AT&T Corp. made changes at the top of its cable unit last week, replacing beleaguered president Dan Somers with a team of former cable executives in a move some took as a sign that the MSO will fight to remain independent.
Somers, who has taken the brunt of the criticism for AT&T Broadband's poor performance over the past two years, announced last week that he would retire. Replacing him will be former Continental Cablevision Inc. president William Schleyer.
Joining Schleyer — who was named president and CEO of the cable unit on Oct. 23 — are former fellow Continental honchos Ron Cooper, who signs on as chief operating officer, and David Fellows, tapped as chief technology officer.
With new management, the 13.7-million-subscriber MSO might make a better case within AT&T that it should follow chairman C. Michael Armstrong's original road map and remain independent, rather than sell out to Comcast Corp.
But Armstrong said all options remain open. Published reports from last week, which said AT&T set a late-November deadline for outside bids on Broadband, appeared to back up those denials.
"We have two options," Armstrong said. "To do something strategic in some combination, or to stay the course and continue to build this into the biggest and best communications company that we can.
"This announcement of this new leadership will not deter nor defer that process. It is our hope that we can conclude the process by year-end."
Armstrong had hoped to hang onto Broadband by spinning it off as a tracking stock and later making into a separately traded, asset-based company. Comcast's unsolicited $51 billion bid for the cable operation in July changed all of that.
Since then, many companies were rumored to be interested in an in-play AT&T Broadband, including AOL Time Warner Inc., Cox Communications Inc., Charter Communications Inc., The Walt Disney Co., USA Networks Inc., Viacom Inc. and Vivendi Universal SA.
Most later said they were no longer interested — except for AOL Time Warner, which hasn't commented at all, but which might face major regulatory problems in trying to combine No. 2 operator Time Warner Cable with No. 1 AT&T Broadband.
BREWING SINCE SUMMER
Armstrong said he began to consider reshuffling the management team this summer, after the company began to show some operational improvements, results that followed a period of intense investment, consolidation and integration.
"It was then that we began to think through really focusing on taking ourselves to the next level of operating management and operating leadership, not just investment, not just consolidation, not just integration," Armstrong said. "I contacted Bill in the summer, and now we're making the announcement."
Armstrong said he arranged a meeting through AT&T non-executive chairman and board member Amos Hostetter, Schleyer's old boss at Continental.
Armstrong also said the return of the Continental crew did not mean that Hostetter would play an expanded role at AT&T Broadband. "For the past year and a half, I've tried to motivate Amos to have an increased role," Armstrong added. "He's had zero interest."
For his part, Hostetter said the hirings would have no effect on what AT&T's board ultimately decides to do with the cable unit.
"I don't know what the Robertses will ultimately do," AT&T director Hostetter said, referring to Comcast chairman Ralph Roberts and president Brian Roberts. "But the year or year and a half from an announcement to actually closing a deal, that's too long not to have an experienced management team."
Hostetter also denied reports that he opposed the Comcast bid because of its ownership structure. According to published reports, Hostetter had apparently been upset that the Robertses would end up with 42 percent of the vote of a combined AT&T-Comcast, but only a 1-percent equity interest. Those reports said that Hostetter favored a "one share, one vote" structure.
"It has nothing to do with that," Hostetter said of AT&T's rejection of Comcast's offer. "Their first bid was inadequate."
According to some Wall Street observers, AT&T's selections for the new management team don't send a strong signal either way.
Some analysts expressed surprise over Schleyer's appointment, adding that if AT&T had hired a more well-known name — like former Charter president Jerald Kent or AOL Time Warner interactive video chairman and CEO Joe Collins — it would have sent a clearer message that it was not going to sell the company.
Though Schleyer is respected in the industry, he hasn't had regular contact with Wall Street analysts, because Continental was a private company.
"People in the industry know who Schleyer is, but it's not like Schleyer comes in with a lot of built-in goodwill," said one Wall Street analyst, adding that it has been accepted wisdom that AT&T's largest shareholders would block a spin-off if Somers remained at the helm.
"There are management moves that AT&T could make that would send a definite signal," the analyst said. "This is a little more nebulous."
Comcast has the only formal offer on the table and won't modify it until a bona fide competitor emerges, people close to that MSO said.
"Schleyer is a really good guy, but he's been living in New Hampshire doing venture capital deals for the past four years," said one source familiar with Comcast. "How do you suddenly change gears and start running a company in need of a massive restructuring?
"It's going to take him months to organize what he's got on his hands. It's really hard to believe they've bought themselves a year or two to try yet another restructuring."
Schleyer does have operating experience, something AT&T Broadband has lacked ever since former president Leo Hindery Jr. resigned in October 1999. Somers, Hindery's replacement, had been AT&T's chief financial officer, and had limited cable-operations experience at Bell Canada.
Schleyer helped Hostetter build Continental into No. 3 MSO, with 4.2 million subscribers, before he unloaded it to US West Media Group in 1996 for a then-hefty $10.9 billion. At about $2,600 per subscriber, that deal was about $600 per customer above the norm.
AT&T purchased essentially the same assets — later called MediaOne Group Inc. — last year for $44 billion.
MediaOne had earned a reputation of being one of the better-run cable operations, with updated plant and a growing foothold in what was then a new category: cable telephony.
Schleyer left MediaOne in 1997, long before the sale to AT&T, walking out with Hostetter after U S West reneged on a promise to keep the cable headquarters in Boston. Since then, Schleyer has been a principal in the Hostetter-controlled venture capital firm, Pilot House Associates.
Cooper, who also did a stint at Pilot House, was most recently president and COO of Denver-based hosting services company Relera Inc. Fellows was a principal at Pilot House.
Although there is a fair amount of uncertainty as to the length of his new post, Schleyer said, it was an opportunity he couldn't pass up.
"No one knows if there will be a deal or what kind of deal it would be," Schleyer said. "The opportunity is here and it's here today. With this collection of assets, this was a unique opportunity to come in and continue to build on what Dan [Somers] has done and develop broadband. It was a pretty easy decision."
Schleyer said his first order of business would be to build on existing strategies. "We're putting together the plans to continue this efficiently," he said.
When Schleyer was asked if he expected cash-flow margins to continue to rise, Armstrong interrupted.
"I am [expecting margins to grow]," Armstrong said. "We put a stake in the ground that we will be able to take these assets to industry margins by 2003. You should anticipate that we will grow margins."
Somers has been under fire for the past few months, as Broadband had reported some of the lowest cash-flow margins in the industry. Although those margins are growing — in the third quarter, they rose to 25.2 percent, up 6 points from the second quarter — they still lag the industry average of between 40 percent and 45 percent.
Boosting margins won't be Schleyer's only concern. Judging by third-quarter results, also released last week, new product growth also is slowing.
AT&T Broadband generated about 447,000 new revenue generating units in the third quarter, down from 551,000 in the second quarter. Cable telephony adds hit 76,000, down from 148,000 in the prior quarter.
Digital subscriber additions also slowed, to 260,000 from 274,000. In high-speed data, AT&T added 111,000 customers, down from 129,000.
Basic subscribers rose by 43,000 customers, or about 1 percent in the period, to 13.7 million.