The Decline and Fall of AT&T

AT&T's revenue has declined from $51 billion in 1999 to $30 billion in 2004, and its residential customer base declining from a peak of 60 million in 2000 to about 24 million at the end of 2004. Now those numbers are not QUITE as horrible as they look in that the 1999 numbers include all the cable and wireless customers who were spun-off and not lost outright, but they are nonetheless very poor results.

In 1999, I (and others) looked at AT&T as a massive cash cow. It was declining in influence and size, and its markets were under attack by wireless and broadband companies and its core business long distance operations were under attack by fiercer-than-expected competition from WorldCom, MCI and Sprint. But it also didn't need to make any massive investments to maintain its existing business, and this business was (a) quite profitable and (b) generating a great deal of revenue and free cash flow. Under these circumstances, I would have expected AT&T to follow a conservative strategy for its core business. If innovation or a new market needed exploring, a joint venture or subsidiary could be set up with the cash flows from the core telephone and business services operation. Beyond that, the company could have / should have paid dividends, lots of them. It didn't need and couldn't effectively use the excess cash.

Instead of this, AT&T embarked on an ill-advised (and ill-fated) strategy under former Chairman and CEO C. Michael Armstrong, which resulted in losses of over $53 billion related to a cable company acquisition spree (MediaOne, TCI, etc.) and the subsequent divestiture of these same companies. Armstrong later advocated splitting the company into four separate entities, a plan which was only partially implemented with the sale of the cable operations to Comcast and the spin-off of AT&T Wireless into a separate company (a company which was utterly unable to compete in the wireless marketplace and was very quickly gobbled up by Cingular Wireless).

[Come to think of it, that sounds almost word-for-word like what happened at Tyco, with an acquisition spree ending in 2001, and the subsequent abortive strategy to break up into 5 companies.]

In October 1999, AT&T had a market capitalization of $152 billion. Today, what's left of that mighty empire is less than $16 billion. Add to that the $47 billion that Comcast paid for AT&T's cable assets and the $50 billion that AT&T Wireless was worth at its spin-off (ignoring the fact that AWE's return was basically a straight line decline and the company was valued at considerably less than that when it was finally put out of its misery by Cingular), and you arrive at $113 billion. So in five years, Armstrong made $39 billion disappear like a fart in the wind. That's a total return of -25.7% or -4.5% per year for five years. Thank you, and good riddance.