New Honcho, New AT&T?

David Dorman's big plans may not save the phone giant

It's hard to understand why anyone would want to run AT&T (T ) these days. The telecom giant's intractable problems have damaged the reputations of every AT&T leader in recent memory, especially current CEO C. Michael Armstrong. And the job is only getting tougher. AT&T spun off its most promising operation, AT&T Wireless Services Inc., earlier this year. Then, Armstrong cut a deal to merge AT&T's cable-TV business with Comcast Corp. that is expected to be completed later this year. That will leave the new AT&T looking a lot like the old AT&T--primarily a long-distance company with revenues projected to drop 12% this year, to $37 billion.

Who wants the job? Not Armstrong. He's jumping ship to become chairman of Comcast. The odds-on favorite to replace him is David W. Dorman, AT&T's current president. The 48-year-old was named to AT&T's board earlier this year, in a move that company insiders and analysts say signals that a promotion is likely. The question is whether the former CEO of Pacific Bell, the phone unit of Pacific Telesis Group, can be anything more than a caretaker until AT&T is scooped up by Verizon, SBC, or BellSouth. The betting is that Dorman will have to sell out for chump change shortly after he takes over. "The case for what will be a stand-alone AT&T communications business will be a hard one to make," says analyst Adam Quinton of Merrill Lynch & Co.

Dorman is intent on proving his skeptics wrong. With Armstrong effectively a lame duck, Dorman is moving ahead with his strategic plan for restoring AT&T's luster. He declined to comment for this story, but BusinessWeek pieced together his strategy from interviews with other AT&T insiders. Most critical, Dorman plans to take AT&T upmarket, positioning it as a premium communications service for businesses and affluent consumers. It's a risky strategy to make AT&T smaller but more profitable. Rather than compete solely on price, AT&T will market innovative services for a slight premium to the competition.

That's not just talk. Dorman earmarked $200 million last year to establish a new group of 1,500 engineers at AT&T Labs that is developing new services for corporate customers. One early offering: a new generation of voice-recognition technology so accurate that businesses can reduce the number of operators on staff. Such cutting edge technology has helped AT&T sell bundles of lucrative corporate services to big clients, including Merrill Lynch, MasterCard, and Hyatt Hotels & Resorts. "I am willing to pay a premium," says Artie Ahrens, senior vice-president at MasterCard. "You get what you pay for."

Dorman knows selling consumers on premium phone service will be tougher. AT&T's long-distance base has dropped to 50 million customers, down from 80 million five years ago. And Dorman is prepared to let another 25 million go, as the Bells complete their invasion of the long-distance market. The key part of his strategy is to hold on to the most lucrative 25 million accounts. To do that, Dorman is retraining all 4,300 of AT&T's customer-service reps so they'll be more responsive. He's also developing new services for consumers, including a Web site that will make it a snap for customers to change their long-distance calling plans on their own.

Can Dorman succeed? The odds are against him. Sure, he has several important factors working in his favor. After the Comcast deal is completed, AT&T will boast the cleanest balance sheet in the long-distance business, with $17 billion in debt. AT&T also has some growth businesses: Internet services rose 37% in the first quarter and local phone service for businesses grew 17% in the quarter.

All of this pales in comparison with the meltdown in long distance. AT&T's long-distance revenues are shrinking about 20% this year, wiping out $6 billion in sales, according to Lehman Brothers Inc. This year, all of AT&T's growth businesses combined won't replace even $1 billion of that lost revenue. Dorman needs to cut costs faster than revenues decline. So far, however, AT&T hasn't been able to do that. Operating earnings from AT&T's phone business tumbled 32% in the first quarter, to $2.8 billion. If revenues and profits keep plummeting, Dorman will have no choice but to sell AT&T within a year or two.

Who's the man stepping into this mess? Dorman is an executive with something to prove. He started off as a young hotshot in telecom, building a stellar career at Sprint Corp. and then becoming CEO of Pacific Bell in 1994 at age 39. Since then, however, he has taken some knocks. He lost his CEO spot when SBC Communications Inc. bought Pacific Telesis in 1998. After that he jumped to Pointcast, a promising startup that pushed news and other information from the Internet to PCs around the country. When the company ran short of cash in 1999, Dorman couldn't complete a deal for more money and jumped to Concert, a joint venture between AT&T and British Telecom. Then Concert, which was already troubled, collapsed, costing AT&T hundreds of millions of dollars and damaging its credibility with multinational customers.

Now Dorman has another shot at stardom. Taking over AT&T will give him the chance to put the troubles of recent years behind him--and prove himself worthy of all the accolades early in his career. "There's no doubt in my mind that Dave will seize the moment at AT&T," says executive recruiter Dennis Carey of SpencerStuart USA.

Dorman is known for a relaxed management style that may serve him well at AT&T. Armstrong has been faulted for a my-way-or-the-highway attitude that drove out some execs. Already, Dorman is beefing up AT&T's ranks. He hired Betsy J. Bernard from Qwest Communications International Inc. to run AT&T's consumer division and Sprint veteran Chris Rooney to head AT&T's government unit. "Dave is very smart and he knows how to grow a business," says Rooney.

He also can make peace between warring factions. When Dorman arrived at Pacific Bell, tensions were flaring between marketing and networking employees. The marketers had promised fast Internet access to everyone in the San Francisco Bay Area, and the techies were worried the push would overwhelm the network. Dorman got the two sides to cooperate for the first time by holding joint meetings and planning projects. Eventually, the company slowed down its Web rollout so the network didn't get overloaded.

Now, Dorman faces his greatest challenge yet. If he can produce solid results for a few quarters, boost the stock price, and attract a takeover offer at a decent price, he may be considered a successful AT&T chief executive. These days, that would be a rare accomplishment.

By Steve Rosenbush in New York

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