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20 years later, Ma Bell covets markets of its growing kids

By James S. Granelli
Los Angeles Times

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There was one company — AT&T — and it charged one basic price for local calls. Long-distance service cost extra and was too expensive not to watch the clock while talking.

Then a federal court turned the telecommunications industry upside down, and millions of Americans suddenly had to start paying attention.

In breaking up AT&T's monopoly, a court-approved antitrust settlement that took effect 20 years ago yesterday forced Ma Bell to turn over its local phone businesses to seven regional Baby Bells and to open up its long-distance network to rivals.

The result was "too much complexity" for average consumers, Pearce said recently. Quintana said dealing with two companies and two bills was "awful."

Now, the company founded by Alexander Graham Bell is trying to recapture a big part of its past.

New technologies and regulations are helping the world's biggest long-distance carrier again woo the local callers it once controlled.

This time, AT&T is the upstart, going head to head with the local phone companies it once owned and the long-distance companies that thrived after its breakup.

The market is so cluttered that AT&T almost merged last spring with BellSouth, one of its offspring.

The consumer phone market is "an intensely competitive space," said Maribel Dolinov, chief telecom analyst at Forrester Research in Cambridge, Mass. "They're going to be challenged by the regional Bells and others, and it's going to be hard for AT&T to differentiate itself when it doesn't have a large consumer base."

But AT&T has a big advantage: its storied name.

"Communications technology is just so vital that I don't feel comfortable trusting it to someone I don't know," said Pearce, a Laguna Hills, Calif., media consultant for the building industry.

He always has had AT&T long-distance service and is thinking about switching local service to the company.

As a retiree, Quintana of Oceanside, Calif., put it: "It's something I recognize."

AT&T Chairman David Dorman is counting on brand recognition as the company navigates massive changes in the telecom industry.

The federal Telecommunications Act of 1996 threw open local markets with the intent of spurring competition, and now wireless and cable companies are rushing in with long distance and other rivals.

Although deals abound for consumers, the market is littered with dead companies and billions of dollars of wasted investments.

"It's still true that we have an enormous brand reach and brand presence and unaided awareness," Dorman said. "But we can't take that for granted."

Unlike in its monopoly days, analysts say, the new AT&T must be slimmer and nimbler to succeed at offering local, toll and long-distance service in one package.

The company, leasing Baby Bell equipment in 35 states covering 60 percent of the national market, is going after the critical mass needed to ensure it would stay in the local market "for the long term," Dorman said.

In the past two years, AT&T has picked up nearly 4 million local residential phone lines, the nation's biggest telecom market.

Still, that pales in comparison with the Bells, which own the local lines and still control 85 percent of the local market nationwide.

With the Baby Bells gaining long-distance customers and able to free themselves from regulated pricing by installing fiber-optic cable to homes, some analysts think AT&T's days are numbered. "I doubt AT&T will be an independent entity in four or five years," said analyst F. Drake Johnstone of Davenport & Co. in Richmond, Va.

But Dorman believes the company has the flexibility and cash flow to stay the course. He sees the residential market as key to AT&T's success.

The company's consumer unit, through the first nine months of 2003, posted a $1.6 billion operating profit on $7.3 billion in sales.

"So it's not a small business," Dorman said. "But right now, it's sort of viewed as, 'Well, that business is going away.' Obviously, the facts belie that."

Indeed, the nine-month operating profit was slightly higher than that for the business unit, which caters to large corporations and brings in two-thirds of annual revenue.

Credit Suisse First Boston analysts at a December conference weren't wowed by the company's consumer plans.

They focused instead on Dorman's estimate that AT&T's crucial big-business unit would suffer a 6 percent drop in annual sales, instead of the expected 5 percent drop, because of pricing pressures.

They downgraded the stock to "neutral" from "outperform."

Analyst Vik Grover of Needham & Co. in New York is more optimistic, putting a "buy" recommendation on the stock.

"We believe the company is the main beneficiary of a flight to quality," he wrote in an October report.

AT&T shares rose 27 cents Wednesday to $20.30 on the New York Stock Exchange. They lost 22 percent of their value in 2003.

Analysts such as Grover credit Dorman for the company's aggressive move into voice-over-Internet protocol (VoIP), a technology that transmits voice along high-speed lines like e-mail and other data.

The company plans to roll out VoIP in the nation's 100 largest markets by the end of March.

The technology, which promises lower-cost phone service with worldwide calling at no extra charge, will come with a host of features that probably will be priced as options.

Among the features AT&T will be offering are ones that block certain calls and junk faxes, send voicemail to e-mail and — in what analyst Dolinov calls a "killer" application — switch a call from a home landline phone to a cellphone in mid-conversation.

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