Perhaps nowhere is the decline of AT&T more visible than its payroll: A decade ago the company employed more than 300,000 – by year-end it’ll be about 49,000. Just five years ago AT&T controlled cable, wireless and traditional telephone businesses aimed at consumers and enterprise customers. Now its core business is limited to the latter. AT&T remains formidable, with $30 billion in revenue last year, but speculation about its future revolves more around acquisition than any return to the glory days. AT&T CEO and Chairman David Dorman recently spoke with Network World Senior Editor Denise Pappalardo and Associate News Editor Paul McNamara about the company’s enterprise services unit, pricing pressures and survival in an ever-difficult telecom market.
How do you expect to find growth in business services?
When you’re growing volumes but your unit prices are declining, it’s pretty tough to actually get top-line change. . . . We have new services and products that this year will produce over $1 billion in new revenue. The number of telecom suppliers out there today will not go on forever. We don’t think telecom is like the airline industry where zombie carriers keep coming back.Growth is an overall industry question that’s not unique to AT&T. But we have to combat it not just by sticking with what we had before but also by venturing into new areas.
What do you see as the most promising of those new services?
Managed services and the IP VPN areas hold the most promise. We are doing things where we have substantial non-price differentiation benefits over our competitors. We have more points of presence, better security features, more and deep service-level agreements.
You’ve said AT&T will not be beaten on price for business services. How do you balance that commitment with the need to grow revenue?
The winner of a price war of this kind is not the last man standing but the last man profitable. We were not going to lead prices down, but we were not going to let competitors who were in more desperate situations simply use price to win and think that was a survivable strategy. . . . We have a portfolio that has highly profitable services as well as new evolving services. We think pricing in the industry has reached a point where the replacement cost of the network these services ride on is so high, no one is going to invest more money to sell services at these prices. And only the largest-scale players can make money.
Who are AT&T’s prime competitors? Are cable companies and local exchange carriers on the same playing field with interexchange carriers?
When we look at the enterprise services market and the nearest competitors we have on a revenue basis, they are MCI, Sprint and Qwest. In MCI’s case they have their hands full managing post-bankruptcy, and we feel like we are competing effectively with them. Sprint, by its own choice, has emphasized its wireless business and allocated much more of its investment to wireless and almost nothing to its core long-distance business. Qwest is in a pretty different space as far as its financial position.
Over time we will certainly see the Bells show up more. But you have to make a serious commitment. If you want to take market share in the large-customer sector you have to offer the customer a reason to switch. There has to be an economic incentive, which means you have to give them an even lower price than guys like us today, which means you’re going to lose money. Then you have to make an upfront investment in systems, people and products, and reach beyond your region.
What’s your pitch to companies when trying to give them a reason to switch to AT&T?
We think we are offering competitive prices, financial stability and strength, and the broadest product array in the industry. There is a lot to like about doing business with AT&T because you can sleep well at night. We are not in a position where we are charging a massive premium for that. We are saying we’ll give you the best service, great SLAs, consistent performance and you know we’re going to be here.
AT&T is not charging a premium? Historically you’ve been known for doing just that.
I said we’re not charging a significant premium. On a historical basis, the fact that AT&T did charge a premium is more true than it is today. We are clearly competitive in pricing.
There has been rampant talk about consolidation in the industry. What’s your take?
I don’t think anyone should be running their business with the idea that they want to be a target for acquisition. Our attitude is we know we have a clear focus now on what our mission is, which is serving businesses’ telecommunications needs. We have the best franchise of business communications services in the world. We are the most profitable, we’re a $30 billion company, and we’re a leader globally and domestically. When you compare us to AT&T of five years ago with a $20 billion-plus consumer business, cable companies, wireless companies, we’re clearly not that company anymore. But at the same time we have the notion that a business franchise like ours is not just going to disappear.
How is your move toward consumer VoIP services going to play out?
We have a profound belief that the voice application is moving from being embedded in a local network infrastructure to being a services-layer application just like e-mail, search or photo exchange or a dozen other things you may do on Yahoo. Voice is going to be more complex because it is a peer-to-peer service by definition and the human voice has to be encapsulated and delivered in such a way that it’s coherent. It’s not predictable so you have to have an [Multi-protocol Label Switching], QoS network to manage it; otherwise you cannot control the outcome.
We have 25 million consumer customers. My view is we’re successful if we convert some number of those. It’s not going to be the 80-million-customer base we had in 1997, but having several million consumer VoIP customers can be a good business for us.
Did regulators force you out of the traditional voice business?
Yes. We had acquired 6 million customers. We actually acquired 10 million and the Bells took back 4 million. It was a fierce battle. We had 6 million customers using our service through the Bells. Congress wanted to bring competition to the local telephone business when it drafted the Telecom Act of 1996. It’s hard to argue that we didn’t do that because the Bells, before we showed up, did not offer bundles, didn’t offer packages, didn’t do win-backs, didn’t send people checks. We created a lot of competition in places like New York, Michigan and California. Now some of those promotions are expiring, and prices are going up. There’s a consequence.
If you were FCC chairman what would you do differently?
I would fix intercarrier compensation across the long-distance, [competitive local exchange carrier], ISP wireless and VoIP provider sectors. Each of those users of the local network pays a different rate. What’s the logic for that? And is that sustainable? In the days when AT&T was first broken up and we were the only guys paying the Bells, it was a transfer of wealth from AT&T to the Bells for the purposes of keeping the Bells’ investments going to the local network. What’s the logic for a dial-up ISP paying 9 cents per hour when I’m paying 9 cents per minute in North Dakota to use exactly the same facilities?
Do you regret that AT&T sold off its wireless division?
I don’t think regret is the right way to look at it. It was clear if we didn’t do something about the total debt level, we were going to face a serious set of circumstances. All you have to do is look around to know what those were. You have to be able to pay back your debt, and we had $5 billion a year in interest charges. We took the tough medicine, which was selling assets. Strategically I would love to have that company under the AT&T name and portfolio, but we did what we had to do.
