At&T: Ready, Set, Devour?

AT&T wants to grab a third of the regional-calling market in a few years

It's the telecom world's version of a war council. Every week or so, about 15 AT&T executives meet at the company's Basking Ridge (N.J.) headquarters to discuss the latest maneuvers by the company and its opponents in the battle for a $90 billion prize--local calling. The team, which has dubbed itself "Mission Control," was formed almost two years ago, but the members shifted into high gear in February. That's when the Telecommunications Act of 1996 became law and local calling markets were thrown open to competition.

Now, Mission Control is hopping. Headed by President Alex J. Mandl, the team has laid plans for AT&T to get into local calling in every state by the end of 1997, with trials starting in five states on Sept. 1. AT&T Chairman Robert E. Allen spelled out his ambitions in the new market in a speech to investors on June 11: "We plan to take at least a third of the local market within a few years," he declared. Mandl says that AT&T not only will hit Allen's target but will also break even on local service in two to three years.

MISSION "IMPLAUSIBLE." Industry analysts aren't so sure. The only immediate path to local calling is to buy service from a regional phone company and resell it. That makes it unprofitable to offer deep discounts, the easiest way to grab customers from the entrenched former monopolies. "The economics of local resale simply can't yield such large market share gains," says Scott Cleland, an analyst with the Washington Research Group, who terms Allen's goal "implausible."

There is one simple solution: sell local service as a loss leader. Like other phone companies in the deregulated market, AT&T plans to compete by offering a bundle of telecom services--local, long-distance, and cellular calling, plus data and video services. AT&T isn't discussing how it will price local service or its bundling plans. But says Shaun P. Gilmore, AT&T's Northeast states president: "The local-services part of a package of services could be discounted." In other words, AT&T can use profits from long-distance or satellite TV to pay for local discounts.

But first AT&T must have local service to offer. To come up with a product, AT&T is developing a complex strategy of reselling, partnering, and building its own facilities--both wired and wireless connections to homes and businesses. At the start, the mix will depend on state and federal regulators, who must rule on a huge range of competitive issues, including guidelines for the wholesale discounts that the local carriers must offer resellers.

At Mission Control, color-coded maps depict AT&T's progress across the country--showing the status of resale negotiations in every state and the discounts determined by state regulators so far. The team also scrutinizes regular progress reports from the seven new regional vice-presidents. Right now, the focus is on California, Georgia, Illinois, Michigan, and Connecticut, where local trials begin on Sept. 1.

Mission Control is also working on another problem: Finding the right combination of products and pricing to persuade consumers to spend their communications dollars with AT&T. More than the $12 or so a month that consumers spend on local calling, AT&T wants to grab a big chunk of the $100 to $200 a month they spend on electronic communications: local and long-distance calling, cable TV, online services, paging, and wireless.

So the folks in Basking Ridge are poring over reams of data on the buying habits of their 80 million residential customers. AT&T figures it can use the information collected from its long-distance and wireless calling bills, Universal Card records, and online services to come up with prices, products, service offerings, and advertising schemes targeted at narrow market segments. Customers who use wireless phones to keep track of the kids might be targets for pagers. Busy travelers might be offered special discounts on credit-card calling. "We will tailor our training, billing, marketing, everything, according to demographic and geographic patterns," says Joseph P. Nacchio, executive vice-president of AT&T's Consumer & Small Business Div.

Most of all, AT&T will be selling its brand--which the company keeps before the public with a $700 million annual ad budget. Executives love to trot out the fact that most surveys show that 30% to 40% of all consumers already believe they get their local-calling service from AT&T, even though the company has been out of that business since the breakup of the Bell system in 1984. "Clearly, AT&T will be our biggest competitor," says Solomon D. Trujillo, President of U S West Communications. "It's the largest company around, one of the largest companies in the world."

