AT&T puts emphasis on mobile services

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One of the perks of being the chief executive of the world’s largest telecommunications company is an early chance to use the iPhone, Apple’s much anticipated mobile phone. The iPhone’s US launch is not until June 29, but Randall Stephenson, chief executive of AT&T, was given one this month by Steve Jobs, his counterpart at Apple.

Mr Stephenson took photographs with the iPhone at a wedding in his native state of Oklahoma, and e-mailed the pictures to his family. “It was a really good experience,” he says in an interview with the Financial Times. “It is going to be much better than most people expect.”

His prediction is hardly surprising, given AT&T has an exclusive deal with Apple to sell the iPhone in the US. But his comments also underline how mobile phone services will be at the heart of AT&T’s growth strategy.

The AT&T giant of today is the product of acquisitions over the past decade by Ed Whitacre, who stepped down as chief executive on June 3. These culminated last year in the purchase of BellSouth, a smaller US rival, for $67bn excluding debt, in what was the second largest telecoms transaction to date.

Mr Stephenson agrees with suggestions that he represents continuity rather than change when asked if his strategy will differ from Mr Whitacre’s. But he plays down the prospect of more big domestic deals, and says the focus is on integrating the three mega acquisitions led by BellSouth.

In 2005, SBC, as AT&T was then called, bought AT&T for $16bn, subsequently adopting the most famous name in the US telecoms industry. In 2004, Cingular, the mobile joint venture between SBC and BellSouth, bought AT&T Wireless, another wireless operator, for $41bn.

“The first priority is we have got to get the mergers we have done – three major mergers over the last three years – we have got to get those integrated and completed,” says Mr Stephenson.

He adds that the integrations are going “very well”, saying AT&T is on course to realise synergies with a net present value of $18bn from buying the old AT&T and $22bn from BellSouth.

Those synergies fired earnings growth in 2006 and should do so again in 2007 and 2008.

The challenge for Mr Stephenson is to increase revenue from the underlying businesses so as to maintain earnings growth after 2008.

He is confident he can find growth, and some Wall Street analysts agree.

Those at Goldman Sachs, who have a buy rating on AT&T, said in an April research note that revenue and earnings per share growth of 3 per cent and 9 per cent respectively could be achieved in 2009.

The first source of growth is mobile. The purchase of BellSouth gave AT&T exclusive control of Cingular, the largest US mobile operator by number of customers.

The launch of the iPhone is being used to rebrand Cingular as AT&T Mobility, and Apple’s exclusive deal should provide significant opportunities to poach customers from rival mobile operators such as Verizon Wireless.

Stealing customers from other networks is likely to become the preoccupation of all US mobile companies in the next few years because most people now own handsets.

In its first quarter for 2007, AT&T signed up 1.2m new mobile customers, which fell short of Wall Street forecasts, and was a potential indicator of slowing growth.

Mr Stephenson says that AT&T’s third generation mobile network should boost growth because it will encourage customers to spend more on data functions such as web browsing.

The second possible source of growth is television, where telecoms companies are going head to head with cable groups in the battle for the living room.

Mr Stephenson says the starting point for “winning the home in general is with wireless”, highlighting how the cable groups do not own mobile operators.

AT&T’s strategy will be to offer many of its 62m mobile customers a “quad play” that also includes fixed-line phone, broadband and its fledgling TV service.

U-verse, as the TV service is called, was launched in November and could be available in all 22 of the states covered by AT&T by 2010.

Based on AT&T’s initial growth projections, this implies U-verse could have 7.5m customers.

Mr Stephenson claims that AT&T could become the second largest TV operator by the end of the decade.

This assertion is based on growth in AT&T’s satellite TV service delivered through partnerships with DirecTV and EchoStar, as well as U-verse.

The risks for AT&T are partly technical. Verizon, AT&T’s main rival in the US telecoms industry, is spending $23bn to install a fibre optic network directly to people’s homes, which will deliver its TV service.

AT&T, by contrast, is spending $6.5bn to install fibre only as far as neighbourhoods, and will then rely on existing copper phone wires to connect to homes. That figure is due to rise because the investment does not extend to nine states in the old BellSouth territory.

But AT&T has no plans to match Verizon’s ambitious fibre project. AT&T admits U-verse has suffered technical problems, but says they have been solved.

The third source of potential growth is serving the needs of multinational companies. AT&T’s enterprise division, which provides voice and data services for multinationals, has been reporting falling sales.

Mr Stephenson says it should return to growth in 2008, as companies increasingly use telecoms and information technology services based on internet protocol transmission standards.

While AT&T may not do further large deals in the US, he adds that more acquisitions are likely to improve the enterprise division’s capability.

Last year, AT&T bought USinternetworking, a software company.

AT&T is seeking contracts with more multinationals based outside the US. “We are a company that has traditionally been US-based,” says Mr Stephenson. “Over the next four to five years you will see our capabilities and the percentage of our revenues that come from non-US-based sources continue to grow.”

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