Is the dream dead?

Armstrong claims AT&T is not giving convergence the cold shoulder Spending $100 billion can cause one heck of a case of buyer's remorse, but there were virtually no signs of regret or second-guessing during AT&T's spinoff announcement last week.

Chairman and CEO C. Michael Armstrong labored mightily to link AT&T's decision almost three years ago to break out of long-distance to the current plan to divide into four separate companies. He specifically referenced a press conference held after an analysts' meeting in January 1998, when AT&T first presented a plan for staving off the decline in long-distance revenues by diversifying into converged services.

"We had some very fundamental decisions to make at that time as to our strategy going forward," Armstrong recalled. "We concluded that our strategy would be founded on the principle of facilities that we would own and operate - not just point of presence to point of presence but facilities that went end-to-end, premise-to-premise."

The four new companies that will emerge from today's conglomerate AT&T will sustain and accelerate that long-term growth, Armstrong said. But some industry observers say the restructuring is merely a tool to draw investment.

"This was an announcement aimed strictly at investor confidence on the Street," said Anthony Ferrugia, an analyst for A.G. Edwards."I don't see this conveying any real or lasting benefit to the operations that these new companies will have to run. Only improvements in execution will create that kind of value."

Other analysts say the choice to separate AT&T into large components - the company's third major overhaul in 15 years, beginning with the Bell bust-up in 1984 - may create obstacles in the company's plan of a converged future that features bundled offerings of video, high-speed data and local and long-distance voice.

"This proposal presents greater management challenges than ever for AT&T's vision of integrated communications," said Lisa Pierce, an analyst for Giga Information Group. "Under the old structure, all the divisions reported to C. Michael Armstrong and his directors. Now the reporting lines are much more confused. It seems as if current top managers will only have the amount of involvement with these future companies that they choose to allow."

AT&T officials insisted that the company retains the vision of selling bundles of services to consumers. The synergies among AT&T divisions today will persist on a more business-like basis, said Charles Noski, chief financial officer."They will be largely market-based, so we won't see big battles about transfer pricing," he said. "There's plenty of price points out there for the things these companies will do together."

But pricing may feel some pressure from the new separation among AT&T's lines of business. For example, earnings from the business services division now help under-write consumer long-distance; a breakup may remove those subsidies, causing residential phone prices to increase.

AT&T fought the good fight to diversify its revenue streams but time and investor patience ran out before its new enterprises could replace long-distance on the company balance sheet, said analyst William Turner with Banc One Investment Advisors.

"They took on a big challenge to transform themselves from a long-distance company to one selling a range of communications," he said. "But pressure from the markets - and probably from within the company, too - have just gotten too strong to resist. If this new plan isn't throwing in the towel on convergence, it's at least going to postpone true converged services for a while."

But Armstrong bridled at the notion that the January 1998 vision is dead.

"It seems to be a lot of fun to write that this is a reversal or a repudiation of our strategy," he said, somberly. "I find that not only wrong but offensive."

He portrayed the restructuring as a natural step after amassing a network asset base and getting the divisions running smoothly.

Armstrong drew an analogy to his experience at the helm of Hughes Electronics, where he served as chairman before taking the top spot at AT&T in 1997. Flying out to take over Hughes, he said, "I went out to be chairman of an aerospace defense company, and by the time I landed, we'd won the Cold War. That took one-half of our market away when the defense budget got cut in half."

Hughes had to redefine itself as a service company by going through the same phases AT&T faces - re-strategizing, making acquisitions, creating new services and, in time, creating value by selling or spinning off parts of the company, Armstrong said.

"After 30 or 40 companies being integrated [into AT&T], after tens of millions of dollars of investment in ourselves, to suggest that this phase of this transformation is some repudiation - I just don't buy into it," he said.