AT&T\'s Biggest Problems Aren\'t Emboldened Rivals, Chief Says

With two potential mergers that could strengthen long-lagging competitors - AT&T is under pressure to respond.

Earlier this week, the telecom giant set aside $14 billion to overhaul its networks, including an upgrade to the latest cellphone data standard.

But the company's chief, Randall Stephenson, contends that a newly emboldened Sprint Nextel, which recently struck a major deal with SoftBank, didn't prompt the move. Rather, it was motivated by AT&T's failed $39 billion takeover of T-Mobile USA.

He faces other worries, too. Mr. Stephenson argued that the uncertainty over the expiration of the Bush-era tax cuts and the potential reduction in government spending that could stem from automatic budget cuts set for year-end - was a bigger threat to his business and his customers.

As for the changing industry landscape, Mr. Stephenson seems less concerned. Even with the SoftBank deal, Sprint, he contends, is largely playing catch up.

When SoftBank announced its plans to buy nearly three-quarters of Sprint earlier this fall, the Japanese company's founder, Masayoshi Son, promoted his history of taking on big incumbents in an industry, and winning. SoftBank entered the Japanese cellphone service market in 2006, and in that time snatched up enormous market share through marketing expertise and exclusive rights to popular devices like the iPhone. Now Mr. Son is hoping to use Sprint as a vehicle to do the same thing in the United States, taking on AT&T and Verizon.

But Mr. Stephenson said in an interview earlier this week that he did not think much had changed in the American market so far. “It doesn't feel much different to me,” he said.

He argued that the $8 billion in cash that SoftBank will pour into Sprint was necessary to help keep the third-place service provider in the game. But with Sprint further behind in building out a Long Term Evolution data network, the company significantly trails its large r competitors.

Mr. Stephenson pointed to his own company's plans as a sign of how expensive it is to keep up in the American cellphone race. The latest $14 billion investment comes on top of billions more that AT&T has already committed to spending on its network.

The plan was born of the collapse of the T-Mobile deal late last year, he said. Buying the smaller rival - which now plans to merge with another service provider, MetroPCS - was meant to give AT&T much-needed spectrum to upgrade to LTE.

With that transaction's death, AT&T was forced to consider how it would acquire more spectrum, as well as how it would spend the enormous amount of cash on its books and deal with nonessential operations like a yellow pages business.

Mr. Stephenson said that he pulled aside one of his top operating executives and tasked him with finding an answer. What emerged was the $14 billion plan, an ambitious effort that includes bolstering AT&T's wired broadband offeri ngs and putting its services into new areas like cars.

Earlier this year, AT&T also sold control of its yellow pages business to Cerberus Capital Management for about $950 million.

The wired Internet assets nearly ended up on the auction block as well, Mr. Stephenson said. But after having had preliminary conversations with a number of potential buyers, the company opted instead to double-down on those operations.

AT&T's moves should help expand its reach, including by bringing LTE service to potentially 300 million people. The company may also turn to smaller acquisitions, what Mr. Stephenson called “tuck-in” transactions that fall far short of the expansiveness of the T-Mobile deal.

“Scaled industry consolidations appear to be more difficult,” he said. “Tuck-in acquisitions are doable.”

(While he claimed to have moved on from the T-Mobile fracas, Mr. Stephenson betrayed some irritation with the government regulators that blocked th e deal. “Our antitrust system is dysfunctional,” he said, pointing to the dual roles played by the Justice Department and the Federal Communications Commission.)

Possible transactions, according to analysts and industry executives, include some sort of partnership with Dish Network, which has an abundance of spectrum, and Leap Wireless.

But of greater concern for now, Mr. Stephenson said, is resolving the potential tax increases that could arrive early next year. Despite his clashes with antitrust regulators, the AT&T chief offered some positive sentiments about a second Obama term.

“Maybe in the short run, this will be better for the fiscal cliff,” he said, referring to the package of tax increases and budget cuts set for year-end, given that a newly re-elected president may have more negotiating leverage with Congress.

Action is imperative, he argued, especially since AT&T's customers had already pulled back spending and investments in May a nd June because of the uncertainty over the fiscal situation.

“If you give businesses a line of sight,” he said, “you will see this economy go.”