Ma Everything!

By Karl Taro Greenfeld

Don't think of it as cable. AT&T wants you to view that innocuous coaxial wire tacked beneath the shag as a gateway to the digital future, one through which phone calls, faxes, e-mail, news, movies and entertainments as yet unimagined will stream into your home, the gigabytes of information flowing seamlessly into your collection of computers, televisions and telephones. And at the end of the month, for all that, AT&T will be sending you one bill.

With last week's $60 billion acquisition of cable company MediaOne and a $5 billion partnership with Microsoft, AT&T and chairman C. Michael Armstrong have completed the first stages of a plan to remake the famously ponderous long-distance telephone company into a new-economy supernova. And if it seems hard to imagine that the cable bringing you Matlock reruns and Stone Cold Steve Austin will be your sole electronic connection with the outside world, get used to it.

This deal amounts to a huge bet that you will come to see a rejuvenated Ma Bell as a benevolent Ma Everything, offering local and long-distance telephone service, high-speed Internet access and new television options such as video on demand, all bundled into that little white wire.

To make this elephant dance, Armstrong has put into practice an elegantly simple plan: fashion AT&T into the leading communications company in the world by acquiring what's known as "the last mile"--the part that ends in your home. If you are like most Americans, you are connected by two wires: a copper phone wire and a coaxial television cable. Own one of those, Armstrong reasons, and the future of communications--via voice, data and television--is AT&T's.

Of course, AT&T owned the last mile back before it was even called the last mile. But that monopoly was broken up by regulators in 1984, forcing the company to divest the Baby Bells--and pay them access fees to use their lines. "If you have to go through your competitors, then how can you be effective in satisfying your customers?" Armstrong asks, explaining his decision to begin purchasing cable companies. "I asked, What was it going to take to become the greatest communications company in the world?"

In a word: him. Since arriving at AT&T 18 months ago, after stints at IBM and Hughes Electronics, Armstrong has unleashed a wave of high-profile, big-bucks purchases that has sent both his and the company's stock soaring. It was the perfect meeting of a CEO with an unlimited imagination and a corporation with an unlimited checkbook. In January 1998, just two months after Armstrong took the helm, the company paid $11 billion for Teleport, a company that operates fiber-optic networks in New York and other cities. Six months later, AT&T purchased Tele-Communications Inc., then the second largest cable company in the U.S., for $53.5 billion. Acquiring MediaOne, and adding its 5 million subscribers to TCI's 12 million households, would finally give AT&T the national footprint it needed for widespread realization of its new strategy.

Armstrong's bold stroke posed such a change in the competitive landscape that various players along the communications-company continuum spent a few desperate days last week searching for ways to keep MediaOne out of AT&T's hands. Internet power America Online, software supremo Microsoft, telecom giant MCI Worldcom and cable's Comcast (which made the initial $48 billion bid for MediaOne that AT&T overwhelmed) all huddled at various times because each had something to lose. AOL, for instance, could find its access to cable-modem customers blocked and its booming online-content business threatened.

Overlooked in all the hype about a bidding war was the fact that the economics of the deal could work only for AT&T, because of the synergies Armstrong's strategy made possible. No other company was in a position to provide each of MediaOne's subscribers with as wide an array of services and soak up all those revenue streams. (Think about it: Would you rather buy phone service from your local cable company or AT&T?) No other company, in other words, could justify the $4,700 per subscriber that AT&T was willing to pay. "Bottom line: we can bring more value to the MediaOne assets, and we can get more value out of the MediaOne assets, than any other company or combination of companies," said Armstrong before the deal closed.

Nevertheless, Armstrong handed out some consolation prizes to keep his rivals from hatching new plots. AT&T made Comcast happy by selling the company 2 million cable subscribers at the relatively low cost of about $4,550 per subscriber. That was in addition to the $1.5 billion breakup fee Comcast collected to walk away from the deal. (Comcast's strengthened position may come in handy later as Exhibit A when AT&T has to prove to regulators that it has not rebuilt the old Ma Bell monopoly.) AT&T sold to Microsoft--a company whose Internet strategy is looking increasingly piecemeal--$5 billion of preferred stock and an opportunity to supply some of the operating systems and software for the set-top boxes and servers that AT&T will have to deploy to support its vast new digital domain.

