AT&T loses its way

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When AT&T Corp. spent $115 billion to acquire cable TV properties from Tele-Communications Inc., MediaOne and Liberty Media in 1999, industry watchers expected the behemoth ultimately to reshape cable TV's landscape.

It hasn't happened yet. For all of its 16 million cable subscribers and perceived marketplace clout, AT&T Broadband today is burdened by the financial problems of the parent company, which is casting a shadow on the cable operation's future.

Although AT&T remains the No. 1 cable provider, several smaller cable rivals are surging ahead, growing through acquisition of regional systems and launching tightly focused marketing campaigns centering on next-generation digital technology.

Now, in the face of an ongoing financial squeeze and a rising chorus of industry concern about the corporate parent's mountain of debt, AT&T Broadband needs to separate its identity and become a nimbler, more consistent operation.

"They have been struggling," says Hal Vogel, CEO of investment advisers Vogel Capital Management. "There is a case to be made that TCI was in pretty shabby condition. The deal has not worked the way it was supposed to work."

AT&T bet its premium digital services would be a big lure for consumers, but building the digital empire is expensive.

AT&T "is deploying digital services, but not as quickly as Comcast Corp. or Cox Communications or AOL Time Warner," says Chris Dixon, security analyst for UBS Warburg, New York.

Many of the systems AT&T inherited from TCI were built in small and rural markets, compared with the large-market concentration strategy of AOL Time Warner's cable operation.

Analysts expect AT&T to run into problems meeting the need for capital improvements in its aging cable systems.

3 MILLION DIGITAL SUBSCRIBERS

Of the 16 million AT&T cable subscribers, 3 million are digital subscribers, which is higher than the industry's average digital level, says an AT&T spokesman. Digital services include any combination of increased channels, video-on-demand, programming interactivity, electronic program guides, pay-per-view home ordering, digital music and telephony services.

To improve and streamline its digital offerings, AT&T last August eliminated the plethora of different digital offerings that TCI and MediaOne had been selling.

The cable company refocused its marketing around four levels of digital plans, called "Digital Value Packages." Prices for these range from $39.99 to $79.99 per month.

AT&T is picking up momentum.

Initially, it was only able to sell 40% of new consumers any digital packages to start, says Cathy Fogler, director of video product management for AT&T Broadband. Now, these so-called "sell-in" rates have jumped to as high as 50% in some cases, she says.

CHANGE IN SALES TECHNIQUE

The difference is in how the packages are sold. Instead of just selling regular analog cable service, sales people are instructed to push the digital service first when new cable customers call. Observers say AT&T always had this philosophy, but unfortunately, not always the capability.

AT&T "has been one of the most aggressive [cable TV marketers]," says Seth Morrison, senior VP-marketing for the Cable & Telecommunications Association for Marketing. "But [it] didn't always have much digital channel capacity."

Like other cable operators, AT&T is hampered by the fact that not all cable systems have the same kind of program lineup or the same kind of technology. Further problems are that some of its systems use older analog technology, as well as older digital technology.

"Where AT&T has a challenge is that they have the most first-generation digital boxes out there" vs. the rest of the industry, says Mr. Morrison. "That's a product development challenge."

AT&T Broadband sold off some cable systems last year to better cluster operations in major markets. Its biggest markets now include San Francisco, Boston and Chicago. The company also is in talks to sell its 25% stake in Time Warner Entertainment, which will help lighten the corporate debt load. AT&T says it hopes to spin off the broadband unit this fall.

EXECUTIVE IN COMMERCIALS

To cluster its systems in major markets, AT&T sold systems representing 574,000 subscribers to Charter Communications and 840,000 to Mediacom Communications.

Some of this has helped its digital marketing plans.

"We have marketing and advertising efficiencies now," says Ms. Fogler. AT&T uses direct mail, bill stuffers, consumer service representatives and cable TV ad time. Ms. Fogler even appears in TV spots to sell its digital services on-air. The spots were created in-house.

This was all part of a bigger plan for AT&T Broadband, which was born last fall when AT&T Chairman-CEO Michael Armstrong announced a plan to split the company into four units: AT&T Broadband, AT&T Wireless, AT&T Consumer Services and AT&T Business Services.

Little has been said since that announcement, and so far, analysts haven't been enthusiastic about the proposed split-especially in establishing AT&T Broadband as a tracking stock.

"Tracking stocks have been discredited," says Mr. Vogel. "It won't be welcomed by Wall Street. They don't provide the stockholders any real value."

If cable TV was to be the driv-ing force of AT&T in future years, as the company's long-distance business declined, that game plan has been accelerated as AT&T's telecommunications profits have slid sharply.

"The long-distance business have fallen off the cliff, deteriorated much faster than expected and has put the pressure for cable to perform better," says Mr. Vogel. He says cable probably represents a big part of AT&T's overall business, putting intense pressure on the broadband division to perform.

ASSETS FALL SHORT

AT&T's financial pinch boils down to the fact that the company spent $115 billion in a number of acquisitions, but the value of those assets is nowhere near that today. AT&T Corp.'s market valuation is $82 billion. AT&T Wireless, a tracking stock, is worth about $45 billion.

AT&T Corp.'s stock price has gyrated along with these trends, trading as high as $64 in January 1999 and as low as $18 to $20 this year.

Recently, the stock "actually has been outperforming the market," says Mr. Vogel. "The stock has stabilized."

Still, considering the state of the economy and its expected effect in slowing the growth of cable TV, the future isn't clear. Mr. Vogel concludes: "You have a direction looking for a company because the company can't find the direction."

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