Ma Bell Gets Mauled

Investors' message: AT&T is moving too slowly

Investor frustration over AT&T Corp. exploded with a fury on May 2. The company's first-quarter earnings announcement came with a nasty surprise: Earnings for the year will be about 5% lower than expected, due to a slowdown in traditional phone services for consumers and businesses. AT&T shares plunged 14% that day and 5% the next, to close at $39 3/4. That wiped out $28 billion in shareholder value. The violent market reaction makes one thing clear: AT&T CEO C. Michael Armstrong is running out of time.

Two and a half years after he began moving into new businesses such as high-speed Internet access and cable telephone service, Wall Street is questioning whether he can finish the job. "Dissatisfaction is rising," says Brian Hayward, manager of the $4 billion Invesco Telecommunications Fund, which holds a small stake in AT&T. "There are some who are questioning whether AT&T can build the cable platform and offer new services quickly enough to offset what is going on in the core business. We are now looking into the abyss."

Investors have reason to be worried. AT&T now says revenue from the consumer long-distance business will decline 5% to 7% this year, about two percentage points more than expected. The reason: Consumer Services failed to anticipate how falling prices, the Internet, and the wireless phone would eat into long-distance. The problem is so severe that AT&T actually toyed with selling the unit to America Online Inc. late last year, according to sources close to the situation. The company could still decide to sell the business, they say.

Problems are also on the rise at the highly regarded unit that sells service to corporations. As 300 multinational accounts were moved from AT&T's business-services unit to the Concert joint venture with British Telecommunications PLC, some customers felt neglected and switched carriers. Revenues in the business-services unit will grow only 8% this year, not 9% to 11%.

TRACKING STOCK. Armstrong insists he'll make it. The company hit all its targets for the first quarter, including corporate earnings and subscriber growth in new units such as high-speed Internet access. "I have got a job to do with investors, communicating with them so they fully understand the success of our investments and acquisitions," Armstrong concedes. He wants AT&T to be valued on the promise of its high-speed Net access, cable telephone, and digital-TV services instead of traditional long-distance. However, Wall Street isn't buying that yet.

The problem isn't the move into new areas since, for the most part, AT&T is hitting its targets. In operations like high-speed Internet access and digital TV, AT&T has signed up roughly 50% of the subscribers that the company was supposed to for the year. Although subscriptions for phone service over the cable system are off to a slow start, Armstrong says even that service will hit this year's target.

Instead, the problem is timing. "The marketplace expected a fast turnaround," independent analyst Jeff Kagan says. "What it got was a long-term effort." At the same time, AT&T's mistakes in its traditional businesses have compounded investors' fears. A few months ago, those problems might have been camouflaged by 41% a year growth in wireless. But that fast-growing business is part of a new tracking stock. "The creation of the wireless tracking stock has allowed the volatile long-distance market to play a greater role in the valuation of the core AT&T," Yankee Group analyst Brian Adamik says. One more reason Mike Armstrong no longer has time on his side.

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