A Hail Mary play?

AT&T offers free cable phone to jump-start business In the telecom game, AT&T can be forgiven for feeling as if it's fourth and 15. Its long-distance business is eroding, and its corporate service sector is struggling to hold on to customers. Last week, as the carrier's stock price dropped below its level three years ago when CEO C. Michael Armstrong took over, Standard & Poor's publicly threatened to cut its credit and debt ratings. And talk has been circulating for weeks about various reorganization plans that would spin off or sell some of the company's dragging divisions.

Now AT&T has unveiled a dramatic play. The question is: Is it a well-designed scoring effort or a desperation heave at the end of the game?

Last week, the carrier confirmed that it will offer up to five months of free local cable telephone service in 10 markets in an all-out effort to grab subscribers and validate Armstrong's vision of a bundle of services delivered over hybrid fiber/coax.

Customers who sign up for the offer between Sept. 1 and Nov. 15 will get free local telephone service through Jan. 31. With some plans, customers also can get free long-distance. Versions of the promotion are available in Dallas, Chicago, San Francisco, Seattle and St. Louis.

Last August, AT&T Broadband and Data Services estimated it would have between 500,000 and 650,000 phone customers by the end of this year. The company reported it had 224,000 phone customers at the end of the second quarter, including those it purchased as part of its acquisition of cable operator MediaOne.

"We believe we're on track to achieve those numbers within the time frame," said an AT&T spokesman. "We're absolutely on plan." The company currently does 1600 cable telephone installations per day, he said.

As for those observers who think the company will fall short of those goals, "Some people also think the aliens have landed," he said.

The promotion is the first wide-scale effort from AT&T to bolster its cable-telephony business.

"It will be effective in building both subscriptions and brand awareness in the 10 markets," said Patrick Comack, an analyst with Guzman & Co. "It's a way to make some noise, draw attention. I don't think the incumbent providers will feel the need to respond just yet, but they may if AT&T looks like it's going to hit its customer targets."

The carrier has to build its cable telephony business quickly to justify the $100 billion it spent acquiring cable operators and to offset the declining revenues from its core long-distance business. AT&T also faces long-distance losses to RBOCs as they win permission to sell the product in their markets.

Placing such a large bet on cable looks less brilliant than it did a year ago, said analyst James Linnehan of Thomas Weisel Partners.

"That's partly due to the problems Excite@Home has had rolling up subscribers - and profits," he said. "But AT&T's got control of them now, so they're going to take the hit."

Last week, AT&T finally consolidated its control of cable ISP Excite@Home, which will remain the exclusive Internet access provider for its cable operations for almost two more years. AT&T now controls 74% of the voting stock in Excite@Home, which is owned by a consortium of multiple systems operators, including AT&T, Cox Communications, Comcast and Cablevision.

Like AT&T, Excite@Home has mounted an aggressive campaign to enroll customers this year in advance of an America Online/Time Warner merger that could shake up the cable Internet world. Excite@Home finally hit 2 million customers in August - but only after missing subscriber targets earlier in the summer because of a shortage of cable modems, the company said. Excite@Home still predicts it will have 3 million customers by the end of the year.

"It's going to be very important that both AT&T and Excite hit bullseyes on their member numbers," Linnehan said. "Failure is not an option for these companies."

AT&T already has caught some of the fallout from Excite@Home's sluggish performance. The carrier said that an early settlement of a legal wrangle with Cablevision about the governance of the cable ISP will add its results to AT&T's financials sooner than expected. That's mixed news because it will force AT&T to lower its third quarter earnings estimates by 5›.

AT&T's stock price got a quick lift after completion of the Excite@Home reorganization, but the earnings news is expected to increase the downward pull on its shares.

"It's good to have some clarity at Excite@Home, but that doesn't translate into real clarity at AT&T," Comack said. "And it won't improve the fundamentals of the company's phone business. To do that, AT&T is going to have to build cable telephony at a rate that will replace the business lost on the long-distance side. They've placed a big burden on cable, and now it's time to start making that bet pay off."

Paradoxically, one vote of confidence may come from AOL, which said last week that it is considering joining a multiple-ISP test in AT&T's Boulder, Colo., market this fall.