The telecom giant has spent billions on cable properties, and is working to expand its business with a variety of new telecom services. Yet declines in its consumer long distance division are offsetting its gains in other areas.
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AT&T remakes itself
For example, AT&T's consumer long distance revenues were 9% lower in the second quarter this year than last, dropping to $4.98 billion, a loss of $495 million. This is somewhat inevitable, as competition in some states now comes from former "Baby Bells" such as Verizon (NYSE: VZ) and SBC Communications (NYSE: SBC), in addition to the company's long-distance competitors. More consumers are also using wireless services for long distance calls.
Nevertheless, the revenue losses significantly offset growth from other businesses. For example, the company's wireless unit, AT&T Wireless Group (NYSE: AWE), posted revenue growth of 32% to $2.48 billion, an increase of $599 million. These are pretty good numbers for the division -- its tracking stock traded up today -- but only enough to make up for the company's losses in long distance, and not much more.
An innovator's dilemma?
Certainly, the company has little choice but to branch out and ensure that its $96 billion in cable acquisitions pay off, and there are some signs of success. The company's broadband division -- which includes its mature cable properties -- reported revenue growth of 10.5%, and is signing up customers across a variety of new telecom services. The division added 85,825 cable telephony customers, for a total of over 223,000, almost ten times greater than last year's figures. The company also tripled its high-speed data customers to 689,030. Yet these services only provided $107 million in revenues, which represents 196% growth from last year's numbers, but not much overall for a company like AT&T.
On the local service front, AT&T is having some success, thanks in part to its "One Rate" local and long distance plan. The company has signed up 500,000 local service customers in New York and about 220,000 in Texas. Of course, those are the two states where Verizon and SBC have received regulatory approval to offer long distance service, and their gains partially offset AT&T's progress in this area.
Current shareholders in AT&T will probably have to be patient as these initiatives scale and analysts, many of whom are down on the company after a surprise earnings warning in May, decide whether they think AT&T is succeeding. After all, the company recorded $62.4 billion in revenue last year, and new technologies will take awhile to have any impact.
AT&T's shares have declined about 38% so far this year, and are cheap, at about 15x trailing earnings. Interested investors may want to keep an eye on how AT&T handles its momentous transformation.
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This quarter's results provide investors a glimpse of the spectacle of a huge multinational corporation remaking itself. Like most other large U.S. telecom providers, AT&T is looking to its wireless and data transmission businesses for revenue and earnings growth. Yet the company's size and declining consumer long distance revenues make it harder for new lines of business to boost the company's bottom line.
In many ways, part of what AT&T is facing is what management consultant and author Clayton Christiansen has termed an "innovator's dilemma": the company is threatened by, and has to pursue, new businesses and technologies, but its older, eroding businesses provide such large revenues and earnings that it takes time for the new businesses to add to the bottom line.
What do you think of AT&T's changes so far? Let us know on the company's discussion board.
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