AT&T Corp - Move To Cable And Internet Markets

MOVE TO CABLE AND INTERNET MARKETS

To promote its image as a leading technology developer and content provider, AT&T launched a Web site, with various online services, in 1995. The Telecommunications Act of 1996, which essentially deregulated the U.S. telecommunications industry, allowed local and long-distance phone companies, Internet firms, and cable businesses to begin competing in each other's markets. AT&T took advantage of the legislation almost immediately, launching WorldNet, an Internet Service Provider (ISP), in March. By November, WorldNet had secured roughly 425,000 subscribers. Other leading telecommunications firms began announcing billion dollar mergers. While consolidation in the industry already had been happening on a limited basis prior to February of 1996, the act opened up unprecedented cross-market penetration opportunities. To prepare itself for such deals, AT&T split into three separate entities in December. The firm retained its communications operations; consolidated the Bell Laboratories equipment manufacturing operations into a new public company, called Lucent Technology; and spun off its struggling computer operations, which had lost roughly $4 billion over the past five years.

In 1997, AT&T added two electronic catalogs—one for residential customers and one for small business clients—to its Web site. Plans to allow e-commerce transactions to take place on the site were launched by the newly formed AT&T Interactive Group. The firm also began marketing its first virtual private network (VPN) service to corporations in December. Earlier in the year, C. Michael Armstrong had replaced Robert Allen as CEO. Wanting to reduce his firm's reliance on the increasingly competitive long-distance market, particularly since attempts to penetrate the computer market had failed, Armstrong orchestrated the $11.3 billion purchase of Teleport Communications Group—a local phone service for businesses owned by cable operators Tele-Communications Inc. (TCI), Cox Enterprises, and Comcast—in 1998. That year, in a deal valued at $10 billion, AT&T and British Telecommunications PLC agreed to merge their international operations to form WorldPartners.

Believing that local telephone, cable, and Internet services would converge into one giant industry in the near future, AT&T also began eyeing cable and Internet firms. Almost immediately after taking over as CEO, Armstrong had approached TCI, attracted to its broadband Internet services and cable operations. After watching several deals unfold—the $10.8 billion purchase of Continental Cablevision, the third largest U.S. cable operator, by regional telephone operator U.S. West Inc.; the $16 billion purchase of Pacific Telesis by SBC Communications to form the second-largest phone company in North America; the $25.6 million joining of Bell Atlantic Corp. and Nynex Corp.; and the $37 billion merger of World-Com Inc. and MCI Communications Corp.—AT&T and TCI decided to act. They announced a $48 million merger agreement in June of 1998 and received Justice Department approval in January of 1999. When the $59 billion deal closed in March, AT&T changed TCI's name to AT&T Broadband & Internet Services. The firm then began working on upgrading TCI's infrastructure to allow for integrated local telephone, cable television, and broadband Internet services.

AT&T became the largest U.S. cable carrier when it paid $58 billion for MediaOne Group Inc. in the middle of the year. However, stock prices began to plummet when several analysts criticized the firm for underestimating the cost and complexity of transforming cable networks into local telephone and Internet pipelines. According to a February 2001 article in Multichannel News, "In its struggle to transform itself into an Internet and wireless communications leader, AT&T slowly began to implode. Almost $20 billion of its revenues were still generated from its long-distance business, slowly depleting the company's deep pockets, which funded the ongoing makeover. Meanwhile, AT&T's stocks continued to reach new lows."

Early in 2001, AT&T sold 574,000 cable subscribers to Charter Communications for $1.79 billion and 840,000 subscribers to Mediacom Communications Corp. for $2.2 billion. AT&T and British Telecommunications revealed plans to shut down Concert, a joint venture they had established in January of 2000 to provide high-speed Internet and phone services to multinational corporations. In May, AT&T agreed to purchase bankrupt Internet Service Provider (ISP) NorthPoint Communications Inc., including its Digital Subscriber Line (DSL) services. Although the firm's WorldNet ISP had grown rapidly to 1.1 million subscribers by mid-1998, its growth in 1999 and 2000 had been stagnant. AT&T hoped to bolster its performance with the launch of DSL services by the end of 2001. In June, the firm announced its intent to begin acting as an ISP in Thailand. According to Armstrong, who insists that AT&T's diversification into cable telephony will pay off for the firm, despite the dire predictions of analysts, the four-way split of AT&T's operations will be finalized by the middle of 2002.