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DirecTV shows AT&T growing pains

Success in a mature market does not guarantee success in a new one. AT&T's reversal on DirecTV shows that it's finding this out the hard way.

Success in a mature market does not guarantee success in a new one. AT&T (T) seems to be finding this out the hard way as it stretches into emerging communications ventures.

The telecommunications giant did a 180-degree turn on its move toward direct television yesterday when it withdrew its equity stake in DirecTV, a unit of Hughes Electronics. The two companies ended a marketing agreement in which AT&T would distribute the DirecTV direct-broadcast television service and digital satellite system (DSS) equipment through AT&T.

AT&T had invested $137.5 million for a 2.5 percent equity stake in DirecTV and had options to purchase up to 27.5 percent more. With the termination of the agreement, which began in March 1996, AT&T is selling back its 2.5 percent stake for $161.8 million, and the remaining equity options have been canceled.

Satellite technology is considered the next generation of wireless Internet connections for the mass market. But affordable satellite surfing for the average consumer is years away, even by the most optimistic projections.

The DirectTV reversal is part of the company's move to refocus on its core business of long distance service. Analysts say AT&T has not been aggressive enough about promoting its Internet offerings and has been lagging behind other telcos in entering the technology age.

AT&T has a great potential for revenues in providing Internet access in addition to the company's core business, according to Robert Wilkes, an analyst with Brown Brothers Harriman. But it has not been assertive in promoting its WorldNet dial-up Internet service.

"It is clearly a big revenue opportunity," Wilkes said. "They are being held back by the fact that they don't have a bundled solution."

To make it work, he and others say, the company needs to expand its offerings, including Internet access service and other AT&T communications services, and offer them all on a single bill. Customers want to simplify their bill payments and have all of their telecom services come from one provider, and other companies have responded to that demand.

Wilkes believes that WorldNet could draw far more business than the 1 million accounts he estimates it now has.

"The Internet has a lot of growth potential, and AT&T has been moving in that direction, but they should be doing better than they are," he said. Wilkes noted that long distance companies generally have an advantage over their local counterparts in telecommunications technology because of their higher pipe capacity.

Deutsche Morgan Grenfell analyst Stuart Conrad agreed, saying AT&T clearly has some ground to make up. And that presents a formidable challenge to new chairman and CEO Michael Armstrong.

The company has to leverage its existing market share to sell more of its services to its broad customer base. "Some people have a head start on them, but the burden is on AT&T to act. The environment is changing rapidly, and they have a significant amount of resources to catch up," Conrad said, noting that it needs to focus on defining plans for its local service and Internet protocol strategy.

AT&T has attempted to show its support for online customers by announcing an Internet initiative that would let customers order AT&T products and services and pay bills through the company's Web site.

In addition, the company has been expanding its products. AT&T recently offered a combination of services including unlimited Internet access, wireless phones, and a personal 800 number, with charges for all the services on a single bill.

Sometimes it is easier for the major players to let start-ups create the technology and then let the big bellwether companies join them through alliances and partnerships. "But," Wilkes added, "success in an old market does not guarantee success in new markets."