Consumer Boom or Bust?

In case you haven’t been paying attention to phone giants lately, they’re rethinking their consumer long-distance businesses — a move consumer advocates say could lead to higher rates.

The traditional bread-and-butter of companies such as AT&T Corp. have grown increasingly competitive and costly to telecom’s bottom lines.

That’s why a day after the nation’s leading long-distance provider AT&T on Oct. 25 said it would break into four separate companies — including the creation of a separately traded subsidiary containing the shrinking consumer long-distance business — No. 2 long-distance provider WorldCom Inc. confirmed it would embark on its own restructuring to address the deteriorating market for traditional long distance. Details of WorldCom’s plans were announced today.

It remains to be seen if such restructuring efforts, for example, will lift AT&T’s share price, which has plummeted about 47 percent this year. But some consumer rights advocates already are concerned the restructuring could lower levels of service for residential consumers of long distance — and possibly lead to higher rates.

Trying to Ensure Affordable Rates

“When companies decide to orphan off their consumer long-distance business, it raises concerns about how much we might be paying in a year or two,” said David Butler, a Washington, D.C.-based spokesman for Consumers Union, a nonprofit group that publishes Consumer Reports magazine.

And Consumers Union isn’t the only one raising a red flag.

Samuel A. Simon, chairman of the Washington, D.C.-based Telecommunications Research & Action Center authored a letter a week ago to the Federal Communications Commission chairman, urging the FCC to examine the recent industry-shaping events and their likely impact on consumers.

“Now, Worldcom and AT&T want to spin off these lines of business. We are concerned that this is simply a plan to siphon off the scale and scope [of] efficiencies that help assure affordable rates for residential customers and transfer them into higher shareholder profits and/or lower business rates,” Simon wrote.

AT&T Defends Split

But AT&T spokesman Mark Siegel disagreed with consumer groups’ concerns that structural changes will mean changes for consumer long-distance service.

“Consumers will see absolutely no difference in the way they get their service. … The fact that we’re creating a tracking stock will be completely transparent to them,” Siegel said.

Consumer Union’s Butler, however, also said consumers may suffer if AT&T’s consumer business fails to survive as its own. “Given AT&T’s debt and pressure on its stock price, AT&T’s consumer long-distance division may not be well positioned to compete in the future, especially now that Verizon and SBC are moving into the consumer long-distance market,” Butler said.

Siegel, however, defended the strong finances behind AT&T’s consumer long-distance business. Siegel said the business will begin with about $20 billion in revenue and about 60 million customers under its belt. “If that’s being on your own, that’s a pretty good place to be,” he added.

Third Major Restructuring

AT&T’s Siegel added the restructuring could lead to opportunities such as new partnerships for the consumer long-distance business. That’s because under the new AT&T structure, the consumer long-distance business can focus on funding itself — not funnelling its revenue to other AT&T units including the wireless and broadband businesses, as is the case under the old AT&T structure.

In fact, the massive AT&T conglomerate with its various business units was one of the key reasons why AT&T decided to split up. On Oct. 25, AT&T confirmed it would dismantle itself into four smaller, publicly traded firms by 2002, so investors can track the growth or decline of each unit instead of trying to value the entire conglomerate. The four new units will be AT&T Wireless, AT&T Broadband, AT&T Business and AT&T Consumer.

The breakup is the third major restructuring for the former national telephone monopoly since 1984’s court-ordered breakup, when AT&T spun off its local calling operations as seven Baby Bells, several of which have since merged.

Wall Street Waiting for Results

Meanwhile, Wall Street is taking a cautious, show-me-more-profits approach to the restructuring news. Many analysts who follow AT&T downgraded the stock after the restructuring change.

“They are going to have to prove that this restructuring is going to put the company on the right track,” said Stanley Nabi, vice chairman at DLJ Asset Management.

Other analysts are more pessimistic. “It’s the surrender to Wall Street, which was foolishly looking for near-term results and stock gains on a five- to 10-year turnaround project,” said Gartner Group analyst Ken McGee.

In 1997, AT&T Chairman C. Michael Armstrong began an overhaul of the company into a one-stop shop for telephone, television and Internet services. It bought two of the nation’s largest cable TV firms, Tele-Communications Inc. and MediaOne Group. Armstrong said the new restructuring is not a repudiation of that hub strategy. The Associated Press and Reuters contributed to this report.

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