At&T Is Strutting Its Stuff In Consumer Goods

Talking to someone on the VideoPhone 2500--the picture phone from AT&T due out this summer--is definitely not like talking face to face. The colors are faint, the motion is intermittent, and the lip sync is miles off. When someone laughs, fully two seconds can elapse before you see the smile pop onto the person's face. All that for $3,000 a pair.

Still, knocking the VideoPhone is a bit like criticizing the glissandos of a piano-playing dog; the wonder is that the thing works at all. Every other video system requires expensive, high-capacity phone lines. The VideoPhone 2500 squeezes video signals so much that they can fit over a standard line--just plug it in and start making calls.

LOADED PIPELINE. The equally surprising thing about the VideoPhone is that American Telephone & Telegraph Co. could pull it off. Even with its drawbacks, it's a symbol of the phone giant's remarkable comeback in consumer electronics--and its intention to take the lead in a new era of products. Kenneth M. Bertaccini, president and CEO of AT&T Consumer Products, calls it "step one" in an effort to blend computers, phones, and consumer electronics.

Less than a decade ago, Consumer Products wouldn't have been up to such a mission. At the time of the breakup of AT&T in 1984, the 28,000-employee business was flopping so badly that some insiders advocated dumping it. AT&T knew how to lease telephones, not retail them. It didn't have a clue about how to control costs, develop products rapidly, or get space on store shelves. Says Bertaccini: "We were losing lots of money, our customers were leaving us in droves, and our people were in trauma."

This year, by contrast, AT&T is No. 1 in the U.S. market for corded phones, cordless telephones, and answering machines (chart), besting the likes of Panasonic, Sony, and Thomson. Consumer Products' revenue has grown an average of 18% a year since 1985, says Bertaccini, to a level that analysts peg at around $2 billion this year. Bertaccini estimates that profit margins are among the highest in AT&T. Casey Dworkin, general manager of Personal Technology Research, a Waltham (Mass.) consulting firm, calls it "probably one of the great turnaround jobs in the high-tech industry."

Here's how it happened: After Bertaccini was promoted to president in 1986, he moved manufacturing out of the U.S., closed hundreds of Phone Center company-owned stores, halved the payroll to 14,000, and brought in talented outsiders to manage the business. AT&T now makes answering machines in Mexico, corded phones in Thailand, and cordless phones in Singapore and Indonesia. Such moves cut annual expenses by $1 billion.

At the same time, Bertaccini tried to wipe out the old AT&T's go-slow attitude. He ordered up team-building exercises such as wilderness treks. And to get AT&T veterans to focus on the bottom line, he instituted performance bonuses. Executives who once earned $100,000 a year got $70,000. But if they hit performance goals, bonuses could run as high as $80,000. Bertaccini split up Consumer Products into strategic business units responsible for particular product lines. And in January, he gave each its own marketing and product-development staffs.

Those measures have protected, even enhanced, the venerable AT&T brand name. It topped all others in a survey this year by rival Thomson Consumer Electronics, according to Robert E. Giordano, vice-president and general manager for Thomson's Communications Products Div. in Syracuse, N.Y. Says Giordano: "I respect a lot of what they've done to change the old AT&T."

EXPLODING MARKET. AT&T is hardly home free. Sony Corp. and Panasonic Co. have expanded manufacturing capacity to launch fresh attacks on AT&T's leadership in cordless phones. And AT&T has yet to transfer its consumer marketing clout overseas, where its name is not well-known. Boosting foreign sales from less than 5% of revenues will be expensive. And the VideoPhone won't have the field to itself for long. Britain's GEC-Marconi Ltd. is developing one that could sell for $720 and hit the U.S. market sometime next year.

But then, it's no surprise that AT&T Consumer Products faces tough challenges. The wonder is that it has done this well. Bertaccini estimates that the market in which Consumer Products competes, $8 billion worldwide this year, will explode to $70 billion by 2001, thanks to new products arising from the convergence of computers, communications, and entertainment. If Bertaccini can keep his business in the thick of the action, a fair chunk of that $70 billion could belong to AT&T. Who says you can't teach an old dog new tricks?