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AT&T survives and thrives, not least because of its legacy national business

By Posted October 22, 2010

My guess is that you haven’t seen many stories about “The Death of AT&T” recently.

It seems odd now, but as recently as six or seven years ago such stories were common. AT&T was a dying brand, went the refrain. Its core product, long distance phone calls, was falling in price and being substituted by (get this) email. And like all long-haul carriers, AT&T had to pay local monopolies for access while competing in a death spiral with dozens of other carriers for customers’ intercity circuits.

It’s particularly funny to recall these observations the day after AT&T reported $12.3 billion in third quarter 2010 profits!

Of course there’s an easy — and superficial — explanation for the disconnect: The entity called AT&T today is not the same collection of telecom assets it was then. Today AT&T is “really” what we used to call SBC (and Ameritech, and BellSouth, and Southern New England Telephone). It’s a combination of what was once called AT&T Wireless with the ultimately more formidable Cingular, which also was connected with SBC and BellSouth. And, of course, it’s the only place to get the iPhone until Apple decides otherwise.

But it turns out that this isn’t the whole story. To say that “AT&T is not AT&T” misses a crucial aspect of the company’s current financial momentum. Local telcos may have an access stranglehold, but they’re also in the process of losing up to half their retail customers to cable triple play or no landline phone at all. And if moving most of your business from wireline to wireless were all it took to succeed, then Sprint would be sitting on top of the heap.

What’s driving AT&T’s financial results right now is the combination of businesses it’s put together. And that includes the huge swath of corporate network accounts that incorporate a wide range of networking services, using contracting platforms devised by the “legacy” long distance AT&T of the previous 20 years.

AT&T’s third quarter earnings had a lot of what Wall Street analysts call “noise,” and it takes some work to see the underlying meaning. For one thing, more than half the total profit came from one-time tax and acquisition-related items. Wireless sales were powerful, but wireless margins were counterintuitively hurt by off-the-charts levels of iPhone activations. (In the short term, that forces AT&T to account for Apple equipment subsidies even as they start iPhone subscribers down the road of presumably much higher future usage and spend.)

All this left the wireline side to contribute its share to AT&T’s profitability. And AT&T pointed out several ways in which the wireline business actually posted some of its strongest numbers in some time. Overall AT&T’s total wireline revenues were down 3.0%, but it’s not like AT&T advertises “long distance” on TV any more. And AT&T bragged that it posted its “best year-over-year business revenue comparisons in six quarters.”

With 70% of AT&T’s previous frame relay customers now squarely on IP services like MPLS (or so they say, I’m amazed it’s not even higher), there was actually a 15.4% year-over-year growth in what AT&T considers Strategic Business Services revenue. That’s almost all of the transport, managed and application services that business customers now commonly buy other than straight long distance and pure private line. The bottom line: Wireline contributed a full $1.8 billion of the company’s $5.1 billion in real operating income for the quarter.

Don’t think that the company doesn’t appreciate how the pieces fit together. AT&T’s recent behavior clearly suggests that it believes that its wireline term contracts with American business are the perfect gateway to additional sales of wireless, local, and managed offerings beyond what they could sell in separate channels.

No doubt AT&T wouldn’t be what it is today were it not for the megamergers in the middle of the last decade. But AT&T also isn’t what it is today just by virtue of rolling up incumbent local territories and riding the mobile broadband wave. Each part of the business makes money in a different way, but they all contribute to a fine return on investment for the carrier — especially when packaged under the same financial roof.

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