AT&T may have needed this deal more than anyone else did. While the company posted a healthy $1.78 billion profit last quarter (in 1998 it earned $5.4 billion on sales of $53 billion), its core long-distance business suffered a 3.4% decline in the face of stiff competition from MCI WorldCom and Sprint. Also worrisome: AT&T's wireless-telephone business is in danger of being lapped by Sprint PCS. MediaOne provides AT&T with sorely needed growth opportunities in previously closed markets, particularly local telephone. "That's what AT&T really knows how to do," says Armstrong. "We're going to be the lowest-cost product out there."

Although AT&T seems to be buying the world, this deal may finally jump-start the increased competition Congress envisioned with the Telecommunications Act of 1996. The Baby Bells are likely to howl to the Federal Communications Commission about AT&T's getting into local phone service, and demand access to long-distance markets for themselves. Bring 'em on, says Armstrong. He knows that consumers still remember, with some fondness, Ma Bell's past--when it was The Phone Company. This could mean more annoying phone calls interrupting dinner urging you to switch your local as well as long-distance phone companies--but it should also lead to lower prices. AT&T will face regulatory review by the feds, particularly given the inclusion of Microsoft, currently the subject of a government antitrust suit. Said FCC chairman William Kennard in a statement: "Because of its size and reach and the many novel legal and policy issues involved, this proposed merger warrants very careful scrutiny."

Beyond the regulatory challenges are a slew of technological hurdles still to be cleared before Ma Everything can deliver anything. Local telephone has been deployed through cable in only a few thousand households. Scaling that up to AT&T's new 20 million-home market will be a different matter. "Finding demand is not a challenge," says Armstrong. "Meeting demand will be." Among the logistical problems: shipping and installing millions of NIUs (network interface units) on the sides of houses. Don't forget that it's been a while since AT&T rolled trucks and laid cable on this level. "They still have a lot of legacy technology that won't work in the information age," says telecom analyst Jeffrey Kagan. "Add all these new companies, and you have a recipe for chaos--or success."

But once the lines are down and the boxes in place, AT&T's merger of brand and technology could change the way we use home computers and televisions. Ma Everything's plans hinge on something called broadband--another word for high-speed Internet access over phone lines, by wireless signals or, in the case of AT&T's strategy, via fiber-optic cable. AT&T's new infrastructure will transfer data 50 to 100 times as fast as standard Internet dial-up access, so the company can funnel Internet users to broadband partner AtHome, which came along as part of the TCI buyout. Because broadband connections are always on, you won't have to dial up an Internet service provider, wade through busy signals or wait for authorization to surf the Net. You'll sit down and go. "I spend tons more time on the Internet now," says Karen Cicero, a cable-modem customer in Bethlehem, Pa. "I shop on the Net now. I would never have done those things with a regular connection."

The high-speed capability, according to experts, will encourage the migration of the computer into the common areas of the household. That means more sites visited, banners clicked and e-commerce transacted--and AT&T (as well as Microsoft) wants a piece of all that fast-growing action. The company already has a wide array of Internet products and e-commerce applications ready to deploy over the nascent network. Gradually, through television advertisements, mailings and those annoying phone calls, AT&T's AtHome could become an online brand to rival AOL. "They are going to hit you on ESPN, on CNN, on NBC, saying AtHome is now available," says Tom Henderson, analyst at Janco Partners Inc. "I think AtHome wins here."

It is hard to believe that just over a year ago, when Armstrong laid out his strategy to his fellow executives, betting big on cable was a radical idea. Then again, that was a time before eBay was a publicly traded company and skeptics insisted Yahoo was overvalued at $24 a share. Since then, the Internet has grown by hyperleaps, and cable-broadband looks likely to be the tool that makes it grow even faster.

In some sense, last week's agreement with Microsoft, a deal in which Bill Gates has taken on a junior-partner role to AT&T, is symbolic of what has occurred. For if Gates has defined visionary business leadership throughout the '90s, then Armstrong may now be emerging as a revisionary visionary in his own right. AT&T, like Microsoft, struggled to form a coherent strategy to embrace the technologies and consumer services emerging in the "post-PC" era. Unlike Microsoft, AT&T has certainly made up for lost time.

--With reporting by Maryanne Murray Buechner and Daniel Eisenberg/New York and Adam Zagorin/Washington

With reporting by Maryanne Murray Buechner and Daniel Eisenberg/New York and Adam Zagorin/Washington