AT&T may spin-off long distance service

It’s hard to imagine AT&T Corp., the former U.S. national phone monopoly and the biggest phone company in that country for nearly 100 years, getting out of the phone business, but that’s just what is reportedly being considered.

In the wake of a pivotal annual board retreat two weeks ago, AT&T management, according to initial reports that surfaced in the Wall Street Journal, is considering spinning off the business that formed the cornerstone of the company for decades: long-distance telephone service.

It seems that’s what the company has come to, as Wall Street and investors prove increasingly distrustful that Ma Bell can turn itself around in the gale force winds of the Internet Economy.

When CEO Mike Armstrong came aboard two years ago and started acquiring cable companies to the tune of US$112 billion, the idea seemed sound. The cable strategy could make it possible for AT&T to sell bundles of services, such as Internet access, phone service and interactive TV, on a single system. As an added bonus, AT&T would avoid the massive charges that the company had to pay to local phone companies in order to terminate long-distance phone calls.

So far, the results haven’t matched the promise. Since cable networks and technologies aren’t doing the trick Mr. Armstrong had hoped they would, financial maneuvering is in order to change AT&T’s image from old-world phone company to broadband powerhouse. This is where Liberty Media Group CEO John Malone, an AT&T board member, is maneuvering to play a big role in the company’s future.

Malone is the financial wizard who managed to cobble together what was once the nation’s largest cable network, TCI, with little capital. Even though it was not a very good cable network from a technology standpoint, he was able to run it competitively for years with complex financial arrangements, balancing his relatively meager cash flow with investments and carefully managing his stock price, which allowed him to expand the company.

He has floated the idea of spinning off AT&T’s phone business in the media, but it would be one of the boldest experiments in financial engineering attempted since the last time AT&T spun off a huge chunk of its business in 1996, creating Lucent Technologies. That was done for very different financial reasons, but was wildly successful.

The problem with AT&T’s long-distance business is that there is no longer a way to effectively cut costs. The networks that used to carry phone traffic have been engineered to death; there is no more efficiency to be squeezed out of them. On top of that, the business demands expensive advertising, some US$600 million a year. The revenue is solid, but eroding at eight per cent a year.

AT&T says it wants to invest in the Internet technologies expected to take the place of old-phone revenue, but so far, apart from the cable strategy and the acquisition of Excite@Home, the telco has not been very aggressive. The company’s boldest move to date was a US$1 billion investment in Internet phone company Net2Phone, but that company is still struggling to figure out its business model and there is little indication AT&T is going to expand that relationship.

It may be a case of too little, too late. AT&T, having failed to evolve, may be broken up and sold – an outcome that Malone might welcome, since it would maximize the value of his AT&T shares.

Observers will probably learn what AT&T will do with its phone business after the company’s next board meeting, to be held late this month.