AT&T; to Ease Out of Home Phone Service

AT&T; Corp., founded by Alexander Graham Bell to build the nation’s telephone system, said Thursday that it would stop marketing residential service -- claiming it couldn’t compete against the local phone companies it once owned.

The company nicknamed Ma Bell said it would continue to serve its 35 million residential customers but would stop spending an estimated $500 million a year to attract new ones.

Given the high customer turnover in the competitive telephone industry, analysts expect AT&T; to essentially be out of the residential market within two years.

It will focus instead on more profitable corporate and government clients, which account for 75% of the company’s business.

“While we don’t relish the decision to discontinue competing in the residential markets, it’s clearly the right choice,” said Chief Executive David Dorman.

The financial forces driving the decision were apparent in AT&T;’s second-quarter earnings, released Thursday.

Profit fell 80% to $103 million, or 14 cents a share, from $536 million, or 68 cents, a year earlier. Sales fell to $7.6 billion from $8.8 billion. The results were the latest in a string of disappointing showings for AT&T;, which had its debt rating cut to “junk” status Thursday by Fitch Ratings.

AT&T;’s pullout marks a significant shift in an industry buffeted by a decade of boom and bust. “We’ve just demolished the most successful models of competition,” said Gene Kimmelman, co-director of Consumers Union, which publishes Consumer Reports magazine. “For the vast majority of phone users, this is moving us back to the world of monopolies.”

Central to AT&T;’s decision was a federal court ruling this year that threw out key aspects of telephone competition rules. The rules had required local phone companies like SBC Communications Inc. to lease their lines to rivals such as AT&T;, MCI and dozens of small, relatively new players at regulated wholesale rates.

After Congress passed the Telecommunications Act of 1996 to encourage competition, federal regulators mandated the leases because SBC and the other local companies control the last mile of copper wire connecting homes to the wider phone network -- a key link prohibitively expensive to duplicate.

Without the rules, SBC and the other so-called Baby Bells are eager to raise the lease rates, which they complain are below their costs. Regulators in California, the richest telecom market in the country, are poised to increase rates as much as 25% by the end of this year.

“If wholesale prices go up, which we expect they will, it will be felt by consumers,” said AT&T; spokesman Paul Kranhold.

Analysts said rate hikes would only hasten the defection of AT&T; customers.

Ironically, much of the network in dispute was originally laid or strung by the Baby Bells when they were part of the old AT&T; monopoly, which was broken up in 1984. AT&T; became a long-distance company, and the Baby Bells took over local service.

But “many people still think of Ma Bell as their phone company,” said Andrew Odlyzko, who worked at AT&T; as a researcher for 26 years and is now director of the Digital Technology Center at the University of Minnesota. “To see it go to pieces is really sad. It was a national resource.”

AT&T; had weakened its competitive position in recent years by selling off its wireless and high-speed Internet divisions. Being able to offer residential customers a discounted bundle of services -- local calling, long-distance, Internet and wireless -- is considered essential to compete.

SBC, California’s dominant local phone company, disputed AT&T;’s claim that the regulatory environment was responsible for its woes. Rather, SBC Chief Financial Officer Rick Lindner said, AT&T; wasn’t selling what customers wanted.

“While it may be positioned as something caused by regulatory action, it’s more of an impact of the fact that they’ve had big declines in their business,” Lindner said.

For its part, SBC on Thursday posted second-quarter sales that rose slightly to $10.3 billion, from $10.2 billion in the same period last year. Profit fell 14% to $1.2 billion, or 35 cents a share, from $1.4 billion, or 42 cents, last year, in part because of expenses related to a May walkout by 100,000 of its workers.

SBC shares rose 38 cents to $23.58 on the New York Stock Exchange. AT&T; shares fell 8 cents to $14.24.

Some analysts hailed Thursday’s announcement.

“The market has always perceived the consumer business to be a bad one” because of its relatively low margins, said David Barden, an analyst with Banc of America Securities. Barden and others noted that cutting its marketing budget by $500 million would immediately improve AT&T;’s margins.

Longer term, he said, the company is focusing on lucrative corporate customers and developing technologies that may render copper wires obsolete, such as calls that travel over the Internet like e-mail.

“Think about the magnitude of the shift,” he said. “A benchmark American consumer brand is leaving the consumer business. This is a board of directors that’s prepared to do radical things. Clearly, there’s a lot of big-picture thinking going on at AT&T.;”