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Adam Thierer, director of telecommunications studies with the Cato Institute, writes in a paper AT&T most likely cannot stay independent.
"With the long-distance market being cannibalized by wireless and VoIP, and the business customer market subject to such intense competition, there's little chance that those two remaining units will be able to keep AT&T afloat much longer," he says.
"A merger of what remains of the company with some other major telecom provider seems inevitable at some point."
AT&T spokesman Dan Lawler says the company does not comment on rumors or speculation, but he says AT&T has one of the strongest balance sheets in the industry. In the first quarter, AT&T reported free cash flow of $800 million and listed net debt of $8.4 billion and cash on hand of $2.6 billion. The company reported an operating margin of 3.5 percent.
AT&T describes itself as "the world's networking company," but critics question the extent to which the company is plugged in to U.S. homes and businesses. AT&T no longer owns a cable TV unit or a wireless division, and it offers millions of customers local phone service over networks the biggest local phone companies control. The federal wholesale rules the company has vociferously defended before regulators and lawmakers have been abolished under a court order.
AT&T recently announced striking a five-year agreement with Sprint Corp. that will allow it sell AT&T-branded wireless service to consumers and businesses, but it is too early to discern how that venture will fare.
Meantime, AT&T's residential long-distance business continues to suffer heavy losses. The consumer unit generated $9.5 billion in revenue last year, half of the $19 billion reported in 2000.
Recently, U.S. credit ratings agencies have expressed concern over the well-being of the company.
Citing changes in regulations and increased pricing pressure in its business unit, AT&T in June lowered its revenue guidance for the year. Reacting to the news, Moody's Investors Service placed AT&T debt ratings on review for possible downgrade, and Standard & Poor's Ratings Services took similar action. "The guidance revision continues to demonstrate AT&T's challenging business risk profile due to industry pricing pressures and the aggressiveness of the regional Bell operating companies in the small and midsize business and consumer segments," S&P credit analyst Rosemarie Kalinowski said in a press release. "In addition, the accelerated deployment of cable telephony is expected to exasperate pricing pressures."
Lisa Pierce, vice president with Forrester Research, says AT&T can survive on its own, "but it really requires that AT&T get the access situation resolved." AT&T is under pressure to figure out a way to reach homes with its own technology, circumventing the networks controlled by the biggest local phone companies.
The Bush administration and the FCC have declined to ask the U.S. Supreme Court to review FCC rules governing access to the biggest local phone networks controlled by BellSouth Corp., Qwest Communications International Inc., SBC Communications and Verizon Communications Inc. AT&T and other phone companies have asked the high court to review the rules, but analysts and legal experts say the court is not likely to review the case without the support of the Bush Administration.
AT&T and a fleet of smaller companies have been providing local phone service to millions of consumers in recent years by leasing the Bell networks at discounted, government-mandated rates through the UNE platform. AT&T also provides approximately 500,000 small business customers local phone service using the platform.
The rules governing wholesale access to the biggest local phone networks were taken off the books this summer. The FCC is going to write new rules, but FCC spokeswoman Diane Griffin said in July she could not provide any details about the new regulations prior to their release.
"I think there is a lot of sort of indecision in the industry right now because we don't know what rules" the FCC will release, says AT&T spokeswoman Claudia Jones. "It's really just very difficult to make decisions other than what we know to be true. Sometime early this year or next year, the Bells are going to start raising rates on UNE-P services."
Pierce predicts "getting AT&T for both local and long-distance service in the states will be something one can do in certain markets but not many markets."
To help defend its market share of residential business, AT&T has aggressively rolled out Internet-based phone service across the country.
The phone giant has pledged to provide consumers Internet-based phone service in 100 markets by the end of September. Kevin Calabrese, an equity analyst with Argus Research, says AT&T wont recapture all the business it has lost in its consumer unit, but analysts say it is a prudent move. Customers signing up for the phone service must have a broadband connection.
"We think there is life for this company," says Todd Rosenbluth, an equity analyst with Standard and Poor's. "We think they are taking the right steps by moving towards Internet telephony," he says. "In the short run, its going to affect their profitability. But we think it will help the company in the long run."
But can AT&T stay independent? In a research note lowering the rating on AT&T from a buy to a hold, Needham & Co. analyst Vik Grover says AT&T is not likely to be part of the anticipated wave of consolidation among the big players until 2005 at the earliest. Analysts say BellSouth and SBC are the most likely candidates to acquire the biggest long-distance phone companies, but currently they are occupied with closing the acquisition of AT&T Wireless through their joint venture, Cingular Wireless.
Grover says Verizon, the biggest local phone company, also is preoccupied with its enterprise business. "... Given that most logical buyers of the IXCs are busy addressing other issues ... an AT&T takeout by a Bell may be a 2005 story at the earliest," Grover says.
S&P analyst Rosenbluth says there needs to be consolidation among the biggest local and longdistance carriers. "We don't know necessarily a deal will occur ... but we think there are too many players in the market and from an investment standpoint that concerns us," he says.
Argus Research analyst Calabrese says AT&T can go it alone but it is "going to be a much smaller and leaner company than it is now." The real question, he says, is whether the company will be involved in consolidation before it finishes evolving.
For now, that remains a matter of conjecture.
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