Ma Bell refocuses on wireless bottom line

Packard had liked the service well enough to make it his business' main telephone line. But now AT&T Wireless says they've changed their policy on who can use their popular wireless services. Packard, who says he built his software consulting company around the cell phone, is angry.

"A year later they tell me they're booting me out of the program," he said. "I run my business off this phone. It's going to be inconvenient."

Packard's phone line is just one small casualty in a massive effort by AT&T to bring its wireless costs down as strong new competitors take aim at its market. The lukewarm greeting for the company's stock offering last month occurred, in part, because Wall Street pinpointed the company's low profit margins compared to some of these new competitors, and the company is now trying to dig itself out of that hole.

AT&T has been a leader in marketing the wireless "One Rate" plan, under which a call made to anywhere in the United States, from anywhere in the United States, costs the same as an ordinary local call. That type of plan, now also offered by Sprint and others, has been one of the strongest attractions for new wireless subscribers, analysts say.

That's fine as long as the caller is somewhere where AT&T offers its own service. But the moment the phone tries to tap into another company's network, whether that firm is a Ma Bell affiliate or not, then AT&T has to pay a fee.

And that shows up as serious red ink--enough so that its profit margins are considerably lower than competitors such as Verizon Wireless or the planned SBC Communications-Bell South joint venture, each of which now have more subscribers than AT&T.

Until Ma Bell brings its costs down, it's unlikely to see the kind of explosion in stock price that companies like Sprint PCS and Nextel have posted over the last year.

Pricy building blocks
AT&T Wireless isn't the only mobile phone firm facing these types of issues. Sprint, which has created its service almost from the ground up, has yet to post profits. The larger firms affiliated with the big local phone companies have higher profit margins. But they'll face the same kind of cost issues as they establish themselves as national brands, some analysts say.

All the companies are also faced with huge costs in upgrading their networks to handle data traffic. Some are still preparing for today's rudimentary wireless Web access, while all will need to make significant expenditures to prepare for the next-generation of high-speed access.

This is all taking place against the backdrop of radically expanding competition, as Verizon Wireless and the BellSouth/SBC venture become national brands competing with AT&T, Sprint and Nextel.

"It's going to be pretty aggressive out there," said Patrick Comack, a financial analyst with Guzman.

But even in the midst of this competition, Ma Bell has shown it is willing to sacrifice some customer goodwill, if necessary--as in Packard's case--to bring costs under control.

A spokesman said AT&T started going through its records last year and is still combing out all the customers who had signed up for the One Rate plan but were using it largely through its affiliate networks. These customers' service is being terminated, the company says. No information was available on how many customers have been affected by the policy change.

Only the beginning...
This is only a small part of a much larger effort, however. The company's public offering of stock was designed in large part to give it the cash needed to fund a huge expansion that will fill in the puzzle pieces now missing in its "national" network, and which could bring off-network customers like Packard back into range.

According to financial documents filed with federal regulators, the company now has $7 billion on tap to spend on acquisitions, infrastructure upgrades and other purposes. It plans to spend about $4 billion this year, compared to about half that last year.

The company says that much of the spending will come inside its existing network, although it is not detailing how much they will spend where. The company has wireless licenses that cover about 95 percent of the country, but has only built networks in about 65 percent in that territory. Those licenses will soon be turned into actual networks, spokesman Rich Blasi said.

The company has fairly good arrangements with a string of affiliates around the country, which give it good deals when Ma Bell customers come calling in their territory. Analysts say these affiliates are likely to top Ma Bell's list of acquisition candidates.

Other companies will match this kind of massive expenditure. Rivals such as Sprint and Verizon are making similar investments to boost their own coverage, capacity and ability to handle data services, analysts say.

"It's going to be a very trying next several years," said Herschel Shosteck, chief executive of Herschel Shosteck Associates, a wireless consulting firm. "The CFOs of these companies have to be having cold sweats over it."

Customers like Packard who are finding themselves losing phone services they relied on are warning AT&T that subscriber goodwill can be as important as finding savings.

"I joined AT&T because it had good customer service," Packard said. "But these are poor business practices. This is awful."