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AT&T Lays Out Bold Plan for Its Future

Telecom: Company will broaden scope with initiatives in local, wireless, Internet. But layoffs could total 18,000.


In his first public meeting with Wall Street since taking control of AT&T, Chairman and Chief Executive C. Michael Armstrong laid out a bold plan for the troubled telecommunications giant that involves expanding the company's core businesses while laying off up to 18,000 employees to cut costs.

Armstrong said the nation's largest phone company will focus on profitability by significantly broadening its scope beyond long-distance with major investments in its network to facilitate new initiatives in local, wireless and Internet-based phone services.

"As I look at alternative technologies, I see the potential for significantly higher performance and lower costs compared to the wire we're operating on today," said Armstrong, who wowed analysts with his presentation.

First on Armstrong's agenda was an announcement that New York-based AT&T will slash its operating costs by $1.6 billion this year. About half that savings will come from laying off 15,000 to 18,000 managers from among AT&T's 130,000 employees. Up to 11,000 of those cuts will come from voluntary buyouts with sweetened pensions, with most of the rest the result of a hiring freeze and attrition.

The company has not yet decided how AT&T's 6,800 workers in California will be affected. The company said the cost-cutting measures are likely to result in a charge later in the year.

AT&T will also cut costs by changing the way it goes after long-distance customers. Rather than recruit as many customers as possible in blind pursuit of revenue and market share, the company has stopped signing up "spinners"--people who switch long-distance providers several times each year--and customers who spend less than $3 a month on long-distance calls, Armstrong said.

AT&T is also rationalizing its entry into the local phone markets, he said. The company will no longer sign up customers by reselling local services from the Baby Bells and GTE and will instead focus on the slower but more profitable strategy of providing services with its own equipment, he said. AT&T's pending $11.3-billion acquisition of Teleport Communications Group, a New York-based competitive local exchange carrier, is the linchpin of this strategy.

But it was Armstrong's radical proposals for wireless and data networks that had the crowd of more than 600 analysts buzzing.

AT&T will focus on transferring customers from its wired network to wireless phones, in part by changing the convention of having recipients pay for wireless calls. Instead, AT&T will roll out a European-style system later this year in which callers will pay to reach out and touch someone on a wireless phone, he said.

Wireless calls will also become more attractive with the introduction this spring of a mobile phone with a 200-hour battery life, said Armstrong, a veteran of such high-tech firms as Hughes Electronics and IBM.

The company that built the country's phone network also surprised analysts with a demonstration of AT&T WorldNet Voice, a service that routes voice calls over the Internet. AT&T President John Zeglis demonstrated the technology with a call to another company executive, prompting applause from analysts.

Callers will not have to use a computer to use the service, but they will have to dial a series of codes into their touch-tone phones. They will be rewarded with a long-distance rate of 7.5 cents to 9 cents a minute, Zeglis said. Trials in at least seven cities are scheduled to begin this spring.

Zeglis also introduced a new long-distance plan that sends calls over its regular network but relegates all paperwork to the Internet. Customers can sign up for the plan at AT&T's Web site, then check their monthly statements online and pay bills by credit card. These customers will be rewarded with lower prices, he said.

The lower operating costs could prompt AT&T competitors such as MCI Communications and Sprint to follow suit, said Dave Otto, a telecommunications analyst with Edward Jones in St. Louis.

Armstrong also hinted at future alliances to deliver phone service over upgraded cable lines and even over power transmission lines. In addition, AT&T is continuing to develop its fixed wireless system for providing local phone service, he said.

"This company is on offense after being on defense for so long," said Zeglis, a career AT&T employee who is expected to eventually succeed Armstrong.

The analysts in attendance seemed to believe it. Jeffrey Kagan, who heads his own telecommunications consulting firm in Atlanta, told Armstrong: "I expected you to announce that you're reinventing the company, but I didn't expect you to announce you were reinventing parts of the industry."

Others said they were impressed by Armstrong's quick mastery of the issues--technical, financial and regulatory--facing AT&T since joining the company Nov. 1.

"He didn't deflect any questions, and he's tackling some issues that some of us who have been here for 15 or 20 years still have a tough time with," Otto said.

Otto also credited Armstrong with restoring credibility and accountability to AT&T's top management. Even though several previous executives have promised massive layoffs at Ma Bell, widespread job cuts have so far failed to materialize.

Before the meeting began, AT&T announced a 6% increase in fourth-quarter earnings to $1.3 billion, or 81 cents a share. Revenue remained flat at $12.8 billion for the quarter.

For the 12 months ending Dec. 31, revenue rose 1.5% to $51.3 billion, and income from continuing operations fell 20% to $4.5 billion. The company said the decline was due to accounting changes.

AT&T's stock fell $3.81 to close at $61.69 on the New York Stock Exchange on Monday. Because Armstrong's presentation Monday was so impressive, several analysts attributed the decline to the old Wall Street adage, "Buy on rumor, sell on news."

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