a cable industry analyst at The Yankee Group. "Clearly they may have overestimated their ability."

In a conference call, AT&T Broadband chief executive Dan Somers remained bullish on cable telephony estimates for the year. "We continue to see impressive results, and absolutely expect to meet our year-end goals of 400,000 to 500,000 customers," Somers said.

The company continues to heavily market its traditional long-distance voice service, but faces a series of evolving businesses and potential distractions including the close of its acquisition of MediaOne Group, the spinoff and initial public offering of AT&T Wireless, and its larger responsibility for the future of Excite@Home.

Amid these smoldering issues, AT&T today reported first-quarter financial results that met Wall Street expectations despite slimmer profit margins, particularly in its consumer long-distance business.

But AT&T also slightly pared back its 2000 profit projections and announced the layoffs of 6,200 employees, primarily from its traditional businesses.

The announcements--not to mention the company's 14 percent stock decline today--underscore the high-stakes bet the company has placed on cable technology to provide new local phone and high-speed, or "broadband," Internet services.

AT&T's cable aspirations Ma Bell has spent more than $100 billion over two years to acquire major cable TV operators and their broadband networks.
Tele-Communications Inc.
price:	$55 billion
announced:	June 1998
finalized:	March 1999
MediaOne Group
price:	$54 billion
announced:	May 1999
finalized:	Not complete

Still, the company has a long way to go to reach its telephony goals. AT&T must first finish upgrading the cable TV networks it bought to handle two-way voice communications, a daunting task considering the fact that the networks owned previously by Tele-Communications Inc. were hardly state-of-the-art. And although the networks of MediaOne are technologically far superior, the timetable for closing the deal has dragged on longer than AT&T expected, cutting into its projections for the year.

"The AT&T paradox is tough to solve. On one hand, they need to transform the company and prepare for the future. On the other hand, they need to keep Wall Street happy every quarter. These are competing and conflicting goals which require different strategies," said independent communications analyst Jeffrey Kagan.

Some analysts said AT&T may only be guilty of not properly managing expectations concerning its cable telephone service plans. "They may have underestimated the amount of time and money it would take to resurrect TCI's networks," Leichtman said. "The question comes down to not if, but when."

In the meantime, AT&T continues to push new services to offset its declining profit margins elsewhere, including upgrading its cable networks, finalizing the MediaOne deal later this year, and quickly deploying cable modem-based Internet service via Excite@Home.

But analysts said AT&T is moving into the difficult period of executing that inevitably follows the earlier announcement of its ambitious plans.

"(Chief executive C. Michael) Armstrong was hired to make the tough calls, and their long-term strategy looks sound, but it will take years to unfold. That's the rub. Wall Street is not patient," Kagan said.

News.com's John Borland contributed to this report.