AT&T disconnects

Teleco pulls out of pact with DirecTV

NEW YORK — AT&T pulled the plug Monday on its 20-month-old marketing alliance with sat-TV operator DirecTV, confirming long-held perceptions that the deal had not worked out as expected.

AT&T said it would sell its 2.5% equity stake in DirecTV back to the company for $161.8 million, a $24 million profit on what it paid for the stake in March 1996. Stock options, which would have taken the telco’s interest in DirecTV to 30%, were canceled.

Ironically, the decision was made just weeks after Michael Armstrong jumped from running DirecTV’s parent company, Hughes Electronics Co., to the top slot at AT&T. But an AT&T spokesman said Armstrong was not involved in the decision.

The spokesman said DirecTV and AT&T began “discussing a change in the arrangement several months ago,” partly because the telco has decided to sell non-core business interests as part of a new focus on telephone businesses.

At the same time, both companies conceded the marketing alliance had not worked as well as it was expected to because customers preferred to order DirecTV service from a consumer electronics outlet rather than over the phone.

AT&T set up a special toll-free number to take orders for the sat-TV service. But in the past 20 months, the telco has added only 35,000 subscribers out of the total 1.6 million who have signed up for DirecTV in that time. (The sat-TV operator now claims more than 3 million subscribers.)

AT&T’s efforts helped expand DirecTV’s brand awareness with the public, however, a DirecTV spokes-man said.

DirecTV made clear last year, in calls with analysts, that AT&T was not having as much impact as expected. Media Group Research analyst Curt Alexander said Monday the announcement “confirmed what people knew since the summer of 1996 … that the partnership wasn’t working.”

Lehman Bros. analyst Larry Petrella said the end of the alliance also was another sign that the video and telecommunications sectors didn’t converge as expected. “One more nail in the coffin” of video-telco hookups, he added.

The AT&T spokesman said the original contract provided for the alliance to be reassessed by both sides at specified times. He said AT&T negotiated the price it would get for the equity stake in DirecTV, based on its original investment “plus a reasonable return.” A DirecTV spokesman declined to comment.

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