(4 of 5)
There are, however, two missing links in this strategy. First of all, AT&T does not produce the full range of products that consumers will want from the electronic highway. Although the company has been adept at providing communication links and transactional services such as banking, it does not make or own the video games, television shows, movies and information products that will be the staple of what consumers order in their homes. To that end, it is considering joint ventures like the one with Sega, but in other cases it may simply be the conduit through which other media companies transmit products.
Second, its forced divestiture of the local Bell companies means that AT&T no longer has a direct conduit into individual homes and businesses -- and the 1984 federal-court consent decree makes it difficult to get back into that business. Like other long-distance carriers, AT&T must go through the local telephone system and pay access fees for the connection. The telecommunications titan paid $14 billion in such charges last year.
One way that AT&T may try to bypass the Baby Bells is by joining forces with local cable operators, such as through the rumored deal with TCI. AT&T would provide cable systems with the valuable switching technology they need to offer interactive, or two-way, services such as home shopping and movies-on- demand. This type of combined strength was the rationale behind the deal between Time Warner (parent company of this magazine) and U S West, one of the Baby Bells.
Another way AT&T can directly connect to consumers is through the cellular market, which was one reason for its $3.8 billion purchase of 33% of McCaw Cellular Communications, the largest cellular company. This, however, could present regulatory problems. The seven regional Baby Bells accuse AT&T of trying to subvert the 1984 divestiture order by using the McCaw link to surreptitiously re-enter the local phone business. They want the Federal Communications Commission either to force AT&T to dissolve its McCaw alliance, or to lift the ban prohibiting local phone companies from offering long- distance service. Says Richard Brown, vice chairman of Ameritech, the Chicago-based Baby Bell: "AT&T is trying to put Humpty-Dumpty back together again."
AT&T must step gingerly. The Baby Bells are customers as well as $ competitors. The seven regional companies, for instance, account for 40% of AT&T's $7.7 billion in sales of central-office telephone switches. That percentage, however, has been declining as the local phone companies try to reduce their dependence on their former parent.
Other companies have moved to defend their turf against the phone giant. In retaliation for AT&T's invasion of its credit-card market, American Express has formed a joint venture with long-distance rival Sprint. Alcatel, the French phone-equipment manufacturer, has entered a partnership with Sprint. And two weeks ago, British Telecom acquired a 20% stake in MCI. Says Ronald LeMay, president of the long-distance-service division of Sprint: "The more AT&T expands, the more allies it creates for us."