AT&T Extends DSL Deal; Cuts Jobs

The phone giant will use Covad's DSL network, enabling it to offer residential broadband with lower overhead. Separately, it cuts 3,500 jobs to reduce costs.

by Colin C. Haley of boston.internet.com [January 7, 2003]

AT&T has extended its outsourcing deal with DSL specialist Covad Communications, enabling the phone giant to offer residential broadband without network overhead.

Under the new pact, which runs until September 2005, AT&T-branded DSL will be offered over Covad's entire network, including the potential subscriber hotbeds of Chicago, New York and San Francisco. Financial terms were not disclosed.

The companies continue to offer DSL services to business customers as well under a previous agreement.

"Collaborating with Covad greatly expands our options and geographic reach," said Kevin Crull, a senior vice president with Bedminster, N.J.-based AT&T. "It accelerates our progress, while allowing us to control spending as we achieve scale."

Because it will use Covad's network, AT&T will incur an asset-impairment charge of about $200 million to reflect the reduced value of its own DSL network assets. AT&T bought the assets of bankrupt DSL provider Northpoint in 2001 but never fully activated the network.

In other news, AT&T said it will lay off 3,500 people, about 5 percent of the workforce. The company said the layoffs are largely "the result of improved processes and automation" in its corporate services units and will be completed by mid-year.

About half the affected positions are in management. The move will add another $240 million charge for severance packages. Finally, AT&T said it will take a $1.1 billion charge to write down assets in Latin America.

For Covad, the stregthened relationship with AT&T boosts its wholesale business. The Santa Clara, Calif., company also sells its own DSL service and recently stepped up efforts to land business accounts.

It also provides additional financial security for Covad, one of the few telecoms to emerge from bankruptcy protection. As part of the deal, Covad granted AT&T warrants to purchase a total of 3 million shares of common stock—1.3 percent of Covad's outstanding shares.

AT&T may also be concerned about a report that the Federal Communications Commission may stop forcing ILECs to provide line access to competitors at discounted rates. The move could hurt AT&T's efforts to expand its range.

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