By David Rohde
Network World, 4/20/98

If AT&T executives want to save their company and see it prosper again, they could start by taking this piece of advice: Throw away all the books and articles about big companies that fail because nobody wants their products anymore.

It's now clear that AT&T's big problem is an amazing ability to underestimate the demand for its products.

While some of the company's officials continue to moan over shrinking margins on telephone calls and the supposed crimes of the regional Bell operating companies, AT&T's new CEO is trying to get them to understand how much more revenue is to be had simply by meeting the soaring bandwidth demands of the market.

But can AT&T chief Mike Armstrong deliver? Observers agree he would have had a better chance when the job first opened up back in the fall of 1996. That's when former CEO Bob Allen began wasting nearly a year unsuccessfully training a printing company executive named John Walter to be his successor.

While that was going on, the year 1997 laid bare the yawning gap between the demand for broadband capacity and the available supply.

Now in 1998, an emboldened MCI Communications Corp. is preparing to drive AT&T's market share below 50% for the first time with the help of merger partner WorldCom, Inc. and their potent combination of nearly 100 local Synchronous Optical Network (SONET) rings.

And at least four new national carriers, along with dozens of new local carriers - some headed by disgruntled former Allen underlings such as Qwest's Joe Nacchio and Teligent's Alex Mandl - are hoping to teach AT&T a lesson.

Insiders say the company still is driven by division between go-slow executives who believe their own propaganda about why telecom reform isn't working from a legal standpoint and those who point out that users will demand wide-area bandwidth regardless of what technical issues are tied up in court. Against this background, Armstrong still has a great deal of work to do.

"He is saying all the right things,'' says Reginard Bernard, president of the Enterprise Networking Technologies Users Association, AT&T's broad-based user group. "I think [Armstrong] has a very good chance of putting [AT&T] on a more disciplined footing.''

But so far, that hasn't meant a change in AT&T's single biggest problem: A shortage of ports and circuits to handle T-1 and even subrate dedicated access facilities.

"AT&T's installation intervals are somewhat longer than the competition,'' says Bernard, who is also assistant director of communications services at State Farm Insurance Co., in Bloomington, Ill. Others are even more direct: "They've basically told their salesmen to stop taking orders or slow down taking orders,'' says Berge Ayvazian, executive vice president of The Yankee Group, a Boston-based telecommunications consulting firm.

Big vacancy near the top

Just a step down the organization chart from Armstrong and new president John Zeglis is where you can probably find the root of the problem.

AT&T is such a big company, with so many peripheral issues on its plate (such as how much money to contribute to Olympic sponsorship or how to counter tricky TV ads by rogue carriers such as 10-321) that the CEO's relationship to professional network managers is more indirect than that of, say, John Chambers of Cisco Systems, Inc. or David House of Bay Networks, Inc.

For example, the top executive of AT&T who deals with corporate users is the executive vice president for business markets. That position is now vacant following two years of turmoil. Shortly after Armstrong arrived, Executive Vice President Jeffrey Weitzen left AT&T to become president of Gateway 2000, Inc. That was after Weitzen's short stint succeeding Gail McGovern, who in 1996 was urgently shifted over to executive vice president for consumer markets to stem losses to Sprint's dime-a-minute offer and the pesky dial-around carriers.

That leaves two obvious inside candidates for a successor: Weitzen's deputies Ken Sichau on the voice side and Bob Aquilina on the data side. In a move that spooked some analysts, it was Sichau who sat in the executive vice president's chair during AT&T's lineup of executives at its January confabulation in New York with Wall Street analysts. That bodes ill for focusing AT&T on the critical data challenges ahead, some say.

For example, on frame relay service, "they've been running far behind their six weeks' install time,'' says Johna Till Johnson, an analyst at Meta Group, Inc., in Stamford, Conn. "They've got not enough people and not enough switches.''

AT&T's capacity crunch is having numerous side effects. At some points over the past year, some requests for proposal from AT&T have simply been ignored, says Tom Walton, president of Walton & Walton Associates, Inc., a mid-Atlantic regional network design consulting firm, in Richmond, Va. And those requests aren't just from the small customers, either. He noted one case in which a well-known financial services company in New York was seeking eight to 10 T-1 access lines to AT&T in Maryland. "There was so much work backlogged that the [account] team couldn't get to the work because of the backlog in placing orders,'' Walton says.

Specialized overlays on T-1 lines, such as ISDN Primary Rate Interface orders, have posed additional delays, Walton adds. "Recently, there just were not enough ports for D channels'' for the same financial services firm.

First come, first . . . blocked?

Armstrong may be enjoying a honeymoon with Wall Street and the press, but a tough period may be just ahead because AT&T can't possibly clean up its capacity problems all at once.

"It's just going to get worse from here on out,'' Johnson says. She notes that new federally mandated charges to help pay for universal service are about to kick in on switched access lines. "So now there's going to be a run on T-1 and subrate circuits, such as 56K and 64K [dedicated access lines],'' she says. "A lot of customers are going to run out and buy leased lines where they had none before.''

Armstrong's solution is to buy hundreds of new central office-class switches - both for circuit-switched and packet-switched traffic - and place them closer to the customer. Walton fully endorses Armstrong's call for an edge switch architecture. "They're at a point of no return,'' he says. "And the answer is to bring some of the [trunk terminations] out of the building and maybe concentrate them.''

By dramatically slimming down the company and indicating that savings will go back to customers before shareholders, Armstrong's strategy gives AT&T a chance to win back those for whom price means everything - and those who had written off AT&T as a viable option years ago.

One of the reasons MCI and WorldCom have made so many inroads into the commercial and investment banking industries is that for all their size, companies in those fields basically operate on thin margins and must save on operating costs such as telecommunications.

For example, global currency and securities trader Prebon Yamane, Ltd. currently operates a private WAN running over 400 leased lines from GTE Corp. and WorldCom.

"I'm glad to see Armstrong turning it around and saying he's going to compete on price,'' says Gary Backer, director of global communications at Prebon Yamane, in New York. "They have been able to win things on their own [name], not because of their price performance.''

Yet even AT&T's own users note a number of pesky AT&T pricing policies that continue to survive of their own volition, almost as if there never were a new CEO who wanted to compete on price.

One is AT&T's habit of passing along all costs it can blame on somebody else, notably regulators. If anything, AT&T has become more militant on this issue over the past year, customers say, making it nearly impossible for users to sign contracts often recommended by lawyers and analysts that freeze prices during the term of a contract. A notable example is the so-called pay phone controversy, in which AT&T has raised the price of terminating 800 calls four times in the past 15 months and has added a calling-card surcharge all because of a new federal regulation forcing them to compensate pay phone owners for coinless calls carried over the AT&T network.

"They have passed on all the charges, and they probably passed on administrative costs that we don't feel are totally equitable,'' Bernard complains.