Now for the hard part - AT and T CEO Michael Armstrong - Cover Story - Interview

Chief Executive, The, Sept, 1999 by J.P. Donlon

In his first 18 months as CEO, Michael Armstrong announced $140 billion worth of acquisitions, an amount equal to 71 percent of AT&T's current market capitalization. He's raising expectations as he turns Ma Bell into an edgy, coaxially cross-dressing dot-com telecom. Soon we'll see how well Ma Broadband can duke it out with upstart advanced capacity networks and former Baby Bells that have matricide on their minds. So far, so good. But the biggest obstacle lies just ahead.

Once a monopoly, always a monopoly? Since the telecom industry's beginning at the turn of the century, large national monopolies provided mostly basic service on a take-it-or-leave-it basis. In the U.S., deregulation in the early 1980s opened up long distance. Challengers such as Qwest, Global Crossing, and Level 3 - all of which have technologically advanced, high-capacity networks - are hotly pursuing customers, while operators with established customer bases are frantically updating obsolete networks. M&A activity is at an all-time high as the quest for strength and infrastructure intensifies. Almost two decades after Judge Greene's decision broke up the Bell system, we are beginning to see the communications industry compete with the gloves off and no quarter given. Convergence, that overripe term for the conjunction of telephony, computing, and multimedia, may soon be upon us in unanticipated ways.

Since Armstrong assumed the CEO title in November 1997, he's forced AT&T to redefine how it reaches its customer base. To get back into the local consumer business, it bought TCI, the cable industry's No. 2 giant telecom, for $59.4 billion last year. This year, it agreed to acquire No. 3, MediaOne Group, pending government approval, for $62.5 billion, as well as Lenfest Communications for $2.2 billion. If the deals fly, AT&T will have access to 60 percent of the nation's households.

Make no mistake, Armstrong's gambit is not just transforming a big long-distance carrier to a big any-distance carrier. His move makes cable the preferred way of delivering access to total telephony, as well as to unlimited video, music, and interactive entertainment. He reckons the best way for AT&T to achieve its goals is to have a direct connection with its customers the way it did before deregulation severed the link between local and long distance. Unlike most of its long-distance rivals, which derive revenue from business customers, AT&T gets 50 percent of its revenue from its 75 million residential customer base. This will fund Armstrong's ambitious goal to transform the $53 billion giant's entry into the Internet age. If successful, AT&T will not only become less dependent on long-distance revenue, it will compete head-on with the former Bells that have been siphoning AT&T profits by charging access fees to complete calls.

There are other technologies than cable, including satellites and digital phone lines. (AT&T is switching its networks from circuit to packet transmission, such as Internet protocol, enabling the convergence of communication services.) It's not clear which will have the best cost advantage in the end, but Armstrong is adopting Confederate General Nathan Bedford Forrest's strategy of whoever gets there "firstest with the mostest" wins. To that end. AT&T is insisting its cable system is proprietary and should not be treated as a utility. Armstrong wears a halo in Congress and among telecom regulators because he promises to bring direct competition for local phone service. But AT&T is fighting local rulings in Portland, OR, and Broward County, FL, which seek to impose open-access requirements to its cable system in those areas. And while rivals such as Bell Atlantic are crying foul, saying AT&T wants its own monopoly, Armstrong maintains that users can avail themselves of any Internet service provider and that open-access should be decided at the national level.

His aggressive moves have clearly energized the somnolent giant of Basking Ridge, NJ. But are the sweeping claims of faster growth and market share gains credible? Three years ago, then-AT&T chief Robert Allen asserted that the firm would pocket 30 percent of the former Baby Bells' local customers by reselling the local exchange's service under its own brand - which, of course, never happened.

Having spent 40 years with three companies, 30 with IBM and five with Hughes Electronics, Charles Michael Armstrong, 60, has seen how technological shifts can suddenly undermine one's market position. He joined IBM in 1961 and by the mid-1980s had worked his way into senior management. He belonged to IBM's personal computer group, which started the decade as the industry leader. But, by the end of the 1980s, faster-moving competitors such as Compaq and Dell left it in the dust. This failure proved bracing. At Hughes, he demonstrated a strategy for competitive success in fracturing markets of not simply unbundling one's business, but unbundling and rebundling to create a new enterprise. Steering the company away from military electronics, Armstrong pursued commercial satellites as well as DirecTV, the service that uses satellite dishes instead of cable.