Ready, aim, price war

Offering five months' free phone service will cost AT&T dearly

The pressure's on AT&T. In its rush to placate anxious investors about its $100 billion bet on cable, AT&T Broadband is starting a cable-telephone price war that other operators have been hoping to avoid for years, and it will cost AT&T dearly, perhaps as much $50 million to $70 million in additional costs over the next several months.

AT&T and other industry executives had been hoping to go slowly on discounting telephone service, offering free installation and a few weeks' free service or discounts on bundled cable, telephone and high-speed Internet service. Their goal was to build the product gradually, grab the easiest customers by underpricing local telcos by 10% to 20% for one telephone line, and wait for economies of scale to apply before discounting aggressively. That's the model DBS companies have pursued, waiting three years before offering the heaviest installation and equipment discounts, while pricing monthly programming service above cable rates in many cases.

But AT&T Chairman Michael Armstrong is jumping to the middle of the business plan. Last Friday, customers in 10 of the company's 17 cable-telephone markets received an extraordinary offer: Instead of the free installation and months of local telephone service AT&T had been offering, they could get free local and long-distance service through Jan. 31.

AT&T currently averages $60 in local and long-distance revenue per phone customer. Local service brings in $20 to $26 per month for one phone line, $22 to $36 for two phone lines, for an average of about $33 per customer. Long-distance service is offered in bundles of 180 and 300 minutes per month. The local package could mean about $150 in lost revenue per new customer; the long-distance package, an additional $50 to $100. And that's plus the $600 average cost of a new-customer hook-up.

Depending on how liberally AT&T accounts for the costs, the extraordinary offer could cut AT&T Broadband's cash flow by 5% to 7%.

Worse, since many customers will already be AT&T long-distance customers, the company will be sacrificing cold cash in the hands of its already rocky long-distance division to buy cable-telephone customers. The offer expires Nov. 15, so new customers will get at least 2 1/2 months of free service.

The initial 10 markets will be Chicago; Dallas; Denver; Hartford, Conn.; Pittsburgh; Portland, Ore.; St. Louis; Salt Lake City; San Francisco Bay area; and Seattle.

Industry analysts and executives maintain that Armstrong was willing to pursue such a costly promotion out of near desperation. He has pledged to secure 500,000 to 650,000 cable-telephone customers by year-end, attempting to justify the acquisitions of Tele-Communications Inc. and MediaOne Group.

AT&T Broadband spokesman Steve Lang disagrees, saying the promotion is simply what it takes to coax customers to drop their long-held reliance on their telephone companies. "Look at the offers the satellite companies have made over the years. Changing people's habits is difficult."

AT &T characterizes the deal as a temporary promotion, not a long-term offer, but industry executives and analysts believe that, once subscribers are conditioned by such huge discounts for a new product, AT&T will have a difficult time retreating.