WASHINGTON – AT&T Corp. (T), the nation's largest long-distance carrier, said Thursday it would stop seeking new customers for its traditional consumer long-distance service, the bedrock of the company known as Ma Bell. The announcement coincided with another big drop in quarterly profit.
The move is the latest in a series of humbling events for the once-mighty telecommunications company, starting with its breakup by a federal judge in 1984. Since then, "AT&T has made a number of decisions that set it up for a big fall, and a big fall we have seen it take," said Adam Thierer, a telecommunications analyst at the Cato Institute.
Even as the company bets its future on its business customers, which now generate 75 percent of revenue, investors knocked pennies off its already battered stock and one ratings agency downgraded its debt to junk status.
By contrast, the announcement was seen as another victory for the regional Bell Companies, once mere divisions of AT&T, now its fiercest rivals. Shares of the three largest regional Bell companies, Verizon Communications Inc. (VZ), BellSouth Corp. (BLS) and SBC Communications Inc. (SBC), rose on Thursday. The only regional Bell trading down was Qwest Communications International Inc. (Q ), whose shares have been depressed by investigations into its past accounting.
AT&T is not pulling out of any markets and will continue to serve its existing residential customers, but it said it will no longer pour roughly $1 billion a year into winning new ones.
The announcement follows a regulatory decision that increases AT&T's costs to provide local service and compete with the regional Bells. "This decision means that AT&T will focus on lines of business where we are a clear leader, where we control our own destiny and where we have distinct competitive advantages," said David W. Dorman, the company's chairman and CEO.
AT&T, based in Bedminster, N.J., did not rule out the possibility of spinning off its consumer unit as a separate company in the future.
Some analysts are predicting yet another breakup for the company, which was split under antitrust law in 1984 and by management in 1995. The next split would divide it in three: a consumer company, a business services company and a wholesaler, said Tim Horan, a telecom analyst at CIBC World Markets Corp.
"I would have preferred to have seen them spin it off now," he said. "But a spin-off is a big move for them psychologically and practically. It's not easy to do."
In a report titled "Ma Bell No More," Legg Mason analyst Daniel Zito said the company could be an acquisition candidate.
The company, founded by Alexander Graham Bell (search ) in 1885, grew to become the nation's main phone company, the only way for most boys in the army or girls at college to call home. Its pioneering advertising, urging viewers to "reach out and touch someone," changed long-distance from a luxury to a necessity.
Still one of the nation's most widely held stocks, an investment in AT&T was long considered a safe bet, with steady share increases and a dependable dividend.
Before the breakup, the company was a government-blessed monopoly. Afterward, critics say it remained mired in a bureaucracy where office furniture was bestowed according to rank and the cushy executive suite was known as "Carpetland."
A series of strategic mistakes and an ongoing price war have bled its profits. For the April-June quarter they were $108 million, or 14 cents a share, down from $536 million, or 68 cents a share, in the same period a year ago. Revenue dropped to $7.6 billion, down 13 percent from $8.8 billion in the same period last year.
Investors were prepared for earnings to be even lower. Analysts surveyed by Thomson Financial had expected profits of 7 cents a share.
The company's profits for the six months ending June 30 were $412 million, or 52 cents a share, down from $1.1 billion, or $1.41 a share, for the same period last year. Its six-month revenue was $15.6 billion, down from $17.8 billion for the same period last year.
Fitch Ratings downgraded AT&T's debt to junk on the news, saying it was concerned the company would be unable to stop the erosion of its revenues. A junk rating means some big investors like pension funds cannot buy AT&T bonds, and could make it more expensive for AT&T to borrow.
The consumer market pullout is a dramatic shift for a company that, in the heat of long-distance competition in the late 1990s, sent prospective customers checks for $75 and $50, with the proviso that customers who cashed them would be switched to AT&T's service.
Since then, its core long-distance business became less profitable and its regional Bell offspring leveraged their biggest advantage — owning the wires into homes. To offer local service, AT&T had to rent access to the Bells' networks, but the regulations setting low rental fees were overturned in Federal court in March and the Bush Administration declined last month to pursue an appeal to the Supreme Court of the United States.
The end of the rental regulations means the company won't be able to offer competitive bundles of local, long-distance and Internet service that have become increasingly popular with consumers, Dorman said.
AT&T had fought with the Bells over the rental regulations for almost 10 years, but Dorman said it would now walk away. "We will not invest to fight legal battles that no longer make sense, given the government's dramatic shift on telephone competition," he said Thursday.
AT&T's stock has slid precipitously in the last four years. It traded above $90 a share at the height of the Internet boom in 2000, but was down 8 cents at $14.24 in trading Thursday on the New York Stock Exchange.
The company has cut its work force by 8 percent this year and said it expects to make additional job cuts. The cuts are the latest in a long series: at the end of 1999, AT&T had 148,000 employees; at the end of last year, it had 61,600 employees.
Until now, the company seemed poised to focus its consumer business on providing phone service over the Internet, a service called VoIP, for Voice Over Internet Protocol, which promises sophisticated phone service at a cheaper cost to carriers and consumers and won't require that AT&T rent from the regional Bells. But Dorman said Thursday that VoIP service depends on fast broadband Internet connections, which are not prevalent enough in homes for an aggressive marketing push to consumers to make sense.
Dorman said the company would not make an aggressive sales pitch for VoIP until more homes have broadband connections.
Verizon, now the nation's largest phone company, said Thursday that it, too, is entering the VoIP market in 139 markets. AT&T offers the service in 100 markets.