"SHAME ON US." On the other hand, AT&T can't afford missteps that would tarnish its name. It learned that lesson when it started selling its WorldNet Internet service in March. AT&T couldn't keep up with the huge demand for sign-up disks, and customers who subscribed found that there were service outages and constant busy signals on help lines. AT&T is now refocusing its online efforts more narrowly on consumer service. "Shame on us," says Mandl. "We learned that customers do expect very high quality, and we also need to be realistic about how strong a drawing card the brand is." Because of the Internet blunder, Mandl says AT&T has redoubled its efforts to ensure that its local-service offering is ready to handle huge volumes from the start.

AT&T's enormous size is a plus in other ways. With some $47 billion in annual revenues--2 1/2 times the size of the biggest Bell--AT&T can offer deals the competition will be hard-pressed to match. For a preview, look at what AT&T is doing in the handful of states where it has already entered the competition for in-state toll calls. The company is offering three months of free, unlimited in-state toll calls to Illinois residents. In Connecticut, the deal is 5 cents a minute on all in-state toll calls for a year. AT&T customers in 13 states can also get special deals on the equipment and programming provided by DirecTV, the Hughes Electronics Corp. satellite-TV service. Then there's that Internet offer that drew such a big response--unlimited access for AT&T customers for $19.95 a month, or five free hours a month for one year.

For all its big plans, though, AT&T is still at the mercy of the local phone companies. The kind of discount deals it can strike with them for buying local service will be the key to how quickly AT&T can gain market share and whether it can meet Mandl's profit target. The Telecom Act says that the Baby Bells, GTE Corp., and other local carriers must offer their service to potential competitors at the retail rate minus "avoidable costs"--the money they save in marketing, billing, and the like by not handling customers directly.

No surprise, there's a wide gulf between how the local carriers, their wholesale customers, and the state regulators calculate those costs. U S West, for example, proposed a formula in Colorado that actually puts the wholesale price higher than the retail rate, arguing that its local consumer rates now are heavily subsidized. Connecticut regulators came up with a similar interim formula. Most state public service commissions have been more generous-- Tennessee and Illinois regulators are recommending 25% and 22% discounts, respectively.

AT&T has one edge in these resale battles--experience. John D. Zeglis, general counsel of AT&T, represented the company in its efforts to keep MCI Communications Corp. out of long distance back in the 1970s. "I was on the other side, resisting every effort to interconnect to our network," he says. "I have the world's record for losing those same arguments from '68 on." Zeglis figures the company will end up in arbitration in all 50 states, and based on his own lack of success with arbitrators back in AT&T's monopoly days, he's confident that the Bells will lose every time. For their part, Bell executives routinely accuse AT&T of dragging out the negotiations in order to score points with regulators. The long-distance giant says the local phone companies aren't budging from unacceptable discount offers. "Our job is to create an environment that's conducive to competition--not to subsidize our competitor," snaps Ameritech Corp. Chairman Richard C. Notebeart.

ALL IN ONE. Long term, AT&T says it would just as soon control its own local networks. The cost of building is staggering. Constructing "local loops" in the top 50 markets could cost upwards of $5 billion, industry analysts estimate. AT&T does plan to build facilities in the largest markets and has already started in Los Angeles, Chicago, and New York. For the rest of the country, "we want to use other people's assets and capital everywhere we can," says Harry S. Bennett, vice-president of AT&T's Local Services Div. Bennett says AT&T will partner with cable operators, competitive access providers (CAPs) that serve businesses with private lines, and even electric utilities. It already has contracted with five CAPs that serve 70 cities.

The other local play is wireless. AT&T spent $12 billion two years ago to buy McCaw, the nation's largest wireless calling operator. It is converting that network from analog to digital and is building a nationwide wireless network based on all-digital personal communications services (PCS) technology. By late 1997 or early 1998, says Bennett, 80% of the country will be covered by an all-digital AT&T Wireless network. At that point it might be viable to offer wireless as a local-service alternative.

Ultimately, AT&T wants to offer any and all of these options. It can't afford not to. The Baby Bells are all gearing up to enter long distance--and other services including cable TV--and AT&T figures the best way to hang on to its existing customers is to sell them a lot more. "All of our market research shows that the customer prefers to have local and long distance treated as one," says Mandl. Expect a lot of late nights for the Mission Control team if they want AT&T to be the one.

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