Whitacre’s way put AT&T at the top of the list

By Dennis Kneale

updated 7:20 p.m. ET Dec. 29, 2006

On 4,000 sun-baked acres of mesquite, blackbrush and cactus 60 miles south of San Antonio, Tex., AT&T Chairman Edward E. Whitacre Jr. keeps a Texas-size ranch house, five man-made ponds stocked with hungry bass, and a beaten-up bulldozer built in 1955. He pilots the Caterpillar, ancient, ugly and creaky, to clear acres of thorny thicket and scrub brush. "It still gets the job done," he says protectively.

Whitacre takes a similar skinflint's approach as the new AT&T embarks on a digital video revolution. In an audacious bid for new business AT&T aims to sell a panoply of video programming to customers of its phone services. It is building an all-Internet network, encompassing 40,000 miles of newly laid fiber-optic lines — on the cheap.

AT&T's U.S. archrival, Verizon, is spending $18 billion in six years to cover 18 million homes by 2010, digging up trees and tulips to lay fiber to each and every house. AT&T will expend just $4.6 billion to reach 19 million homes by year-end 2008, lacing fiber into neighborhoods and using copper phone lines, already laid, to carry video the last few thousand feet to homes. This means the AT&T network won't be quite as fast or quite as fancy — but it will do. It will get the job done.

A telco gone Hollywood, AT&T has signed distribution deals with more than 300 cable channels. It has won approval to offer video in six states plus ten other markets. It rolled out its new video service in hometown San Antonio in June and, in some neighborhoods, snagged a surprising 30 percent of homes; it just lit it up in Houston. It hopes to be available to 1.9 million homes in 15 markets as the new year unfolds. Video revenue, now a trickle at AT&T, could in a few years hit $4 billion, including $2 billion in ad sales. "There's not much growth in our business without a new product," Whitacre says. "Video probably is that product."

AT&T's video ambitions will intensify as Whitacre closed the latest in a string of big takeovers: the $86 billion buyout of BellSouth, the last Bell standing. On Friday, he received the blessing of one last holdout, the FCC. "It's a big, big milestone," he says, vowing to push broadband services and digital video "much deeper into the American public."

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Since becoming chief executive in 1990, Whitacre has pulled off 13 deals with a combined price tag of about $290 billion, including assumed debt (including the BellSouth deal). He started this buying spree as chief executive of the former Southwestern Bell, the unaccountably proud runt of the seven Baby Bells spun off from the old AT&T monopoly that the government busted up in 1984. He has built the regional utility into the renewed and renamed AT&T Inc., the largest telecom company in the world, 28 percent bigger (in revenue) than second-place Nippon Telegraph & Telephone.

Suddenly Wall Street — harshly negative on telecom stocks since the markets crashed in 2000 — is impressed. AT&T's stock is up 44 percent in the past year. Whitacre says it should be up even more. "Shoot, even now it's way behind. It oughta be up 200 percent!" he says. "This is a stock that sells way higher at some point."

That surge and other strong metrics — its sales grew 46 percent and per-share earnings 61 percent in 12 months; its shares more than doubled the return of Verizon's — combine to make AT&T our Company of the Year for 2006. It is a bit of sweet vindication for Whitacre, who was pilloried in the press for raking in $135 million in a six-year period in which the company's stock price fell 48 percent.

"You beat up on me a lot. Everyone did," Whitacre says. Forbes gave his board a grade of "D" in 2003, and in mid-2005 we put him on a "hit list": "Why well-paid, underperforming execs should be worried." (Five of the seven chief executives on that list no longer hold their jobs.) He still smarts from a piece in the New York Times Magazine that ran five years ago. The writer said Whitacre exemplified a stock-options system "shot through with hypocrisy" and "gradual corruption." "You know him?" Whitacre asks. "You tell him he's a sorry bastard." He grins.

The new AT&T, with BellSouth in hand, will possess a sweep and scale that few imagined when Whitacre began. It will serve 90 million accounts. It will have 68 million phone lines in 22 states, 12 million high-speed Internet access users and 59 million customers nationwide for Cingular (soon to be renamed AT&T). It will employ 300,000 people and have 1.8 million shareholders. It will be one of the nation's largest property owners, with 2,300 stores and a fleet of 35,000 trucks, each one a moving billboard. This rebuilt juggernaut will have annual revenue in 2007 near $110 billion and net income of $10 billion.

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