AT&T’s decision to stop marketing traditional consumer local and long-distance services highlights the seismic shift underway in the telecom arena. I’ve written much on the growing distinction between “bandwidth providers” that offer commodity bandwidth and “service providers” that specialize in ensuring effective delivery of services and applications.
AT&T clearly plans to do the latter. But the courts, the FCC and the administration accelerated the shift with recent decisions on unbundled network element pricing (UNE-P). The upshot: It’s more expensive, and much less rewarding, for AT&T to compete in the legacy consumer services space. So the carrier threw in the towel.
The decision is a bellwether. As AT&T CEO David Dorman said: “Obviously this is a historic shift that has broad-reaching implications, not only for AT&T, but also the industry at large.” He’s right. But what exactly are those implications?
Industry guru David Isenberg astutely observes that AT&T’s strategy could be a classic response to disruptive technologies as described by Clayton Christensen in his book The Innovator’s Dilemma. As Christensen notes, “up-market migration” (pursuing a diminishing market for high-margin, high-value offerings) can, if not managed carefully, result in a company essentially withering away – selling fewer and fewer services to a shrinking group of customers.
At first blush, this sounds a lot like AT&T: In recent years, AT&T exited Concert, its global partnership; sold its wireless operations; and spun off its much-vaunted cable acquisition. And Isenberg’s a smart guy: In the mid 1990s he accurately predicted the success of the Internet and the failure of AT&T’s then-popular “advanced intelligent network” strategy.
But I think he’s calling this particular shot wrong. Here’s why: Knowing when to cut your losses – and focus on your strengths – is critical, especially in a changing environment. Technologies such as IP and VoIP are dramatically reshaping the playing field. Although it’s still possible to make money selling legacy consumer voice services, margins are eroding and demand is softening. Increasingly, consumers won’t bother with local phone service, relying instead on cell phones or low-cost VoIP services over broadband.
Targeting VoIP and business services reflects a renewed focus on AT&T’s historical strength – the company has traditionally led with technology, backed up with outstanding service. It also represents the segment with the best growth potential. Businesses have been demanding better managed, more effective, more functional services from providers, including AT&T. Enterprise telco managers say they’re willing to pay extra to receive premium services. My read is that AT&T’s recent move is about focusing on its strengths.
The trend is toward a cleaner distinction between bandwidth providers and service providers. The characteristics of the two types of players are as distinct as the those of powerlifters and marathon runners – and the strongest players are those that clearly know which sport they’re playing and have the right shape for the game.
Johnson is president and chief research officer at Nemertes Research, an independent technology research firm. She can be reached at johna@nemertes.com.
