AT&T'S RINGING HEADACHE

By GEORGE J. CHURCH

What a way to celebrate an anniversary! Last Tuesday, just over a year after announcing that AT&T would split itself into three parts, chairman Robert Allen placed a conference call to investment analysts to issue a progress report. What he said promptly knocked $9 billion off the company's market value: it dropped $5.625 a share to $51.50. The reason: the phone company, still the biggest piece, is likely to earn about 10% less profit in the third quarter than analysts estimated. Allen said that net in the fourth quarter will also be below forecasts. That means profit will be down from a year ago too, perhaps as much as 14%.

The news had industry watchers wondering whether Allen was building a trapdoor beneath his feet. After the huge write-offs earlier this year, better results were expected, and soon. Explaining the disappointing prospects, AT&T reminded analysts that its core business, long-distance phone service, remains under intense pressure from new and old rivals. Even so, says Simon Flannery, an analyst with J.P. Morgan, many investors hoped the second-quarter trouble "was a one-quarter phenomenon and that things would improve. People who bought stock on that hope were probably disappointed and sold it." Which is not to say that the so-called trivestiture was a mistake. AT&T would probably be worse off had it held on to its equipment-manufacturing and computer businesses--the latter a huge money loser--which are being spun off.

But AT&T has not been an agile phone warrior, and there are few signs that the breakup has put the core business into better shape to meet cutthroat competition. Anyone turning on a radio or TV, answering the phone or picking up the mail these days has to fend off endless pleas from AT&T and competitors--MCI and Sprint are the biggest--to switch his or her long-distance calls from one carrier to another. Or pleas not to switch. Or to switch back.

AT&T seems to be losing market share and is in a costly battle to get it back. Last week it descended into a pure price war, announcing a new flat-rate plan: 15' a minute for any call, anytime, anywhere in the country. Competitors already offer such plans. MCI Telecommunications president Timothy Price jeers, "The routine is that MCI introduces a service and AT&T says it isn't necessary. Then a year later they come out with something similar." AT&T isn't the only phone company whose stock is under pressure (see chart). Share prices of the Baby Bells have also lagged the market. Next year new federal legislation will allow the Baby Bells--regional phone companies spun off from AT&T under a 1984 antitrust decree--to start muscling in on the long-distance market too. Some analysts think that over time the Baby Bells might win a 20% share, part of which would come out of Ma Bell's hide.

But remember, say AT&T officials, the same law allows the company to invade the local calling business. Allen thinks he can quickly grab a 30% share. Some Wall Streeters think 10% to 20% in five years is more likely. But even that much of a $100 billion market would boost profits nicely.

In addition, notes Richard W. Miller, AT&T's executive vice president and chief financial officer, "we're already No. 2 in Internet access." In the past six months AT&T's WorldNet Internet-access-provider program has claimed more than 400,000 subscribers. And it has the capital to develop and supply equipment that would speed up the often molasses-slow process of downloading material from Internet to home PC. Even so, the company that was once the model of a monopoly is still feeling its way. Says Miller: "It's a new competitive environment." In spades. Doubled and redoubled.

--By George J. Church. Reported by Stacy Perman/New York

With reporting by Stacy Perman/New York