AT&T's historical business model, voice long distance telephony, is doomed. Doomed because the differential-per-minute charges have dropped by more than 70% domestically in the last five years; almost every bit that is left is owed to the local exchange carrier in regulatory mandated passthroughs. We as consumers see five-cent-minute rates; we don't see that as much as 4.5 cents of that goes directly to the local carrier.
Ah, the local carrier. In 90% of the country, that used to be AT&T. But the 1984 forced divestiture of all of the Baby Bells changed AT&T from being the company that owned everything -- from the interior of your home phone outward -- to being the largest company to handle long distance.
Well, it's still the largest LD carrier, but it's neither growing nor maintaining its market share. Rather, the two other big carriers, MCI WorldCom <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: WCOM)") else Response.Write("(Nasdaq: WCOM)") end if %> and Sprint <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FON)") else Response.Write("(NYSE: FON)") end if %> have been eating into its market share. And worse, on the higher-margin international calls, AT&T's market share has plummeted as resellers, smaller carriers, and foreign carriers all chew away at its market. And finally, the voice-minute rates that have been charged for international destinations have been eroded even worse than the domestic ones.
Hmmmm. Eroding market share with crumbling gross and net margins, in a business with a doomed billing model and low barriers to entry. Sounds like the recipe for disaster, and AT&T has as much as acknowledged the same by de-emphasizing its long distance services. Instead, about five years ago AT&T began the transition into being a bulk carrier, a cable company, an Internet service provider, a wireless company, and a content carrier.
As for the bulk carrier business, telecom and data carriers require large bandwidth pipes in order to provide dedicated services. Should be a good business for Ma Bell. But unfortunately, even among the second- and third-tier carriers, AT&T is a nonentity in this market, once again trailing MCI and Sprint as well as Qwest <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: Q)") else Response.Write("(NYSE: Q)") end if %>, Level 3 <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LVLT)") else Response.Write("(Nasdaq: LVLT)") end if %>, and so on. AT&T is, in this market, part haughty socialite and part gang that couldn't shoot straight. The socialite really can't be bothered with the smaller, less significant deals (which, as it turns out, have the highest margins), and the gang is plagued by a tedious order entry system, uneven implementation, and a ferocious bureaucracy.
Match these problems with the biggest of all: an old, creaky legacy network, something with which the Young Turks are not saddled.
AT&T moved aggressively into cable television and the guaranteed fees generated by monthly recurring contracts. Moreover, AT&T was seeking, just as it once did with telephony, to control access to homes provided by cables, so that it could exclusively provide other information services, such as Internet connectivity. Great move, but AT&T's relationship with Excite@Home, the largest provider of cable Internet service, has been strained, as AT&T can't seem to make up its mind as to which way it is going. The uncertain legal ground upon which @Home's exclusivity stands does not help. If the benchmark Portland case opens the market to all competition, AT&T will have to compete with all comers on equal ground. See paragraph above as to why this will be difficult.
In wireless, AT&T completely rocks. Its service is excellent, its network is extensive, it has the largest market share, and its flat pricing plans have crushed competitors that existed upon roaming fees. AT&T's shareholders just voted to issue a tracking stock for its wireless division, an event that should generate an enormous amount of money for AT&T as it "IPOs" the wireless division. But Ma Bell's not a cell company, is she? She's got an enormous asset base that simply cannot be supported by wireless revenues, particularly since the margins in wireless services are dropping as well. Still, you aren't going to find me saying anything bad about AT&T wireless.
And AT&T is also helped by its purchase of TCI, and its subsidiary, Liberty Media run by John Malone. Liberty also has a tracking stock, trading on the NYSE under LMG.A. Liberty Media is a powerful creature, one that AT&T is justifiably pleased with. But Liberty Media's true value to AT&T, as a media source, will be through its combination of the information provided with other components of AT&T. AT&T's difficulties in implementing other parts of its strategy could mean that this value is never fully extracted.
You're not going to find a hideously critical bear argument on AT&T from me. I think it is a great company. I do believe, however, that Ma Bell is at an inflection point, and as such this is a company that is at some risk to slide into irrelevance.
From the bear, I'm TMF Otter (apologies to Crossfire).
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