The Babies Are Leaving Ma Bell Behind

To see how far apart they've become, consider SBC's third-quarter profit of $2.1 billion and AT&T's $7.1 billion loss

By Brian Grow

Earnings at two of the nation's biggest phone companies spotlighted the topsy-turvy fortunes of the telecommunications business on Oct. 21. Boosted by a big asset sale and revenue gains in all of its business units, SBC Communications (SBC ) saw profits soar 75% in the third quarter. But at AT&T (T ), an asset write-down and charges for massive job cuts combined to produce a huge loss.

The results at SBC and AT&T underscore the industry's divergent trends. The Baby Bells are benefiting from recent rulings that loosen the guidelines on renting their phone lines to competitors and from their rapid expansion into more communications niches such as ultra-high-speed Internet access.

Meanwhile, storied long-distance companies such as AT&T have been pummeled by falling prices, lost regulatory battles, and the steady defection of consumers to regional phone companies and cell-phone providers. The bad news has sparked speculation that AT&T, and other long-distance providers such as MCI, are ripe for takeover.


  AT&T, the nation's oldest telecom, lost $7.1 billion in the quarter, or $8.95 per share, spurred by $12.5 billion in charges for shuttered operations and 7,500 job cuts. Total revenues fell 11.7%, to $7.6 billion, from $8.65 billion last year, led by a 15% drop in income from long-distance customers. Excluding charges and gains from tax benefits, AT&T would have reported a profit of $262 million, down from $438 million in the same period last year.

"Clearly, we've made some tough choices this year," said David W. Dornan, AT&T's chief executive, in a conference call with analysts on Oct. 21. Indeed, investors were cheered by the harsh cost-cutting and drove up the share price 1.4%, to $15.79, that day.

Still, the New Jersey-based giant has been hobbled by a series of setbacks. A price war with other long-distance providers helped slash revenue from business customers by 10.4%, to $5.6 billion, in the quarter. In June, the Federal Communications Commission voted to scale back regulations that require local phone companies to rent their residential lines to AT&T and others at cheap rates. Now, the four Baby Bells, including SBC, plan to raise the cost of leasing those lines by as much as 15% next year.


  The ruling prompted AT&T to announce an exit from the consumer long-distance business -- and to slash about 20% of its workforce this year, or at least 12,500 jobs. Seeking to bat down speculation that AT&T faces a takeover or might merge with another carrier, Dornan said: "We're absolutely certain that we'll weather the storm and be here. The frustrating thing is the timeline."

SBC has no such jitters. The San-Antonio-based company reported third-quarter profits jumped to $2.1 billion, up from $1.2 billion in the same period last year, buoyed largely by the September sale of SBC's directory publishing business to Yellow Pages publisher R.H. Donnelley (RHD ) for $1.4 billion. The sale yielded an aftertax profit of $827 million.

Overall, revenues rose 1.4%, to $10.3 billion, in the quarter, while costs remained flat at $8.6 billion. A multipronged services strategy, bundling local, long distance, and Internet access for consumers, reaped substantial gains: 400,000 new broadband customers joined SBC in the quarter, up 28% from the same quarter last year, and it added 1.3 million long-distance lines.


  Indeed, SBC is clearly relishing the chance to add new high-tech offerings, such as video services, to its arsenal. In the latest boost to that plan, the FCC said on Oct. 14 that regional Bells won't be required to lease the last mile of fiber -- from the street to the home -- to competitors at a discount. The upshot: Last week, SBC said it will accelerate its plan to invest $4 billion to $6 billion to bring that fiber to 18 million homes by 2007.

"We are moving forward aggressively to deploy an advanced network to deliver next-generation, integrated all-digital TV, super-high-speed broadband, and IP services," SBC Chairman and CEO Edward E. Whitacre Jr. told analysts on Oct. 21.

Despite all the good news, SBC's share price fell nearly 3%, to $25.68, as traders cashed in profits on Oct. 21. The fall-off is just one more sign of how much investors are demanding from the Baby Bells these days.

Grow is a correspondent for BusinessWeek in Atlanta

Edited by Thane Peterson

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