Amid a Price War, Revenues Fall at AT&T and MCI

By KEN BELSON
Published: August 6, 2004

Quarterly results from MCI Inc. and the AT&T Corporation are doing little to reassure investors that the long-distance industry is stabilizing, and are reinforcing speculation that the companies have become potential takeover targets.
Amid a nasty price war for phone services, revenue at AT&T, MCI and other long-distance carriers is plunging. No one in the industry seems to know when the declines will slow. The companies, desperate to stop the bleeding, are cutting thousands of jobs, selling assets and exiting entire businesses.

MCI, which is based in Ashburn, Va., reported its second-quarter numbers yesterday, saying that its sales fell 15 percent from the same period a year ago, to $5.2 billion.
MCI lost $71 million, or 22 cents a share, in the quarter after earning $8 million in the same period a year ago. It continues to cut costs and will pay a quarterly dividend of 40 cents a share. News of the dividend payment lifted the company's stock 18 percent, to $16.31, in after-hours trading. During normal trading hours, before the earnings report was released, MCI's stock dipped 8 cents, or 0.6 percent, to $13.84.
AT&T reported similarly disappointing numbers two weeks ago, when it said revenue in the second quarter slid 13.2 percent, to $7.6 billion, and net profits plunged 80 percent, to $108 million, from the same period a year ago.
The companies have lost business to wireless providers and to local phone companies that have gained entry into the long-distance market. The bleak prospects for the industry have fueled speculation that AT&T and MCI will both be bought soon, most likely by one of the regional Bell operating companies. The long-distance carriers still have vast international data networks and deep lists of corporate clients that would complement the Bells' residential businesses, analysts said.
Both AT&T and MCI, the analysts said, are cutting costs not just to survive, but also to make themselves more attractive to buyers.
AT&T said last month that it cut 14 percent of its staff in the last year, and would eliminate another 8 percent of its work force this year. MCI said it aims to shed 16,000 jobs, or 28 percent of its employees, by the end of the year.
MCI and AT&T are also fleeing the residential phone business. Last month, AT&T said it would stop seeking new customers for its $8 billion residential business. Sprint has taken similar steps, though more quietly. MCI, which has already shut several call centers and laid off thousands of call center operators, appears to be doing the same.
Wayne Huyard, the head of MCI's consumer business, said yesterday that the company expected to reduce its efforts to acquire new residential local phone customers that have their calls completed using the Bells' networks.
"We are sizing our consumer effort to the profit opportunity," Michael D. Capellas, MCI's chief executive, said in a call with investors.
The company was unable to say when prices would stabilize, either in the residential or commercial phone business.
Without a halt to the price war across the telephone industry, the companies are looking for other ways to cut costs. On Wednesday, AT&T said it might write down the value of some of its $22.8 billion in assets in the third quarter. Such a write-down could reduce its depreciation costs and lower the net worth of the company.
Regardless, until the business of selling long-distance phone services stops shrinking, potential buyers are likely to hold off bidding for AT&T or MCI. The Bells, which have started special advertising campaigns and price promotions, appear more comfortable stealing AT&T and MCI customers one by one than buying one of them outright.
"No one can tell you where the bottom is and until you know where the bottom is, you can't limit your risk as a buyer," said Scott C. Cleland, chief executive of the Precursor Group, an independent research firm in Washington. "When the Bells see AT&T and MCI, they snicker. But if they buy them now, it becomes their own ulcer."