Flying Solo

AT&T'S cable phone dream fades

C. Michael Armstrongs dream of selling local phone service through a national cable partnership has quietly died, leaving the AT&T chairman with a patchwork of cable telephone franchises and a bleak future competing with the regional Bells.

While officials at AT&T Broadband remain bullish on their budding cable telephone service, the business now appears lost in a no-mans land of failed deals and uncertain direction.

Adding to the confusion are Armstrongs recent threats to drop more than 1 million local customers in New York and Texas, comments that have forced officials to reassure cable telephone customers that their service is not in jeopardy. The local service Armstrong is considering dropping uses the networks and switching facilities of the regional Bells, not AT&Ts own cable pipelines.

Armstrong blames the high cost of doing business with the Bells as the reason for mulling a pullout. But his comments this month — on the anniversary of the 1996 Telecommunications Act — revived speculation that AT&T might get out of local phone service altogether, an idea that AT&T Broadband officials in suburban Denver hotly denied.

"Were not backing off of local telephone service," said AT&T Broadband spokesman Steve Lang. "In one year, we built the biggest phone-over-cable service in the country. Why would we do that? No ones doing it better than we are."

In fact, AT&T built its local cable telephone base by giving away the service. Prospective customers were offered up to four months of free local and long-distance for agreeing to try the service. It is not known how many customers agreed to stay beyond the free period that ended Feb. 1.

But losing a deal to sell local phone service through Time Warner Cable, now a part of AOL Time Warner, was a major blow to Armstrongs hopes of creating a true national cable telephone network that promised a huge revenue stream for AT&T.

"They needed it. It was critical to their business model, and it was a huge disappointment when they didnt get it," said Scott Cleland, chief executive of The Precursor Group, a research firm in Washington, D.C.

While neither AT&T nor Time Warner Cable has officially declared the telephone deal dead, "its been code blue for a long time," Cleland said. "That doesnt mean it cant be revived, but its highly unlikely."

Instead of selling AT&Ts local phone service, Time Warner Cable is expanding its trial of Internet phone service in the Rochester, N.Y., area at $9.95 per month, a rate designed to attract purchasers of second lines. AT&T, meanwhile, is selling replacement service against the regional Bells in highly competitive markets such as Dallas and Denver.

While published reports last week said Armstrong has designs on running the broadband unit when AT&T is broken apart, some analysts are dubious that Armstrong, 62, would want to take on a new challenge in the midst of splitting the company. Instead, they see the breakup as Armstrongs exit strategy.