Armstrong Backs Bundle, Says Units Will All Get Along

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New York-According to C. Michael Armstrong, AT&T is still committed to bundling voice, video and data services.

Some analysts predicted the plan to split up AT&T Corp. into four parts would ease the pressure to provide a bundle of services, especially at AT&T Broadband.

But chairman Armstrong, speaking at the Bear Stearns Global Communications Conference here last Thursday, called the bundling strategy "critical" and said AT&T would "continue with that same strategy going forward with these separate companies.

"The reason we're doing telephony over cable is not out of any goodwill gesture," Armstrong said. "It's simply out of self-interest and profitability."

Currently, AT&T Broadband generates about $40 per month from each video customer and about $25 monthly from high-speed data customers, Armstrong added. Telephony service adds another $52 to $65 per month to the mix.

"It's the highest revenue-generating unit of the business," Armstrong said.

On Oct. 25, AT&T announced a sweeping restructuring in which it would split itself into wireless, broadband, consumer long-distance and business-services units.

Because most of the cost of offering the service-mainly in infrastructure improvements-has already been made, the margins on telephony service are also high, he said.

"We've got the fixed cost of the fiber infrastructure. We're able to allocate bandwidth through these various businesses, so we don't have to dig up stuff," Armstrong said. "The marginal capital cost is very rewarding and we are the low-cost provider of these services.

"Far from abandoning [the bundle], you will see us continue to exceed penetration levels," Armstrong added. "We are pretty confident that 30 percent penetration over five years of homes passed over that fiber infrastructure is absolutely a doable situation."

Armstrong pointed to a bundling test the company conducted in Aurora, Colo., in which penetration levels of 20 percent were achieved in the first year.

"The business is going well," Armstrong said. "There is good return on invested capital. I can't think of any reason why we would reverse course on that strategy."

Most don't believe AT&T will abandon the bundle right away either. But it gets trickier after the restructuring is

complete in 2002.

At that time, what incentive does AT&T Broadband have to buy long-distance from AT&T if it can get it from another provider at a lower cost?

Armstrong had an answer for that too. According to the restructuring agreements, AT&T divisions are obligated to buy services from each other.

"With that [AT&T] brand will go a set of terms and conditions, licenses, fees and obligations," he said. "One of those obligations will be if we're going to do something in each other's space-bundling, cross-marketing, cross-promoting, cross applications like unified messaging, we're obligated to do it with each other."

If other AT&T divisions are going to use a long-distance network to deliver their integrated services-such as broadband or wireless-those divisions have five-year contracts with options for another five years to source their network from each other, he added.

AT&T has about 400,000 cable telephony customers at present and is on track to meet its stated goal of 500,000 to 650,000 cable-telephone customers by year-end. But some analysts fear a large portion of that growth is due to a promotion in which AT&T offered five months of free phone service to select cable customers.

The fear is that once that promotion expires, many of those customers would drop the service.

"We're confident that given our experience with paying customers that our service meets the expectations and that those who come to the end of the free period will stay with us," said AT&T Broadband spokesman Steve Lang.

Assuming customers will drop the service after the promotion expires also assumes they'd be willing to go through the hassle of switching back their local phone service-mainly, waiting for a technician to install the service at their home.

According to some sources, roughly 25,000 of AT&T Broadband's 400,000 cable-telephony subscribers are part of the free program. That's because AT&T added 50,000 customers in September, when the promotion was offered, and it is available in half of the telephony-ready cities.

The decline in long-distance revenue and cash flow was a catalyst for the breakup because it has dragged down the company's stock. Although AT&T has denied that its sluggish stock price was the reason behind the restructuring, Armstrong admitted that AT&T "didn't anticipate correctly the decline in the long distance business."

AT&T rival Worldcom Inc. last week announced a major restructuring-similar to AT&T's-in which it would create separate tracking stocks for its fast-growing Internet and data business and its long-distance unit.

So far, the restructuring has had little positive effect on AT&T stock, which has dropped steadily since the announcement.

Armstrong also said the drop in AT&T's stock price after the announcement was justified, given the company's poor third-quarter financial results.

"The market's reaction to the AT&T news in total was very rational," Armstrong told a group of reporters.

But he said he felt Wall Street was warming up to the restructuring.

"The analysts on the street, their reaction is that there is a lot of value here."

AT&T stock closed at $21.56 on Thursday, down 44 cents per share.

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