"Everything he just said is [poppycock]."
Jeff puts forward the thesis that AT&T is in the right business. That it is a transformed company, no longer the sleeping giant but an increasingly nimble participant in the communications business. It's an argument that resonates with me as being directly to the point. Where AT&T was dead in the water before, now it has transformed itself into a player.
No better argument can be made to this end than to recall the company that was watched most closely following the Time Warner/AOL merger. It was Ma Bell, the phone company. Were they going to make a purchase of their own? Merge with Yahoo! or Disney? These were not idle bemusements. If AT&T were really a white elephant, no one would have thought twice about what their reaction was.
And yet, within Jeff's argument lies the Achilles Heel of AT&T. "How is AT&T going to make more money in the future?" Well, we know this much: AT&T's cash cow of voice long distance service is looking more and more like a cash calf, as the margins and the company's position in the market continue to erode. And make no mistake -- neither trend is going to reverse itself. So AT&T needs to figure out how to make more money than it is now.
There are defined paths to this goal: wireless, broadband services, and cable. But will these activities, also in highly competitive arenas, be enough to replace the 40% of AT&T's revenues that are currently derived from long distance?
No, I don't believe that LD revenues are disappearing. But remember the question: How do they make more money? It's not enough to replace it. In order for AT&T to be a good investment, its growth components must increase revenues and profits at a rate that supplants its shrinking core. Even the millions of existing AT&T Internet customers, with their fixed monthly contracts and their high cost of acquisition, will not do much to replace the lost revenues from the differential per minute pricing model in long distance.
Herein lies the argument against AT&T as a superior long-term investment. Sure, it's got the largest wireless service provider in the U.S. But AT&T's wireless edge is not something that is necessarily sustainable. Even in a growth market, AT&T's wireless rate of growth may not sufficiently cover the loss of revenues from its long distance operations.
AT&T bought its equivalent in the cable arena, TCI, a bloated monstrosity of a company, with a significant legacy network, much of which will need to be upgraded and/or replaced as bandwidth requirements continue to grow. So, even if AT&T's LD revenues are replaceable here, the high cost of cable customer acquisition and the high level of capital reinvestment needed to update these networks will depress the level of operating profit coming out of these properties for some time.
And finally, broadband. AT&T is, with its international network, its cable companies, and its customer base, an intriguing broadband provider. If nothing else, the ability of AT&T to combine all of these services into a single bill for an existing customer base of 90 million makes it an intriguing participant in this market. And AT&T's 25% ownership of Excite@Home, the leading cable Internet provider, rounds out of AT&T's service offerings. But as the ongoing case in Portland, Oregon shows, no one knows how this will end. AT&T may have 3 million broadband customers by the end of this year, but how many of these are using AT&T because they have no other choice? If the Portland case opens up the cable networks for competing service providers, AT&T may have a much more difficult time competing in an open market.
I love AT&T. But I see a number of really big guns pointed right at it. Should any of them go off, AT&T may be back on that slide down toward irrelevance.
So Fools the bear.
This Week's Duel
Related Links