Telcos hit snags in Net efforts

news analysis So it goes with many telecommunications carriers as they struggle to grab a share of the fast-growing Internet business.

Deregulation and new technology was supposed to make it easier for telcos to jump onto the Net, providing a "one-stop" shop for consumers to get phone, Net access, and cable TV. But--despite their huge installed distribution networks--management indifference, marketing snafus, and some resistance from regulators have made it difficult for telcos to connect on the promise.

"The telcos realize they have been distracted by regulatory and competitive issues," said Abhi Chaki, telecommunications analyst for Jupiter Communications. "In the process, young companies such as America Online, Yahoo, and Excite have sprung up under their radar and carved out incredible Net franchises. Now companies such as AT&T want to get a piece of that."

The latest reminder of the telcos' determination to get online surfaced today with a report--unconfirmed by either company--that AT&T had made an offer to buy AOL. The rumor has floated around since last year, but London's Financial Times reported today that AT&T made an offer several weeks ago "comfortably above" AOL's $19 billion market capitalization. AOL is understood to have rejected the offer several days ago, the Times reported, citing inside sources. Both companies declined comment.

If the report is true, the offer would show AT&T's keen interest in gaining a major foothold on the Net. It also would represent a huge financial gamble.

David Simons, managing director of Digital Video Investments, put the supposed deal in context.

"For half of the implied $24 billion price, AT&T could offer all 12 million AOL members four years of its WorldNet [Internet] access free," he said. "On a pro-forma basis, AT&T's March quarter earnings would have been diluted 17 percent by the acquisition of AOL for $24 billion in AT&T stock. On top of that, AT&T would have to buy out WorldCom's five-year, usage-based contract to provide telecommunications to AOL."

Many analysts agree that AT&T has been late to "get it" when it comes to the Net. Despite AT&T's ranking as the nation's largest telco, its WorldNet business has lagged behind other ISPs. Analysts argue that the division should be growing faster and marketed more aggressively. The telco also has run into criticism from some consumers for its pricing policies.

Another sign of AT&T's Net growing pains: Its 180-degree turn last December on direct television and satellite technology, when the company abruptly withdrew its $137.5 million equity stake in DirecTV, a unit of Hughes Electronics. Satellite technology is expected to provide the next generation of wireless Internet connections for the mass market.

Under chief executive Michael Armstrong, who joined AT&T last fall, the telco giant has renewed its push onto the Internet. For example, the company has held talks with cable Net access provider @Home about a possible alliance, sources said. In addition, AT&T recently has struck deals with Lycos, Excite, and Infoseek to bundle Net access with Internet start pages, so-called portals to the Net.

AT&T is not alone in struggling to come up with a moneymaking Net strategy.

In February, Sprint abandoned a "go it alone" approach to the Net and said it would form a joint Internet service with EarthLink. Under the terms of the deal, Sprint gained a 30 percent stake in EarthLink. Sprint concluded that striking a deal with an ISP was a more practical way to get on the Net than starting its own effort from scratch. One analyst concluded that Sprint had "neither the time nor the manpower" to execute its own Net strategy.

Sprint is confident that it now is pursuing the right path.

Telcos also have drawn criticism from customers and consumer groups. Pacific Bell, for example, continues to face regulatory scrutiny as to whether its ISDN service is falling below the performance standards set by the California Public Utilities Commission last year amid consumer complaints. The telco said it now is meeting the goals outlined in those standards.

In the meantime, PacBell and Southwestern Bell, both owned by SBC Communications, said they would join many other ISPs in raising rates and putting a cap on unlimited access, effective August 1. They said the increase was needed to boost profit margins and improve service.

But telco management can't be the only ones blamed for the industry's take-it-slow approach to the Net.

Regulators also are making it difficult to expand, the industry argues. For example, the pending merger of MCI Communications and WorldCom has drawn intense scrutiny from both the U.S. Department of Justice and European regulators. As a result, MCI has been forced to sell off some of its Net backbone business. The company is in talks to expand the assets being sold, sources said, and a deal could be announced later this month. MCI wouldn't comment.